[SHIP GRAPHIC]
VANGUARD
MORGAN(TM)GROWTH
FUND
Annual Report
December 31, 1999
[A MEMBER OF THE VANGUARD GROUP (R) LOGO]
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[JOHN C. BOGLE PHOTO]
JOHN C. BOGLE
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by, and
that has made all the difference.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the past
25 years, the assets we hold in stewardship for investors have grown from $1
billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of one
man," Vanguard today is far greater than any individual. The Vanguard crew has
splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant nearly
four years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to assure
you that I will remain vigorous and active in a newly created Vanguard unit,
researching the financial markets, writing, and speaking. I'll continue to focus
whatever intellectual power and ethical strength I possess on my mission to
assure that mutual fund investors everywhere receive a fair shake. In the spirit
of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to
go before I sleep.
You have given me your loyalty and friendship over these long years, and I
deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
/S/
JCB
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CONTENTS
REPORT FROM THE CHAIRMAN ............1 FUND PROFILE .......................10
AFTER-TAX RETURNS REPORT ............5 PERFORMANCE SUMMARY ................12
THE MARKETS IN PERSPECTIVE ..........6 FINANCIAL STATEMENTS ...............13
REPORT FROM THE ADVISERS ............8 REPORT OF INDEPENDENT ACCOUNTANTS ..23
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[JOHN J. BRENNAN PHOTO]
JOHN J. BRENNAN
REPORT FROM THE CHAIRMAN
During a year when the amazing bull market continued to reach new heights,
Vanguard Morgan Growth Fund achieved a total return of 34.1%--an impressive 13.1
percentage points higher than the Standard & Poor's 500 Index.
As the table at right shows, Morgan Growth Fund's return for the 12 months
ended December 31, 1999, topped the average return of the Growth Fund Stock
Index, which is based on the stocks held by the 50 largest growth mutual funds.
However, our gain fell well short of the average return of multi-cap growth
funds.
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TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1999
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Vanguard Morgan Growth Fund 34.1%
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Average Multi-Cap Growth Fund* 52.3%
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S&P 500 Index 21.0%
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Growth Fund Stock Index** 25.4%
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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 fund's total return (capital change plus reinvested dividends and
distributions) is based on an increase in net asset value from $19.72 per share
on December 31, 1998, to $22.92 per share on December 31, 1999, and is adjusted
for a dividend of $0.15 per share paid from net investment income and
distributions totaling $3.08 per share paid from net realized capital gains.
FINANCIAL MARKETS IN REVIEW
The U.S. stock market rode an upsurge in the technology sector in 1999 to an
unprecedented fifth consecutive year of returns exceeding 20%. This performance
was something of a come-from-behind story. Stocks got off to a strong start
during the first four months of 1999 but, weighed down by higher interest rates,
struggled through most of the summer and into the fall. Through September, the
Wilshire 5000 Total Market Index returned 4.6%. But technology stocks rallied,
leading the market on an upward tear over the final three months of 1999,
bringing the Wilshire 5000's full-year return to a remarkable 23.8%.
The S&P 500 Index, which is dominated by large-capitalization stocks,
returned 21.0%. Small-cap stocks, as measured by the Russell 2000 Index,
returned 21.3%--a fine showing for a market segment that had badly lagged
large-cap stocks in the five previous years.
The rise for the major indexes in 1999 suggests a broad advance for the
market, but in truth it was a year of "haves" and "have nots"--a huge number of
stocks did not join in the market's ascent. Fully 60% of the stocks listed on
the New York Stock Exchange actually declined in price in 1999, and so did 48%
of the stocks listed on the Nasdaq market. (In fact, 36% of NYSE stocks and 31%
of Nasdaq issues fell by more than 20%.)
As mentioned, the technology sector set a torrid pace--tech stocks in the
S&P 500 Index gained 74% for the year and were largely responsible for growth
stocks within the index (+28.2%) far outpacing value stocks (+12.7%). Among
small stocks, technology issues gained 107%, and the difference between growth
and value was an amazing 44.6 percentage points (43.1% for the Russell 2000
Index's growth stocks and -1.5% for its value stocks).
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Somewhat surprisingly, these stock market returns occurred in an
environment of rising interest rates. Rates increased substantially during
1999--a rise encouraged by Federal Reserve policymakers, who boosted short-term
interest rates in three steps by a total of 0.75 percentage point (75 basis
points). Rising interest rates can depress stock prices, especially for growth
issues, because they lessen the current value of projected future earnings. But
during 1999, investors decided that improving prospects for corporate profits
outweighed the negative impact of higher rates.
Bond prices are, of course, tightly linked to interest rates, and rising
rates cause prices of existing bonds to fall. Interest rates rose across all
maturities in 1999, and prices dropped accordingly. The yield of the benchmark
30-year U.S. Treasury bond stood at 6.48% on December 31, 138 basis points above
its 5.10% yield when the year began. The total return of the Lehman Brothers
Aggregate Bond Index, a broad measure of the U.S. bond market, was -0.8%, as a
price decline of -7.0% more than offset interest income of 6.2%.
1999 PERFORMANCE OVERVIEW
Morgan Growth Fund outperformed the S&P 500 Index and even its growth component,
which gained 28.2% in 1999. Last year was the fifth straight year of
double-digit returns for the fund as well as for the overall market.
Technology stocks were the big winners. While this sector represented about
20% of assets on average for both the fund and the S&P 500 Index, Morgan
Growth's tech stocks fared far better, returning 96%--22 percentage points more
than the index's tech stocks. Our biggest commitment was in
consumer-discretionary stocks (mostly retailers), where almost a quarter of
Morgan Growth's assets were invested, a weighting almost double that of the
index. Here we trounced the index by a similar margin, with the fund's holdings
gaining 49% compared with the index sector's 28%. We also benefited from
excellent stock selection in producer durables and utilities--in the latter
sector, our 64% return was more than five times that of utility stocks in the
index.
However, our selections in the consumer-staples and materials & processing
sectors did not fare as well. Fortunately, we held a relatively small portion of
our assets in those sectors. In the case of consumer staples--the
worst-performing sector for both the fund (-35%) and the S&P 500 (-16%)--we had
an average weighting of 3.8%, less than half that of the index.
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TOTAL ASSETS MANAGED
DECEMBER 31, 1999
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$ MILLION PERCENTAGE
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Wellington Management $2,075 42%
Franklin Portfolio Associates 1,996 39
Vanguard Core Management 731 14
Cash Reserve* 264 5
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Total $5,066 100%
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*This cash reserve is invested in equity index futures to simulate investment in
stocks. Each adviser also may maintain a modest cash reserve.
