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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-29601) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 54
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 56
VANGUARD MORGAN GROWTH FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600
MALVERN, PA 19355-0741
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THE AMENDMENT BECOME EFFECTIVE:
on April 30, 1999, pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the period ended December 31, 1998 on March 29, 1999.
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<PAGE>
VANGUARD MORGAN GROWTH FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Front and Back Cover Pages............. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risk,
and Performance........................ Fund Profile
Item 3. Risk/Return Summary: Fee Table......... Fee Table
Item 4. Investment Objectives, Principal
Investment Strategies, and Related
Risks.................................. A Word about Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund
Performance............................ Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated December 31, 1998
filed with the Securities & Exchange
Commission's EDGAR system February 24,
1999.
Item 6. Management, Organization, and
Capital Structure...................... The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information................ Share Price; Dividends, Capital Gains,
and Taxes; Investing with Vanguard
Item 8. Distribution Arrangements.............. Not Applicable
Item 9. Financial Highlights Information....... Financial Highlights
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page and Table of Contents....... Cover Page; Table of Contents
Item 11. Fund History........................... Description of the Trust
Item 12. Description of the Fund and its
Investments and Risks.................. Investment Policies; Description of the
Trust; Fundamental Investment
Limitations
Item 13. Management of the Fund................. Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities.......................... Management of the Trust
Item 15. Investment Advisory and Other
Services............................... Investment Advisory Services
Item 16. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions
Item 17. Capital Stock and Other Securities..... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of
Shares................................. Purchase of Shares; Redemption of
Shares; Share Price
Item 19. Taxation of the Fund................... Description of the Trust
Item 20. Underwriters........................... Not Applicable
Item 21. Calculation of Performance Data........ Yield and Total Return
Item 22. Financial Statements................... Financial Statements
</TABLE>
<PAGE>
VANGUARD
MORGAN GROWTH
FUND
Prospectus
April 30, 1999
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1998.
<PAGE>
VANGUARD MORGAN GROWTH FUND
Prospectus
April 30, 1999
A Growth Stock Mutual Fund
CONTENTS
1 FUND PROFILE
2 ADDITIONAL INFORMATION
3 A WORD ABOUT RISK
3 WHO SHOULD INVEST
3 PRIMARY INVESTMENT STRATEGIES
6 THE FUND AND VANGUARD
7 INVESTMENT ADVISERS
8 YEAR 2000 CHALLENGE
8 DIVIDENDS, CAPITAL GAINS, AND TAXES
9 SHARE PRICE
10 FINANCIAL HIGHLIGHTS
11 INVESTING WITH VANGUARD
11 SERVICES AND ACCOUNT FEATURES
12 TYPES OF ACCOUNTS
12 BUYING SHARES
14 REDEEMING SHARES
17 TRANSFERRING REGISTRATION
17 FUND AND ACCOUNT UPDATES
GLOSSARY (INSIDE BACK COVER)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Morgan Growth Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND PROFILE
The following profile summarizes key features of Vanguard Morgan Growth Fund.
INVESTMENT OBJECTIVE
The Fund is a stock fund that seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests primarily in the stocks of large- and medium-size domestic
companies whose revenues and/or earnings are expected to grow faster than those
of the average company in the market. The Fund also invests in stocks of smaller
companies with similar characteristics.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
|_| Investment style risk, which is the chance that returns from large- or
mid-capitalization growth stocks will trail returns from other asset
classes or the overall stock market.
|_| Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not necessarily
indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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[GRAPHIC]
In the printed version there appears a bar chart with the following
percentages depicted:
1989 22.66%
1990 -1.51%
1991 29.33%
1992 9.54%
1993 7.32%
1994 -1.67%
1995 35.98%
1996 23.30%
1997 30.81%
1998 22.26%
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During the period shown in the bar chart, the highest return for a calendar
quarter was 25.88% (quarter ended December 31, 1998) and the lowest return for a
quarter was -16.41% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
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Vanguard Morgan Growth Fund 22.26% 21.40% 17.09%
S&P 500 Index 28.58 24.06 19.21
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1
<PAGE>
PLAIN TALK ABOUT
THE COSTS OF INVESTING
COSTS ARE AN IMPORTANT CONSIDERATION IN CHOOSING A MUTUAL FUND. THAT'S BECAUSE
YOU, AS A SHAREHOLDER, PAY THE COSTS OF OPERATING A FUND, PLUS ANY TRANSACTION
COSTS ASSOCIATED WITH THE FUND'S BUYING AND SELLING OF SECURITIES. THESE COSTS
CAN ERODE A SUBSTANTIAL PORTION OF THE GROSS INCOME OR CAPITAL APPRECIATION A
FUND ACHIEVES. EVEN SEEMINGLY SMALL DIFFERENCES IN EXPENSES CAN, OVER TIME, HAVE
A DRAMATIC EFFECT ON A FUND'S PERFORMANCE.
PLAIN TALK ABOUT
FUND EXPENSES
ALL MUTUAL FUNDS HAVE OPERATING EXPENSES. THESE EXPENSES, WHICH ARE DEDUCTED
FROM A FUND'S GROSS INCOME, ARE EXPRESSED AS A PERCENTAGE OF THE NET ASSETS OF
THE FUND. VANGUARD MORGAN GROWTH FUND'S EXPENSE RATIO IN FISCAL YEAR 1998 WAS
0.44%, OR $4.40 PER $1,000 OF AVERAGE NET ASSETS. THE AVERAGE GROWTH EQUITY
MUTUAL FUND HAD EXPENSES IN 1998 OF 1.44%, OR $14.40 PER $1,000 OF AVERAGE NET
ASSETS, ACCORDING TO LIPPER INC., WHICH REPORTS ON THE MUTUAL FUND INDUSTRY.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if
you buy and hold shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are based upon those incurred in the fiscal year ended
December 31, 1998.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.41%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.44%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$45 $141 $246 $555
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS
Distributed annually in December
INVESTMENT ADVISERS
Vanguard Morgan Growth Fund follows a multiadviser approach:
| | Wellington Management Company, LLP, Boston, Mass., since inception
| | Franklin Portfolio Associates, LLC, Boston, Mass.,
since 1990
| | Vanguard Core Management Group, Valley Forge, Pa., since 1993
INCEPTION DATE
December 31, 1968
NET ASSETS AS OF DECEMBER 31, 1998
$3.6 billion
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors
NEWSPAPER ABBREVIATION
Morg
VANGUARD FUND NUMBER
026
CUSIP NUMBER
921928107
TICKER SYMBOL
VMRGX
2
<PAGE>
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Morgan Growth Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Morgan Growth Fund,
you should also take into account your personal tolerance for the daily
fluctuations of the stock market.
Look for this [flag graphic] symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
| | You wish to add a growth stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
| | You are seeking growth of capital over the long term--at least five years.
| | You are not looking for current income.
| | You are seeking a fund that invests in growth companies representing a wide
variety of industries.
| | You characterize your investment temperament as "relatively aggressive."
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
| | The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
| | There is a limit on the number of times you can exchange into and out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
| | The Fund reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all Fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund, and may change the investment strategies in the interest of
shareholders.
3
<PAGE>
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, the prices of such stocks are
typically above-average in relation to such measures as revenue, earnings, book
value, and dividends. Value funds generally emphasize stocks of companies from
which the market does not expect strong growth. The prices of value stocks
typically are below-average in comparison to such factors as earnings and book
value, and these stocks typically pay above-average dividend yields. Growth and
value stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hopes of a greater
increase in share price. Growth funds also may appeal to investors with taxable
accounts who want a higher proportion of returns to come as capital gains (which
may be taxed at lower rates than dividend income). Value funds, by contrast, are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations.
MARKET EXPOSURE
The Fund is a growth fund that invests mainly in large- and mid-capitalization
domestic common stocks. The Fund also includes stocks of smaller companies that
may not have a long history of growth but are found attractive by one of the
Fund's advisers. Stocks are primarily chosen on the basis of the advisers'
expectations that revenues and/or earnings will grow faster than average. The
Fund may also invest in securities that are convertible to common stocks.
[flag graphic] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE
POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR
EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH
PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of market activity. (Total returns consist of dividend
income plus change in market price.) Note that the returns shown do not include
the costs of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between best and
worst tends to narrow over the long term.
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U.S. STOCK MARKET RETURNS (1926-1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
Growth stocks, which are the Fund's primary investments, are likely to be
even more volatile in price than the stock market as a whole.
Historically, growth funds have tended to outperform in bull markets and
underperform in declining markets. Of course, there is no guarantee that this
pattern will continue in the future. The Fund also holds a significant number of
mid-cap stocks, which tend to be more volatile than the large-cap stocks that
dominate the S&P 500 Index.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold stocks
of companies with a market value of less than $1 billion.
4
<PAGE>
[flag graphic] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM LARGE- OR MID-CAPITALIZATION
GROWTH STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION GROWTH
STOCKS EACH TEND TO GO THROUGH CYCLES OF DOING BETTER--OR
WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN
THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Vanguard Morgan Growth Fund has three investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The three investment advisers employ active investment management methods,
which means that securities are bought and sold according to the advisers'
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
Wellington Management Company, LLP (WMC), which is currently responsible for
about 39% of the Fund's assets, uses traditional methods of stock
selection--research and analysis--to identify companies that it believes have
above-average growth prospects, particularly those in industries undergoing
change. Research is focused on companies with a proven record of sales and
earnings growth, profitability, and cash flow generation. Securities are sold
when an investment has achieved its intended purpose, or because it is no longer
considered attractive.
