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A Member of The Vanguard Group
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PROSPECTUS--MAY 31, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Specialized Portfolios, Inc. (the "Fund") is an open-end
OBJECTIVE diversified investment company. The Fund consists of four Portfolios that
AND POLICIES invest primarily in common stocks and other equity securities concentrated
in a particular industry or group of related industries. Three Portfolios
of the Fund (Energy, Gold & Precious Metals and Health Care) seek to
provide long-term capital appreciation. A fourth Portfolio (Utilities
Income) seeks to provide current income and moderate growth of capital and
income. There is no assurance that any Portfolio will achieve its stated
objective. Given their specialized focus, the Portfolios should not be
considered a complete investment program. The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees). However, the
Fund incurs expenses for investment advisory, management, administrative,
and distribution services.
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OPENING AN To open a regular (non-retirement) account, please complete and return the
ACCOUNT Account Registration Form. If you need assistance in completing this Form,
please call our Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA Adoption Agreement. To
obtain a copy of this form, call 1-800-662-7447, Monday through Friday,
from 8:00 a.m. to 9:00 p.m. (Eastern time), and Saturday, from 9:00 a.m. to
4:00 p.m. (Eastern time). The minimum initial investment is $3,000 per
Portfolio ($500 for retirement accounts and Uniform Gifts/Transfers to
Minors Act accounts).
IMPORTANT NOTE: If shares of the Energy, Gold & Precious Metals and Health Care Portfolios
1% REDEMPTION FEE are redeemed or exchanged prior to being held for one year, they will be
subject to a 1% redemption fee. See "Fund Expenses."
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ABOUT THIS This Prospectus is designed to set forth concisely the information you
PROSPECTUS should know about the Fund before you invest. It should be retained for
future reference. A "Statement of Additional Information" containing
additional information about the Fund has been filed with the Securities
and Exchange Commission. Such Statement is dated May 31, 1994, and has been
incorporated by reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the Investor
Information Department.
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TABLE OF CONTENTS
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Page Page Page
Highlights ....................... 2 Who Should Invest ................ 14 SHAREHOLDER GUIDE
Fund Expenses .................... 4 Implementation of Policies ....... 15 Opening an Account and
Financial Highlights ............. 5 Investment Limitations ........... 16 Purchasing Shares .............. 24
Yield and Total Return ........... 7 Management of the Fund ........... 17 When Your Account Will
FUND INFORMATION Investment Advisers .............. 18 Be Credited .................... 27
Investment Objective ............. 8 Dividends, Capital Gains Selling Your Shares .............. 27
Investment Policies .............. 8 and Taxes ...................... 20 Exchanging Your Shares ........... 29
Investment Risks ................. 10 The Share Price of Each Important Information About
Portfolio ... 22 Telephone Transactions ......... 30
General Information .............. 22 Transferring Registration ........ 31
Other Vanguard Services .......... 31
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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HIGHLIGHTS
OBJECTIVE AND The Fund is an open-end diversified investment company. The Fund
POLICIES consists of four Portfolios that invest primarily in common stocks and
other equity securities concentrated in a particular industry or group
of related industries. Three Portfolios of the Fund (Energy, Gold &
Precious Metals and Health Care) seek to provide long-term capital
appreciation. A fourth Portfolio (Utilities Income) seeks to provide
current income and moderate growth of capital and income. There is no
assurance that any Portfolio will achieve its stated objective.
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RISK Each Portfolio of the Fund is subject to market risk and industry risk.
CHARACTERISTICS Market risk is the possibility that stock prices will decline over short
or even extended periods. The stock market tends to be cyclical, with
periods when stock prices generally rise and periods when stock prices
generally decline. Each Portfolio is expected to be strongly influenced
by these broad fluctuations in stock prices.