As noted earlier, Morgan Growth Fund's return lagged far behind the average
multi-cap growth fund. Lipper Inc., which analyzes mutual fund returns, has
placed Morgan Growth in this new category as part of a recent reorganization of
its fund classifications. We believe it is a reasonable fit. In the past, Morgan
Growth Fund's benchmark was the average growth fund, which returned 29.3% in
1999. The new multi-cap growth category embraces about 380 mutual funds that
invest in large- and medium-sized companies. Overall, our
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shortfall versus this group can be attributed to the fact it was "growthier" in
character than Morgan Growth Fund.
As you know, three investment advisers choose stocks for Morgan Growth
Fund. The table on page 2 shows the proportion of fund assets managed by each
adviser as of December 31, 1999.
LONG-TERM PERFORMANCE OVERVIEW
Over the past decade, Morgan Growth Fund recorded an excellent absolute return
that averaged 18.1% a year. However, in relation to our index and fund
benchmarks, the result was slightly subpar. The table at right presents the
average annual return for our fund and its comparative measures over the past
ten years, as well as the results of a hypothetical $10,000 investment in each
at the start of the decade.
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TOTAL RETURNS
TEN YEARS ENDED DECEMBER 31, 1999
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
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Vanguard Morgan Growth Fund 18.1% $52,955
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Average Multi-Cap Growth Fund 20.3% $63,674
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S&P 500 Index 18.2% $53,278
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Our average annual return was 2.2 percentage points behind that of the
average multi-cap growth fund and a slim tenth of a point behind the S&P 500.
Two factors caused us to lag the index slightly. During the 1990s, the
market's best performers were very large growth companies, which dominate the
S&P 500. Morgan Growth Fund held some of these "megacap" stocks, but it also
diversified into mid-cap issues. Our median capitalization of $29.3 billion at
year-end 1999 was roughly one-third of the index's. In addition, the index,
which is a theoretical construct, incurs none of the real-world operating and
transaction costs that all mutual funds must bear. We note that Morgan Growth
Fund's costs are among the lowest for actively managed growth funds. In 1999,
the fund's expense ratio--annual expenses as a percentage of average net
assets--was 0.42%, compared with our average competitor's 1.52%. That translates
to $4.20 for each $1,000 of net assets for Morgan Growth Fund, but $15.20 per
$1,000 for the average peer. Over the long run, we believe, lower costs should
aid us in our quest to provide superior returns.
In six of the past ten years, we have earned returns greater than 22%--with
returns above 30% in three of those years. We also recorded negative returns in
two years. We remind newer investors, who may not yet have experienced a severe
market downturn, that such losses occur from time to time and are an inherent
risk of the stock market.
The final year of the 1990s capped an amazing decade for stocks. The U.S.
stock market, as measured by the Wilshire 5000 Index, produced an average annual
return of 17.6% for those years, more than 11/2 times the average return of
about 11% achieved by stocks since 1925. In part, the outsized returns reflect
the underlying growth in the U.S. economy and in corporate profits. But part of
the gains can be traced to growing optimism about stocks and less fear about
their risks. These changes in perception are reflected in the extraordinary rise
in the average stock's price/earnings ratio--from about 16 as the decade of the
1990s began to an unprecedented 33 when it ended. No one knows whether or how
investor perceptions may change. But the moods of markets, like those of the
millions of individuals who make up the markets, can shift dramatically.
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In constructing long-term plans, we believe it is prudent to recognize that
financial markets will go through bad times as well as good times, and to adopt
realistic assumptions about future returns. The odds are heavily stacked against
the stock market's repeating its performance of the 1990s in the decade ahead.
This isn't a forecast of doom. If inflation remains in the neighborhood of 3%
annually, it would take stock returns of only 8% to 9% a year to provide decent
real, or inflation-adjusted, returns of 5% to 6%.
IN SUMMARY
As we enter a new century, the temptation for investors to chase hot performance
may be stronger than ever. But building an investment program around a
relatively narrow group of stocks that have recently skyrocketed is a
dangerous--and unnecessary--gamble. The financial markets are ever cyclical.
Stocks of all styles and sizes--as well as entire asset classes--move in and out
of favor in unpredictable patterns. That is why we recommend that investors hold
balanced, diversified portfolios of stock funds, bond funds, and short-term
reserves that are suited to their individual goals, investment time horizon, and
temperament for risk-taking. Such balanced portfolios are a solid foundation for
long-term investment success.
/S/
John J. Brennan
Chairman and Chief Executive Officer
January 20, 2000
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A NOTE OF THANKS TO OUR FOUNDER
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As you may have read on the inside cover of our report, our founder, John C.
Bogle, retired on December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
Morgan Growth Fund's after-tax performance. The figures on this page demonstrate
the considerable impact that federal income taxes can have on a fund's
return--an important consideration for investors who own mutual funds in taxable
accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own Morgan Growth
Fund in a tax-deferred account such as an individual retirement account or a
401(k), this information does not apply to you. Such accounts are not subject to
current taxes.
The table below presents the pretax and after-tax returns for your fund and
an appropriate peer group of mutual funds. Two things to keep in mind:
o The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
o The peer funds' returns are provided by Morningstar, Inc. (Elsewhere in
this report, returns for comparable mutual funds are derived from data provided
by Lipper Inc., which differ somewhat.)
As you can see, Morgan Growth Fund's pretax total return of 34.1% for the
12 months ended December 31, 1999, was reduced by taxes to 29.5%. In other
words, for investors in the highest bracket, taxes cut the fund's pretax return
by 4.6 percentage points. The average fund in Morningstar's large growth group
achieved a pretax return of 38.6% and an after-tax return of 35.9%, a difference
of 2.7 percentage points.
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AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
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Vanguard Morgan
Growth Fund 34.1% 29.5% 29.2% 25.2% 18.1% 14.9%
Average Large
Growth Fund* 38.6 35.9 28.5 25.4 18.6 16.1
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*Based on data from Morningstar, Inc.
Morgan Growth Fund has consistently lagged its peers in tax efficiency.
While our fund's pretax return beat that of its average peer over the past five
years, we lagged in after-tax returns for this period. Over the past decade,
Morgan trailed the peer-group average in both pretax and after-tax returns.
We stress that because many interrelated factors affect how tax-friendly a
fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, it's important to note that our calculation does not reflect the
effect of your own investment activities. Specifically, you may incur additional
capital gains taxes--thereby lowering your after-tax return--if you sell all or
some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
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THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1999
A global expansion in economic activity bolstered stocks at home and abroad
during 1999. The muscular U.S. economy provided a good bit of the oomph, but it
got an assist from solid growth in Asian, European, and Latin American economies
that had slumped in 1997 and 1998.