The other two advisers, Franklin Portfolio Associates, LLC and Vanguard Core
Management Group (the Group), employ a "quantitative" investment approach. In
other words, they use computerized models for portfolio construction and stock
selection to outperform, if possible, a specific market standard. For Vanguard
Morgan Growth Fund, this market standard is the Growth Fund Stock Index, which
is made up of the stocks held by the nation's 50 largest growth funds. Franklin
Portfolio Associates' investment strategy focuses on stock selection and fund
structure. The stock selection process is driven by a series of more than 30
computer models that value a universe of 3,500 stocks. These models cover a
broad range of publicly available data and focus on four areas: fundamental
momentum (based on the trends of reported and forecasted earnings), relative
value, future cash flow, and economic cycles. The individual models rank each
security in the universe. Using these rankings, a separate program builds a
fund, consistent with the Growth Fund Stock Index's characteristics. Franklin
Portfolio Associates currently manages about 43% of the Fund's assets.
The Group ranks a universe of approximately 2,000 stocks using a variety of
computer models. These models focus on investment characteristics such as
earnings, fundamental momentum, share price momentum, relative value, and cash
flow. A separate program then selects the stocks for the Fund, consistent with
the Growth Fund Stock Index's characteristics, from among the stocks rated
highly by the investment models. The Group currently manages about 15% of the
Fund's assets.
The balance of Vanguard Morgan Growth Fund's assets (about 3%) is held in
cash reserves, also managed by the Group, which may invest in stock futures to
give the cash reserves the performance of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while retaining
cash on hand to meet liquidity needs.
The Fund is generally managed without regard to tax ramifications.
[flag graphic] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT ONE OR MORE OF THE FUND'S ADVISERS MAY DO A POOR JOB OF
SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 78%. A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.
5
<PAGE>
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all growth stock funds is
approximately 82%, according to Morningstar, Inc.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund reserves the
right to invest up to 20% of its assets in foreign securities. These securities
may be traded in U.S. or foreign markets. To the extent that it owns foreign
stocks, the Fund is subject to: (1) country risk, which is the possibility that
political events (such as a war), financial problems (such as government
default), or natural disasters (such as an earthquake) will weaken a country's
economy and cause investments in that country to lose money, and (2) currency
risk, which is the possibility that Americans investing abroad could lose money
because of a rise in the value of the U.S. dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
the Fund acquires an interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
| | To keep cash on hand to meet shareholder redemptions or
other needs while simulating full investment in stocks.
| | To reduce the Fund 's transaction costs or add value when these instruments
are favorably priced.
The Fund may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $460 billion. All of the Vanguard funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
6
<PAGE>
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Morgan Growth Fund are:
ROBERT D. RANDS, CFA, Senior Vice President of Wellington Management Company,
LLP; has worked in investment management since 1966, with WMC since 1978;
adviser to the Fund since 1994; B.A., Yale University; M.B.A., University of
Pennsylvania.
JOHN J. NAGORNIAK, CFA, President of Franklin Portfolio Associates, LLC; has
worked in investment management since 1970, with Franklin Portfolio Associates
since 1982; adviser to the Fund since 1990; B.A., Princeton University; M.S.,The
Sloan School of Management, Massachusetts Institute of Technology.
GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985, with Vanguard since 1987, including primary
responsibility for Vanguard Core Management Group since 1987; A.B., Dartmouth
College; M.B.A., University of Chicago.
INVESTMENT ADVISERS
The Fund employs three investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Trustees and officers of the Fund.
Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA 02109,
and its predecessors have provided investment advisory services since 1928. The
firm currently manages more than $207 billion in stock and bond portfolios,
including 14 Vanguard funds. As of December 31, 1998, WMC managed 39% of
Vanguard Morgan Growth Fund's assets.
WMC's advisory fee is paid quarterly. This fee is based on certain annual
percentages applied to the Fund's average month-end assets managed by WMC. The
advisory fee may be adjusted based on the 36-month cumulative total return
performance of WMC's portion of the Fund as compared to the cumulative total
return of the Growth Fund Stock Index. Under the fee schedule, WMC's basic fee
may be increased or decreased by as much as 50%.
Franklin Portfolio Associates, LLC, Two International Place, Boston, MA
02110, is a professional advisory firm founded in 1982. Franklin Portfolio
Associates is a wholly owned, indirect subsidiary of Mellon Bank, and has no
affiliation with the Franklin/Templeton Group of Funds or Franklin Resources,
Inc. Franklin Portfolio Associates currently manages approximately $18.6 billion
in assets, including $6.7 billion in Vanguard funds. As of December 31, 1998,
Franklin Portfolio Associates managed 43% of Vanguard Morgan Growth Fund's
assets.
Franklin Portfolio Associates' advisory fee is paid quarterly. This fee is
based on the average month-end assets managed by Franklin Portfolio Associates.
The advisory fee may be adjusted based on the 36-month cumulative
total return performance of Franklin Portfolio Associates' portion of the Fund
as compared to the cumulative total return of the Growth Fund Stock Index. Under
the fee schedule, Franklin Portfolio Associates' basic fee may be increased or
decreased by as much as 0.10%.
Vanguard Core Management Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, was responsible for 15% of Vanguard Morgan Growth Fund's assets as of
December 31, 1998. The Group provides investment advisory services, on an
at-cost basis, to several Vanguard funds, managing more than $147 billion in
total assets as of year-end 1998. Any Fund assets held in cash (which, as of
December 31, 1998, equaled 3% of the Fund's assets) are also managed by the
Group.
7
<PAGE>
For the year ended December 31, 1998, the aggregate investment advisory fee
represented an effective annual basic rate of 0.12% of average net assets of the
Fund before an increase of 0.01% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to
all transactions.
In the interest of obtaining better execution of a transaction, the advisers
may choose brokers who charge higher commissions. If more than one broker can
obtain the best available price and favorable execution of a transaction, then
the advisers are authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the advisers or the Fund. Also,
the Fund may direct the advisers to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for any of the advisers or as an additional adviser. However, any
such change will be communicated to shareholders in writing.
YEAR 2000 CHALLENGE
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses) as well as any capital gains realized from the sale
of its holdings. Distributions generally occur in December. In addition, the
Fund may occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year.
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the Fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
8
<PAGE>
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
You can receive distributions of income or capital gains in cash, or you can
have them automatically invested in more shares of the Fund. In either case,
these distributions are taxable to you. It is important to note that
distributions of dividends and capital gains that are declared in December--if
paid to you by the end of January--are taxed as if they had been paid to you in
December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.
| ] The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.
| | Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.
| | Although the Fund does not seek to realize any particular amount of
capital gains during a year, such gains are realized from time to time as
by-products of its ordinary investment activities. Consequently,
distributions may vary considerably from year to year.
| | If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
| | Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.
IMPORTANT NOTE: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
9
<PAGE>
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is MORG.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1998 with a net asset value (price) of $17.54 per share.
During the year, the Fund earned $0.18 per share from investment income
(interest and dividends) and $3.61 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.61 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($3.79 per share) minus the distributions ($1.61 per share)
resulted in a share price of $19.72 at the end of the year. This was an increase
of $2.18 per share (from $17.54 at the beginning of the year to $19.72 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 22.26% for the year.
As of December 31, 1998, the Fund had $3.6 billion in net assets. For the
year, its expense ratio was 0.44% ($4.40 per $1,000 of net assets); and net
investment income amounted to 0.96% of its average net assets. It sold and
replaced securities valued at 81% of its net assets.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
<TABLE>
<CAPTION>
Vanguard Morgan Growth Fund
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $17.54 $15.63 $14.09 $11.36 $12.01
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
Turnover Rate 81% 76% 73% 76% 84%
====================================================================================================================
</TABLE>
"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.
10
<PAGE>
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [Book Graphic]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD DIRECT DEPOSIT SERVICE(TM) [Book graphic]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [Book graphic]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [Book graphic]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [Book graphic]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [Book graphic]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [Computer graphic]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
| | Open a new account.*
| | Buy, sell, or exchange shares of most funds.
| | Change your name/address.
| | Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
11
<PAGE>
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [Book graphic]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [Book graphic]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [Book graphic]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance falls below $2,500. The fee is
waived if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [Envelope graphic]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
12
<PAGE>
Make your check payable to: The Vanguard Group-26
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [Telephone graphic]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [Wire graphic]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Morgan Growth Fund-26
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
13
<PAGE>
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
| | Vanguard sends the redemption proceeds to you or a designated third party.*
| | You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 16.
When Exchanging Shares:
| | The redemption proceeds are used to purchase shares of a different Vanguard
fund.
| | You must meet the receiving fund's minimum investment requirements.
| | Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is processed and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [Computer graphic]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
NOTE: The Vanguard funds whose shares you cannot exchange online or by
telephone are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, VANGUARD
TOTAL INTERNATIONAL STOCK INDEX FUND, and VANGUARD GROWTH AND INCOME FUND. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [Telephone graphic]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
14
<PAGE>
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable
to provide:
X The ten-digit account number.
X The name and address exactly as registered on the account.
X The primary Social Security or employer identification number as registered
on the account.
X The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [Envelope graphic]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
| | Traditional IRAs and Roth IRAs--call Client Services.
| | SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815
15
<PAGE>
For clients of Vanguard's Institutional Division...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
X The Fund name and account number.
X The amount of the transaction (in dollars or shares).
X Signatures of all owners exactly as registered on the account (for mail
requests).
X Signature guarantees (if required).*
X Any supporting legal documentation that may be required.
X Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of the Fund
and increase the Fund's costs for all shareholders, Vanguard limits account
activity as follows:
| | You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
| | Your round trips through the Fund must be at least 30 days apart.
| | The Fund may refuse a share purchase at any time, for any reason.
| | Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1100 455 Devon Park Drive
Valley Forge, PA 19482-1100 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [Book graphic]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
17
<PAGE>
FUND AND ACCOUNT UPDATES (continued)
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [Book graphic]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
18
<PAGE>
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19
<PAGE>
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20
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any
12b-1distribution fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison to revenue,
earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
21
<PAGE>
[VANGUARD LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about Vanguard Morgan Growth Fund, the following
documents are available free upon request:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
CLIENT SERVICES DEPARTMENT TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act
file number: 811-1685
22
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
P026N-04/30/1999
<PAGE>
VANGUARD
MORGAN GROWTH
FUND
Participant Prospectus
April 30, 1999
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1998.
