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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-29601) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 53
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 54
VANGUARD MORGAN GROWTH FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 21, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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VANGUARD
MORGAN(TM) GROWTH
FUND
Prospectus
April 21, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
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VANGUARD(R) MORGAN(TM) GROWTH FUND
Prospectus
April 21, 2000
A Growth Stock Mutual Fund
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CONTENTS
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1 FUND PROFILE 13 FINANCIAL HIGHLIGHTS
3 ADDITIONAL INFORMATION 15 INVESTING WITH VANGUARD
3 A WORD ABOUT RISK 15 Services and Account Features
3 WHO SHOULD INVEST 16 Types of Accounts
4 PRIMARY INVESTMENT STRATEGIES 17 Buying Shares
9 THE FUND AND VANGUARD 19 Redeeming Shares
9 INVESTMENT ADVISERS 23 Transferring Registration
10 DIVIDENDS, CAPITAL GAINS, AND TAXES 23 Fund and Account Updates
12 SHARE PRICE GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Morgan Growth Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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1
FUND PROFILE
The following profile summarizes key features of Vanguard Morgan Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests primarily in the stocks of large- and medium-size domestic
companies whose revenues and/or earnings are expected to grow faster than those
of the average company in the market. The Fund also invests in stocks of smaller
companies with similar characteristics.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- or
mid-capitalization growth stocks will trail returns from other asset
classes or the overall stock market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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1990 -1.51%
1991 29.33%
1992 9.54%
1993 7.32%
1994 -1.67%
1995 35.98%
1996 23.30%
1997 30.81%
1998 22.26%
1999 34.10%
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During the period shown in the bar chart, the highest return for a calendar
quarter was 25.88% (quarter ended December 31, 1998) and the lowest return for a
quarter was -16.41% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Morgan Growth Fund 34.10% 29.17% 18.14%
S&P 500 Index 21.04 28.56 18.21
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2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31,1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.40%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.42%
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Morgan Growth Fund's expense ratio in fiscal year 1999 was
0.42%, or $4.20 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1999 of 1.53%, or $15.30 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
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The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$43 $135 $235 $530
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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3
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF DECEMBER 31, 1999
Distributed annually in December $5.1 billion
INVESTMENT ADVISERS SUITABLE FOR IRAS
Vanguard Morgan Growth Fund uses Yes
three advisers:
MINIMUM INITIAL INVESTMENT
- - Wellington Management Company, $3,000; $1,000 for IRAs and custodial
LLP, Boston, Mass., since accounts for minors
inception
- - Franklin Portfolio Associates, NEWSPAPER ABBREVIATION
LLC, Boston, Mass., since 1990 Morg
- - The Vanguard Group Inc., Valley
Forge, Pa., since 1993 VANGUARD FUND NUMBER
026
INCEPTION DATE CUSIP NUMBER
December 31, 1968 921928107
TICKER SYMBOL
VMRGX
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard Morgan
Growth Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for current income.
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4
- - You are seeking a fund that invests in growth companies representing a wide
variety of industries.
- - You characterize your investment temperament as "relatively aggressive."
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges that shareholders may make.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund, and may change the investment strategies in the interest of
shareholders.
MARKET EXPOSURE
The Fund is a growth fund that invests mainly in large- and mid-capitalization
domestic common stocks. The Fund also includes stocks of smaller companies that
may not have a long history of growth but are found attractive by one of the
Fund's advisers. Stocks are primarily chosen on the basis of the advisers'
expectations that revenues and/or earnings will grow faster than average. The
Fund may also invest in securities that are convertible to common stocks.
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5
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
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Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
Growth stocks, which are the Fund's primary investments, are likely to be
even more volatile in price than the stock market as a whole. Historically,
growth funds have tended to outperform in bull markets and underperform in
declining markets. Of course, there is no guarantee that this pattern will
continue in the future. The Fund also holds a significant number of mid-cap
stocks, which tend to be more volatile than the large-cap stocks that dominate
the S&P 500 Index.
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6
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM LARGE-OR MID-CAPITALIZATION GROWTH STOCKS WILL TRAIL RETURNS
FROM THE OVERALL STOCK MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION
GROWTH STOCKS EACH TEND TO GO THROUGH CYCLES OF DOING BETTER--OR
WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
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PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, the prices of such stocks are
typically above-average in relation to such measures as revenue, earnings, book
value, and dividends. Value funds generally emphasize stocks of companies from
which the market does not expect strong growth. The prices of value stocks
typically are below-average in comparison to such factors as earnings and book
value, and these stocks typically pay above-average dividend yields. Growth and
value stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hopes of a greater
increase in share price. Growth funds also may appeal to investors with taxable
accounts who want a higher proportion of returns to come as capital gains
(which may be taxed at lower rates than dividend income). Value funds, by
contrast, are appropriate for investors who want some dividend income and the
potential for capital gains, but are less tolerant of share-price fluctuations.
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SECURITY SELECTION
Vanguard Morgan Growth Fund has three investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The three investment advisers employ active investment management methods,
which means that securities are bought and sold according to the advisers'
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
Wellington Management Company, LLP (Wellington Management), which is
currently responsible for about 42% of the Fund's assets, uses traditional
methods of stock selection-research and analysis-to identify companies that it
believes have above-average growth prospects, particularly those in industries
undergoing change. Research is focused on companies with a proven record of
sales and earnings growth, profitability, and cash flow generation. Securities
are sold when an investment has achieved its intended purpose, or because it is
no longer considered attractive.
The other two advisers, Franklin Portfolio Associates, LLC and The Vanguard
Group (Vanguard), employ a "quantitative" investment approach. In other words,
they use computerized models for portfolio construction and stock selection to
outperform, if possible, a specific market standard. For Vanguard Morgan Growth
Fund, this market standard is the Growth Fund Stock Index, which is made up of
the stocks held by the nation's 50 largest growth funds.