Interest rates increased significantly--causing bond prices to fall--as
both investors and monetary policymakers grew concerned that economic growth was
so vigorous that it would cause inflation to accelerate.
U.S. STOCK MARKETS
The booming economy and growing corporate profits provided plenty of fuel for
stock prices during 1999. However, higher interest rates restrained the rise,
especially for financial-services and electric utility stocks regarded as
interest rate sensitive.
U.S. economic output increased at an inflation-adjusted rate of about 4%--a
very rapid pace for such a large, mature economy. Analysts estimated that
corporate profits would grow by 14% in 1999 and again in 2000. Consumer
spending, which accounts for roughly two-thirds of economic activity, was
strong. People felt prosperous, thanks to the long bull market, plentiful jobs,
and rising incomes. (After-tax personal income grew by more than 5% in 1999, and
unemployment at year-end was at a three-decade low of 4.1% of the workforce.)
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AVERAGE ANNUAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
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1 YEAR 3 YEARS 5 YEARS
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STOCKS
S&P 500 Index 21.0% 27.6% 28.6%
Russell 2000 Index 21.3 13.1 16.7
Wilshire 5000 Index 23.8 26.1 27.1
MSCI EAFE Index 27.3 16.1 13.2
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BONDS
Lehman Aggregate Bond Index -0.8% 5.7% 7.7%
Lehman 10 Year Municipal Bond Index -1.3 4.8 7.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
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OTHER
Consumer Price Index 2.7% 2.0% 2.4%
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The stock market, as measured by the Wilshire 5000 Index, gained 23.8%,
with more than three-quarters of the gain coming in the final quarter of 1999.
For the first time in several years, smaller stocks outpaced
large-capitalization issues. The S&P 500 Index, which is dominated by large-cap
stocks and accounts for more than three-quarters of the U.S. stock market's
total value, gained 21.0% during the year; the rest of the market gained 35.4%.
Hidden in the market averages was an amazing divergence in stock
performance. Prices soared for most technology-related stocks, but performance
was pedestrian, at best, for most other issues. Indeed, three-fifths of stocks
on the New York Stock Exchange fell in 1999. The technology sector of the S&P
500 Index gained 74%, and the producer-durables sector, driven by huge gains for
some makers of telecommunications and technology gear, was up 49%. These results
were in stark contrast to the declines suffered by food and beverage companies
in the consumer-staples sector (-16%) and by many companies in the health-care
group (-10%).
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Investors seemed bedazzled by the prospects for growth in revenue and
profits among tech stocks, but less interested in the actual profits for nontech
companies. Remarkably, the average S&P 500 stock without earnings gained 36.5%
in 1999, while the average stock with earnings rose 11.5%. There is general
agreement that growth in Internet commerce, computers, software, wireless
communications, and other key tech sectors will be stupendous. However, there is
much disagreement about whether profits will grow so impressively, given the
intense competition. During 1999, optimists clearly ruled.
U.S. BOND MARKETS
The pickup in worldwide economic activity buoyed stock prices but depressed bond
prices. Interest rates, which move in the opposite direction from bond prices,
rose sharply. The rate increase stemmed from increased borrowing by corporations
and individuals and from investors' fears that a sizzling economy was bound to
send inflation soaring.
The inflation evidence was ambiguous. Price increases were greater in 1999
than in 1998 at both the wholesale and consumer levels. Wholesale prices rose
3.0%, the biggest gain since 1990. And the Consumer Price Index advanced 2.7% in
1999 after a gain of just 1.6% in 1998. However, energy prices, which plunged in
1998 and shot up in 1999, skewed the figures in both periods. At the consumer
level, the "core rate" of inflation, which excludes food and energy prices, was
up just 1.9% in 1999, the smallest increase in 35 years.
At midyear, the Federal Reserve Board, aiming to cool the economy a bit to
head off price pressures, began raising short-term interest rates. In all, the
Fed pushed up rates by 0.75 percentage point in three quarter-point steps. The
bond market anticipated the Fed--interest rates began rising sharply in
February--and at year-end the yield of 30-year U.S. Treasury bonds was up 1.38
percentage points (138 basis points) to 6.48%. The 10-year Treasury note--a
benchmark for mortgage lenders--rose 179 basis points, from 4.65% to 6.44%.
Short-term rates didn't rise as far; 3-month Treasury bill yields were up 88
basis points to 5.33% at year-end.
Price declines, as usual, were greatest for long-term bonds and least for
short-term bonds. The overall market, as measured by the Lehman Aggregate Bond
Index, which has an intermediate-term average maturity, posted a -0.8% total
return in 1999. Short-term bonds generally provided returns of 2% to 3%.
Long-term bonds suffered significant price declines, and the Lehman Long
Government/Corporate Index recorded a -7.7% total return.
INTERNATIONAL STOCK MARKETS
Bullishness among stock investors was an international phenomenon in 1999. The
biggest gains came in Pacific-region and emerging markets that had suffered most
from economic slumps and currency crises during 1997 and 1998.
Overall, the Morgan Stanley Capital International Europe, Australasia, Far
East (EAFE) Index of major developed markets produced a 27.3% return for U.S.
dollar-based investors. The MSCI Pacific Free Index gained an astounding 56.4%
for U.S. investors, as a strong rise in the Japanese yen against the U.S. dollar
tacked on about 12.5 percentage points to a 43.9% return in local currencies. In
Europe, currency fluctuations had the opposite effect: European currencies,
including the new 11-nation common currency, the euro, mostly fell against the
dollar, and the 30.3% return in local currencies was nearly halved to 15.8% in
U.S. dollars.
Emerging markets managed a stunning turnaround, as the Select Emerging
Markets Free Index rose 60.9% in U.S.-dollar terms after having plummeted -18.4%
in 1998 and -16.4% in 1997.
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REPORT FROM THE ADVISERS
In a good year for growth stocks and a fantastic year for technology stocks,
Vanguard Morgan Growth Fund recorded a 34.1% return. It was the fourth-best year
in the fund's history, trailing only the 36.0% return achieved in 1995, the
34.7% return in 1980, and the 43.1% gain during 1975.
Morgan Growth Fund's total return exceeded both the 21.0% gain of the S&P
500 Index and the 25.4% return of the Growth Fund Stock Index, which is
constructed from the holdings of the 50 largest growth mutual funds. We did not
keep pace with the extraordinary 52.3% average return for funds in Lipper Inc.'s
new multi-cap growth category. However, Morgan Growth Fund did outperform the
29.3% return of the average growth fund, representing the group in which Lipper
placed us in the past. In all, it was a successful year for the fund.