<PAGE>
Vanguard
Morgan Growth
Fund
Participant Prospectus
April 30, 1999
A Growth Stock Mutual Fund
CONTENTS
1 FUND PROFILE 8 YEAR 2000 CHALLENGE
2 ADDITIONAL INFORMATION 9 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 A WORD ABOUT RISK 9 SHARE PRICE
3 WHO SHOULD INVEST 10 FINANCIAL HIGHLIGHTS
3 PRIMARY INVESTMENT STRATEGIES 11 INVESTING WITH VANGUARD
6 THE FUND AND VANGUARD 11 ACCESSING FUND INFORMATION BY COMPUTER
7 INVESTMENT ADVISERS GLOSSARY (INSIDE BACK COVER)
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Morgan Growth Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you to decide whether the Fund is the
right investment for you. We suggest that you keep it for future reference.
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like
to open a personal investment account--can be obtained by calling Vanguard
at 1-800-662-7447.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND PROFILE
The following profile summarizes key features of Vanguard Morgan Growth Fund.
INVESTMENT OBJECTIVE
The Fund is a stock fund that seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests primarily in the stocks of large- and medium-size domestic
companies whose revenues and/or earnings are expected to grow faster than
those of the average company in the market. The Fund also invests in stocks
of smaller companies with similar characteristics.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
The Fund is also subject to:
o Investment style risk, which is the chance that returns from large- or
mid-capitalization growth stocks will trail returns from other asset
classes or the overall stock market.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing
in the Fund. The bar chart shows the Fund's performance in each calendar year
over a ten-year period. The table shows how the Fund's average annual returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does
not necessarily indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
[GRAPHIC]
In the printed version there appears a bar chart with the following
percentages depicted:
1989 22.66%
1990 -1.51%
1991 29.33%
1992 9.54%
1993 7.32%
1994 -1.67%
1995 35.98%
1996 23.30%
1997 30.81%
1998 22.26%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a
calendar quarter was 25.88% (quarter ended December 31, 1998) and the lowest
return for a quarter was -16.41% (quarter ended September 30, 1998).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard Morgan Growth Fund 22.26% 21.40% 17.09%
S&P 500 Index 28.58 24.06 19.21
- --------------------------------------------------------------------------------
1
<PAGE>
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if
you buy and hold shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are based upon those incurred in the fiscal year ended
December 31, 1998.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.41%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
- --------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.44%
The following example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various
periods if you invest $10,000 in the Fund. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses remain the same.
The results apply whether or not you redeem your investment at the end of
each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$45 $141 $246 $555
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS
Distributed annually in December
INVESTMENT ADVISERS
Vanguard Morgan Growth Fund follows a multiadviser approach:
o Wellington Management Company, LLP, Boston, Mass., since inception
o Franklin Portfolio Associates, LLC, Boston, Mass.,
since 1990
o Vanguard Core Management Group, Valley Forge, Pa., since 1993
INCEPTION DATE
December 31, 1968
NET ASSETS AS OF DECEMBER 31, 1998
$3.6 billion
NEWSPAPER ABBREVIATION
Morg
VANGUARD FUND NUMBER
026
CUSIP NUMBER
921928107
TICKER SYMBOL
VMRGX
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs associated with the fund's buying and selling of
securities. These costs can erode a substantial portion of the gross income
or capital appreciation a fund achieves. Even seemingly small differences in
expenses can, over time, have a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets
of the fund. Vanguard Morgan Growth Fund's expense ratio in fiscal year 1998
was 0.44%, or $4.40 per $1,000 of average net assets. The average growth
equity mutual fund had expenses in 1998 of 1.44%, or $14.40 per $1,000 of
average net assets, according to Lipper Inc., which reports on the mutual
fund industry.
2
<PAGE>
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Morgan Growth Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential
reward. The reverse, also, is generally true: The lower the risk, the lower
the potential reward. As you consider an investment in Vanguard Morgan Growth
Fund, you should also take into account your personal tolerance for the daily
fluctuations of the stock market.
Look for this [flag] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
o You wish to add a growth stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
o You are seeking growth of capital over the long term--at least five years.
o You are not looking for current income.
o You are seeking a fund that invests in growth companies representing a wide
variety of industries.
o You characterize your investment temperament as "relatively aggressive."
The Vanguard funds do not permit market-timing. Do not invest in this Fund
if you are a market-timer.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
o The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
o There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
o The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in
pursuit of the Fund's objective, long-term growth in capital. It also
explains how the advisers implement these strategies. In addition, this
section discusses several important risks--market risk, investment style
risk, and manager risk--faced by investors in the Fund. The Fund's Board of
Trustees oversees the management of the Fund, and may change the investment
strategies in the interest of shareholders.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the
costs. Therefore, the Fund discourages short-term trading by, among other
things, limiting the number of exchanges it permits.
3
<PAGE>
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, the prices of such stocks are
typically above-average in relation to such measures as revenue, earnings,
book value, and dividends. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison to such factors as
earnings and book value, and these stocks typically pay above-average
dividend yields. Growth and value stocks have, in the past, produced similar
long-term returns, though each category has periods when it outperforms the
other. In general, growth funds appeal to investors who will accept more
volatility in hopes of a greater increase in share price. Growth funds also
may appeal to investors with taxable accounts who want a higher proportion of
returns to come as capital gains (which may be taxed at lower rates than
dividend income). Value funds, by contrast, are appropriate for investors who
want some dividend income and the potential for capital gains, but are less
tolerant of share-price fluctuations.
MARKET EXPOSURE
The Fund is a growth fund that invests mainly in large- and mid-capitalization
domestic common stocks. The Fund also includes stocks of smaller companies
that may not have a long history of growth but are found attractive by one of
the Fund's advisers. Stocks are primarily chosen on the basis of the advisers'
expectations that revenues and/or earnings will grow faster than average. The
Fund may also invest in securities that are convertible to common stocks.
[flag graphic] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE
POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR
EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH
PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows
the best, worst, and average total returns for the U.S. stock market over
various periods as measured by the Standard & Poor's 500 Composite Stock
Price Index, a widely used barometer of market activity. (Total returns
consist of dividend income plus change in market price.) Note that the
returns shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note, also, that
the gap between best and worst tends to narrow over the long term.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND
SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold
stocks of companies with a market value of less than $1 billion.
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on
stocks for all of the 5-year periods was 10.7%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from
1994 through 1998). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
Growth stocks, which are the Fund's primary investments, are likely to be
even more volatile in price than the stock market as a whole.
Historically, growth funds have tended to outperform in bull markets and
underperform in declining markets. Of course, there is no guarantee that
4
<PAGE>
this pattern will continue in the future. The Fund also holds a significant
number of mid-cap stocks, which tend to be more volatile than the large-cap
stocks that dominate the S&P 500 Index.
THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM LARGE- OR MID-CAPITALIZATION GROWTH STOCKS WILL TRAIL
RETURNS FROM THE OVERALL STOCK MARKET. AS A GROUP, LARGE- AND
MID-CAPITALIZATION GROWTH STOCKS EACH TEND TO GO THROUGH CYCLES OF
DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS
HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Vanguard Morgan Growth Fund has three investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the
Fund.
The three investment advisers employ active investment management methods,
which means that securities are bought and sold according to the advisers'
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
Wellington Management Company, LLP (WMC), which is currently responsible
for about 39% of the Fund's assets, uses traditional methods of stock
selection--research and analysis--to identify companies that it believes have
above-average growth prospects, particularly those in industries undergoing
change. Research is focused on companies with a proven record of sales and
earnings growth, profitability, and cash flow generation. Securities are sold
when an investment has achieved its intended purpose, or because it is no
longer considered attractive.
The other two advisers, Franklin Portfolio Associates, LLC and Vanguard
Core Management Group (the Group), employ a "quantitative" investment
approach. In other words, they use computerized models for portfolio
construction and stock selection to outperform, if possible, a specific
market standard. For Vanguard Morgan Growth Fund, this market standard is the
Growth Fund Stock Index, which is made up of the stocks held by the nation's
50 largest growth funds. Franklin Portfolio Associates' investment strategy
focuses on stock selection and fund structure. The stock selection process is
driven by a series of more than 30 computer models that value a universe of
3,500 stocks. These models cover a broad range of publicly available data and
focus on four areas: fundamental momentum (based on the trends of reported
and forecasted earnings), relative value, future cash flow, and economic
cycles. The individual models rank each security in the universe. Using these
rankings, a separate program builds a fund, consistent with the Growth Fund
Stock Index's characteristics. Franklin Portfolio Associates currently
manages about 43% of the Fund's assets.
The Group ranks a universe of approximately 2,000 stocks using a variety
of computer models. These models focus on investment characteristics such as
earnings, fundamental momentum, share price momentum, relative value, and
cash flow. A separate program then selects the stocks for the Fund,
consistent with the Growth Fund Stock Index's characteristics, from among the
stocks rated highly by the investment models. The Group currently manages
about 15% of the Fund's assets.
The balance of Vanguard Morgan Growth Fund's assets (about 3%) is held in
cash reserves, also managed by the Group, which may invest in stock futures
to give the cash reserves the performance of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while
retaining cash on hand to meet liquidity needs.
The Fund is generally managed without regard to tax ramifications.
[flag graphic] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT ONE OR MORE OF THE FUND'S ADVISERS MAY DO A POOR JOB OF
SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been
held. The Fund's average turnover rate for the past five years has been about
78%. A turnover rate of 100% would occur, for example, if the Fund sold and
replaced securities valued at 100% of its net assets within a one-year
period.