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7
Franklin Portfolio Associates' investment strategy focuses on stock
selection and fund structure. The stock selection process is driven by a series
of more than 40 computer models that value a universe of 3,500 stocks. These
models cover a broad range of publicly available data and focus on four areas:
fundamental momentum (based on the trends of reported and forecasted earnings),
relative value, future cash flow, and economic cycles. The individual models
rank each security in the universe. Using these rankings, a separate program
builds a fund consistent with the Growth Fund Stock Index's characteristics.
Franklin Portfolio Associates currently manages about 39% of the Fund's assets.
Vanguard ranks a universe of approximately 2,000 stocks using a variety of
computer models. These models focus on investment characteristics such as
earnings, fundamental momentum, share price momentum, relative value, and cash
flow. A separate program then selects the stocks for the Fund, consistent with
the Growth Fund Stock Index's characteristics, from among the stocks rated
highly by the investment models. Vanguard currently manages about 14% of the
Fund's assets.
The balance of Vanguard Morgan Growth Fund's assets (about 5%) is held in
cash reserves, also managed by Vanguard, which may invest in stock futures to
give the cash reserves the performance of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while retaining
cash on hand to meet liquidity needs.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT ONE OR MORE
OF THE FUND'S ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 74.2%.
(A turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
income subject to taxes. As of December 31, 1999, the average turnover rate for
all growth stock funds was approximately 99%, according to Morningstar, Inc.
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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund reserves the
right to invest up to 20% of its assets in foreign securities. These securities
may be traded in U.S. or foreign
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8
markets. To the extent that it owns foreign stocks, the Fund is subject to: (1)
country risk, which is the chance that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money, and (2) currency risk, which is the chance that Americans
investing abroad could lose money because of a rise in the value of the U.S.
dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some
futures and options have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as
leveraged investments, derivatives can carry considerable risks.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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9
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
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INVESTMENT ADVISERS
The Fund employs three investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Trustees and officers of the Fund.
WELLINGTON MANAGEMENT COMPANY, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, and its predecessors have provided investment advisory
services since 1928. The firm currently manages more than $235 billion in stock
and bond portfolios, including 15 Vanguard funds.
Wellington Management's advisory fee is paid quarterly. This fee is based
on certain annual percentages applied to the Fund's average month-end assets
managed by Wellington Management. The advisory fee may be adjusted based on the
36-month cumulative total return performance of Wellington Management's portion
of the Fund as compared to the cumulative total return of the Growth Fund Stock
Index.
FRANKLIN PORTFOLIO ASSOCIATES, LLC, Two International Place, Boston, MA
02110, is a professional advisory firm founded in 1982. Franklin Portfolio
Associates is a wholly owned, indirect subsidiary of Mellon Bank, and has no
affiliation with the Franklin/Templeton Group of Funds or Franklin Resources,
Inc. Franklin Portfolio Associates currently manages approximately $21.4 billion
in assets.
Franklin Portfolio Associates' advisory fee is paid quarterly. This fee is
based on the average month-end assets managed by Franklin Portfolio Associates.
The advisory fee may be adjusted based on the 36-month cumulative total return
performance of Franklin Portfolio Associates' portion of the Fund as compared to
the cumulative total return of the Growth Fund Stock Index.
THE VANGUARD GROUP, (Vanguard) P.O. Box 2600, Valley Forge, PA 19482,
founded in 1975, is a wholly-owned subsidiary of the Vanguard funds. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. The Fund receives advisory services from Vanguard on an at cost basis.
The Fund's most recent Statement of Additional Information provides
complete details of how Wellington Management and Franklin Portfolio Associates
are compensated. For the year ended December 31, 1999, the aggregate investment
advisory fee represented an effective annual basic rate of 0.11% of average net
assets of the Fund before an increase of less than 0.01% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are
<PAGE>
10
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Morgan Growth Fund are:
ROBERT D. RANDS, CFA, Senior Vice President of Wellington Management Company,
LLP; has worked in investment management since 1966, with Wellington Management
since 1978; adviser to the Fund since 1994; B.A., Yale University; M.B.A.,
University of Pennsylvania.
JOHN J. NAGORNIAK, CFA, CEO of Franklin Portfolio Associates, LLC; has worked in
investment management since 1970, with Franklin Portfolio Associates since 1982;
adviser to the Fund since 1990; B.A., Princeton University; M.S., The Sloan
School of Management, Massachusetts Institute of Technology.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985: primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
JOHN S. CONE, CFA, President of Franklin Portfolio Associates, LLC; has worked
in investment management with Franklin Portfolio Associates since 1982; adviser
to the Fund since 1990; B.A., Rice University; M.S., Perdue University.
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DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
<PAGE>
11
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
- --------------------------------------------------------------------------------
<PAGE>
12
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds". Different newspapers
use different abbreviations of the Fund's name, but the most common is MORG.
<PAGE>
13
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
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%
Turnover Rate 65% 81% 76% 73% 76%
================================================================================
<PAGE>
14
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $19.72 per share.
During the year, the Fund earned $0.14 per share from investment income
(interest and dividends) and $6.29 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $3.23 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($6.43 per share) minus the distributions ($3.23 per share)
resulted in a share price of $22.92 at the end of the year. This was an
increase of $3.20 per share (from $19.72 at the beginning of the year to $22.92
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was 34.10% for the
year.