There was considerable turmoil during the year, and price fluctuations for
individual stocks and the market averages were unusually wide. But through all
the volatility, investors who focused on large-capitalization, high-quality
companies with consistent or accelerating earnings or revenue growth were
generally rewarded. In essence, it was a "momentum" year, in which investors
seemed most attracted to those stocks that had already gone up. Stocks that
disappointed market expectations, even if by only a little, often plummeted. And
stocks that seemed relatively cheap, in terms of price/earnings ratios or
dividend yields, tended to get cheaper.
The best performers in a volatile year were technology companies,
especially those in or serving the burgeoning Internet sector, and companies
engaged in wireless telecommunications. These stocks benefited from investors'
expectations of big payoffs stemming from the way new technologies are changing
business and the economy.
CHANGES IN OUR HOLDINGS
The biggest change in Morgan Growth Fund's sector weightings during 1999 was an
increase of about 50% in our commitment to technology stocks--from about 17% of
our equity holdings at year-end 1998 to nearly 26% at the end of 1999. In large
part, this change reflected the appreciation of technology stocks rather than
additions to our holdings. The number of tech stocks we held rose only
slightly--from 52 at the start of the year to 55 at year-end. We took gains by
selling part of our stake in EMC. We added to our position in Texas Instruments,
which has shed a number of money-losing assets and is concentrating on its
strength in digital signal processing.
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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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As the tech sector's presence grew, there were declines of 2 to 3
percentage points in our stock weightings in four other sectors: consumer
discretionary (retailers, restaurants, etc.); consumer staples (food and
beverage manufacturers and media companies); financial services; and health
care.
In the consumer-discretionary group, now our second-largest industry
weighting, we took some
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profits on America Online, although it remains a top-ten holding, and boosted
our holdings in media companies, including Knight Ridder, Infinity Broadcasting,
and Time Warner.
In financial services, our third-largest sector weighting, we trimmed our
stake in Fannie Mae, a former top-ten holding, but boosted our commitment to
Citigroup. In the commercial-finance area, we again bought shares in CIT Group,
and we raised our stake in Associates First Capital.
In the health-care group, market appreciation and some additional purchases
made the biotechnology company Immunex our largest holding. We added to our
stakes in Baxter International and MedImmune, while we eliminated our McKesson
HBOC position and sold part of our holdings in Cardinal Health and Columbia/HCA
Healthcare.
Morgan Growth Fund's three advisers select the fund's stocks independently,
although all share the objective of long-term capital appreciation. Brief
descriptions of the advisers' strategies follow.
FRANKLIN PORTFOLIO ASSOCIATES
Franklin uses an array of computer models to analyze some 3,500 stocks in search
of issues that appear to be undervalued. Franklin considers the economic cycle
and ranks securities based on three key analyses: fundamental momentum, which
seeks to identify companies with strong near-term business prospects; relative
value, which looks for stocks with attractive prices in relation to past market
values or to specific financial measures such as book value or sales; and future
cash flow, which assesses stocks based on prospects for growth in earnings and
dividends.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management's portfolio manager seeks to identify companies with
above-average prospects for growth, especially in industries undergoing
fundamental changes. In-depth, company-by-company examination and analysis by
dozens of global industry analysts support the investment process.
VANGUARD CORE MANAGEMENT GROUP
Vanguard Core Management Group uses computer models to rank some 3,000 stocks by
a variety of measures, including cash flow, relative value, and share-price
momentum. Overall rankings are based on weights assigned to the various
measures. From the higher-ranking stocks, a portfolio is constructed to resemble
the Growth Fund Stock Index in such key characteristics as market capitalization
and diversification among industry sectors.
Franklin Portfolio Associates, LLC
Wellington Management Company, LLP
Vanguard Core Management Group
January 14, 2000
9
<PAGE>
FUND PROFILE
MORGAN GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
PORTFOLIO CHARACTERISTICS INVESTMENT FOCUS
- -------------------------------------- ---------------------------------------
MORGAN S&P 500 [GRID]
- -------------------------------------- STYLE ...........................GROWTH
Number of Stocks 319 500 MARKET CAP.......................LARGE
Median Market Cap $29.3B $86.7B
Price/Earnings Ratio 29.7x 29.8x
Price/Book Ratio 5.2x 5.5x
Yield 0.6% 1.1%
Return on Equity 18.4% 23.4%
Earnings Growth Rate 16.6% 16.6%
Foreign Holdings 4.2% 1.3%
Turnover Rate 65% --
Expense Ratio 0.42% --
Cash Reserves 2.2% --
TEN LARGEST HOLDINGS
VOLATILITY MEASURES (% OF TOTAL NET ASSETS)
- -------------------------------------- ---------------------------------------
MORGAN S&P 500 AT&T Corp-Liberty Media Group
- -------------------------------------- Class A 3.0%
R-Squared 0.88 1.00 Cisco Systems, Inc. 2.9
Beta 1.11 1.00 Microsoft Corp. 2.7
Home Depot, Inc. 2.6
MCI WorldCom, Inc. 1.9
Lucent Technologies, Inc. 1.6
Immunex Corp. 1.5
America Online, Inc. 1.5
General Instrument Corp. 1.5
Citigroup, Inc. 1.4
