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VANGUARD MORGAN[TM] GROWTH FUND
[PHOTO]
SEMIANNUAL REPORT
June 30, 2000
[THE VANGUARD GROUP LOGO]
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is more
like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments.
Remember that, at any moment, some part of a diversified portfolio will lag
other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall asset
allocation.
o Capture as much of the market's return as possible by minimizing costs and
taxes.
Costs and taxes diminish long-term returns while doing nothing to reduce the
risks you incur as an investor.
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CONTENTS
REPORT FROM THE CHAIRMAN 1 FUND PROFILE 8
THE MARKETS IN PERSPECTIVE 4 PERFORMANCE SUMMARY 10
REPORT FROM THE ADVISER 6 FINANCIAL STATEMENTS 11
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"Standard & Poor's (R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to
the Russell Indexes.
"Wilshire 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
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REPORT FROM THE CHAIRMAN
[PHOTO]
JOHN J. BRENNAN
Vanguard Morgan Growth Fund had a total return of 3.2% during the first half of
2000. This was a middle-of-the-road result--ahead of the modest decline posted
by the overall stock market but behind the average return of competing funds.
The table at right presents the half-year total returns (capital change
plus reinvested dividends) for the fund, the average multi-capitalization growth
fund, and a pair of unmanaged benchmarks--the large-cap-dominated Standard &
Poor's 500 Index and the Growth Fund Stock Index, which is based on the stocks
held by the 50 largest growth-oriented mutual funds.
The fund's return is based on an increase in net asset value from $22.92
per share on December 31, 1999, to $22.95 per share on June 30, 2000, and is
adjusted for a distribution in March of $0.75 per share paid from net realized
capital gains.
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TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 2000
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Vanguard Morgan Growth Fund 3.2%
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Average Multi-Cap Growth Fund* 6.5%
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S&P 500 Index -0.4%
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Growth Fund Stock Index** 6.9%
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*Derived from data provided by Lipper Inc.
**Reflects the average common stock holdings of the
50 largest growth-oriented mutual funds.
THE PERIOD IN REVIEW
The first half of 2000 was a tumultuous time in the financial markets, which
were buffeted by a complex set of crosscurrents. The domestic economy continued
to grow at a strong pace--the production of goods and services during the second
quarter of 2000 was about 6% higher than in the same period last year, even
after adjusting for inflation. Unemployment remained low, hovering around 4% of
the workforce. Elsewhere in the world, growth was picking up from more subdued
levels.
Economic growth is generally good for corporate earnings and, thus, for
stock prices. But investors and economic policymakers have worried that the
combination of rapid economic growth and low unemployment would trigger sharply
higher wages and inflation. The Federal Reserve Board, in an effort to slow the
economy's momentum and forestall an inflationary outburst, continued to raise
short-term interest rates during the first half of the year. The Fed boosted its
target for the federal funds rate three times during the period by a total of
1.0 percentage point (100 basis points). In all, the Fed has raised its target
rate by 175 basis points in the past 12 months.
For most of the first quarter of 2000, a continuing boom in technology
stocks kept the market averages rising, despite the threat of higher interest
rates. But during the second quarter, tech stocks in particular cooled off. The
market may have reacted to evidence that the ideal combination of rapid growth
and low inflation was coming to an end. If the Fed succeeds in slowing the
economy, corporate earnings growth might slow, too. And if earnings growth
slowed, some investors reasoned, technology and telecommunications stocks would
have a tough time maintaining their lofty price/earnings multiples. The split
between the two quarters was evident in the results for the tech-dominated
Nasdaq Composite Index, which rose 12.7% in the first quarter, only to
slide-14.7% in the second. End result? A -3.9% return for the half-year.
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The overall U.S. stock market, as measured by the Wilshire 5000 Total
Market Index, posted a -0.7% return for the six months. The small-cap Russell
2000 Index gained 3.0%, outpacing the large-cap S&P 500 Index, which posted a
return of -0.4%. Leadership within the market switched back and forth during the
period. Growth stocks were in front early on, but value stocks performed best in
late March and April. Growth issues bounced back in June, however, and for the
full six months, growth generally outpaced value. For example, the growth stocks
within the Russell 1000 Index (comprising the 1,000 largest U.S. stocks) earned
4.2%, while the value stocks declined by an equal amount.
The Fed's efforts succeeded in pushing up short-term interest rates: The
yield of 3-month U.S. Treasury bills climbed 52 basis points (from 5.33% to
5.85%) during the half-year. But after rising early in the year, yields for
longer-term Treasuries began to fall after the Treasury announced that it would
use rising federal budget surpluses to buy back billions of dollars' worth of
long-term bonds. A shrinking supply of long-term Treasuries caused their prices
to rise and their yields to fall. By June 30, the 30-year Treasury bond's yield
had fallen 58 basis points, from 6.48% to 5.90%.
PERFORMANCE OVERVIEW
The Morgan Growth Fund's half-year return was 3.6 percentage points higher than
that of the S&P 500 Index. However, the fund lagged the average multi-cap growth
fund and the Growth Fund Stock Index by similar margins--3.3 and 3.7 percentage
points, respectively.
In relation to the S&P 500 Index, Morgan Growth Fund benefited from holding
some mid-cap stocks, which were among the market's leaders. The fund's $26.9
billion median market capitalization (as of June 30) is less than one-third that
of the index. The fund's advisers also did a good job of picking stocks in two
key growth sectors. Our health care stocks had a total return of 39.2%, while
those in the index gained 23.4%. And our holdings in the technology sector
returned 9.2%, twice as much as the index's tech stocks. As of June 30, the fund
had slightly larger stakes than the S&P 500 in both sectors.
While Morgan Growth navigated the topsy-turvy technology sector with
aplomb, its competitors on average managed to do even better. The 50 largest
growth-oriented mutual funds, for example, earned 13.2% on their tech holdings.
Similar performance gaps in the consumer discretionary and producer durables
sectors accounted for most of our shortfall versus both the average multi-cap
growth fund and the Growth Fund Stock Index. Additional details about the fund's
performance during the semiannual period can be found in the Report From The
Advisers, which begins on page 6.
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TOTAL ASSETS MANAGED
JUNE 30, 2000
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$ MILLION PERCENTAGE
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Wellington Management $2,307 40%
Franklin Portfolio Assocaites 2,305 39
Vanguard Quantitative Equity Group 939 16
Cash Investments* 305 5
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Total $5,856 100%
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*Cash in invested in equity index futures to simulate investment in
stocks. Each adviser also may maintain a modest cash reserve.