In addition, unlike more widely diversified mutual funds, the Portfolios
are subject to industry risk, the possibility that a particular group of
related stocks will decline in price due to industry-specific
developments. Securities held by the Energy Portfolio will be influenced
by cyclical fluctuations in the supply and demand for oil, as well as
tax and regulatory policies, conservation trends, and international oil
politics. The Gold & Precious Metals Portfolio will be subject to the
highly volatile and often erratic markets for gold and precious metals
and for the common stocks of mining companies. Investments relating to
gold and precious metals or minerals are considered speculative, and are
affected by a host of world-wide economic, financial and political
factors. Stocks held by the Health Care Portfolio will be affected by
government policies on health care reimbursements, regulatory approval
for new drugs and medical instruments, and similar matters.
Industry risks in the Utilities Income Portfolio include: changing
utility regulation, new competitive pressures, and rising operating
costs, on top of unique risks for telephone, electric, gas and water
utilities. The Utilities Income Portfolio is also exposed to interest
rate risk--price fluctuations due to changing interest rates. More so
than other stock market sectors, utility stocks may sometimes behave
like fixed income investments, rising and falling as interest rates
change.
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THE VANGUARD The Fund is a member of The Vanguard Group of Investment Companies, a
GROUP group of 32 investment companies with 78 distinct investment portfolios
and total assets in excess of $120 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard funds, provides
on an at-cost basis all corporate management, administrative,
distribution, marketing and shareholder accounting services to the funds
in the Group.
PAGE 17
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INVESTMENT Wellington Management Company serves as investment adviser to the
ADVISERS Energy, Health Care, and Utilities Income Portfolios. M&G Investment
Management Limited serves as investment adviser to the Gold & Precious
Metals Portfolio.
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DIVIDENDS, CAPITAL Dividends of net investment income are expected to be made quarterly for
GAINS AND TAXES the Utilities Income Portfolio, and annually for the Energy, Gold &
Precious Metals and Health Care Portfolios. Capital gains, if any, will
be distributed annually. Dividend and capital gains distributions are
generally subject to federal, state and local income taxes. Also, a sale
of shares--whether by outright redemption or exchange--is a taxable
event and may result in a capital gain or loss.
PAGE 20
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PURCHASING You may purchase shares by mail, wire, or exchange from another Vanguard
SHARES Fund. The minimum initial investment is $3,000 per Portfolio; the
minimum for subsequent investments is $100. There are no sales
commissions or 12b-1 fees.
PAGE 24
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SELLING SHARES You may redeem shares of each Portfolio by mail or by telephone. The
Energy, Gold & Precious Metals and Health Care Portfolios assess a 1%
redemption fee, on shares held less than 12 months. (The Utilities
Income Portfolio does not assess a 1% redemption fee.) Each Portfolio's
share price is expected to fluctuate, and at the time of redemption may
be more or less than at the time of initial purchase, resulting in a
gain or loss.
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EXCHANGING You may exchange a Portfolio's shares for those of another Portfolio of
SHARES the Fund or other Vanguard Funds. An exchange from the Energy, Gold &
Precious Metals, and Health Care Portfolios will be subject to a 1%
redemption fee if held for less than 12 months. (The Utilities Income
Portfolio does not assess a 1% redemption fee.)
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SPECIAL (1) Under normal circumstances, at least 80% of the assets of each
CONSIDERATIONS Portfolio (75% in the case of the Utilities Income Portfolio) will be
invested in equity securities concentrated in a particular industry or
group of industries. As a result, a Portfolio of the Fund may be subject
to greater fluctuations in market value than a mutual fund which invests
in a more widely diversified group of stocks. Due to the specialized
focus of the individual Portfolios, an investment in a Portfolio should
not be considered a complete investment program.
(2) The Gold & Precious Metals Portfolio may invest all of its assets in
foreign securities, and each of the other Portfolios of the Fund may
invest a portion of its assets in foreign securities. Each Portfolio may
enter into forward foreign exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates, but
not for speculative purposes.
PAGE 15
(3) Each Portfolio may lend its securities.
PAGE 16
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FUND EXPENSES The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund. The expenses and fees set forth in
the table are for the fiscal year ended January 31, 1994.
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GOLD &
PRECIOUS HEALTH UTILITIES
ENERGY METALS CARE INCOME
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
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Sales Load Imposed on Purchases............. None None None None
Sales Load Imposed on Reinvested
Dividends................................. None None None None
Redemption Fees*............................ 1% 1% 1% None
Exchange Fees............................... None None None None
*The 1% fee withheld from redemption proceeds is paid to the Portfolio.