---------------------------------------
Top Ten 20.6%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------------------------------------------
MORGAN MORGAN S&P 500
----------------------------------------------------
Auto & Transportation ...... 1.5% 1.3% 1.9%
Consumer Discretionary ..... 23.2 21.2 13.9
Consumer Staples ........... 5.6 2.7 6.3
Financial Services ......... 16.0 14.1 13.8
Health Care ................ 13.3 11.4 9.3
Integrated Oils ............ 1.3 0.8 4.8
Other Energy ............... 1.1 1.3 1.3
Materials & Processing ..... 2.8 2.7 3.2
Producer Durables .......... 6.1 5.0 3.6
Technology ................. 17.2 25.6 25.4
Utilities .................. 9.3 9.4 10.2
Other ...................... 2.6 4.5 6.3
- --------------------------------------------------------------------------------
10
<PAGE>
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 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 past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
11
<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-DECEMBER 31, 1999
- --------------------------------------------------------------------------------
MORGAN GROWTH FUND S&P 500 MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
1980 30.5% 4.2% 34.7% 32.4% 1990 -4.4% 2.9% -1.5% -3.1%
1981 -7.1 2.3 -4.8 -4.9 1991 26.3 3.0 29.3 30.5
1982 24.1 3.6 27.7 21.5 1992 8.1 1.4 9.5 7.6
1983 25.8 2.6 28.4 22.5 1993 5.9 1.4 7.3 10.1
1984 -8.1 2.0 -6.1 6.3 1994 -2.9 1.2 -1.7 1.3
1985 27.5 2.8 30.3 31.8 1995 34.6 1.4 36.0 37.6
1986 4.2 3.6 7.8 18.7 1996 22.3 1.0 23.3 23.0
1987 3.3 1.7 5.0 5.3 1997 29.7 1.1 30.8 33.4
1988 19.8 2.5 22.3 16.6 1998 21.1 1.2 22.3 28.6
1989 19.9 2.8 22.7 31.7 1999 33.3 0.8 34.1 21.0
- --------------------------------------------------------------------------------
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: DECEMBER 31, 1989-DECEMBER 31, 1999
- --------------------------------------------------------------------------------
[MOUNTAIN CHART]
MORGAN AVERAGE S&P
GROWTH MULTI-CAP 500
FUND GROWTH FUND* INDEX
- --------------------------------------------------------------------------------
1989/12 10000 10000 10000
1990/03 9838 9824 9699
1990/06 10549 10671 10309
1990/09 8852 8766 8892
1990/12 9849 9627 9690
1991/03 11468 11670 11097
1991/06 11336 11498 11072
1991/09 11829 12715 11664
1991/12 12738 14143 12642
1992/03 12602 13787 12322
1992/06 12362 13112 12557
1992/09 12866 13603 12953
1992/12 13954 15284 13605
1993/03 14254 15505 14199
1993/06 14299 15951 14268
1993/09 14712 17098 14637
1993/12 14975 17397 14976
1994/03 14369 16806 14408
1994/06 13917 15967 14469
1994/09 14847 17117 15176
1994/12 14726 16972 15174
1995/03 15933 18207 16651
1995/06 17812 20179 18241
1995/09 19639 22365 19690
1995/12 20025 22685 20876
1996/03 21265 23835 21996
1996/06 22473 25295 22983
1996/09 23594 26053 23694
1996/12 24691 26843 25669
1997/03 24452 25532 26357
1997/06 28379 29607 30958
1997/09 32353 33614 33277
1997/12 32298 32757 34233
1998/03 36552 37047 39008
1998/06 37528 37853 40296
1998/09 31371 32381 36288
1998/12 39488 41798 44016
1999/03 41247 43938 46209
1999/06 45127 47154 49466
1999/09 43022 45942 46377
1999/12 52955 63674 53278
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31,1999
------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Morgan Growth Fund 34.10% 29.17% 18.14% $52,955
Average Multi-Cap Growth Fund* 52.34 30.27 20.34 63,674
S&P 500 Index 21.04 28.56 18.21 53,278
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Morgan Growth Fund 12/31/1968 34.10% 29.17% 16.55% 1.59% 18.14%
- --------------------------------------------------------------------------------
12
<PAGE>
FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 (92.7%) (1)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (1.2%)
o FDX Corp. 324,500 $ 13,284
o Ryanair Holdings PLC 225,900 12,453
Werner Enterprises, Inc. 406,250 5,713
Delta Air Lines, Inc. 97,200 4,842
Delphi Automotive Systems Corp. 278,733 4,390
Ford Motor Co. 68,500 3,661
PACCAR, Inc. 77,300 3,425
Burlington Northern
Santa Fe Corp. 116,100 2,816
o Navistar International Corp. 49,700 2,355
o UAL Corp. 28,900 2,242
Meritor Automotive, Inc. 97,100 1,881
Tidewater Inc. 25,200 907
General Motors Corp. 11,200 814
Arctic Cat, Inc. 27,300 273
-----------
59,056
-----------
CONSUMER DISCRETIONARY (19.6%)
o AT&T Corp.-Liberty Media
Group Class A 2,703,600 153,429
Home Depot, Inc. 1,914,150 131,239
o America Online, Inc. 1,011,400 76,298
o Viacom Inc. Class B 913,300 55,198
Wal-Mart Stores, Inc. 766,300 52,970
Kimberly-Clark Corp. 798,300 52,089
Knight Ridder 675,300 40,180
o Federated Department
Stores, Inc. 620,600 31,379
o Infinity Broadcasting Corp. 793,750 28,724
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o AMFM Inc. 324,100 25,361
The Walt Disney Co. 795,000 23,254
o Yahoo!, Inc. 50,000 21,634
o Bed Bath & Beyond, Inc. 550,000 19,113
Gannett Co., Inc. 232,100 18,931
Time Warner, Inc. 232,200 16,820
o TV Guide, Inc. 379,600 16,323
o Univision Communications Inc. 148,600 15,185
o Clear Channel
Communications, Inc. 155,000 13,834
News Corp. Ltd. Pfd. ADR 395,000 13,208
o KPN Qwest NV 187,600 11,960
Hasbro, Inc. 582,550 11,105
Whirlpool Corp. 164,000 10,670
R.R. Donnelley & Sons Co. 425,800 10,565
May Department Stores Co. 312,700 10,085
E.W. Scripps Co. Class A 225,000 10,083
o Valassis Communications, Inc. 223,050 9,424
Dayton Hudson Corp. 108,900 7,997
o CBS Corp. 119,500 7,640
Darden Restaurants Inc. 402,100 7,288
o Iron Mountain, Inc. 168,300 6,616
Tiffany & Co. 70,200 6,265
Central Newspapers, Inc. 150,000 5,906
o Harrah's Entertainment, Inc. 189,100 4,999
Tandy Corp. 92,100 4,530
The McGraw-Hill Cos., Inc. 72,100 4,443
o Brinker International, Inc. 184,000 4,416
Tribune Co. 79,700 4,388
Eastman Kodak Co. 58,300 3,862
o Furniture Brands International Inc. 171,000 3,762
13
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