As of December 31, 1999, the Fund had $5.1 billion in net assets. For the year,
its expense ratio was 0.42% ($4.20 per $1,000 of net assets); and net
investment income amounted to 0.71% of its average net assets. It sold and
replaced securities valued at 65% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
15
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [BOOK]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
16
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
17
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-26
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [PHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
18
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Morgan Growth Fund-26
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
19
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 22.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in the "Redeeming Shares"
section of this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
<PAGE>
20
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
21
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express Redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your prelinked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
<PAGE>
22
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
<PAGE>
23
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
<PAGE>
24
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any
12b-1distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other interests in investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Morgan Growth Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA
19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by electronic request at the
following e-mail address:
[email protected]. or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-1685
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P026N-04/21/2000
<PAGE>
VANGUARD
MORGAN(TM) GROWTH
FUND
Participant Prospectus
April 21, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD(R) MORGAN(TM) GROWTH FUND
Participant Prospectus
April 21, 2000
A Growth Stock Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 10 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 11 SHARE PRICE
3 A WORD ABOUT RISK 12 FINANCIAL HIGHLIGHTS
3 WHO SHOULD INVEST 14 INVESTING WITH VANGUARD
4 PRIMARY INVESTMENT STRATEGIES 15 ACCESSING FUND INFORMATION BY COMPUTER
8 THE FUND AND VANGUARD GLOSSARY (inside back cover)
9 INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Morgan Growth Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement
or savings plans. Another version--for investors who would like to open a
personal investment account--can be obtained by calling Vanguard at 1-800-662-
7447.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Morgan Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests primarily in the stocks of large- and medium-size domestic
companies whose revenues and/or earnings are expected to grow faster than those
of the average company in the market. The Fund also invests in stocks of smaller
companies with similar characteristics.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- or
mid-capitalization growth stocks will trail returns from other asset
classes or the overall stock market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -1.51%
1991 29.33%
1992 9.54%
1993 7.32%
1994 -1.67%
1995 35.98%
1996 23.30%
1997 30.81%
1998 22.26%
1999 34.10%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 25.88% (quarter ended December 31, 1998) and the lowest return for a
quarter was -16.41% (quarter ended September 30, 1998).
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Morgan Growth Fund 34.10% 29.17% 18.14%
S&P 500 Index 21.04 28.56 18.21
--------------------------------------------------------------------
<PAGE>
2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31,1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.40%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.42%
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Morgan Growth Fund's expense ratio in fiscal year 1999 was
0.42%, or $4.20 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1999 of 1.53%, or $15.30 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
- --------------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$43 $135 $235 $530
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
3
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF DECEMBER 31, 1999
Distributed annually in December $5.1 billion
INVESTMENT ADVISERS NEWSPAPER ABBREVIATION
Vanguard Morgan Growth Fund uses Morg
three advisers:
VANGUARD FUND NUMBER
- - Wellington Management Company, 026
LLP, Boston, Mass., since
inception CUSIP NUMBER
- - Franklin Portfolio Associates, 921928107
LLC, Boston, Mass., since 1990
- - The Vanguard Group Inc., Valley TICKER SYMBOL
Forge, Pa., since 1993 VMRGX
INCEPTION DATE
December 31, 1968
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard Morgan
Growth Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for current income.
- - You are seeking a fund that invests in growth companies representing a wide
variety of industries.
- - You characterize your investment temperament as "relatively aggressive."
<PAGE>
4
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges that shareholders may make.
- --------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund, and may change the investment strategies in the interest of
shareholders.
MARKET EXPOSURE
The Fund is a growth fund that invests mainly in large- and mid-capitalization
domestic common stocks. The Fund also includes stocks of smaller companies that
may not have a long history of growth but are found attractive by one of the
Fund's advisers. Stocks are primarily chosen on the basis of the advisers'
expectations that revenues and/or earnings will grow faster than average. The
Fund may also invest in securities that are convertible to common stocks.
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
Growth stocks, which are the Fund's primary investments, are likely to be
even more volatile in price than the stock market as a whole. Historically,
growth funds have tended to outperform in bull markets and underperform in
declining markets. Of course, there is no guarantee that this pattern will
continue in the future. The Fund also holds a significant number of mid-cap
stocks, which tend to be more volatile than the large-cap stocks that dominate
the S&P 500 Index.
<PAGE>
6
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM LARGE-OR MID-CAPITALIZATION GROWTH STOCKS WILL TRAIL RETURNS
FROM THE OVERALL STOCK MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION
GROWTH STOCKS EACH TEND TO GO THROUGH CYCLES OF DOING BETTER--OR
WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, the prices of such stocks are
typically above-average in relation to such measures as revenue, earnings, book
value, and dividends. Value funds generally emphasize stocks of companies from
which the market does not expect strong growth. The prices of value stocks
typically are below-average in comparison to such factors as earnings and book
value, and these stocks typically pay above-average dividend yields. Growth and
value stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hopes of a greater
increase in share price. Growth funds also may appeal to investors with taxable
accounts who want a higher proportion of returns to come as capital gains
(which may be taxed at lower rates than dividend income). Value funds, by
contrast, are appropriate for investors who want some dividend income and the
potential for capital gains, but are less tolerant of share-price fluctuations.
- --------------------------------------------------------------------------------
SECURITY SELECTION
Vanguard Morgan Growth Fund has three investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The three investment advisers employ active investment management methods,
which means that securities are bought and sold according to the advisers'
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
Wellington Management Company, LLP (Wellington Management), which is
currently responsible for about 42% of the Fund's assets, uses traditional
methods of stock selection-research and analysis-to identify companies that it
believes have above-average growth prospects, particularly those in industries
undergoing change. Research is focused on companies with a proven record of
sales and earnings growth, profitability, and cash flow generation. Securities
are sold when an investment has achieved its intended purpose, or because it is
no longer considered attractive.
The other two advisers, Franklin Portfolio Associates, LLC and The Vanguard
Group (Vanguard), employ a "quantitative" investment approach. In other words,
they use computerized models for portfolio construction and stock selection to
outperform, if possible, a specific market standard. For Vanguard Morgan Growth
Fund, this market standard is the Growth Fund Stock Index, which is made up of
the stocks held by the nation's 50 largest growth funds.
<PAGE>
7
Franklin Portfolio Associates' investment strategy focuses on stock
selection and fund structure. The stock selection process is driven by a series
of more than 40 computer models that value a universe of 3,500 stocks. These
models cover a broad range of publicly available data and focus on four areas:
fundamental momentum (based on the trends of reported and forecasted earnings),
relative value, future cash flow, and economic cycles. The individual models
rank each security in the universe. Using these rankings, a separate program
builds a fund consistent with the Growth Fund Stock Index's characteristics.
Franklin Portfolio Associates currently manages about 39% of the Fund's assets.