The fund's long-term record remains excellent. Part of this record reflects
the contributions of John J. Nagorniak, founder of Franklin Portfolio
Associates, which serves as one of the fund's three investment advisers. (As
shown in the adjacent table, Franklin managed 39% of the fund's assets as of
June 30.) Mr. Nagorniak, who retired on June 30, led the development of the
quantitative models that Franklin has used since it began managing a portion of
the fund in 1990. These models will remain in use, guided by another key player
in their
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development, John S. Cone, who is Franklin's president and chief executive. We
wish Mr. Nagorniak the best, and on behalf of our fellow shareholders in
Vanguard Morgan Growth Fund, we thank him for the energy and intellect he
brought to his work.
IN SUMMARY
During the first half of 2000 we witnessed very sharp day-to-day price
fluctuations, significant swings in investor sentiment, and sudden shifts in
market leadership. All of this volatility, squeezed into a mere six months,
underscored the fact that unpredictability is par for the course in financial
markets. The timing, extent, and duration of such episodes are impossible to
foretell with precision, but investors must be willing to endure them to reap
the long-term rewards of investing.
At Vanguard, we reiterate our long-standing recommendation for navigating
stormy seas toward long-term financial goals. First, create an investment plan
with a balance of stock funds, bond funds, and money market funds suited to your
time horizon, investment objectives, and tolerance for market fluctuations.
Then, once you have such a diversified plan in place, stick with it. Avoid the
impulse to alter it based on short-term events--whether those be unsettling
turbulence in the market or glittery returns from some particular corner of the
market. "Stay the course" is timeless investment wisdom.
/S/
John J. Brennan
Chairman and Chief Executive Officer
July 20, 2000
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IN MEMORY
It is with great sadness that I report the death of John C. Sawhill, an
independent trustee of the fund and a member of The Vanguard Group's board of
directors since 1991. John, an economist who was president and chief executive
officer of The Nature Conservancy, died on May 18 at age 63. He was a senior
lecturer at the Harvard Business School and had formerly served as president of
New York University and as deputy secretary of the U.S. Department of Energy
under President Jimmy Carter. John was a remarkable man who was full of energy,
vigor, and life. His experience and wisdom added a great deal to Vanguard, and
his death is a blow to everyone who knew and loved him. Though John's work on
behalf of our funds was often carried on behind the scenes, he was a dedicated
advocate for the best interests of our shareholders. He will be missed.
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 2000
The perpetual tug-of-war in the financial markets ended in a near stalemate
during the first half of 2000, despite lots of back-and-forth movement. On
average, neither stock nor bond prices ended the period far from where they
began it. However, bonds, thanks to their superior income, outpaced stocks in
total return.
Economic signals were conflicting. Growth continued at a rapid pace, and
corporate profits rose smartly. On the other hand, stock prices as the year
began already reflected high levels of optimism, and the market administered
severe punishment to companies that failed to live up to earnings expectations.
Also weighing on the market were concerns that the economy's vigor at a time of
low unemployment would inevitably push labor costs and other prices higher.
Indeed, higher costs for oil and natural gas pushed broad gauges of inflation
higher (the Consumer Price Index gained 2.4% for the six months and 3.7% for the
twelve months ended June 30). Yet core inflation, which excludes energy and food
items, registered a moderate 2.4% gain during the 12 months ended June 30.
The Federal Reserve Board raised short-term interest rates by 0.25
percentage point in February and again in March, before adding a half-point
boost in May. These steps, which followed three quarter-percentage-point
increases in 1999, took the Fed's target for short-term rates to 6.5%.
Thereafter, signs of a slowing in economic activity cropped up, although it was
not certain that the Fed was done trying to throttle down the economic engine.
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 2000
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6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index -0.4% 7.2% 23.8%
Russell 2000 Index 3.0 14.3 14.3
Wilshire 5000 Index -0.7 10.0 22.6
MSCI EAFE Index -4.0 17.4 11.6
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BONDS
Lehman Aggregate Bond Index 4.0% 4.6% 6.3%
Lehman 10 Year Municipal Bond Index 4.0 4.5 6.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.8 5.3 5.2
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OTHER
Consumer Price Index 2.4% 3.7% 2.5%
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*Annualized.
U.S. STOCK MARKETS
Stock prices were quite volatile during the half-year, and large day-to-day
price fluctuations in market averages were commonplace. There also were two
swift shifts in market leadership. The year began with a continuance in the
rapid rise for the "TMT" stocks (technology, media, telecommunications) that
were the market's darlings during 1999. Through mid-March, the surge in these
"new economy" groups left "old economy" stocks far behind. For example, the
Nasdaq Composite Index, which is dominated by tech-related stocks, gained 15.6%
and the Russell 1000 Value Index fell -10.4% during January and February. But in
mid-March, value stocks took charge and TMT stocks slumped. The Russell 1000
Value Index returned 12.1% while the Nasdaq plummeted to a -27.4% return in the
March-May period. But June brought another flip-flop: The value index declined
-4.6%, while the Nasdaq rebounded with a 14.5% return.
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When the half-year was over, most broad market indexes had modest declines.
The all-market Wilshire 5000 Index returned -0.7%, the large-capitalization S&P
500 Index slipped -0.4%, and the Nasdaq fell -3.9%. Small- and mid-cap stocks
did better: The small-cap Russell 2000 Index gained 3.0% and the Wilshire 4500
Completion Index, comprising virtually all the U.S. stocks outside of the S&P
500, eked out a 0.3% return.
U.S. BOND MARKETS
The Federal Reserve most directly influences interest rates of short-term
securities. The Fed pushed up its target federal funds rate (charged on
overnight loans between banks) by 1 percentage point to 6.5%. But yields of
3-month U.S. Treasury bills rose only half as far (0.52 percentage point, or 52
basis points to 5.85%). And yields actually declined on long-term Treasury
securities, whose prices rose. Big federal budget surpluses are causing a
shrinking supply of Treasury bonds. The 10-year Treasury note's yield fell 41
basis points to 6.03% as of June 30, and the yield of the 30-year Treasury
declined 58 basis points--from 6.48% to 5.90%--during the half-year.
The upshot was an unusual "inversion" in the yield curve. Instead of
sloping upward--with yields increasing along with the maturity of Treasury
securities--the curve descended. The 5.90% yield of 30-year Treasuries on June
30 was 49 basis points below the 6.39% yield on 3-year Treasury notes.
Corporate bonds did not perform as well as Treasuries for two main reasons:
a record level of new offerings and investors' concern that credit quality might
be declining. The rise in yields (and fall in prices) was slight for
higher-quality corporate bonds but more severe for high-yield "junk" bonds.