5
<PAGE>
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high turnover rates may be
more likely to generate capital gains that must be distributed to
shareholders as income subject to taxes. The average turnover rate for all
growth stock funds is approximately 82%, according to Morningstar, Inc.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures
and options are derivatives that have been trading on regulated exchanges for
more than two decades. These "traditional" derivatives are standardized
contracts that can easily be bought and sold, and whose market values are
determined and published daily. It is these characteristics that
differentiate futures and options from the relatively new types of
derivatives. If used for speculation or as leveraged investments, derivatives
can carry considerable risks.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund
reserves the right to invest up to 20% of its assets in foreign securities.
These securities may be traded in U.S. or foreign markets. To the extent that
it owns foreign stocks, the Fund is subject to: (1) country risk, which is
the possibility that political events (such as a war), financial problems
(such as government default), or natural disasters (such as an earthquake)
will weaken a country's economy and cause investments in that country to lose
money, and (2) currency risk, which is the possibility that Americans
investing abroad could lose money because of a rise in the value of the U.S.
dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in stock futures and
options contracts, which are traditional types of derivatives. Losses (or
gains) involving futures can sometimes be substantial--in part because a
relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a fund. This Fund will not use
futures for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment. The value of all futures and options
contracts in which the Fund acquires an interest cannot exceed 20% of total
assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
o To reduce the Fund's transaction costs or add value when these
instruments are favorably priced.
The Fund may, from time to time, take temporary defensive measures--such
as holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35
investment companies with more than 100 distinct investment portfolios
holding assets worth more than $460 billion. All of the Vanguard funds share
in the expenses associated with business operations, such as personnel,
office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each
fund pays its allocated share of The Vanguard Group's marketing costs.
6
<PAGE>
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management
companies that may be owned by one person, by a group of individuals, or by
investors who own the management company's stock. By contrast, Vanguard
provides its services on an "at-cost" basis, and the funds' expense ratios
reflect only these costs. No separate management company reaps profits or
absorbs losses from operating the funds.
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Morgan Growth Fund are:
ROBERT D. RANDS, CFA, Senior Vice President of Wellington Management
Company, LLP; has worked in investment management since 1966, with WMC since
1978; adviser to the Fund since 1994; B.A., Yale University; M.B.A.,
University of Pennsylvania.
JOHN J. NAGORNIAK, CFA, President of Franklin Portfolio Associates, LLC;
has worked in investment management since 1970, with Franklin Portfolio
Associates since 1982; adviser to the Fund since 1990; B.A., Princeton
University; M.S., The Sloan School of Management, Massachusetts
Institute of Technology.
GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985, with Vanguard since 1987, including primary
responsibility for Vanguard Core Management Group since 1987; A.B., Dartmouth
College; M.B.A., University of Chicago.
INVESTMENT ADVISERS
The Fund employs three investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Trustees and officers of the
Fund.
Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA
02109, and its predecessors have provided investment advisory services since
1928. The firm currently manages more than $207 billion in stock and bond
portfolios, including 14 Vanguard funds. As of December 31, 1998, WMC managed
39% of Vanguard Morgan Growth Fund's assets.
WMC's advisory fee is paid quarterly. This fee is based on certain annual
percentages applied to the Fund's average month-end assets managed by WMC.
The advisory fee may be adjusted based on the 36-month cumulative total return
performance of WMC's portion of the Fund as compared to the cumulative total
return of the Growth Fund Stock Index. Under the fee schedule, WMC's basic fee
may be increased or decreased by as much as 50%.
Franklin Portfolio Associates, LLC, Two International Place, Boston, MA
02110, is a professional advisory firm founded in 1982. Franklin Portfolio
Associates is a wholly owned, indirect subsidiary of Mellon Bank, and has no
affiliation with the Franklin/Templeton Group of Funds or Franklin Resources,
Inc. Franklin Portfolio Associates currently manages approximately $18.6
billion in assets, including $6.7 billion in Vanguard funds. As of December
31, 1998, Franklin Portfolio Associates managed 43% of Vanguard Morgan Growth
Fund's assets.
Franklin Portfolio Associates' advisory fee is paid quarterly. This fee is
based on the average month-end assets managed by Franklin Portfolio Associates.
The advisory fee may be adjusted based on the 36-month cumulative
total return performance of Franklin Portfolio Associates' portion of the
Fund as compared to the cumulative total return of the Growth Fund Stock
Index. Under the fee schedule, Franklin Portfolio Associates' basic fee may
be increased or decreased by as much as 0.10%.
Vanguard Core Management Group (the Group), P.O. Box 2600, Valley Forge,
PA 19482, was responsible for 15% of Vanguard Morgan Growth Fund's assets as
of December 31, 1998. The Group provides investment advisory services, on an
at-cost basis, to several Vanguard funds, managing more than $147 billion in
total assets as of year-end 1998. Any Fund assets held in cash (which, as of
December 31, 1998, equaled 3% of the Fund's assets) are also managed by the
Group.
7
<PAGE>
For the year ended December 31, 1998, the aggregate investment advisory
fee represented an effective annual basic rate of 0.12% of average net assets
of the Fund before an increase of 0.01% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to
handle the purchase and sale of securities for the Fund, and to get the best
available price and most favorable execution from these brokers with respect
to all transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and favorable execution of a
transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research services to the
advisers or the Fund. Also, the Fund may direct the advisers to use a
particular broker for certain transactions in exchange for commission rebates
or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders,
change the terms of the advisory agreement or hire a new investment adviser,
either as a replacement for any of the advisers or as an additional adviser.
However, any such change will be communicated to shareholders in writing.
YEAR 2000 CHALLENGE
The common practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading
to errors or failure. Such failure could adversely affect a fund's
operations, including pricing, securities trading, and the servicing of
shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal
systems. Vanguard is diligently working with external partners, suppliers,
and vendors, including fund managers and other service providers, to assure
that the systems with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through
the rollover of 1999 into 2000 and to quickly implement alternate solutions
if necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance
could be hurt if a computer-system failure at a company or governmental unit
affects the price of securities the Fund owns.
8
<PAGE>
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term depending on whether the fund held the securities for
less than or more than one year.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses) as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Dividend and capital gains distributions of Fund shares that are held as
an investment option in an employer-sponsored retirement or savings plan will
be reinvested in additional Fund shares and accumulate on a tax-deferred
basis. You will not owe taxes on these distributions until you begin
withdrawals. You should consult your plan administrator, your plan's Summary
Plan Document, or your tax adviser about the tax consequences of an
investment in the Fund and of any plan withdrawals.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated
each business day after the close of trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days the Exchange is closed).
Net asset value per share is computed by adding up the total value of the
Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS -- LIABILITIES
NET ASSET VALUE = --------------------------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder
because it indicates the current value of your investment. The Fund's NAV,
multiplied by the number of shares you own, gives you the dollar amount you
would have received had you sold all of your shares back to the Fund that
day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different
newspapers use different abbreviations of the Fund's name, but the most
common is MORG.
9
<PAGE>
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1998 with a net asset value (price) of $17.54 per
share. During the year, the Fund earned $0.18 per share from investment
income (interest and dividends) and $3.61 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $1.61 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($3.79 per share) minus the distributions ($1.61 per share)
resulted in a share price of $19.72 at the end of the year. This was an
increase of $2.18 per share (from $17.54 at the beginning of the year to
$19.72 at the end of the year). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund
was 22.26% for the year.
As of December 31, 1998, the Fund had $3.6 billion in net
assets. For the year, its expense ratio was 0.44% ($4.40 per $1,000 of net
assets); and net investment income amounted to 0.96% of its average net
assets. It sold and replaced securities valued at 81% of its net assets.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand
the Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Fund (assuming reinvestment of all
dividends and distributions). This information has been derived from the
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, whose report--along with the Fund's financial statements--is
included in the Fund's most recent annual report to shareholders. You may
have the annual report sent to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Vanguard Morgan Growth Fund
YEAR ENDED DECEMBER 31,
---------------------------------------------------
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%
Turnover Rate 81% 76% 73% 76% 84%
=========================================================================================
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes
both past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation (or depreciation). Neither yield
nor total return should be used to predict the future performance of a fund.
"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.
10
<PAGE>
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your
plan administrator or your employee benefits office can provide you with
detailed information on how to participate in your plan and how to elect the
Fund as an investment option.
o If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
o If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed
as soon as they have been received by Vanguard in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate
assets. In all cases, your transaction will be based on the Fund's
next-determined net asset value after Vanguard receives your request (or, in
the case of new contributions, the next-determined net asset value after
Vanguard receives the order from your plan administrator). As long as this
request is received before the close of trading on the New York Stock
Exchange, generally 4 p.m. Eastern time, you will receive that day's net
asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to
purchase shares of another fund) may be available to you through your plan.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate this privilege, limit the amount of
an exchange or reject any exchange, at any time, without notice. Because
excessive exchanges can potentially disrupt the management of the Fund and
increase its transaction costs, Vanguard limits participant exchange activity
to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90
days apart) during any 12-month period. A "round trip" is a redemption from
the Fund followed by a purchase back into the Fund. "Substantive" means a
dollar amount that Vanguard determines, in its sole discretion, could
adversely affect the management of the Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
o Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
o Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
o Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website,
which provides timely news and information about Vanguard funds and services;
an online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
11
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
12
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that
the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any
12b-1distribution fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the
level of income offered by these securities is predetermined, their prices
may fluctuate.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by
the poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have
above-average prospects for growth. Reflecting market expectations for superior
growth, the prices of growth stocks often are relatively high in comparison to
revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities,
divided by the number of shares outstanding. The value of a single share is
called its share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings
(profits) from the past year. A stock selling for $20, with earnings of $2 per
share, has a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net
asset value, with the ending net asset value adjusted to account for the
reinvestment of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low
prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
13
<PAGE>
[Vanguard LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about Vanguard Morgan Growth Fund, the
following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the
Fund's annual and semiannual reports to shareholders. In these reports, you
will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI,
or to request additional information about the Fund or other Vanguard funds,
please contact us as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC
20549-6009.