Vanguard ranks a universe of approximately 2,000 stocks using a variety of
computer models. These models focus on investment characteristics such as
earnings, fundamental momentum, share price momentum, relative value, and cash
flow. A separate program then selects the stocks for the Fund, consistent with
the Growth Fund Stock Index's characteristics, from among the stocks rated
highly by the investment models. Vanguard currently manages about 14% of the
Fund's assets.
The balance of Vanguard Morgan Growth Fund's assets (about 4%) is held in
cash reserves, also managed by Vanguard, which may invest in stock futures to
give the cash reserves the performance of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while retaining
cash on hand to meet liquidity needs.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT ONE OR MORE
OF THE FUND'S ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 74.2%.
(A turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
income subject to taxes. As of December 31, 1999, the average turnover rate for
all growth stock funds was approximately 99%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund reserves the
right to invest up to 20% of its assets in foreign securities. These securities
may be traded in U.S. or foreign
<PAGE>
8
markets. To the extent that it owns foreign stocks, the Fund is subject to: (1)
country risk, which is the chance that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money, and (2) currency risk, which is the chance that Americans
investing abroad could lose money because of a rise in the value of the U.S.
dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some
futures and options have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as
leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
9
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund employs three investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Trustees and officers of the Fund.
WELLINGTON MANAGEMENT COMPANY, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, and its predecessors have provided investment advisory
services since 1928. The firm currently manages more than $235 billion in stock
and bond portfolios, including 15 Vanguard funds.
Wellington Management's advisory fee is paid quarterly. This fee is based
on certain annual percentages applied to the Fund's average month-end assets
managed by Wellington Management. The advisory fee may be adjusted based on the
36-month cumulative total return performance of Wellington Management's portion
of the Fund as compared to the cumulative total return of the Growth Fund Stock
Index.
FRANKLIN PORTFOLIO ASSOCIATES, LLC, Two International Place, Boston, MA
02110, is a professional advisory firm founded in 1982. Franklin Portfolio
Associates is a wholly owned, indirect subsidiary of Mellon Bank, and has no
affiliation with the Franklin/Templeton Group of Funds or Franklin Resources,
Inc. Franklin Portfolio Associates currently manages approximately $21.4 billion
in assets.
Franklin Portfolio Associates' advisory fee is paid quarterly. This fee is
based on the average month-end assets managed by Franklin Portfolio Associates.
The advisory fee may be adjusted based on the 36-month cumulative total return
performance of Franklin Portfolio Associates' portion of the Fund as compared to
the cumulative total return of the Growth Fund Stock Index.
THE VANGUARD GROUP, (Vanguard) P.O. Box 2600, Valley Forge, PA 19482,
founded in 1975, is a wholly-owned subsidiary of the Vanguard funds. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. The Fund receives advisory services from Vanguard on an at cost basis.
The Fund's most recent Statement of Additional Information provides
complete details of how Wellington Management and Franklin Portfolio Associates
are compensated. For the year ended December 31, 1999, the aggregate investment
advisory fee represented an effective annual basic rate of 0.11% of average net
assets of the Fund before an increase of less than 0.01% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are
<PAGE>
10
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Morgan Growth Fund are:
ROBERT D. RANDS, CFA, Senior Vice President of Wellington Management Company,
LLP; has worked in investment management since 1966, with Wellington Management
since 1978; adviser to the Fund since 1994; B.A., Yale University; M.B.A.,
University of Pennsylvania.
JOHN J. NAGORNIAK, CFA, President of Franklin Portfolio Associates, LLC; has
worked in investment management since 1970, with Franklin Portfolio Associates
since 1982; adviser to the Fund since 1990; B.A., Princeton University;
M.S., The Sloan School of Management, Massachusetts Institute of Technology.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
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DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>
11
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
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SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds". Different newspapers
use different abbreviations of the Fund's name, but the most common is MORG.
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12
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
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VANGUARD MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
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NET ASSET VALUE,
BEGINNING OF YEAR $19.72 $17.54 $15.63 $14.09 $11.36
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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)
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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%
Turnover Rate 65% 81% 76% 73% 76%
================================================================================
<PAGE>
13
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PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $19.72 per share.
During the year, the Fund earned $0.14 per share from investment income
(interest and dividends) and $6.29 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $3.23 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($6.43 per share) minus the distributions ($3.23 per share)
resulted in a share price of $22.92 at the end of the year. This was an
increase of $3.20 per share (from $19.72 at the beginning of the year to $22.92
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was 34.10% for the
year.
As of December 31, 1999, the Fund had $5.1 billion in net assets. For the year,
its expense ratio was 0.42% ($4.20 per $1,000 of net assets); and net
investment income amounted to 0.71% of its average net assets. It sold and
replaced securities valued at 65% of its net assets.
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"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.
<PAGE>
14
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next- determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Vanguard Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
15
ACCESSING FUND INFORMATION BY COMPUTER
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VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
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(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any
12b-1distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other interests in investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Morgan Growth Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports
and other information about the
Fund are also available on the
SEC's website (www.sec.gov),
or you can receive copies of this
information, for a fee,
by electronic request at the
following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-1685
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I026N-04/21/2000
<PAGE>
PART B
VANGUARD MORGAN GROWTH FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 21, 2000
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated April 21, 2000). To obtain, without charge, the
Prospectus or the most recent Annual Report to Shareholders, which contains the
Fund's financial statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447
TABLE OF CONTENTS
DESCRIPTION OF THE FUND......................................................B-1
INVESTMENT POLICIES..........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-8
PURCHASE OF SHARES...........................................................B-9
REDEMPTION OF SHARES........................................................B-10
SHARE PRICE.................................................................B-10
MANAGEMENT OF THE FUND......................................................B-11
INVESTMENT ADVISORY SERVICES................................................B-14
PORTFOLIO TRANSACTIONS......................................................B-18
YIELD AND TOTAL RETURN......................................................B-18
PERFORMANCE MEASURES........................................................B-20
COMPARATIVE INDEXES.........................................................B-21
FINANCIAL STATEMENTS........................................................B-23
DESCRIPTION OF THE FUND
ORGANIZATION
The Fund was organized as a Delaware corporation in 1968, merged into a Maryland
corporation in 1973, and then reorganized as a Delaware business trust in June
1998. Prior to its reorganization as a Delaware business trust, the Fund was
known as Vanguard/Morgan Growth Fund, Inc. The Fund is registered with the
United States Securities and Exchange Commission (the Commission) under the
Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified
management investment company. It currently offers the following investor share
class fund: Vanguard Morgan Growth Fund (the Fund). The Fund has the ability to
offer additional funds or classes of shares. There is no limit on the number of
full and fractional shares that the Fund may issue for a single fund or class of
shares.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as the Fund's custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
B-1
<PAGE>
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Fund's shares, other
than the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected fund. Unless terminated by reorganization or
liquidation, the Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. However, only the
shares of the fund affected by a particular matter are entitled to vote on that
matter. Voting rights are noncumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with the
Fund's shares.