Investors grew wary of riskier bonds due to an increase in defaults. The Lehman
High Yield Bond Index saw a price decline of -5.7% during the first half of
2000, more than offsetting its six-month income of 4.5%. Tax-exempt municipal
bonds generally outperformed corporates but did not do as well as Treasury
securities. The overall taxable bond market, as measured by the Lehman Aggregate
Bond Index, returned 4.0%, as a price gain of 0.4% augmented a 3.6% income
return.
INTERNATIONAL STOCK MARKETS
International stock markets were generally unprofitable for U.S. investors due
to lack-luster local market performances and a stronger U.S. dollar during the
half-year. Although economic growth in most of Europe appeared to be
strengthening, stocks were hurt by continued economic weakness in Japan and from
expectations of higher interest rates. On the other hand, European stock prices
got some support from an increase in corporate takeovers.
In local currencies, European stocks posted a 1.7% return in the aggregate
and stocks from the Pacific region recorded a modest decline of -2.6%. However,
the dollar's strength diminished those results for U.S. investors, for whom the
Morgan Stanley Capital International (MSCI) Europe Index returned -3.0% and the
MSCI Pacific Free Index returned -5.9%. The MSCI Europe, Australasia, Far East
(EAFE) Index of developed foreign markets registered a -4.0% return for U.S.
investors.
The Select Emerging Markets Free Index fell -9.6% in U.S. dollars, having
declined-3.5% in local currencies. The index was hit by weakness in South Africa
(-15%) and several emerging Asian markets, including Indonesia (-44%), Thailand
(-36%), and the Philippines (-36%). The biggest gains among emerging markets
were in Israel (+27%) and Venezuela (+19%).
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REPORT FROM THE ADVISERS
Vanguard Morgan Growth Fund's return of 3.2% for the first half of 2000 was well
ahead of the -0.4% decline in the S&P 500 Index but trailed both the average
multi-cap growth fund (+6.5%) and the Growth Fund Stock Index (+6.9%).
The inflation-fighting efforts of the Federal Reserve Board overshadowed
the U.S. stock market throughout the period. After raising its target for
short-term interest rates three times in 1999--in 0.25-percentage-point moves
that pushed the bond market lower but had little discernible effect on the stock
market--the Fed repeated its performance in the new year. This time, however,
policymakers mixed in a 0.50-percentage-point hike. In all, they have raised the
federal funds rate by 1.75 percentage points in the past 12 months.
The half-year was extremely volatile--doubtless in part because of the
Fed's actions. From January through late March, the stock market focused, as it
had in 1999, on momentum. Health care, energy, and technology stocks led a surge
in the market averages. Then came a sharp correction. It was fairly
brief--lasting a little more than two months--but many newer investors had never
before seen such a period of market declines. From its peak on March 10, the
tech-laden Nasdaq Composite Index lost nearly 40% of its value in a ten-week
period. (Benchmarks that are more representative of the overall market, such as
the S&P 500 Index, were much less volatile.) Finally, June saw a powerful
rebound, bringing growth-stock indexes back into positive territory for the year
to date.
Morgan Growth Fund followed the course of the overall market fairly
closely, although with less volatility than some of our more aggressive peers.
It had a total return of 4.2% in the first 21/2 months of the period (through
March 10), then declined-6.2% through May 31. In June, the fund bounced back,
gaining 5.5%. For the full period, we underperformed the Growth Fund Stock Index
primarily because our stock selection was slightly subpar. Our holdings in the
technology sector, for example, had an average total return of 9.2%, powered by
big gains from integrated-circuit producers, particularly Analog Devices and
Applied Micro Circuits. But the tech stocks in the index gained 13.2%. Part of
our shortfall was due to our relatively small stake in some first-half winners,
such as Texas Instruments (+42.3%).
Our industry weightings shifted somewhat during the half-year. Most
notably, as of June 30, tech stocks accounted for 30.5% of assets, up from 23.7%
as of December 31. The rise was attributable both to gains for many of our
holdings and to some new purchases. We diversified our tech-sector holdings
significantly, increasing the number of stocks from 55 to 120. To fund these
purchases, we reduced our exposure to financial services stocks (now 9.3% of
assets, down from 13.0%). Among significant additions were a revitalized
PepsiCo; JDS Uniphase, the worldwide leader in optical components manufacturing;
and the newly formed VeriSign/Network Solutions combo in the Internet
infrastructure arena. We sold, primarily for valuation reasons, Warner-Lambert
and Nokia.
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INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by holding a well-diversified portfolio of growth stocks selected by
several advisers using distinct investment strategies. Over time, such a fund
should provide gross returns that parallel those of other large, growth-oriented
mutual funds and net returns that exceed the group average.
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LOOKING AHEAD
The real (adjusted for inflation) federal funds rate is now at its highest level
in a decade. This suggests that the Fed may be near the end of its tightening
phase. At the same time, we have seen a number of leading economic indicators
turn negative. At the margin, manufacturing trends have moved down,
manufacturing pricing has softened, and consumer spending and housing starts are
lower. These elements may be sufficient to cause the Fed to loosen its grip on
the economy.
In the short run, however, the stock market continues to challenge
investors: Volatility remains high and style leadership uncertain. But there
have been some reassuring signs of rational behavior. The future earnings
prospects of certain "new economy" stocks have been reexamined, with subsequent
stock-price adjustments. While our results during the first half of the year
were not as strong as we would have liked, we are confident that a balanced
investment process that puts significant emphasis on reasonable valuations will
continue to be successful over the long run.
Wellington Management Company, LLP
Franklin Portfolio Associates, LLC
Vanguard Quantitative Equity Group
July 19, 2000
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ABOUT THE FUND'S INVESTMENT STRATEGIES
Morgan Growth Fund's three advisers select stocks for the fund independently,
although they share a common goal of long-term growth in capital. The following
are brief descriptions of the advisers' strategies.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management's portfolio manager seeks to identify companies with
above-average prospects for growth, especially in industries undergoing
fundamental changes. The investment process is supported by in-depth,
company-by-company examinations and evaluations by more than 30 global industry
analysts.
FRANKLIN PORTFOLIO ASSOCIATES, LLC
Franklin uses an array of computer models to analyze some 4,000 stocks in search
of issues that appear to be undervalued. Franklin considers the economic cycle
and ranks securities based on three key analyses: fundamental momentum, which
seeks to identify companies with relatively strong near-term business prospects;
relative value, which searches out stocks with attractive prices in relation to
past market values or to specific financial measures such as book value or
sales; and future cash flow, which assesses stocks based on prospects for growth
in earnings and dividends.