Sears, Roebuck & Co. 123,500 3,759
o Best Buy Co., Inc. 74,300 3,729
The Limited, Inc. 77,000 3,335
TJX Cos., Inc. 163,100 3,333
o Flextech PLC 175,000 3,317
o Tricon Global Restaurants, Inc. 79,200 3,059
Hertz Corp. Class A 55,600 2,787
Circuit City Stores, Inc. 54,500 2,456
Ethan Allen Interiors, Inc. 70,550 2,262
o Kmart Corp. 186,200 1,874
Ross Stores, Inc. 93,200 1,672
o Abercrombie & Fitch Co. 59,600 1,590
o Office Depot, Inc. 141,000 1,542
American Greetings Corp. Class A 49,900 1,179
Maytag Corp. 24,300 1,166
o HomeBase, Inc. 363,200 1,112
Liz Claiborne, Inc. 26,400 993
o The Neiman Marcus Group,
Inc. Class A 33,900 947
Galileo International, Inc. 25,400 761
McDonald's Corp. 16,300 657
o CDI Corp. 11,400 275
Waste Management, Inc. 15,600 268
-----------
993,246
-----------
CONSUMER STAPLES (2.5%)
Philip Morris Cos., Inc. 1,415,900 32,831
Anheuser-Busch Cos., Inc. 345,800 24,508
H.J. Heinz Co. 330,900 13,174
IBP, Inc. 672,500 12,105
ConAgra, Inc. 436,700 9,853
o Safeway, Inc. 240,000 8,535
Unilever NV ADR 129,464 7,048
Colgate-Palmolive Co. 67,000 4,355
Sara Lee Corp. 173,500 3,828
SuperValu Inc. 157,600 3,152
Nabisco Group Holdings Corp. 251,300 2,670
Bestfoods 44,800 2,355
Universal Corp. 81,500 1,859
Interstate Bakeries Corp. 47,600 863
-----------
127,136
-----------
FINANCIAL SERVICES (13.0%)
Citigroup, Inc. 1,255,750 69,773
American International
Group, Inc. 636,127 68,781
Morgan Stanley Dean
Witter & Co. 343,200 48,992
Marsh & McLennan Cos., Inc. 487,650 46,662
First Data Corp. 808,300 39,859
Associates First Capital Corp. 1,210,200 33,205
AXA Financial, Inc. 718,600 24,342
FleetBoston Financial Corp. 684,681 23,836
Golden West Financial Corp. 607,500 20,351
Bank of America Corp. 392,039 19,676
St. Paul Cos., Inc. 523,800 17,646
Providian Financial Corp. 189,400 17,247
American General Corp. 215,100 16,321
Donaldson, Lufkin & Jenrette, Inc. 331,500 16,036
J.P. Morgan & Co., Inc. 125,200 15,853
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Freddie Mac 331,400 15,597
Ace, Ltd. 875,000 14,602
MBNA Corp. 505,000 13,761
o BISYS Group, Inc. 181,100 11,817
SunTrust Banks, Inc. 170,300 11,719
KeyCorp 495,900 10,972
Heller Financial, Inc. 520,000 10,432
The Chase Manhattan Corp. 101,336 7,873
Dime Bancorp, Inc. 474,400 7,175
Cullen/Frost Bankers, Inc. 251,000 6,463
Franklin Resources Corp. 200,000 6,412
Merrill Lynch & Co., Inc. 70,100 5,853
Bear Stearns Co., Inc. 112,140 4,794
Fannie Mae 76,500 4,777
The CIT Group, Inc. 190,300 4,020
SouthTrust Corp. 102,900 3,891
PNC Bank Corp. 85,300 3,796
Mellon Financial Corp. 109,300 3,723
Household International, Inc. 93,500 3,483
The PMI Group Inc. 66,450 3,244
CIGNA Corp. 40,200 3,239
T. Rowe Price 74,300 2,744
U.S. Bancorp 108,000 2,572
Travelers Property Casualty Corp. 74,000 2,534
Deluxe Corp. 92,300 2,532
Countrywide Credit Industries, Inc. 87,991 2,222
MGIC Investment Corp. 32,400 1,950
Charter One Financial 89,510 1,712
Hartford Life, Inc. 37,600 1,655
AMBAC Financial Group Inc. 29,500 1,539
A.G. Edwards & Sons, Inc. 41,600 1,334
UnionBanCal Corp. 28,800 1,136
Old Republic International Corp. 60,300 822
Sovereign Bancorp, Inc. 102,917 767
-----------
659,742
-----------
HEALTH CARE (10.6%)
o Immunex Corp. 708,300 77,426
Pfizer, Inc. 1,109,500 35,989
AstraZeneca Group PLC ADR 835,000 34,861
Johnson & Johnson 370,500 34,503
o MedImmune Inc. 158,400 26,275
Abbott Laboratories 702,700 25,517
Baxter International, Inc. 388,500 24,403
Warner-Lambert Co. 276,675 22,670
o Genzyme Corp. 480,000 21,600
o Human Genome Sciences, Inc. 140,000 21,367
American Home Products Corp. 505,000 19,916
Cardinal Health, Inc. 389,750 18,659
o Millennium Pharmaceuticals, Inc. 145,900 17,800
Pharmacia & Upjohn, Inc. 389,000 17,505
United Healthcare Corp. 325,600 17,297
o Boston Scientific Corp. 783,700 17,144
o Gilead Sciences, Inc. 232,100 12,563
Aetna Inc. 198,300 11,068
o Pacificare Health Systems, Inc. 194,700 10,319
o Andrx Corp. 212,100 8,975
o Biogen, Inc. 99,900 8,441
o Amgen, Inc. 136,800 8,216
14
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o IVAX Corp. 267,200 6,880
Columbia/HCA Healthcare Corp. 214,200 6,279
Merck & Co., Inc. 82,300 5,519
C.R. Bard, Inc. 94,600 5,014
Bristol-Myers Squibb Co. 66,400 4,262
Alpharma, Inc. Class A 109,100 3,355
o Sybron International Corp. 123,400 3,046
Eli Lilly & Co. 45,600 3,032
o HEALTHSOUTH Corp. 461,600 2,481
Mylan Laboratories, Inc. 76,100 1,917
o Tenet Healthcare Corp. 69,500 1,633
o Trigon Healthcare, Inc. 32,900 971
-----------
536,903
-----------
INTEGRATED OILS (0.8%)
Kerr-McGee Corp. 265,800 16,480
USX-Marathon Group 314,100 7,754
Chevron Corp. 55,800 4,834
Texaco Inc. 74,200 4,030
Phillips Petroleum Co. 74,300 3,492
Atlantic Richfield Co. 33,100 2,863
-----------
39,453
-----------
OTHER ENERGY (1.2%)
Enron Corp. 285,400 12,665
Halliburton Co. 300,000 12,075
Transocean Sedco Forex Inc. 325,000 10,948
o AES Corp. 95,000 7,101
o Calpine Corp. 99,000 6,336
o BJ Services Co. 149,000 6,230
Ashland, Inc. 66,400 2,187
Sunoco, Inc. 51,200 1,203
-----------
58,745
-----------
MATERIALS & PROCESSING (2.5%)
Weyerhaeuser Co. 318,000 22,836
Georgia Pacific Group 359,400 18,240
Engelhard Corp. 962,900 18,175
Air Products & Chemicals, Inc. 525,000 17,620
Louisiana-Pacific Corp. 841,600 11,993
Dow Chemical Co. 76,500 10,222
International Paper Co. 108,300 6,112
Sherwin-Williams Co. 240,300 5,046
E.I. du Pont de Nemours & Co. 60,300 3,972
Lafarge Corp. 127,900 3,533
USG Corp. 48,100 2,267
Owens Corning 100,200 1,935
The Timber Co. 52,300 1,288
RPM Inc. (Ohio) 121,425 1,237
-----------
124,476
-----------
PRODUCER DURABLES (4.6%)
Nokia Corp. ADR 170,000 32,300
United Technologies Corp. 478,702 31,116
o LAM Research Corp. 277,000 30,903
Koninklijke (Royal) Philips
Electronics NV 184,000 24,840
o American Tower Corp. Class A 625,000 19,102
o Crown Castle International Corp. 385,000 12,368
o Lexmark International Group,