REDEMPTION PROVISIONS. The Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.
CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that the Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, the Fund must
comply with certain requirements. If the Fund fails to meet these requirements
in any taxable year, it will be subject to tax on its taxable income at
corporate rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and
B-2
<PAGE>
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies set forth in
the Prospectus.
TURNOVER RATE. While the rate of turnover is not a limiting factor when
management deems changes appropriate, it is anticipated that the annual turnover
rate will not normally exceed 100%. A rate of turnover of 100% could occur, for
example, if the Fund sold and replaced securities valued at 100% of its total
assets. The Fund's turnover rate for each of its last five fiscal years is set
forth under "Financial Highlights" in the Fund's Prospectus.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a
fixed-income security (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance, or a certificate of deposit) from a
commercial bank, broker, or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Fund's Board of Trustees will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker, or
dealer party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying instrument at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the advisers
acknowledge these risks, it is expected that they will be controlled through
careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities on a short-term or
long-term basis to qualified institutional investors (typically brokers,
dealers, banks, or other financial institutions) who need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities, or completing arbitrage operations. By
lending its portfolio securities, the Fund attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Fund. The terms, the structure, and the
aggregate amount of such loans must be consistent with the 1940 Act, and the
Rules or interpretations of the Commission thereunder. These provisions limit
the amount of securities the Fund may lend to 33 1/3% of the Fund's total
assets, and require that (a) the borrower pledge and maintain with the Fund
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the U.S. Government
having a value at all times not less than 100% of the value of the securities
loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the
Fund's investing any cash
B-3
<PAGE>
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value. Loan arrangements made
by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange (the Exchange), which rules
presently require the borrower, after notice, to redeliver the securities within
the normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer, or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a Vanguard fund may participate in the program only if
and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
FOREIGN INVESTMENTS. As indicated in the Prospectus, the Fund may invest up
to 20% of its assets in foreign securities and may engage in currency
transactions with respect to these investments. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
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Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option, or similar
financial instrument if such instrument is not marked-to-market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts, and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
Fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated
investments and foreign currency contracts the Fund may make or enter into will
be subject to the special currency rules described above.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held for a number of years, they may be considered illiquid
securities-- meaning that they could be difficult for the Fund to convert to
cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This will generally include
securities that are restricted but which may be sold to qualified institutional
buyers under Rule 144A of the Securities Act of 1933 (the 1933 Act). While the
Fund's investment advisers determine the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the Board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.
FUTURES CONTRACTS AND OPTIONS. The Fund may enter into futures contracts,
options, and options on futures contracts for the purpose of remaining fully
invested and reducing transactions costs. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security at a specified future time and at a specified price. Futures
contracts which are standardized as to maturity date and underlying financial
instrument are traded
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on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government agency. Assets committed to futures contracts will be segregated
to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold", or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators". Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed", that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no
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assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The principal stock index futures exchanges in the U.S. are the Board of Trade
of the City of Chicago and the Chicago Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to the low margin deposits required. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Fund is not subject to
extreme losses from futures because 100% of the contract obligation is held
separately in cash or other liquid portfolio securities. The Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options involve the
risk that the investment advisers will incorrectly predict stock market and
interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for
federal income tax purposes to recognize as income for each taxable year, its
net unrealized gains and losses on certain futures contracts as of the end of
the year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities
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upon disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies, or other income derived with respect to the
Fund's business of investing in securities. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the distributions.
TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political, or other conditions. Such measures could include investments in: (a)
highly liquid short-term fixed-income securities issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, and bank certificates of deposits; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of shares means
shares representing the lesser of: (i) 67% or more of the votes cast to approve
a change, so long as shares representing more than 50% of the Fund's net asset
value are present or represented by proxy; or (ii) more that 50% of the Fund's
net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may
invest in stock futures contracts and options. No more that 5% of the Fund
assets may be used as initial margin deposit for futures contracts, and no more
that 20% of the Fund's assets may be invested in stock futures contracts or
options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID OR RESTRICTED SECURITIES. The Fund may not acquire any security
if, as a result, more than 15% of its net assets would be invested in securities
that are illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more that 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for the purpose
of controlling its management.
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INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed-income securities or by entering into repurchase agreements, or through
Vanguard's interfund lending program by lending its portfolio securities.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Trust's investment policies relating to
commodities.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
that 15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate, or interests
therein.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents the Fund from participating in The
Vanguard Group. As a member of The Vanguard Group, the Fund may own securities
issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs
or other financial requirements. See "Management of the Fund" for more
information.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offerings
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund, and (iii) to reduce or waive
the minimum investment for or any other restrictions on initial and subsequent
investments for certain fiduciary accounts or under circumstances where certain
economies can be achieved in sales of the Fund's shares.
TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
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REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange (the Exchange) is closed, or
trading on the Exchange is restricted as determined by the Commission, (ii)
during any period when an emergency exists as defined by the Commission as a
result of which it is not reasonably practicable for the Fund to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
Exchange (generally 4:00 p.m. Eastern time) on each day that the Exchange is
open for trading.