VANGUARD QUANTITATIVE EQUITY GROUP
Vanguard Quantitative Equity Group uses computer models to rank some 3,000
stocks by a variety of measures, including cash flow, relative value, and
share-price momentum. Overall rankings are based on weights assigned to the
various measures. A portfolio is constructed from among the higher-ranking
stocks to resemble the Growth Fund Stock Index, which reflects the average
common stock holdings of the 50 largest growth-oriented mutual funds, in such
key characteristics as market capitalization and diversification among industry
sectors.
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FUND PROFILE
MORGAN GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
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MORGAN S&P 500
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Number of Stocks 400 500
Median Market Cap $26.9B $94.9B
Price/Earnings Ratio 38.2x 28.7x
Price/Book Ratio 4.9x 5.2x
Yield 0.6% 1.1%
Return on Equity 19.1% 24.5%
Earnings Growth Rate 17.4% 17.3%
Foreign Holdings 2.2% 1.2%
Turnover Rate 94%* --
Expense Ratio 0.38%* --
Cash Investments 2.5% --
*Annualized.
INVESTMENT FOCUS
-----------------
STYLE = GROWTH
MARKET CAP = LARGE
VOLATILITY MEASURES
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MORGAN S&P 500
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R-Squared 0.45 1.00
Beta 0.59 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
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Cisco Systems, Inc. 2.9%
Microsoft Corp. 2.5
AT&T Corp.-Liberty Media Class A 2.4
WorldCom, Inc. 1.6
Corning, Inc. 1.5
Citigroup, Inc. 1.5
Home Depot, Inc. 1.5
Texas Instruments, Inc. 1.5
Analog Devices, Inc. 1.4
General Electric Co. 1.3
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Top Ten 18.1%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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June 30, 1999 June 30, 2000
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Morgan Morgan S&P 500
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Auto & Transportation 1.7% 1.3% 1.6%
Consumer Discretionary 23.2 19.0 11.8
Consumer Staples 3.6 2.3 5.7
Financial Services 16.7 10.1 13.4
Health Care 10.7 13.1 11.7
Integrated Oils 0.9 1.4 4.5
Other Energy 0.7 1.5 1.8
Materials & Processing 3.9 0.9 2.2
Producer Durables 6.0 4.8 2.9
Technology 18.8 33.1 29.9
Utilities 9.2 9.1 8.6
Other 4.6 3.4 5.9
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BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
9
<PAGE>
PERFORMANCE SUMMARY
MORGAN GROWTH FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1979-JUNE 30, 2000
---------------------------------------------------------
MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
---------------------------------------------------------
1980 30.5% 4.2% 34.7% 32.4%
1981 -7.1 2.3 -4.8 -4.9
1982 24.1 3.6 27.7 21.5
1983 25.8 2.6 28.4 22.5
1984 -8.1 2.0 -6.1 6.3
1985 27.5 2.8 30.3 31.8
1986 4.2 3.6 7.8 18.7
1987 3.3 1.7 5.0 5.3
1988 19.8 2.5 22.3 16.6
1989 19.9 2.8 22.7 31.7
1990 -4.4 2.9 -1.5 -3.1
---------------------------------------------------------
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1979-JUNE 30, 2000
---------------------------------------------------------
MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
---------------------------------------------------------
1991 26.3% 3.0% 29.3% 30.5%
1992 8.1 1.4 9.5 7.6
1993 5.9 1.4 7.3 10.1
1994 -2.9 1.2 -1.7 1.3
1995 34.6 1.4 36.0 37.6
1996 22.3 1.0 23.3 23.0
1997 29.7 1.1 30.8 33.4
1998 21.1 1.2 22.3 28.6
1999 33.3 0.8 34.1 21.0
2000* 3.2 0.0 3.2 -0.4
---------------------------------------------------------
*Six months ended June 30, 2000.
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Morgan Growth Fund 12/31/1968 21.10% 25.13% 16.30% 1.58% 17.88%
--------------------------------------------------------------------------------
10
<PAGE>
FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
--------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (92.2%)(1)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (1.2%)
o FedEx Corp. 569,500 $ 21,641
o Ryanair Holdings PLC ADR 451,800 16,491
Delta Air Lines, Inc. 104,800 5,299
Werner Enterprises, Inc. 406,250 4,697
Eaton Corp. 68,800 4,610
PACCAR, Inc. 107,000 4,247
o AMR Corp. 141,700 3,746
UAL Corp. 42,000 2,444
o Navistar International Corp. 75,600 2,348
Burlington Northern
Santa Fe Corp. 91,600 2,101
Ford Motor Co. 30,700 1,320
Meritor Automotive, Inc. 97,100 1,068
General Motors Corp. 17,449 1,013
Kansas City Southern
Industries, Inc. 7,200 639
o Visteon Corp. 4,020 49
----------
71,713
----------
CONSUMER DISCRETIONARY (17.6%)
o AT&T Corp.-Liberty Media
Class A 5,747,700 139,382
Home Depot, Inc. 1,726,750 86,230
o America Online, Inc. 1,298,600 68,501
Time Warner, Inc. 676,300 51,399
o Viacom Inc. Class B 573,988 39,139
The Walt Disney Co. 964,900 37,450
o AMFM Inc. 542,100 37,405
Wal-Mart Stores, Inc. 505,300 29,118
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
o Infinity Broadcasting Corp. 793,750 $ 28,922
Knight Ridder 488,500 25,982
Kimberly-Clark Corp. 406,800 23,340
o Clear Channel
Communications, Inc. 309,200 23,190
o Comcast Corp.-Special Class A 546,400 22,129
News Corp. Ltd. Pfd. ADR 445,000 21,137
o Bed Bath & Beyond, Inc. 500,000 18,125