Fund's Investment Company Act
file number: 811-1685
14
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
I026N-04/30/1999
14
<PAGE>
PART B
VANGUARD MORGAN GROWTH FUND
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1999
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated April 30, 1999). To obtain the Prospectus
or an additional 1998 Annual Report to Shareholders, containing the Trust's
financial statements, which are hereby incorporated by reference, please call
the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Fundamental Investment Limitations.......................... B-8
Purchase of Shares.......................................... B-10
Redemption of Shares........................................ B-10
Share Price................................................. B-10
Management of the Trust..................................... B-12
Investment Advisory Services................................ B-15
Portfolio Transactions...................................... B-20
Yield and Total Return...................................... B-21
Performance Measures........................................ B-22
Comparative Indexes......................................... B-22
Financial Statements........................................ B-25
</TABLE>
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Delaware corporation in 1968, merged into a
Maryland corporation in 1973, and then reorganized as a Delaware business trust
in June 1998. Prior to its reoganization as a Delaware business trust, the Trust
was known as Vanguard/Morgan Growth Fund, Inc. The Trust is registered with the
United States Securities and Exchange Commission (the Commission) under the
Investment Company Act of 1940 (the 1940 Act) as an open-end diversified
management investment company. It currently offers the following investor share
class fund: Vanguard Morgan Growth Fund (the Fund).
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as the Fund's custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
B-1
<PAGE>
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected funds. Unless terminated by reorganization or
liquidation, the Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Trust will
not be personally liable for payment of the Trust's debts except by reason of
his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Trust's net assets, and to change any
fundamental policy of the Trust. Shareholders of the Trust receive one vote for
each dollar of net asset value owned on the record date, and a fractional vote
for each fractional dollar of net asset value owned on the record date. However,
only the shares of the fund affected by a particular matter are entitled to vote
on that matter. Voting rights are non-cumulative and cannot be modified without
a majority vote of shareholders.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable funds of
the Trust.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares
of the Trust.
CONVERSION RIGHTS. There are no conversion rights associated with shares
of the Trust.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE TRUST
The Fund qualifies as a "regulated investment company" under Subchapter M
of the Internal Revenue Code. This special tax status means that the Fund will
not be liable for federal tax on income and capital gains distributed to
shareholders. In order to preserve its tax status, the Fund must comply with
certain requirements. If the Fund fails to meet these requirements in any
taxable year, it will be subject to tax on its taxable income at corporate
rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before regaining its tax status as a regulated
investment company.
B-2
<PAGE>
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies set forth
in the Prospectus.
TURNOVER RATE. While the rate of turnover is not a limiting factor when
management deems changes appropriate, it is anticipated that the annual turnover
rate will not normally exceed 100%. A rate of turnover of 100% could occur, for
example, if the Fund sold and replaced securities valued at 100% of its total
assets. The Fund's turnover rate for each of its last five fiscal years is set
forth under "Financial Highlights" in the Fund's Prospectus.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a
fixed-income security (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance, or a certificate of deposit) from a
commercial bank, broker, or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Trust's Board of Trustees will monitor the Trust's repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker, or
dealer party to a repurchase agreement with the Trust.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying instrument at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities on a short-term or
long-term basis to qualified institutional investors (typically brokers,
dealers, banks, or other financial institutions) who need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities, or completing arbitrage operations. By
lending its portfolio securities, the Fund attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Fund. The terms, the structure, and the
aggregate amount of such loans must be consistent with the 1940 Act, and the
Rules and Regulations or interpretations of the Commission thereunder. These
provisions limit the amount of securities the Trust may lend to 33 1/3% of the
Fund's total assets, and require that (a) the borrower pledge and maintain with
the Trust collateral consisting of cash, an irrevocable letter of credit issued
by a domestic U.S. bank, or securities issued or guaranteed by the U.S.
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the
Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the
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creditworthiness of the broker, dealer, or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Trust's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
FOREIGN INVESTMENTS. As indicated in the Prospectus, the Fund may invest
up to 20% of its assets in foreign securities and may engage in currency
transactions with respect to these investments. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
CURRENCY RISK. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option, and similar
financial instrument if such instrument is not marked-to-market. The disposition
of a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Fund which is not subject to the special currency
rules (such as foreign
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equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction. It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts the Trust may make
or enter into will be subject to the special currency rules described above.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
Commission rules, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, they may
be considered illiquid securities -- meaning that they could be difficult for
the Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Trust's Board of Trustees. This will generally
include securities that are restricted but which may be sold to qualified
institutional buyers under Rule 144A of the Securities Act of 1933. While the
Fund's investment adviser determines the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors the Board considers in monitoring these
decisions include the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the security's
issuer.
COUNTRY RISK. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
FUTURES CONTRACTS. The Fund may enter into futures contracts, options, and
options on futures contracts for the purpose of remaining fully invested and
reducing transactions costs. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission (CFTC), a U.S. Government agency. Assets committed to futures
contracts will be segregated to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
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Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed," that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to
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be a liquid secondary market. The principal stock index futures exchanges in the
United States are the Board of Trade of the City of Chicago and the Chicago
Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to the low margin deposits required. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Fund is not subject to
extreme losses from futures because 100% of the contract obligation is held
separately in cash or other liquid portfolio securities. The Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options involve the
risk that the investment advisers will incorrectly predict stock market and
interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for
federal income tax purposes to recognize as income for each taxable year, its
net unrealized gains and losses on certain futures contracts as of the end of
the year as well as those actually realized during the year. In most cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Furthermore, sales of
futures contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies, or other income derived with respect to the
Fund's business of investing in securities. It is anticipated that any net gain
realized from the closing out of futures contracts will be considered qualifying
income for purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital
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gains realized on the Fund's other investments and shareholders will be advised
on the nature of the distributions.
TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political, or other conditions. Such measures could include investments in (a)
highly liquid short-term fixed income securities issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, and bank certificates of deposits; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the Trust's shares. For these purposes, a "majority" of shares
means shares representing the lesser of: (i) 67% or more of the votes cast to
approve a change, so long as shares representing more than 50% of the Fund's net
asset value are present or represented by proxy; or (ii) more that 50% of the
Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. The
Fund may borrow money through banks, reverse repurchase agreements, or
Vanguard's interfund lending program only, and must comply with all applicable
regulatory conditions. The Fund may not make any additional investments whenever
its outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may
invest in stock futures contracts and options. No more that 5% of the Fund
assets may be used as initial margin deposit for futures contracts, and no more
that 20% of the Fund's assets may be invested in stock futures contracts or
options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more that 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID OR RESTRICTED SECURITIES. The Fund may not acquire any security
if, as a result, more than 15% of its net assets would be invested in securities
that are illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more that 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for the
purpose of controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed income securities or by entering into repurchase agreements, or through
Vanguard's interfund lending program by lending its portfolio securities.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Trust's investment policies relating to
commodities.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
that 15% of its net assets.
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REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate, or interests
therein.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents the Fund from participating in The
Vanguard Group. As a member of The Vanguard Group, the Fund may own securities
issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs
or other financial requirements. See "Management of the Trust" for more
information.
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PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts or under circumstances
where certain economies can be achieved in sales of the Trust's shares.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange (the Exchange) is closed,
or trading on the Exchange is restricted as determined by the Commission, (ii)
during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the Commission may permit.
No charge is made by the Trust for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Trust.
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and
conditions. Under this arrangement, the Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions. Customer
orders that are properly transmitted to the Fund by Schwab, or if applicable,
Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
Exchange (generally 4:00 p.m. Eastern time) on each day that the Exchange is
open for trading.
Portfolio securities for which market quotations are readily available
(which include those securities listed on national securities exchanges, as well
as those quoted on the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securities which are not
traded on the valuation date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is taken from the exchange where
the security is primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
Short term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of a Fund's investment occur
after the close of the securities markets on which such securities
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are primarily traded, those investments may be valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect the fair value.
The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of "Vanguard Funds".
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MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
The officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its officers. The following is a list of the Trustees
and officers of the Trust and a statement of their present positions and
principal occupations during the past five years. As a group, the Trust's
Trustees and officers own less than 1% of the outstanding shares of the Trust.
Each Trustee also serves as a Director of The Vanguard Group, Inc., and as a
Trustee of each of the 36 investment companies administered by Vanguard (35 in
the case of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing address
of the Trustees and officers of the Trust is Post Office Box 876, Valley Forge,
PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) SENIOR CHAIRMAN AND TRUSTEE*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each of
the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).
JOHN J. BRENNAN, (DOB: 7/29/1954) CHAIRMAN, CHIEF EXECUTIVE OFFICER, AND
TRUSTEE*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) TRUSTEE
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare, Inc.
(Research and Education Institution), Recording for the Blind and Dyslexic, The
Medical Center at Princeton, and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) TRUSTEE
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) TRUSTEE
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern New
England Telecommunications Co.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) TRUSTEE
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/ Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).
JOHN C. SAWHILL, (DOB: 6/12/1936) TRUSTEE
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) TRUSTEE
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) TRUSTEE
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director of
Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Products);
and Trustee of Vanderbilt University.
B-12
<PAGE>
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) SECRETARY*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) TREASURER*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) CONTROLLER*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ------------------
* Officers of the Trust are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Vanguard Morgan Growth Fund is a member of The Vanguard Group of Investment
Companies, which consists of more than 35 investment companies (the Trusts).