Inc. Class A 132,700 12,009
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o JDS Uniphase Corp. 66,000 10,647
o RF Micro Devices, Inc. 154,000 10,539
o Applied Materials, Inc. 75,800 9,603
o Novellus Systems, Inc. 61,000 7,474
o Teradyne, Inc. 105,900 6,989
Centex Corp. 222,400 5,490
Emerson Electric Co. 85,700 4,917
The Boeing Co. 117,500 4,883
Pitney Bowes, Inc. 53,700 2,594
Herman Miller, Inc. 108,500 2,496
o Andrew Corp. 112,651 2,133
Caterpillar, Inc. 33,700 1,586
o KLA-Tencor Corp. 11,200 1,247
Molex, Inc. 22,000 1,247
o Esterline Technologies Corp. 18,600 215
-----------
234,698
-----------
TECHNOLOGY (23.7%)
COMMUNICATIONS TECHNOLOGY (9.7%)
o Cisco Systems, Inc. 1,383,700 148,229
Lucent Technologies, Inc. 1,091,200 81,635
o General Instrument Corp. 880,900 74,876
Motorola, Inc. 427,000 62,876
Corning, Inc. 395,000 50,930
o Comverse Technology, Inc. 149,200 21,597
o NCR Corp. 390,200 14,779
o 3Com Corp. 250,000 11,750
o Covad Communications
Group, Inc. 130,000 7,272
o General Motors Corp. Class H 75,000 7,200
o C-Cube Microsystems, Inc. 95,100 5,920
o Rhythms NetConnections Inc. 140,000 4,340
o RealNetworks, Inc. 34,300 4,157
COMPUTER SERVICES, SOFTWARE & SYSTEM (6.1%)
o Microsoft Corp. 1,178,200 137,555
o BMC Software, Inc. 455,000 36,371
o Rational Software Corp. 607,200 29,829
o VeriSign, Inc. 107,300 20,467
o Oracle Corp. 144,850 16,232
o Sterling Software, Inc. 490,000 15,435
o Ceridian Corp. 565,000 12,183
o QLogic Corp. 50,300 8,042
Computer Associates
International, Inc. 110,800 7,749
o Electronics for Imaging, Inc. 114,200 6,638
o Symantec Corp. 104,200 6,109
Adobe Systems, Inc. 80,900 5,440
o The SABRE Group Holdings, Inc. 57,600 2,952
o Parametric Technology Corp. 66,000 1,786
o Mercury Interactive Corp. 10,000 1,079
COMPUTER TECHNOLOGY (2.2%)
o Adaptec, Inc. 587,600 29,306
o Computer Sciences Corp. 225,000 21,291
International Business
Machines Corp. 137,500 14,850
Hewlett-Packard Co. 70,600 8,044
o Sun Microsystems, Inc. 91,600 7,093
15
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
o Apple Computer, Inc. 63,500 6,528
o EMC Corp. 52,900 5,779
o Seagate Technology Inc. 124,100 5,778
o Gateway, Inc. 77,800 5,607
Electronic Data Systems Corp. 43,000 2,878
o Synopsys, Inc. 40,100 2,677
ELECTRONICS (0.3%)
o Flextronics International Ltd. 350,000 16,100
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (3.8%)
o Analog Devices, Inc. 599,000 55,707
Texas Instruments, Inc. 480,800 46,577
Intel Corp. 319,800 26,324
o Applied Micro Circuits Corp. 158,800 20,207
o SCI Systems, Inc. 216,000 17,753
o National Semiconductor Corp. 195,500 8,370
o Lattice Semiconductor Corp. 95,000 4,477
o Micron Technology, Inc. 56,800 4,416
o LSI Logic Corp. 62,900 4,246
o Xilinx, Inc. 66,900 3,042
o Actel Corp. 28,800 691
ELECTRONICS--TECHNOLOGY (0.9%)
o Solectron Corp. 360,000 34,245
General Dynamics Corp. 177,500 9,363
Harris Corp. 68,200 1,820
SCIENTIFIC EQUIPMENT & SUPPLIES (0.7%)
PE Corp.-PE Biosystems Group 296,400 35,661
-----------
1,202,258
-----------
UTILITIES (8.7%)
o MCI WorldCom, Inc. 1,836,750 97,463
o Sprint PCS 385,000 39,463
o NEXTEL Communications, Inc. 374,000 38,569
Comcast Corp. Class A Special 713,800 36,092
o COLT Telecom Group PLC 680,800 34,772
AT&T Corp. 674,657 34,239
o Intermedia Communications Inc. 765,400 29,707
o UnitedGlobalCom Inc. Class A 273,000 19,281
o NTL Inc. 151,500 18,900
o McLeodUSA, Inc. Class A 190,000 11,186
Southern Co. 457,000 10,740
Telecom Italia SpA 700,000 7,761
o Cox Communications, Inc.
Class A 150,500 7,751
BroadWing Inc. 200,000 7,375
o TeleCorp PCS, Inc. 185,000 7,030
o MediaOne Group, Inc. 87,700 6,737
o Hellenic Telecommunications
Organization SA 282,500 6,653
Bell Atlantic Corp. 81,700 5,030
o United Pan-Europe
Communications NV 37,000 4,718
o Tritel, Inc. 125,000 3,961
BellSouth Corp. 72,300 3,384
ALLTEL Corp. 34,400 2,845
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Public Service Enterprise
Group, Inc. 70,500 2,454
DTE Energy Co. 49,000 1,537
CenturyTel, Inc. 25,250 1,196
Edison International 32,200 843
GPU, Inc. 15,800 473
o Z-Tel Technologies, Inc. 1,800 68
-----------
440,228
-----------
OTHER (4.3%)
Tyco International Ltd. 1,420,200 55,210
Illinois Tool Works, Inc. 811,385 54,819
General Electric Co. 238,500 36,908
Monsanto Co. 480,000 17,100
Textron, Inc. 150,600 11,549
Johnson Controls, Inc. 193,000 10,977
Teleflex Inc. 191,800 6,006
Brunswick Corp. 265,800 5,914
Honeywell International Inc. 92,700 5,348
Minnesota Mining &
Manufacturing Co. 48,600 4,757
Norsk Hydro AS ADR 105,700 4,519
o Berkshire Hathaway Inc. Class A 37 2,076
GenCorp, Inc. 100,000 987
o Berkshire Hathaway Inc. Class B 22 40
-----------
216,210
-----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $3,048,228) 4,692,151
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.0%)(1)
- --------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 5.64%, 1/18/2000 $ 5,300 5,288
(2) 5.61%, 1/28/2000 1,000 996
(2) 5.64%, 1/21/2000 7,000 6,982
U.S. TREASURY BILL
(2) 5.19%, 1/20/2000 2,000 1,995
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.25% 1/3/2000 386,193 386,193
3.47% 1/3/2000--Note F 57,033 57,033
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $458,480) 458,487
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.7%)
(Cost $3,506,708) 5,150,638
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.7%)
- --------------------------------------------------------------------------------
Other Assets--Note C $ 72,567
Liabilities--Note F (156,872)
-----------
(84,305)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 221,000,766 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $5,066,333
================================================================================
NET ASSET VALUE PER SHARE $22.92
================================================================================
* See Note A in Notes to Financial Statements.