o Univision Communications Inc. 148,600 15,380
Sears, Roebuck & Co. 452,500 14,763
Waste Management, Inc. 725,000 13,775
Lowe's Cos., Inc. 312,400 12,828
o Federated Department
Stores, Inc. 371,800 12,548
Circuit City Stores, Inc. 377,200 12,518
o TV Guide, Inc. 354,600 12,145
Gannett Co., Inc. 199,400 11,927
E.W. Scripps Co. Class A 240,000 11,820
o Yahoo!, Inc. 94,900 11,756
Whirlpool Corp. 242,200 11,293
Hasbro, Inc. 729,950 10,995
Viad Corp. 383,500 10,450
Darden Restaurants Inc. 598,600 9,727
o Valassis Communications, Inc. 247,150 9,423
o Michaels Stores, Inc. 202,900 9,295
o EchoStar Communications Corp. 275,000 9,105
o Robert Half International, Inc. 319,000 9,091
o Tech Data Corp. 208,400 9,078
Interpublic Group of Cos., Inc. 200,000 8,600
o Barnes & Noble, Inc. 330,400 7,351
Target Corp. 126,500 7,337
11
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
--------------------------------------------------------------------------------
o TMP Worldwide, Inc. 94,700 $ 6,990
Omnicom Group Inc. 78,200 6,965
o Convergys Corp. 127,400 6,609
The Limited, Inc. 286,600 6,198
o Jones Apparel Group, Inc. 249,600 5,866
o eBay Inc. 107,200 5,822
o Iron Mountain, Inc. 168,300 5,722
o Zale Corp. 156,600 5,716
o USA Networks, Inc. 250,000 5,406
R.R. Donnelley & Sons Co. 233,300 5,264
Eastman Kodak Co. 84,300 5,016
Galileo International, Inc. 238,900 4,987
Tiffany & Co. 70,200 4,739
o Tricon Global Restaurants, Inc. 166,900 4,715
New York Times Co. Class A 111,300 4,396
o Best Buy Co., Inc. 67,600 4,276
Young & Rubicam Inc. 68,800 3,935
May Department Stores Co. 159,800 3,835
o Jack in the Box Inc. 144,500 3,558
o Cendant Corp. 236,600 3,312
RadioShack Corp. 68,100 3,226
TJX Cos., Inc. 163,100 3,058
Polaroid Corp. 166,400 3,006
The McGraw-Hill Cos., Inc. 51,700 2,792
o InfoSpace, Inc. 46,400 2,564
o Telewest Communications PLC 661,500 2,283
Wendy's International, Inc. 104,000 1,853
Ethan Allen Interiors, Inc. 70,550 1,693
Hertz Corp. Class A 55,600 1,560
o Lycos, Inc. 26,800 1,447
o Grupo Prisa SA 53,931 1,256
Liz Claiborne, Inc. 34,400 1,213
McDonald's Corp. 33,500 1,103
o The Neiman Marcus Group,
Inc. Class A 33,900 1,002
Talbots Inc. 18,000 989
American Greetings Corp. Class A 46,100 876
o Toys R Us, Inc. 40,200 585
o Harrah's Entertainment, Inc. 24,500 513
o CDI Corp. 11,400 232
Manpower Inc. 5,400 173
o CDW Computer Centers, Inc. 2,400 150
----------
1,027,555
----------
CONSUMER STAPLES (2.2%)
PepsiCo, Inc. 815,000 36,217
Philip Morris Cos., Inc. 1,103,700 29,317
Sara Lee Corp. 850,000 16,416
Ralston-Ralston Purina Group 487,500 9,720
The Coca-Cola Co. 156,200 8,972
ConAgra, Inc. 462,600 8,818
Anheuser-Busch Cos., Inc. 84,000 6,274
The Pepsi Bottling Group, Inc. 192,900 5,630
SuperValu Inc. 269,700 5,141
----------
126,505
----------
FINANCIAL SERVICES (9.3%)
Citigroup, Inc. 1,435,350 86,480
American International
Group, Inc. 508,227 59,717
First Data Corp. 838,100 41,591
Ace, Ltd. 875,000 24,500
Marsh & McLennan Cos., Inc. 228,950 23,911
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Fannie Mae 441,900 $ 23,062
Golden West Financial Corp. 498,700 20,353
Associates First Capital Corp. 844,600 18,845
J.P. Morgan & Co., Inc. 148,600 16,365
AXA Financial, Inc. 479,400 16,300
Lehman Brothers Holdings, Inc. 169,500 16,028
Freddie Mac 385,600 15,617
MBNA Corp. 505,000 13,698
Providian Financial Corp. 150,900 13,581
Bank of America Corp. 305,438 13,134
o HomeStore.com, Inc. 397,400 11,599
The PMI Group Inc. 218,650 10,386
Heller Financial, Inc. 495,000 10,147
Morgan Stanley Dean
Witter & Co. 119,600 9,957
The Chase Manhattan Corp. 187,404 8,632
o BISYS Group, Inc. 138,600 8,524
Loews Corp. 139,100 8,346
Merrill Lynch & Co., Inc. 70,100 8,061
Dime Bancorp, Inc. 474,400 7,472
FleetBoston Financial Corp. 190,500 6,477
Cullen/Frost Bankers, Inc. 226,000 5,947
Dow Jones & Co., Inc. 72,800 5,333
CIGNA Corp. 51,700 4,834
KeyCorp 272,200 4,798
Bear Stearns Co., Inc. 112,140 4,668
Deluxe Corp. 188,600 4,444
Donaldson, Lufkin & Jenrette, Inc. 103,500 4,392
American General Corp. 65,000 3,965
UnionBanCal Corp. 165,872 3,079
Countrywide Credit Industries, Inc. 88,658 2,687
o Portal Software, Inc. 35,200 2,248
o DST Systems, Inc. 22,000 1,675
A.G. Edwards & Sons, Inc. 41,600 1,622
MGIC Investment Corp. 32,400 1,474
Green Point Financial Corp. 63,700 1,194
Old Republic International Corp. 60,300 995
----------
546,138
----------
HEALTH CARE (12.1%)
Pfizer, Inc. 1,352,800 64,934
o Immunex Corp. 1,303,100 64,422
Pharmacia Corp. 1,190,400 61,529
Johnson & Johnson 511,000 52,058
AstraZeneca Group PLC ADR 835,000 38,827
o Genzyme Corp. General Division 608,300 36,156
Baxter International, Inc. 490,100 34,460
American Home Products Corp. 505,000 29,669
Cardinal Health, Inc. 389,750 28,841
Abbott Laboratories 580,000 25,846
UnitedHealth Group Inc. 301,000 25,811
o Boston Scientific Corp. 783,700 17,192
o Human Genome Sciences, Inc. 125,000 16,672
o Forest Laboratories, Inc. 155,900 15,746
Merck & Co., Inc. 195,100 14,950
o Quest Diagnostics, Inc. 200,700 14,363
o MedImmune Inc. 189,200 14,001
Schering-Plough Corp. 274,800 13,877
o IVAX Corp. 326,300 13,541
o Gilead Sciences, Inc. 184,300 13,108
o Millennium Pharmaceuticals, Inc. 112,900 12,631
IMS Health, Inc. 600,000 10,800
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