Portfolio securities for which market quotations are readily available
(which include those securities listed on national securities exchanges, as well
as those quoted on the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securities which are not
traded on the valuation date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is taken from the exchange where
the security is primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
Short term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of the Fund's investment
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect the fair value.
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MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton,
and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/Coal/ Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries, Inc. (Machinery/Coal/Appliances), and Newfield
Exploration Co. (Energy); formerly, Director and Senior Partner of McKinsey &
Co., and President of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), The Mead Corp. (Paper Products), and AmeriSource Health
Corp.; and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
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ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
*Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Trust and the other Trusts in The Vanguard
Group obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's total expenses which are allocated among
the funds under methods approved by the Board of Trustees of each fund. In
addition, each fund bears its own direct expenses such as legal, auditing, and
custodian fees.
The funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard and the Fund's advisers have adopted Codes of Ethics designed to
prevent employees who may have access to nonpublic information about the trading
activities of the Fund (access persons) from profiting from that information.
The Codes permit access persons to invest in securities for their own accounts,
including securities that may be held by the Fund, but place substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons receive advance approval for every securities trade
to ensure that there is no conflict with the trading activities of the Fund.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested are adjusted from time to time
in order to maintain the proportionate relationship between each funds' relative
net assets and its contribution to Vanguard's capital. The Amended and Restated
Funds' Service Agreement provides as follows: (a) each Vanguard fund may be
called upon to invest up to 0.40% of its current assets in Vanguard, and (b)
there is no other limitation on the dollar amount that each Vanguard fund may
contribute to Vanguard's capitalization. At December 31, 1999, the Morgan Growth
Fund had contributed capital of $931,000 to Vanguard, representing 0.02% of the
Fund's net assets and 0.9% of Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of Vanguard. The Trustees and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard funds based upon relative net assets. The
remaining one half of those expenses is allocated among the funds based upon
each fund's sales for the preceding 24 months relative to the total sales of the
funds as a Group, provided, however, that no funds aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of
B-12
<PAGE>
average distribution expense rate for Vanguard, and that no fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency) distribution, and marketing expenses: $7,362,000,
$9,220,000, and $12,351,000, respectively.
INVESTMENT ADVISORY SERVICES
Vanguard also provides the fund with investment advisory services. These
services are provided on an at-cost basis from a money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the funds utilizing these services.
TRUSTEES COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-14), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.
INDEPENDENT TRUSTEE. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the Fund--in three ways:
. The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
. The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
B-13
<PAGE>
VANGUARD MORGAN GROWTH FUND
TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL VANGUARD
COMPENSATION AS PART OF THIS BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FROM THIS FUND(1) FUND'S EXPENSES(1) RETIREMENT TRUSTEES(2)
- ------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $778 $43 $15,000 $80,000
Bruce K. MacLaury $808 $72 $12,000 $75,000
Burton G. Malkiel $784 $71 $15,000 $80,000
Alfred M. Rankin, Jr. $778 $52 $15,000 $80,000
John C. Sawhill $778 $66 $15,000 $80,000
James O. Welch, Jr. $778 $76 $15,000 $80,000
J. Lawrence Wilson $778 $55 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Fund's fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 funds (102 in the
case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999 calendar
year.
(3) Mr. Bogle retired from the funds' Board, effective December 31, 1999.
INVESTMENT ADVISORY SERVICES
The Fund currently uses three separate investment advisers, each of whom manages
the investment and reinvestment of a portion of the Vanguard Morgan Growth
Fund's assets. Prior to April 24, 1990, Wellington Management Company served as
the Fund's sole investment adviser.
WELLINGTON MANAGEMENT COMPANY, LLP. The Fund employs Wellington Management
Company, LLP (Wellington Management) under an investment advisory agreement to
manage the investment and reinvestment of a portion of the Fund's assets, and to
continuously review, supervise, and administer the Fund's investment program.
Wellington Management discharges its responsibilities subject to the control of
the officers and Trustees of the Fund. Wellington Management is a Massachusetts
limited liability partnership, and the following persons serve as managing
partners of Wellington Management: Laurie A. Gabriel, Duncan M. McFarland, and
John R. Ryan. Wellington Management and its predecessor organizations have
provided investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Robert D. Rands, Senior Vice President
of Wellington Management, has served as portfolio manager of the Fund since
1994.
The Fund pays Wellington Management a Basic Fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Trust's average month-end net assets managed by
Wellington Management for the quarter:
NET ASSETS ANNUAL RATE
- ---------- -----------
First $100 million................... 0.175%
Next $500 million.................... 0.100%
Over $1 billion...................... 0.075%
The Basic Fee may be increased or decreased by applying an adjustment based
on the investment performance of the assets of the Fund managed by Wellington
Management relative to the investment record of The Growth Fund Stock Index (the
Index), which is described on page B-21.
B-14
<PAGE>
The following table sets forth the adjustment rates payable by the Fund to
Wellington Management under the investment advisory agreement:
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE GROWTH FUND STOCK INDEX ADJUSTMENT
- ---------------------------------- ----------
Less than -12%.................... -0.50 x Basic Fee
Between -12% and -6%.............. -0.25 x Basic Fee
Between -6% and 6%................ 0.00 x Basic Fee
Between 6% and 12%................ +0.25 x Basic Fee
More than 12%..................... +0.50 x Basic Fee
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the Wellington Management
Portfolio shall be averaged over the same period as the investment performance
of the Wellington Management Portfolio and the investment record of the Growth
Fund Stock Index are computed. The investment performance of the Wellington
Management Portfolio for such period, expressed as a percentage of the
Wellington Management Portfolio's net asset value per share at the beginning of
such period, shall be the sum of: (i) the change in the Wellington Management
Portfolio's net asset value per share during such period; (ii) the value of the
Wellington Management Portfolio's cash distributions per share having an
ex-dividend date occurring within such period; and (iii) the per share amount of
capital gains taxes paid or accrued during such period by the Wellington
Management Portfolio for undistributed realized long-term capital gains.