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
(Vanguard), the Trust and the other Trusts in The Vanguard Group obtain at cost
virtually all of their corporate management, administrative, and distribution
services. Vanguard also provides investment advisory services on an at-cost
basis to certain Vanguard Trusts.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings, and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated among
the Trusts under methods approved by the Board of Trustees of each Trust. In
addition, each Trust bears its own direct expenses such as legal, auditing, and
custodian fees.
The Trust's officers are also officers and employees of Vanguard. No
officer or employee owns, or is permitted to own, any securities of any external
adviser for the Trusts.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. The Code is designed to prevent unlawful practices in
connection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics, certain officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Trusts.
The amounts which each of the Trusts has invested are adjusted from time to time
in order to maintain the proportionate relationship between each Trust's
relative net assets and its contribution to Vanguard's capital. At December 31,
1998, the Trust had contributed capital of $588,000 to Vanguard, representing
0.02% of the Fund's net assets and 0.8% of Vanguard's capitalization. The
Amended and Restated Funds' Service Agreement provides as follows: (a) each
Vanguard Trust may be called upon to invest up to 0.40% of its current assets in
Vanguard, and (b) there is no other limitation on the dollar amount that each
Vanguard Trust may contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Trusts by third parties. During the
fiscal years ended December 31, 1996, 1997, and 1998, the Trust's share of
Vanguard's actual net costs of operation relating to management and
administrative services (including transfer agency) totaled approximately
$5,684,000, $6,897,000, and $8,626,000, respectively.
B-13
<PAGE>
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the Trusts in the Group. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
Vanguard Group. The Trustees and officers of Vanguard determine the amount to be
spent annually on distribution activities, the manner and amount to be spent on
each Trust, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon relative net assets. The remaining one
half of those expenses is allocated among the Trusts based upon each Trust's
sales for the preceding 24 months relative to the total sales of the Trusts as a
Group, provided, however, that no Trust's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for The Vanguard Group,
and that no Trust shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets. During the fiscal years ended
December 31, 1996, 1997, and 1998, the Trust incurred approximately $312,000,
$465,000, and $594,000, respectively, of The Vanguard Group's distribution and
marketing expenses.
INVESTMENT ADVISORY SERVICES. Vanguard also provides the Trust with
investment advisory services. These services are provided on an at-cost basis
from a money management staff employed directly by Vanguard. The compensation
and other expenses of this staff are paid by the Trusts utilizing these
services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard Trusts (with two
exceptions, which are noted in the table appearing on page B-15), and each Trust
pays a proportionate share of the Trustees' compensation. The Trusts employ
their officers on a shared basis, as well. However, officers are compensated by
The Vanguard Group, Inc., not the Trusts.
INDEPENDENT TRUSTEES. The Trusts compensate their independent Trustees --
that is, the ones who are not also officers of the Trust -- in three ways:
o The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled
Board meetings.
o The independent Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
o Upon retirement, the independent Trustees receive an aggregate annual
fee of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEES. The Trusts' interested Trustees -- Messrs. Bogle
and Brennan -- receive no compensation for their service in that capacity.
However, they are paid in their role as officers of The Vanguard Group, Inc.
B-14
<PAGE>
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Trust for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard Trusts upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard Trusts. All information shown is for the fiscal
year ended December 31, 1998.
VANGUARD MORGAN GROWTH FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF TRUST ANNUAL BENEFITS VANGUARD TRUSTS
NAMES OF TRUSTEES FROM TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
- ---------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle......... None None None None
John J. Brennan....... None None None None
Barbara Barnes
Hauptfuhrer(2)...... $712 $ 96 $15,000 $75,000
JoAnn Heffernan
Heisen.............. $356 $ 42 $15,000 $37,500
Robert E.
Cawthorn(2)......... $296 $ 64 $ 6,000 $31,250
Bruce K. MacLaury..... $743 $ 73 $12,000 $70,000
Burton G. Malkiel..... $716 $ 69 $15,000 $75,000
Alfred M. Rankin,
Jr. ................ $712 $ 51 $15,000 $75,000
John C. Sawhill....... $712 $ 64 $15,000 $75,000
James O. Welch, Jr.... $712 $ 74 $15,000 $75,000
J. Lawrence Wilson.... $712 $ 53 $15,000 $75,000
</TABLE>
- ------------------
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 36 Vanguard Trusts (35 in
the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.
INVESTMENT ADVISORY SERVICES
The Trust currently uses three separate investment advisers, each of whom
manages the investment and reinvestment of a portion of the Vanguard Morgan
Growth Fund's assets. Prior to April 24, 1990, Wellington Management Company
served as the Fund's sole investment adviser.
WELLINGTON MANAGEMENT COMPANY, LLP. The Trust employs Wellington Management
Company, LLP (WMC) under an investment advisory agreement to manage the
investment and reinvestment of a portion of the Fund's assets, and to
continuously review, supervise, and administer the Fund's investment program.
WMC discharges its responsibilities subject to the control of the officers and
Trustees of the Trust. WMC is a Massachusetts limited liability partnership, and
the following persons serve as managing partners of WMC: Robert W. Doran, Duncan
M. McFarland, and John R. Ryan. WMC and its predecessor organizations have
provided investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Robert D. Rands, Senior Vice President
of WMC, has served as portfolio manager of the Fund since 1994.
B-15
<PAGE>
The Fund pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the Trust's average month-end net assets managed by WMC for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
- ---------- -----
<S> <C>
First $500 million.................................. 0.175%
Next $500 million................................... 0.100%
Over $1 billion..................................... 0.075%
</TABLE>
The Basic Fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of the
Fund managed by WMC relative to the investment record of The Growth Fund Stock
Index (the Index), which is described on page B-23.
The following table sets forth the incentive/penalty fee rates payable by
the Fund to WMC under the investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH
PERFORMANCE VERSUS THE PERFORMANCE FEE
GROWTH FUND STOCK INDEX ADJUSTMENT*
----------------------- -----------------
<S> <C>
Less than -12%................................... -0.50 x Basic Fee
Between -12% and -6%............................. -0.25 x Basic Fee
Between -6% and 6%............................... 0.00 x Basic Fee
Between 6% and 12%............................... +0.25 x Basic Fee
More than 12%.................................... +0.50 x Basic Fee
</TABLE>
- ------------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
This incentive/penalty fee was not fully operable until the quarter ending
March 31, 1999. Until that date, a "blended" fee rate consisting of varying
percentages of (i) the performance adjustment based on the schedule set forth
above (the new rate), and (ii) the performance adjustment based on the schedule
set forth in the Fund's previous investment advisory agreement with the
Adviser(1) (the previous rate) was used as follows:
1. QUARTER ENDED JUNE 30, 1996. The incentive/penalty fee was
calculated as the sum of 8.3% (e.g., one of 12 quarters) of the fee payable
under the new rate plus 91.7% (e.g., 11 of 12 quarters) of the fee payable
under the previous rate.
2. QUARTER ENDED SEPTEMBER 30, 1996. The incentive/penalty fee was
calculated as the sum of 16.6% of the fee payable under the new rate plus
83.4% of the fee payable under the previous rate.
3. QUARTER ENDED DECEMBER 31, 1996. The incentive/penalty fee was
calculated as the sum of 25% of the fee payable under the new rate plus 75%
of the fee payable under the previous rate.
4. QUARTER ENDED MARCH 31, 1997. The incentive/penalty fee was
calculated as the sum of 33% of the fee payable under the new rate plus 67%
of the fee payable under the previous rate.
5. QUARTER ENDED JUNE 30, 1997. The incentive/penalty fee was
calculated as the sum of 41.6% of the fee payable under the new rate plus
58.4% of the fee payable under the previous rate.
6. QUARTER ENDED SEPTEMBER 30, 1997. The incentive/penalty fee was
calculated as the sum of 50% of the fee payable under the new rate plus 50%
of the fee payable under the previous rate.
B-16
<PAGE>
7. QUARTER ENDED DECEMBER 31, 1997. The incentive/penalty fee was
calculated as the sum of 58.4% of the fee payable under the new rate plus
41.6% of the fee payable under the previous rate.
8. QUARTER ENDED MARCH 31, 1998. The incentive/penalty fee was
calculated as the sum of 67% of the fee payable under the new rate plus 33%
of the fee payable under the previous rate.
9. QUARTER ENDED JUNE 30, 1998. The incentive/penalty fee was
calculated as the sum of 75% of the fee payable under the new rate and 25%
of the fee payable under the previous rate.
10. QUARTER ENDED SEPTEMBER 30, 1998. The incentive/penalty fee was
calculated as the sum of 83.4% of the fee payable under the new rate plus
16.6% of the fee payable under the previous rate.
11. QUARTER ENDED DECEMBER 31, 1998. The incentive/penalty fee was
calculated as the sum of 91.7% of the fee payable under the new rate plus
8.3% of the fee payable under the previous rate.
12. QUARTER ENDED MARCH 31, 1999. New rate became fully operable.
- ------------------
1 The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to 0.0375% per annum (0.009375 of 1%
per quarter) of the average month-end assets if the Trust's investment
performance for the 36 months preceding the end of the quarter was between 6
and 12 percentage points above or below, respectively, the investment record
of the Growth Fund Stock Index and 0.075% per annum (0.1875 of 1% per) of the
average month-end assets of the Fund if the Fund's investment performance for
the 36 months preceding the end of the quarter was twelve percentage points or
more above or below, respectively, the investment record of the Growth Fund
Stock Index.
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the WMC Portfolio shall be
averaged over the same period as the investment performance of the WMC Portfolio
and the investment record of the Growth Fund Stock Index are computed. The
investment performance of the WMC Portfolio for such period, expressed as a
percentage of the WMC Portfolio's net asset value per share at the beginning of
such period, shall be the sum of: (i) the change in the WMC Portfolio's net
asset value per share during such period; (ii) the value of the WMC Portfolio's
cash distributions per share having an ex-dividend date occurring within such
period; and (iii) the per share amount of capital gains taxes paid or accrued
during such period by the WMC Portfolio for undistributed realized long-term
capital gains.