o Cytyc Corp. 188,900 $ 10,083
Eli Lilly & Co. 95,900 9,578
o Aclara Biosciences, Inc. 138,900 7,075
o Abgenix, Inc. 58,200 6,976
o MiniMed, Inc. 58,700 6,927
Alpharma, Inc. Class A 109,100 6,791
o Andrx Corp. 99,400 6,354
o Pacificare Health Systems, Inc. 102,300 6,157
HCA-The Healthcare Co. 188,600 5,729
Bristol-Myers Squibb Co. 62,900 3,664
o Gene Logic Inc. 100,000 3,569
Tenet Healthcare Corp. 127,300 3,437
o Watson Pharmaceuticals, Inc. 57,600 3,096
o Amgen, Inc. 37,800 2,655
o Chiron Corp. 45,800 2,175
Allergan, Inc. 24,700 1,840
o HEALTHSOUTH Corp. 187,500 1,348
o Varian Medical Systems, Inc. 16,200 634
Bausch & Lomb, Inc. 6,800 526
----------
708,048
----------
INTEGRATED OILS (1.3%)
Exxon Mobil Corp. 217,700 17,089
Kerr-McGee Corp. 265,800 15,666
Occidental Petroleum Corp. 706,600 14,883
USX-Marathon Group 563,300 14,118
Phillips Petroleum Co. 101,100 5,125
Chevron Corp. 55,800 4,733
Texaco Inc. 74,200 3,951
----------
75,565
----------
OTHER ENERGY (1.4%)
Halliburton Co. 450,000 21,234
o Calpine Corp. 274,400 18,042
Transocean Sedco Forex Inc. 325,000 17,367
Apache Corp. 228,200 13,421
o BJ Services Co. 176,900 11,056
Valero Energy Corp. 31,600 1,003
Sunoco, Inc. 32,800 966
----------
83,089
----------
MATERIALS & PROCESSING (0.8%)
Air Products & Chemicals, Inc. 515,300 15,878
Dow Chemical Co. 330,600 9,980
Louisiana-Pacific Corp. 702,700 7,642
Engelhard Corp. 440,900 7,523
Georgia Pacific Group 82,000 2,152
Owens Corning 189,200 1,750
Alcoa Inc. 53,636 1,555
o Energizer Holdings, Inc. 84,633 1,545
International Paper Co. 11,316 337
----------
48,362
----------
PRODUCER DURABLES (4.5%)
o Applied Materials, Inc. 371,400 33,658
Koninklijke (Royal) Philips
Electronics NV NY Shares 611,000 29,022
United Technologies Corp. 475,000 27,966
o American Tower Corp. Class A 600,000 25,012
o Teradyne, Inc. 232,700 17,103
Emerson Electric Co. 282,100 17,032
o Crown Castle International Corp. 360,000 13,140
o LAM Research Corp. 284,700 10,676
o Agilent Technologies, Inc. 137,520 10,142
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Dover Corp. 210,800 $ 8,551
RF Micro Devices, Inc. 94,000 8,237
o Credence Systems Corp. 140,300 7,743
o KLA-Tencor Corp. 122,900 7,197
o Brooks Automation, Inc. 105,000 6,713
o LTX Corp. 188,500 6,586
o Novellus Systems, Inc. 108,400 6,131
Pitney Bowes, Inc. 138,500 5,540
o EMCORE Corp. 43,300 5,196
Cooper Industries, Inc. 142,200 4,630
Pall Corp. 160,000 2,960
The Boeing Co. 62,100 2,597
o Varian Semiconductor
Equipment Associates, Inc. 30,400 1,910
Tektronix, Inc. 16,700 1,236
York International Corp. 43,500 1,136
Tecumseh Products Co. Class A 20,200 771
----------
260,885
----------
TECHNOLOGY (30.5%)
COMMUNICATIONS TECHNOLOGY (10.0%)
o Cisco Systems, Inc. 2,670,900 169,769
Corning, Inc. 331,300 89,410
o JDS Uniphase Corp. 407,200 48,813
o 3Com Corp. 774,800 44,648
o Cabletron Systems, Inc. 1,026,400 25,917
Motorola, Inc. 836,251 24,304
Lucent Technologies, Inc. 366,800 21,733
o General Motors Corp. Class H 210,000 18,427
o QUALCOMM, Inc. 181,700 10,902
o Remec, Inc. 238,700 9,996
o Natural Microsystems Corp. 86,800 9,760
o Digital Microwave Corp. 247,500 9,436
o ISS Group, Inc. 89,100 8,797
o Brocade Communications
Systems, Inc. 47,200 8,660
o RealNetworks, Inc. 169,100 8,550
o Software.com, Inc. 64,600 8,390
o Foundry Networks, Inc. 71,800 7,934
o Comverse Technology, Inc. 80,000 7,440
KPN Qwest NV ADR 177,600 7,037
o Aspect Communications Corp. 158,000 6,211
o Tekelec 120,900 5,826
o Handspring, Inc. 212,100 5,727
o NCR Corp. 129,600 5,046
o Advanced Fibre
Communications, Inc 110,800 5,021
o ADC Telecommunications, Inc. 56,700 4,756
o Black Box Corp. 60,000 4,750
o FLAG Telecom Holdings Ltd. 302,500 4,500
DSET Corp. 87,300 2,652
o Network Associates, Inc. 91,000 1,854
COMPUTER SERVICES, SOFTWARE, & SYSTEMS (8.2%)
o Microsoft Corp. 1,817,500 145,400
o VeriSign, Inc. 225,430 39,788
o Oracle Corp. 378,700 31,834
o BMC Software, Inc. 805,000 29,370
o BroadVision, Inc. 392,900 19,964
o Rational Software Corp. 200,000 18,587
o Veritas Software Corp. 150,400 16,998
o Micromuse Inc. 81,300 13,454
13
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
--------------------------------------------------------------------------------
o BEA Systems, Inc. 266,200 $ 13,160
o Siebel Systems, Inc. 72,300 11,826
o Vignette Corp. 200,000 10,403
o Ceridian Corp. 415,000 9,986
o HNC Software, Inc. 160,400 9,905
o Mercator Software, Inc. 136,000 9,350
o Macromedia, Inc. 90,000 8,702
Computer Associates
International, Inc. 161,800 8,282
Adobe Systems, Inc. 63,500 8,255
o Macrovision Corp. 114,600 7,325
o Intuit, Inc. 176,600 7,307
o Aspen Technologies, Inc. 165,000 6,352
o QLogic Corp. 88,700 5,860
o AXENT Technologies, Inc. 231,100 5,734
o Symantec Corp. 104,200 5,620
o Compuware Corp. 511,600 5,308
o Brio Technology, Inc. 243,800 5,166
o MarchFirst, Inc. 272,636 4,976
o Cadence Design Systems, Inc. 240,800 4,906
o i2 Technologies, Inc. 39,600 4,129
o Allaire Corp. 97,200 3,572
o Informatica Corp. 37,200 3,048
o Zomax Inc. 227,900 2,991
o Citrix Systems, Inc. 122,100 2,312
o TenFold Corp. 120,100 1,974
Sabre Holdings Corp. 57,600 1,642
o Viant Corp. 32,400 960
o Electronics for Imaging, Inc. 6,000 152
COMPUTER TECHNOLOGY (4.1%)
o EMC Corp. 502,600 38,669
Hewlett-Packard Co. 221,600 27,672