The investment record of the Growth Fund Stock Index for any period,
expressed as a percentage of the Growth Fund Stock Index level at the beginning
of such period, shall be the sum of (i) the change in the level of the Growth
Fund Stock Index during such period and (ii) the value, computed consistently
with the Growth Fund Stock Index, of cash distributions having an ex-dividend
date occurring within such period made by companies whose securities comprise
the Growth Fund Stock Index. The foregoing notwithstanding, any computation of
the investment performance of the Wellington Management Portfolio and the
investment record of the Growth Fund Stock Index shall be in accordance with any
then applicable rules of the Commission.
DURATION AND TERMINATION. The current agreement with Wellington Management
is renewable for successive one-year periods only so long as such renewal is
approved at least annually by a vote of the Trust's Board of Trustees, including
the affirmative votes of a majority of the Trustees who are not parties to the
contract or "interested persons" (as defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of considering such approval.
The agreement is automatically terminated if assigned, and may be terminated
without penalty at any time either (1) by vote of the Board of Trustees of the
Trust on sixty (60) days' written notice to Wellington Management, or (2) by
Wellington Management upon ninety (90) days' written notice to the Trust.
RELATED INFORMATION CONCERNING WELLINGTON MANAGEMENT COMPANY, LLP.
Wellington Management, 75 State Street, Boston, MA 02109, is a professional
investment counseling firm which provides investment services to investment
companies, other institutions and individuals. Among the clients of Wellington
Management are more than fifteen of the investment companies of The Vanguard
Group. Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960.
B-15
<PAGE>
During the last three fiscal years, the Fund paid the following advisory fees,
to Wellington Management:
1997 1998 1999
---- ---- ----
Basic Fee.......................... $1,292,417 $1,541,922 $1,830,546
Increase or Decrease for Performance
Adjustment........................ (63,493) 76,371 378,563
---------- ---------- ----------
Total.............................. $1,228,924 $1,618,293 $2,209,110
FRANKLIN PORTFOLIO ASSOCIATES, LLC. The Fund employs Franklin Portfolio
Associates, LLC under an investment advisory agreement to manage the investment
and reinvestment of a portion of the Fund's assets. Franklin Portfolio
Associates discharges its responsibilities subject to the control of the
officers and Trustees of the Fund.
The Fund pays Franklin Portfolio Associates a Basic Fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the average month-end net assets managed by Franklin
Portfolio Associates for the quarter:
NET ASSETS ANNUAL RATE
- ---------- -----------
First $100 million................ 0.25%
Next $200 million................. 0.20%
Next $200 million................. 0.15%
Next $200 million................. 0.10%
Next $4 billion................... 0.08%
Over $5 billion................... 0.06%
The Basic Fee may be increased or decreased by applying an Adjustment based
on the investment performance of the assets of the Fund managed by Franklin
Portfolio Associates (the "Franklin Portfolio") relative to the investment
record of the Index. The Adjustment is calculated as follows:
CUMULATIVE 36-MONTH
PERFORMANCE VS. THE INDEX ADJUSTMENT
- ------------------------- ----------
+6% or more........................ +80% of Basic Fee
+3% to +6%......................... +40% of Basic Fee
- -3% to +3.......................... 0
- -3% to -6%......................... -40% of Basic Fee
Less than -6%...................... -80% of Basic Fee
For purposes of determining the Adjustment, the net assets of the Franklin
Portfolio will be averaged over the same period used to compute the investment
performance of the Franklin Portfolio and the investment record of the Index. In
addition, the investment performance of the Franklin Portfolio, the unit value
of the Franklin Portfolio, and the investment record of the Index will be
calculated in the same manner as set forth in the discussion of Wellington
Management's advisory fees.
B-16
<PAGE>
TRANSITION RULE. The Adjustment schedule set forth above will not be fully
operable until April 30, 2001. Until that date, a transition schedule consisting
of varying percentages of the above Adjustment schedule and a prior schedule
will be used. For each fiscal quarter included in the 36 months beginning May 1,
1998, the incentive/penalty fee will be calculated as the sum of a and b,
whereby:
a = # of months elapsed since 5/1/1998 X the Adjustment calculated
---------------------------------- under the current schedule
36 months
b = # of months remaining until 5/30/2001 X the Adjustment calculated
------------------------------------- under the prior schedule
36 months
The current agreement with Franklin Portfolio Associates is renewable for
successive one year periods only so long as such renewal is approved at least
annually by a vote of the Fund's Board of Trustees, including the affirmative
votes of a majority of the Trustees who are not parties to the contract or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of considering such approval. The
agreement may be terminated without penalty at any time either (1) by vote of
the Board of Trustees of the Fund on 60 days' written notice to Franklin
Portfolio Associates, or (2) by Franklin Portfolio Associates upon 90 days'
written notice to the Fund.
During the last three fiscal years, the Fund paid Franklin Portfolio
Associates the following advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee............................ $1,310,220 $1,701,152 $1,981,731
Increase or Decrease for Performance
Adjustment.......................... 571,862 383,794 (212,101)
---------- ---------- ----------
Total................................ $1,882,082 $2,084,946 $1,769,630
RELATED INFORMATION CONCERNING FRANKLIN PORTFOLIO ASSOCIATES, LLC. Franklin
Portfolio Associates, Two International Place, Boston, MA 02110. Franklin
Portfolio Associates is a Massachusetts limited liability company, which is an
indirect, wholly-owned subsidiary of MBC Investments Corporation, which is
itself a wholly-owned subsidiary of Mellon Bank Corporation. Franklin Portfolio
Associates is a professional investment counseling firm which specializes in the
management of common stock funds through the use of quantitative investment
models. As of December 31, 1999, Franklin Portfolio Associates provided
investment advisory services with respect to approximately $21.4 billion of
client assets, including approximately $8.8 billion for Vanguard Growth and
Income Fund, another mutual fund member of The Vanguard Group.