The investment record of the Growth Fund Stock Index for any period,
expressed as a percentage of the Growth Fund Stock Index level at the beginning
of such period, shall be the sum of (i) the change in the level of the Growth
Fund Stock Index during such period and (ii) the value, computed consistently
with the Growth Fund Stock Index, of cash distributions having an ex-dividend
date occurring within such period made by companies whose securities comprise
the Growth Fund Stock Index. The foregoing notwithstanding, any computation of
the investment performance of the WMC Portfolio and the investment record of the
Growth Fund Stock Index shall be in accordance with any then applicable rules of
the Securities and Exchange Commission.
In April 1972, the Commission issued Release No. 7113 under the 1940 Act to
call attention of Trustees and investment advisers to certain factors which must
be considered in connection with investment company incentive fee arrangements.
One of these factors is to "avoid basing significant fee adjustments upon random
or insignificant differences" between the investment performance of a fund and
that of the particular index with which it is being compared. The Release
provides that "preliminary studies (of the staff of the Commission) indicate
that as a 'rule of thumb' the performance difference should be at least (plus
or minus) 10 percentage points" annually before the maximum performance
adjustment may be made. However, the Release also states that "because of the
B-17
<PAGE>
preliminary nature of these studies, the Commission is not recommending, at this
time, that any particular performance difference exist before the maximum fee
adjustment may be made." The Release concludes that the Trustees of a Trust
"should satisfy themselves that the maximum performance adjustment will be made
only for performance differences that can reasonably be considered significant."
The Board of Trustees of the Trust has fully considered the Commission's Release
and believes that the performance adjustments as included in the agreement are
entirely appropriate although not within the (plus or minus) 10 percentage
points per year range suggested in the Release. Under the Trust's investment
advisory agreement, the maximum performance adjustment is made at a difference
of (plus or minus) 12 percentage points from the performance of the index over a
thirty-six month period, which would effectively be the equivalent of
approximately (plus or minus) 4 percentage points difference per year. The
Trust's investment advisory agreement provides for no performance adjustment at
a difference of less than (plus or minus) 6 percentage points from the
performance of the index over a thirty-six month period, which would be the
equivalent of approximately (plus or minus) 2 percentage points per year.
DURATION AND TERMINATION. The current agreement with WMC is renewable for
successive one-year periods only so long as such renewal is approved at least
annually by a vote of the Trust's Board of Trustees, including the affirmative
votes of a majority of the Trustees who are not parties to the contract or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of considering such approval. The
agreement is automatically terminated if assigned, and may be terminated without
penalty at any time either (1) by vote of the Board of Trustees of the Trust on
sixty (60) days' written notice to WMC, or (2) by WMC upon ninety (90) days'
written notice to the Trust.
RELATED INFORMATION CONCERNING WELLINGTON MANAGEMENT COMPANY, LLP. WMC, 75
State Street, Boston, MA 02109, is a professional investment counseling firm
which provides investment services to investment companies, other institutions
and individuals. Among the clients of WMC are more than ten of the investment
companies of The Vanguard Group. WMC and its predecessor organizations have
provided investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. WMC is a Massachusetts limited
liability partnership of which the following persons are managing partners:
Messrs. Robert W. Doran, Duncan M. McFarland and John R. Ryan.
During the last three fiscal years, the Fund incurred the following
advisory fees, attributable to WMC:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee........................................... $1,084,780 $1,292,417 $1,541,922
Increase (Decrease) for Performance Adjustment...... 51,915 (63,493) $ 76,371
---------- ---------- ----------
Total............................................... $1,136,695 $1,228,924 $1,618,293
========== ========== ==========
</TABLE>
FRANKLIN PORTFOLIO ASSOCIATES, LLC. The Trust employs Franklin Portfolio
Associates, LLC under an investment advisory agreement to manage the investment
and reinvestment of a portion of the Fund's assets. Franklin Portfolio
Associates discharges its responsibilities subject to the control of the
officers and Trustees of the Trust.
The Fund pays Franklin Portfolio Associates a Basic Fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the average month-end net assets managed by Franklin
Portfolio Associates for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
- ---------- --------
<S> <C>
First $100 million................................... 0.25%
Next $200 million.................................... 0.20%
Next $200 million.................................... 0.15%
Over $500 million.................................... 0.10%
</TABLE>
B-18
<PAGE>
The Basic Fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of the
Fund managed by Franklin Portfolio Associates relative to the investment record
of the Index. Such incentive/penalty fee provides for an increase or decrease in
Franklin Portfolio Associates' basic fee in an amount equal to 0.10% per annum
(0.025% per quarter) of the average month-end net assets of the portion of the
Fund managed by Franklin Portfolio Associates if the investment performance of
that portion of the Fund for the thirty-six months preceding the end of the
quarter is six percentage points or more above or below, respectively, the
investment record of the Index for the same period.
The following table sets forth the incentive/penalty fee rates payable by
the Fund to Franklin Portfolio Associates under the investment advisory
agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH ANNUAL INCENTIVE (+)/
PERFORMANCE PENALTY (-) FEE
VS. THE INDEX RATE
------------------- ---------------------
<S> <C>
+6% or more above............................... +.10%
Between +6% and -6%............................. -0-
- -6% or more below............................... -.10%
</TABLE>
The investment performance of the portfolio of securities managed by
Franklin Portfolio Associates, the unit value of the portfolio and the
investment record of the Index will be calculated in the same manner as set
forth under the discussion of the WMC Agreement on page B-17. For the purposes
of determining the incentive/penalty fee, the net assets of the Franklin
Portfolio Associates portfolio will be averaged over the same period as the
investment performance of the Franklin Portfolio Associates portfolio and the
investment record of the Index are computed.
The formula used to determine the performance adjustments differs from the
view taken by the staff of the Securities and Exchange Commission. For a more
detailed discussion, see pages B-16 and B-17. The Board of Trustees of the Trust
believes that the performance adjustments, as included in the agreement with
Franklin Portfolio Associates, are appropriate although less than the +10
percentage points per year range suggested in SEC Release No. 7113. Under the
proposed agreement, the maximum performance adjustment is made at a difference
of approximately +2 percentage points per year.
The current agreement with Franklin Portfolio Associates is renewable for
successive one year periods only so long as such renewal is approved at least
annually by a vote of the Trust's Board of Trustees, including the affirmative
votes of a majority of the Trustees who are not parties to the contract or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of considering such approval. The
agreement may be terminated without penalty at any time either (1) by vote of
the Board of Trustees of the Trust on 60 days' written notice to Franklin
Portfolio Associates, or (2) by Franklin Portfolio Associates upon 90 days'
written notice to the Trust.
During the last three fiscal years, the Fund paid Franklin Portfolio
Associates the following advisory fees:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee........................................... $ 987,145 $1,310,220 $1,701,152
Increase (Decrease) for Performance Adjustment...... 115,797 571,862 383,794
---------- ---------- ----------
Total............................................... $1,102,942 $1,882,082 $2,084,946
========== ========== ==========
</TABLE>
RELATED INFORMATION CONCERNING FRANKLIN PORTFOLIO ASSOCIATES, LLC. Franklin
Portfolio Associates, Two International Place, Boston, MA 02110. Franklin
Portfolio Associates is a Massachusetts limited liability company, which is an
indirect, wholly-owned subsidiary of MBC Investments Corporation, which is
itself a wholly owned subsidiary of Mellon Bank Corporation.
B-19
<PAGE>
Franklin Portfolio Associates is a professional investment counseling firm
which specializes in the management of common stock funds through the use of
quantitative investment models. As of December 31, 1998, Franklin Portfolio
Associates provided investment advisory services with respect to approximately
$18.6 billion of client assets, including approximately $5.16 billion for
Vanguard Growth and Income Fund, another mutual fund member of The Vanguard
Group.
VANGUARD'S CORE MANAGEMENT GROUP. Vanguard's Core Management Group
provides investment advisory services on an at-cost basis with respect to 15% of
Vanguard Morgan Growth Fund's assets as of December 31, 1998. The Core
Management Group employs a quantitative investment approach that uses computer
techniques to track -- and, if possible, outperform -- a specific market
standard. For Morgan Growth Fund, this market standard is the Growth Fund Stock
Index, which is made up of the stocks held by the nation's 50 largest growth
funds.
ADVISORY CHANGES. The Trust's Board of Trustees may, without the approval
of shareholders, provide for:
A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing adviser
or as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.
Any such change will be communicated to shareholders in writing.
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the Advisers (with the
approval of the Trust's Board of Trustees) to select the brokers or dealers that
will execute the purchases and sales of securities for the Fund and direct the
Advisers to use their best efforts to obtain the best available price and most
favorable execution as to all transactions for the Fund. The Advisers have
undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances. During the fiscal years ended December 31, 1996, 1997,
and 1998, the Fund paid $2,130,785, $3,104,030, and $4,313,385 respectively, in
brokerage commissions.
In placing portfolio transactions, the Advisers will use their best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
Advisers. The Advisers consider such information useful in the performance of
their obligations under the agreement but are unable to determine the amount by
which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Trust's Board of Trustees, the Advisers may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Advisers to the Fund and the other Trusts in the Group.
B-20
<PAGE>
Currently, it is the Fund's policy that the Advisers may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Advisers will only pay such higher
commissions if they believe this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Advisers and/or the Fund. However, the
Advisers have informed the Trust that they generally will not pay higher
commission rates specifically for the purpose of obtaining research services.
Some securities considered for investment by the Fund may also be
appropriate for other funds and/or clients served by the Advisers. If purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these other funds or clients serviced by the Advisers are
considered at or about the same time, transactions in such securities will be
allocated among the several funds and clients in a manner deemed equitable by
the Advisers.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1998 was
0.64%.