International Business
Machines Corp. 248,800 27,259
o Sun Microsystems, Inc. 254,300 23,125
o Computer Sciences Corp. 309,300 23,101
o Apple Computer, Inc. 290,100 15,194
o Dell Computer Corp. 272,800 13,452
Compaq Computer Corp. 500,300 12,789
o RSA Security Inc. 172,300 11,932
o Seagate Technology Inc. 187,800 10,329
o Network Appliance, Inc. 100,10 8,058
o InFocus Corp. 179,700 5,784
Electronic Data Systems Corp. 125,600 5,181
o Gateway, Inc. 72,000 4,086
o Phoenix Technologies Ltd. 242,900 3,962
o Maxtor Corp. 338,200 3,572
o Zebra Technologies Corp. Class A 64,900 2,876
o Synopsys, Inc. 40,100 1,386
o Silicon Graphics, Inc. 240,000 900
o Emulex Corp. 5,600 368
o Unisys Corp. 24,000 349
o Ingram Micro, Inc. 10,900 190
o Adaptec, Inc. 6,800 155
ELECTRONICS (1.1%)
o Flextronics International Ltd. 350,000 24,041
o Sanmina Corp. 180,900 15,467
o Vishay Intertechnology, Inc. 230,050 8,728
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Methode Electronics, Inc. Class A 123,900 $ 4,786
o Semtech Corp. 58,100 4,444
AVX Corp. 191,500 4,393
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (6.3%)
Texas Instruments, Inc. 1,247,800 85,708
o Analog Devices, Inc. 1,048,400 79,678
Intel Corp. 480,400 64,223
o Broadcom Corp. 79,900 17,493
o National Semiconductor Corp. 288,500 16,372
o Advanced Micro Devices, Inc. 179,300 13,851
o International Rectifier Corp. 230,300 12,897
o Xilinx, Inc. 122,100 10,081
o Applied Micro Circuits Corp. 89,900 8,878
o Amkor Technology, Inc. 232,700 8,217
o SCI Systems, Inc. 178,500 6,995
o Lattice Semiconductor Corp. 95,000 6,567
o Jabil Circuit, Inc. 129,600 6,431
o Cree, Inc. 45,600 6,088
o Atmel Corp. 154,600 5,701
o Integrated Silicon Solution, Inc. 133,700 5,081
o Arrow Electronics, Inc. 161,800 5,016
o Maxim Integrated Products, Inc. 50,000 3,397
o Cypress Semiconductor Corp. 60,900 2,573
o ACT Manufacturing, Inc. 20,600 957
ELECTRONICS--TECHNOLOGY (0.8%)
o Solectron Corp. 702,400 29,413
o KEMET Corp. 278,100 6,970
o Coherent, Inc. 61,800 5,183
Harris Corp. 68,200 2,234
Rockwell International Corp. 34,200 1,077
SCIENTIFIC EQUIPMENT & SUPPLIES
Newport Corp. 27,000 2,899
----------
1,787,092
----------
UTILITIES (8.4%)
o WorldCom, Inc. 2,040,450 93,606
o Sprint Corp. (PCS Group) 1,073,800 63,891
o NTL Inc. 404,875 24,242
o Nextel Communications, Inc. 372,400 22,786
o COLT Telecom Group PLC 680,800 22,675
o Cox Communications, Inc. Class A 450,900 20,544
o MediaOne Group, Inc. 256,699 17,023
o UnitedGlobalCom Inc. Class A 348,000 16,269
o Global Crossing Ltd. 603,500 15,880
BellSouth Corp. 366,800 15,635
o Intermedia Communications Inc. 475,400 14,143
o McLeodUSA, Inc. Class A 678,000 14,026
o VoiceStream Wireless Corp. 90,600 10,536
Sprint Corp. 199,100 10,154
Telephone & Data Systems, Inc. 100,100 10,035
o Powertel Inc. 140,600 9,974
o Rural Cellular Corp. Class A 125,000 9,570
AT&T Corp. 291,357 9,214
o TeleCorp PCS, Inc. 220,000 8,869
o China Unicom Ltd. ADR 397,600 8,449
o NEXTLINK Communications, Inc. 204,200 7,747
o Tritel, Inc. 250,000 7,422
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Telecom Italia SpA ADR 700,000 $ 7,180
BroadWing Inc. 275,000 7,133
FPL Group, Inc. 121,000 5,989
Bell Atlantic Corp. 113,900 5,788
o MGC Communications, Inc. 92,400 5,538
TXU Corp. 185,700 5,478
o Metricom 182,900 5,098
o Nextel Partners, Inc. 144,300 4,699
U.S. Unwired, Inc. 328,400 4,269
Reliant Energy, Inc. 88,800 2,625
o Alamosa PCS Holdings, Inc. 89,600 1,870
Duke Energy Corp. 26,600 1,500
DTE Energy Co. 49,000 1,498
Public Service Enterprise
Group, Inc. 30,100 1,042
CenturyTel, Inc. 25,250 726
GPU, Inc. 15,800 428
Unicom Corp. 6,900 267
----------
493,818
----------
OTHER (2.9%)
General Electric Co. 1,412,300 74,852
Tyco International Ltd. 740,000 35,057
Illinois Tool Works, Inc. 497,419 28,353
Textron, Inc. 187,400 10,178
Johnson Controls, Inc. 193,000 9,903
Fortune Brands, Inc. 291,400 6,720
Minnesota Mining &
Manufacturing Co. 56,600 4,669
GenCorp, Inc. 100,000 800
----------
170,532
----------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $4,076,637) 5,399,302
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.7%)(1)
--------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(2)6.33%, 7/27/2000 $ 3,000 2,986
FEDERAL NATIONAL MORTGAGE ASSN.
(2)6.06%, 7/13/2000 10,300 10,282
(2)6.09%, 7/20/2000 9,000 8,973
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.71%, 7/3/2000 390,809 390,809
6.71%, 7/3/2000--Note G 38,514 38,514
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $451,561) 451,564
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $4,528,198) 5,850,866
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Market
Value*
(000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
--------------------------------------------------------------------------------
Other Assets--Note C $ 98,894
Liabilities--Note G (94,203)
----------
4,691
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 255,155,979 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $5,855,557
================================================================================
NET ASSET VALUE PER SHARE $22.95
================================================================================
*See Note A in Notes to Financial Statements.
oNon-income-producing security.