o Non-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 97.8% and 3.9%, respectively, of net assets.
See Note E in Notes to Financial Statements.
(2) Securities with an aggregate value of $15,261,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid in Capital $3,248,036 $14.70
Overdistributed Net
Investment Income (1,941) (.01)
Accumulated Net Realized Gains 166,941 .75
Unrealized Appreciation--Note E
Investment Securities 1,643,930 7.44
Futures Contracts 9,367 .04
- --------------------------------------------------------------------------------
NET ASSETS $5,066,333 $22.92
================================================================================
17
<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
YEAR ENDED DECEMBER 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 30,802
Interest 14,241
Security Lending 352
-------------
Total Income 45,395
-------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 4,313
Performance Adjustment 166
The Vanguard Group--Note C
Management and Administrative 11,824
Marketing and Distribution 527
Custodian Fees 93
Auditing Fees 10
Shareholders' Reports 126
Trustees' Fees and Expenses 6
-------------
Total Expenses 17,065
Expenses Paid Indirectly--Note C (452)
-------------
Net Expenses 16,613
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 28,782
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 641,971
Futures Contracts 24,308
- --------------------------------------------------------------------------------
REALIZED NET GAIN 666,279
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 567,788
Futures Contracts 2,593
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 570,381
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,265,442
================================================================================
18
<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.
- --------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 28,782 $ 29,623
Realized Net Gain 666,279 286,705
Change in Unrealized Appreciation (Depreciation) 570,381 329,112
------------------------------
Net Increase in Net Assets Resulting
from Operations 1,265,442 645,440
------------------------------
DISTRIBUTIONS
Net Investment Income (29,733) (30,730)
Realized Capital Gain (600,879) (240,911)
------------------------------
Total Distributions (630,612) (271,641)
------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 863,925 622,565
Issued in Lieu of Cash Distributions 605,622 260,711
Redeemed (593,217) (497,205)
------------------------------
Net Increase from Capital Share Transactions 876,330 386,071
- --------------------------------------------------------------------------------
Total Increase 1,511,160 759,870
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 3,555,173 2,795,303
------------------------------
End of Year $5,066,333 $3,555,173
================================================================================
1Shares Issued (Redeemed)
Issued 40,331 33,834
Issued in Lieu of Cash Distributions 28,114 13,960
Redeemed (27,767) (26,859)
------------------------------
Net Increase in Shares Outstanding 40,678 20,935
================================================================================
19
<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,
--------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $19.72 $17.54 $15.63 $14.09 $11.36
- -------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .18 .160 .14 .15
Net Realized and Unrealized Gain (Loss) on Investments 6.29 3.61 4.435 3.07 3.89
--------------------------------------------
Total from Investment Operations 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 (3.08) (1.43) (2.525) (1.53) (1.16)
--------------------------------------------
Total Distributions (3.23) (1.61) (2.685) (1.67) (1.31)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.92 $19.72 $17.54 $15.63 $14.09
=================================================================================================
TOTAL RETURN 34.10% 22.26% 30.81% 23.30% 35.98%
=================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $5,066 $3,555 $2,795 $2,054 $1,471
Ratio of Total Expenses to Average Net Assets 0.42% 0.44% 0.48% 0.51% 0.49%
Ratio of Net Investment Income to Average Net Assets 0.71% 0.96% 0.93% 0.97% 1.10%
Portfolio Turnover Rate 65% 81% 76% 73% 76%
=================================================================================================
</TABLE>
20
<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.
21
<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 $500,000
for the year ended December 31, 1999.
For the year ended December 31, 1999, the advisory fee represented an
effective annual basic rate of 0.11% of the fund's average net assets before an
increase of $166,000 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 December 31, 1999, the fund had contributed capital of $931,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.9% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
Vanguard has asked the fund's investment advisers to direct certain
security trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the fund part of the commissions generated. Such
rebates are used solely to reduce the fund's management and administrative
expenses. For the year ended December 31, 1999, these arrangements reduced the
fund's expenses by $452,000 (an annual rate of 0.01% of average net assets).
D. During the year ended December 31, 1999, the fund purchased $2,528,665,000 of
investment securities and sold $2,454,925,000 of investment securities, other
than temporary cash investments.
E. At December 31, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,643,930,000,
consisting of unrealized gains of $1,804,855,000 on securities that had risen in
value since their purchase and $160,925,000 in unrealized losses on securities
that had fallen in value since their purchase.
At December 31, 1999, the aggregate settlement value of open futures
contracts expiring in March 2000 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
---------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- --------------------------------------------------------------------------------
S&P 500 498 $184,783 $5,325
S&P Midcap 400 354 79,500 4,042
- --------------------------------------------------------------------------------
F. The market value of securities on loan to broker/dealers at December 31,
1999, was $55,053,000, for which the fund held cash collateral of $57,033,000.
Cash collateral received is invested in repurchase agreements.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Morgan Growth Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Morgan Growth Fund (the "Fund") at December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 2000
23
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD MORGAN GROWTH FUND
This information for the fiscal year ended December 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $452,207,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended December
31, 1999, all of which is designated as a 20% rate gain distribution.
For corporate shareholders, 11.1% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
- --------------------------------------------------------------------------------
24
<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.
Seven of Vanguard's nine 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 C. BOGLE * (1967) Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN * (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.
JOHN C. SAWHILL * (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. * (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
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 * Core Management Group.
<PAGE>
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.
[SHIP LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
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 4500" and "Wilshire 5000"
are trademarks of Wilshire Associates.
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.
Q260-02/16/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