THE VANGUARD GROUP. The Vanguard Group provides investment advisory
services on an at cost basis with respect to 14% of Vanguard Morgan Growth
Fund's assets as of December 31, 1999. The remaining 5% of the Fund's assets are
held in cash reserves and are also managed by Vanguard. Vanguard employs a
quantitative investment approach that uses computer techniques to track--and, if
possible, outperform--a specific market standard. For Morgan Growth Fund, this
market standard is the Growth Fund Stock Index, which is made up of the stocks
held by the nation's 50 largest growth funds.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
incurred advisory fees owed to Vanguard of $219,000, $317,000, and $500,000,
respectively.
B-17
<PAGE>
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the advisers (with the approval of
the Fund's Board of Trustees) to select the brokers or dealers that will execute
the purchases and sales of securities for the Fund and direct the Advisers to
use their best efforts to obtain the best available price and most favorable
execution as to all transactions for the Fund. The Advisers have undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances. During the fiscal years ended December 31, 1997, 1998, and 1999,
the Fund paid $3,104,030, $4,313,385, and $3,752,229 respectively, in brokerage
commissions.
In placing portfolio transactions, the Advisers will use their best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the best available price and most favorable execution. The
full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
Fund and/or the Advisers. The Advisers consider such information useful in the
performance of their obligations under the agreement but are unable to determine
the amount by which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Trust's Board of Trustees, the Advisers may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Advisers to the Fund and the other Trusts in the Group.
Currently, it is the Fund's policy that the Advisers may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Advisers will only pay such higher
commissions if they believe this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Advisers and/ or the Fund. However, the
Advisers have informed the Trust that they generally will not pay higher
commission rates specifically for the purpose of obtaining research services.
Some securities considered for investment by the Fund may also be
appropriate for other funds and/or clients served by the Advisers. If purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these other funds or clients serviced by the Advisers are
considered at or about the same time, transactions in such securities will be
allocated among the several funds and clients in a manner deemed equitable by
the Advisers.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1999 was 0.60%.
The average annual total return of the Fund for the one-, five-, and
ten-year periods ending December 31, 1999 was 34.10%, 29.17%, and 18.14%,
respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years, or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and
B-18
<PAGE>
assume that all dividends and capital gains distributions during the respective
periods were reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)1/N - 1
Where:
T = average annual total return.
P = a hypothetical initial investment of $1,000.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P (1+T)N = ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions.
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
B-19
<PAGE>
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
PERFORMANCE MEASURES
There are a number of different ways to measure the performance of a mutual
fund. One of these methods is to calculate the current yield of a fund. This is
done by dividing the total amount of dividends per share paid by a fund during
the past twelve months by a current offering price (including the sales charge,
if any). Under certain circumstances, such as when there has been a fundamental
change in investment or dividend policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends paid during the past twelve months. An alternate method is
to calculate a compound yield. This is derived by computing the total compounded
dividends paid by a fund during the past twelve months on the assumption that
all dividends were reinvested in additional shares (and giving no effect to
capital gains distributions or taxes) and dividing this by a current offering
price. Another method is to calculate the total return by dividing the change in
value of an investment in shares over a period of time (generally ten years or
more), assuming the reinvestment of all dividends and capital gains
distributions, by the original net asset value of the shares. Regardless of the
method used, past performance is not necessarily indicative of future results,
but is an indication of the return to shareholders only for the limited
historical period used.
From time to time, advertisements, reports and promotional literature
regarding the Fund may compare its yield or total return (as calculated above)
to yields or returns reported by other investments and to various indexes and
averages to assist an investor's calculation of how an investment in the Fund
might satisfy his investment objectives.
B-20
<PAGE>
COMPARATIVE INDEXES
Each of the investment company members of The Vanguard Group, including Vanguard
Morgan Growth Fund, may, from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.
GROWTH FUND STOCK INDEX--The Index is composed of the various common stocks that
are held in the 50 largest growth stock mutual funds, using year-end net assets,
monitored by Morningstar, Inc. Under an agreement with the Fund, Morningstar,
Inc. develops the composition of the Index and its total return each quarter.
Neither The Vanguard Group, Inc., Wellington Management, nor Franklin Portfolio
Associates are affiliated with Morningstar in any way.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--contains the stocks of 500 of
the largest domestic companies.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--includes stocks selected by Standard &
Poor's Index Committee to include leading companies in leading industries and to
reflect the U.S. stock market.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard & Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is composed of all bonds covered
by the Shearson Lehman Hutton Treasury Bond Index with maturities of ten years
or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN BROTHERS CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $25 million outstanding. This index
includes over 1,000 issues.
B-21
<PAGE>
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Brothers Corporate Bond Index covering all corporate, publicly issued,
fixed-rate, nonconvertible U.S. debt issues rated at least Baa, with at least
$50 million principal outstanding and maturity greater than ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX --70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Long-Term Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS LONG--TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded stocks in the U.S.
RUSSELL 2000 STOCK INDEX-- consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
RUSSELL 2000 (REGISTERED) VALUE INDEX--contains stocks from the Russell 2000
Index with a less-than-average growth orientation.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
LIPPER SMALLCAP FUND AVERAGE--the average performance of small company growth
funds as defined by Lipper Inc. Lipper defines a small company growth fund as a
fund that by prospectus or portfolio practice, limits its investments to
companies on the basis of the size of the company. From time to time, Vanguard
may advertise using the average performance and/or the average expense ratio of
the small company growth funds. (This fund category was first established in
1982. For years prior to 1982, the results of the Lipper Small Company Growth
category were estimated using the returns of the Funds that constituted the
Group at its inception.)
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
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LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between
one and five years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market weighted
index that contains individually priced U.S. Treasury, agency and corporate
securities rated BBB- or better with maturities greater than ten years. The
index has a market value of over $900 billion.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
AGGRESSIVE GROWTH FUND STOCK INDEX--The Index is composed of the various common
stocks that are held in the 50 largest aggressive growth stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc.
Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's financial statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Morgan Growth Fund 1999 Annual Report to Shareholders,
and the report thereon of PricewaterhouseCoopers LLP, independent accountants,
also appearing therein, are incorporated by reference in this Statement of
Additional Information. For a more complete discussion of the performance,
please see the Fund's Annual Report to Shareholders, which may be obtained
without charge.
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SAI026-MORGAN GROWTH
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