(1)The fund invests a portion of its cash reserve in equity
markets through the use of index futures contracts. After
giving effect to futures investments, the fund's effective
common stock and temporary cash investment positions
represent 97.5% and 2.4%, respectively, of net assets.
See Note F in Notes to Financial Statements.
(2)Securities with an aggregate value of $22,241,000 have
been segregated as initial margin for open futures
contracts.
ADR--American Depositary Receipt.
--------------------------------------------------------------------------------
AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital $4,033,760 $15.81
Undistributed Net
Investment Income 19,646 .08
Accumulated Net Realized Gains 485,335 1.90
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 1,322,668 5.18
Futures Contracts (5,852) (.02)
--------------------------------------------------------------------------------
NET ASSETS $5,855,557 $22.95
================================================================================
15
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
--------------------------------------------------------------------------------
MORGAN GROWTH FUND
SIX MONTHS ENDED JUNE 30, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 17,863
Interest 13,042
Security Lending 554
---------
Total Income 31,459
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,591
Performance Adjustment 98
The Vanguard Group--Note C
Management and Administrative 7,192
Marketing and Distribution 312
Custodian Fees 74
Auditing Fees 5
Shareholders' Reports 82
Trustees' Fees and Expenses 3
---------
Total Expenses 10,357
Expenses Paid Indirectly--Note D (485)
---------
Net Expenses 9,872
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 21,587
--------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 485,403
Futures Contracts 12,198
--------------------------------------------------------------------------------
REALIZED NET GAIN 497,601
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (321,262)
Futures Contracts (15,219)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (336,481)
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $182,707
================================================================================
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 2000 DEC. 31, 1999
(000) (000)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 21,587 $ 28,782
Realized Net Gain 497,601 666,279
Change in Unrealized Appreciation (Depreciation) (336,481) 570,381
---------------------------------
Net Increase in Net Assets Resulting from Operations 182,707 1,265,442
---------------------------------
DISTRIBUTIONS
Net Investment Income -- (29,733)
Realized Capital Gain (179,207) (600,879)
---------------------------------
Total Distributions (179,207) (630,612)
---------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 1,007,904 863,925
Issued in Lieu of Cash Distributions 173,192 605,622
Redeemed (395,372) (593,217)
---------------------------------
Net Increase from Capital Share Transactions 785,724 876,330
-----------------------------------------------------------------------------------------------------------
Total Increase 789,224 1,511,160
----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 5,066,333 3,555,173
End of Period $5,855,557 $5,066,333
===========================================================================================================
1Shares Issued (Redeemed)
Issued 44,435 40,331
Issued in Lieu of Cash Distributions 7,075 28,114
Redeemed (17,355) (27,767)
---------------------------------
Net Increase in Shares Outstanding 34,155 40,678
===========================================================================================================
</TABLE>
17
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.92 $19.72 $17.54 $15.63 $14.09 $11.36
---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .09 .14 .18 .160 .14 .15
Net Realized and Unrealized Gain (Loss)
on Investments .69 6.29 3.61 4.435 3.07 3.89
--------------------------------------------------------------
Total from Investment Operations .78 6.43 3.79 4.595 3.21 4.04
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.15) (.18) (.160) (.14) (.15)
Distributions from Realized Capital Gains (.75) (3.08) (1.43) (2.525) (1.53) (1.16)
---------------------------------------------------------------
Total Distributions (.75) (3.23) (1.61) (2.685) (1.67) (1.31)
--------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $22.95 $22.92 $19.72 $17.54 $15.63 $14.09
==============================================================================================================
TOTAL RETURN 3.20% 34.10% 22.26% 30.81% 23.30% 35.98%
==============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $5,856 $5,066 $3,555 $2,795 $2,054 $1,471
Ratio of Total Expenses to
Average Net Assets 0.38%* 0.42% 0.44% 0.48% 0.51% 0.49%
Ratio of Net Investment Income to
Average Net Assets 0.78%* 0.71% 0.96% 0.93% 0.97% 1.10%
Portfolio Turnover Rate 94%* 65% 81% 76% 73% 76%
==============================================================================================================
*Annualized.
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Morgan Growth Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES CONTRACTS: The fund uses S&P 500 and S&P Midcap 400 Index
futures contracts to a limited extent, with the objective of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Wellington Management Company, LLP and Franklin Portfolio Associates, LLC
provide investment advisory services to the fund for fees calculated at an
annual percentage rate of average net assets. The basic fee is subject to
quarterly adjustments based on performance for the preceding three years,
relative to an index of the equity holdings of the largest growth stock mutual
funds.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $252,000
for the six months ended June 30, 2000.
For the six months ended June 30, 2000, the advisory fee represented an
effective annual basic rate of 0.09% of the fund's average net assets before an
increase of $98,000 based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 2000, the fund had contributed capital of $1,081,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.1% of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. The fund has asked its investment advisers to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the six months ended
June 30, 2000, directed brokerage and custodian fee offset arrangements reduced
expenses by $470,000 and $15,000, respectively. The total expense reduction
represented an effective annual rate of 0.02% of the fund's average net assets.
E. During the six months ended June 30, 2000, the fund purchased $2,929,504,000
of investment securities and sold $2,386,469,000 of investment securities, other
than temporary cash investments.
F. At June 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,322,668,000,
consisting of unrealized gains of $1,553,648,000 on securities that had risen in
value since their purchase and $230,980,000 in unrealized losses on securities
that had fallen in value since their purchase.
At June 30, 2000, the aggregate settlement value of open futures contracts
expiring in September 2000 and the related unrealized depreciation were:
--------------------------------------------------------------------------------
(000)
-------------------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
--------------------------------------------------------------------------------
S&P 500 597 $219,114 $(3,229)
S&P Midcap 400 366 89,359 (2,623)
--------------------------------------------------------------------------------
G. The market value of securities on loan to broker/dealers at June 30, 2000,
was $37,172,000, for which the fund held cash collateral of $38,514,000. Cash
collateral received is invested in repurchase agreements.
20
<PAGE>
--------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. Noted in parentheses is the year in which the trustee joined the
Vanguard board.
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY Secretary; Managing Director and Secretary of The Vanguard
Group, Inc.; Secretary of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of
each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Quantitative Equity Group.
<PAGE>
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[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q262 082000
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