The average annual total return of the Fund for the one-, five-, and
ten-year periods ending December 31, 1998 was 22.26%, 21.40%, and 17.09%,
respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years, or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)1/n-1
Where:
<TABLE>
<S> <C> <C>
T = average annual total return.
P = a hypothetical initial investment of $1,000.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
B-21
<PAGE>
Where:
<TABLE>
<S> <C> <C>
C = cumulative total return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((a-b)/cd + 1)(6)- 1]
Where:
<TABLE>
<S> <C> <C>
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
PERFORMANCE MEASURES
There are a number of different ways to measure the performance of a mutual
fund. One of these methods is to calculate the current yield of a fund. This is
done by dividing the total amount of dividends per share paid by a fund during
the past twelve months by a current offering price (including the sales charge,
if any). Under certain circumstances, such as when there has been a fundamental
change in investment or dividend policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends paid during the past twelve months. An alternate method is
to calculate a compound yield. This is derived by computing the total compounded
dividends paid by a fund during the past twelve months on the assumption that
all dividends were reinvested in additional shares (and giving no effect to
capital gains distributions or taxes) and dividing this by a current offering
price. Another method is to calculate the total return by dividing the change in
value of an investment in shares over a period of time (generally ten years or
more), assuming the reinvestment of all dividends and capital gains
distributions, by the original net asset value of the shares. Regardless of the
method used, past performance is not necessarily indicative of future results,
but is an indication of the return to shareholders only for the limited
historical period used.
From time to time, advertisements, reports and promotional literature
regarding the Fund may compare its yield or total return (as calculated above)
to yields or returns reported by other investments and to various indices and
averages to assist an investor's calculation of how an investment in the Fund
might satisfy his investment objectives.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Morgan Growth Fund, may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
B-22
<PAGE>
GROWTH FUND STOCK INDEX -- The Index is composed of the various common
stocks that are held in the 50 largest growth stock mutual funds, using year-end
net assets, monitored by Morningstar, Inc. Under an agreement with the Fund,
Morningstar, Inc. develops the composition of the Index and its total return
each quarter. Neither The Vanguard Group, Inc., WMC, nor Franklin Portfolio
Associates are affiliated with Morningstar in any way.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- contains the stocks of
500 of the largest domestic companies.
STANDARD & POOR'S MIDCAP 400 INDEX -- is composed of 400 medium sized
domestic stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX -- includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX -- contains stocks of the
S&P SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX -- contains stocks of the
S&P SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000
Index (comprising the 1,000 largest U.S.-based companies measured by total
market capitalization) with the lowest price-to-book ratios, comprising 50% of
the market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard & Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and
29 preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of ten years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500
U.S. Treasury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than ten years.
B-23
<PAGE>
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the
average yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only and does
not include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ
Industrial Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG -- TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of
U.S. domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- consists of the smallest 2,000 stocks within
the Russell 3000; a widely-used benchmark for small capitalization common
stocks.
RUSSELL 2000(REGISTERED) VALUE INDEX -- Contains stocks from the Russell
2000 Index with a less-than-average growth orientation.
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER SMALLCAP FUND AVERAGE -- the average performance of small company
growth funds as defined by Lipper Inc. Lipper defines a small company growth
fund as a fund that by prospectus or portfolio practice, limits its investments
to companies on the basis of the size of the company. From time to time,
Vanguard may advertise using the average performance and/or the average expense
ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment
B-24
<PAGE>
grade bonds rated BBB- or better with maturities between one and five years. The
index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX
- -- is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
five and ten years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency and
corporate securities rated BBB- or better with maturities greater than ten
years. The index has a market value of over $900 billion.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average
general equity funds with similar investment objectives and policies, as
measured by Lipper Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Inc.
AGGRESSIVE GROWTH FUND STOCK INDEX -- The Index is composed of the various
common stocks that are held in the 50 largest aggressive growth stock mutual
funds, using year-end net assets, monitored by Morningstar, Inc.
Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's financial statements as of and for the year ended December 31,
1998, appearing in the Vanguard Morgan Growth Fund 1998 Annual Report to
Shareholders, and the report thereon of PricewaterhouseCoopers LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of the
performance, please see the Fund's Annual Report to Shareholders, which may be
obtained without charge.
B-25
<PAGE>
PART C
VANGUARD MORGAN GROWTH FUND
OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<S> <C>
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's
Declaration of Trust
(d) Investment Advisory Contracts**
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the
Trust" in the Registrant's Statement of Additional
Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule*
(o) Not Applicable
</TABLE>
- ------------------
* Filed herewith
** Previously filed
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Wellington Management Company, LLP, (WMC) 75 State Street, Boston,
Massachusetts 02109, is a Massachusetts limited liability partnership, of which
the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan. No partner has any other affiliation with the
Registrant.
C-1
<PAGE>
WMC is an investment adviser registered under the Investment Advisers Act
of 1940, as amended (the Advisers Act). The list required by this Item 26 of
officers and partners of WMC, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and partners during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by WMC pursuant to the
Advisers Act (SEC File No. 801-15908).
Franklin Portfolio Associates, LLC, Two International Place, Boston,
Massachusetts 02110, is a Massachusetts limited liability company, which is an
indirect, wholly-owned subsidiary of MBC Investments Corporation, which is
itself a wholly-owned subsidiary of Mellon Bank Corporation. No officer has any
other affiliation with the Registrant.
Franklin Portfolio Associates is an investment adviser registered under the
Advisers Act. The list required by this Item 26 of officers and partners of
Franklin Portfolio Associates, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and partners during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Franklin Portfolio
Associates pursuant to the Advisers Act (SEC File No. 801-17057).
Investment advisory services are also provided to the Registrant on an at
cost basis by The Vanguard Group, Inc., a jointly owned subsidiary of the
Registrant and the other funds in the Group. See the information concerning The
Vanguard Group set forth in Parts A and B.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by
Section 31(a) of the Investment Company Act and the rules promulgated thereunder
will be maintained at the offices of Registrant; Registrant's Transfer Agent,
The Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02105.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part
B of this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all the requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Valley
Forge and the Commonwealth of Pennsylvania, on the 26th day of April, 1999.
VANGUARD MORGAN GROWTH FUND
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ JOHN C. BOGLE Senior Chairman of the Board April 26, 1999
- ----------------------------------- and Trustee
(HEIDI STAM)
JOHN C. BOGLE*,
By: /s/ JOHN J. BRENNAN President, Chairman, April 26, 1999
- ----------------------------------- Chief Executive Officer,
(HEIDI STAM) and Trustee
JOHN J. BRENNAN*,
By: /s/ JOANN HEFFERNAN HEISEN Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
JOANN HEFFERNAN HEISEN*,
By: /s/ BRUCE K. MACLAURY Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
BRUCE K. MACLAURY*,
By: /s/ BURTON G. MALKIEL Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
BURTON G. MALKIEL*,
By: /s/ ALFRED M. RANKIN, JR. Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
ALFRED M. RANKIN, JR.*,
By: /s/ JOHN C. SAWHILL Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
JOHN C. SAWHILL*,
By: /s/ JAMES O. WELCH, JR. Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
JAMES O. WELCH, JR.*,
By: /s/ J. LAWRENCE WILSON Trustee April 26, 1999
- -----------------------------------
(HEIDI STAM)
J. LAWRENCE WILSON*,
By: /s/ THOMAS J. HIGGINS Treasurer and Principal April 26, 1999
- ----------------------------------- Financial
(HEIDI STAM) Officer and Accounting Officer
THOMAS J. HIGGINS*,
</TABLE>
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants......................................... Ex-99.BJ
Financial Data Schedule.................................................... Ex-99.BN
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 54 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 2, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of Vanguard Morgan Growth Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers - Independent Accountants" in the Statement of Additional
Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
April 22, 1999
[ARTICLE] 6
[RESTATED]
[CIK] 0000068138
[NAME] VANGUARD MORGAN GROWTH FUND
[SERIES]
[NUMBER] 001
[NAME]Vanguard Morgan Growth Fund
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 2,547,401
[INVESTMENTS-AT-VALUE] 3,623,543
[RECEIVABLES] 31,459
[ASSETS-OTHER] 588
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 3,655,590
[PAYABLE-FOR-SECURITIES] 20,320
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 80,097
[TOTAL-LIABILITIES] 100,417
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,371,706
[SHARES-COMMON-STOCK] 180,323
[SHARES-COMMON-PRIOR] 159,388
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 990
[ACCUMULATED-NET-GAINS] 101,541
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 1,082,916
[NET-ASSETS] 3,555,173
[DIVIDEND-INCOME] 29,713
[INTEREST-INCOME] 12,374
[OTHER-INCOME] 890
[EXPENSES-NET] 13,354
[NET-INVESTMENT-INCOME] 29,623
[REALIZED-GAINS-CURRENT] 286,705
[APPREC-INCREASE-CURRENT] 329,112
[NET-CHANGE-FROM-OPS] 645,440
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 30,730
[DISTRIBUTIONS-OF-GAINS] 240,911
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 33,834
[NUMBER-OF-SHARES-REDEEMED] 26,859
[SHARES-REINVESTED] 13,960
[NET-CHANGE-IN-ASSETS] 759,870
[ACCUMULATED-NII-PRIOR] 117
[ACCUMULATED-GAINS-PRIOR] 55,747
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4,034
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 13,598
[AVERAGE-NET-ASSETS] 3,084,546
[PER-SHARE-NAV-BEGIN] 17.54
[PER-SHARE-NII] 0.18
[PER-SHARE-GAIN-APPREC] 3.61
[PER-SHARE-DIVIDEND] 0.18
[PER-SHARE-DISTRIBUTIONS] 1.43
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 19.72
[EXPENSE-RATIO] 0.44
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