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GOLD &
PRECIOUS HEALTH UTILITIES
ENERGY METALS CARE INCOME
ANNUAL OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
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Management & Administrative Fees............ 0.07%* 0.07%* 0.16%* 0.27%
Investment Advisory Fees.................... 0.14 0.23 0.14 0.13
12b-1 Fees.................................. None None None None
Other Expenses
Distribution Costs........................ 0.03* 0.00* 0.03* 0.00
Miscellaneous Expenses.................... 0.03 0.03 0.03 0.02
-------- -------- -------- --------
Total Other Expenses........................ 0.06% 0.03% 0.06% 0.02%
-------- -------- -------- --------
TOTAL OPERATING
EXPENSES.............................. 0.27% 0.33% 0.36% 0.42%
-------- -------- -------- --------
-------- -------- -------- --------
*Excludes the effects of reductions associated with redemption fees.
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1% REDEMPTION FEE The Energy, Gold & Precious Metals and Health Care Portfolios are
intended for long-term investors who can withstand substantial price
fluctuation. For this reason, the Portfolios will assess a 1% redemption
fee on shares that are redeemed or exchanged out before they have been
held for one year. Solely for purposes of calculating the one year
holding period the Portfolio will use the "first-in, first-out" (FIFO)
method. That is, the date of the redemption or exchange will be compared
to the earliest purchase date. If this holding period is less than one
year, the fee will be assessed. The fee will be prorated if a portion of
the shares being redeemed or exchanged has been held for more than one
year. This fee will not apply to dividend or capital gain reinvestment
and it is paid directly to the Portfolio. The Utilities Income Portfolio
does not assess the 1% fee.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period. This example takes
into account the 1% fee that applies to redemptions from the Energy,
Gold & Precious Metals, and Health Care Portfolios or exchanges from
these Portfolios to another Vanguard Fund or Portfolio (including the
Utilities Income Portfolio).
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
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Energy Portfolio................... $ 3 $ 9 $ 15 $34
Gold & Precious Metals Portfolio... $ 3 $ 11 $ 19 $42
Health Care Portfolio.............. $ 4 $ 12 $ 20 $46
Utilities Income Portfolio......... $ 4 $ 13 $ 24 $53
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THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
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FINANCIAL The following financial highlights for a share outstanding throughout
HIGHLIGHTS each period, insofar as they relate to each of the five years in the
period ended January 31, 1994, have been audited by Price Waterhouse,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the Fund's financial
statements and notes thereto, which are incorporated by reference in the
Statement of Additional Information and in this Prospectus, and which
appear, along with the report of Price Waterhouse, in the Fund's 1994
Annual Report to the Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1994 Annual Report to
Shareholders which may be obtained without charge by writing to the Fund
or by calling our Investor Information Department at 1-800-662-7447.
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ENERGY PORTFOLIO
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YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------------- MAY 23, 1984+,
1994 1993 1992 1991 1990 1989 1988 1987 1986 TO JAN. 31, 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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NET ASSET
VALUE,
BEGINNING OF
PERIOD........ $13.82 $12.73 $13.39 $14.94 $12.29 $10.22 $12.42 $9.93 $9.81 $10.00
----- ------ ------ ------ ------ ------ ------ ------ ------ -----------
INVESTMENT
OPERATIONS
Net Investment
Income...... .31 .34 .42 .45 .38 .36 .61 .18 .45 .16
Net Realized
and
Unrealized
Gain (Loss)
on
Investments... 3.31 1.29 (.24) (.66) 3.20 2.08 (.64) 2.80 (.11) (.35)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----------
TOTAL FROM
INVESTMENT
OPERATIONS... 3.62 1.63 .18 (.21) 3.58 2.44 (.03) 2.98 .34 (.19)
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DISTRIBUTIONS
Dividends from
Net
Investment
Income...... (.29) (.36) (.42) (.46) (.36) (.37) (.76) (.44) (.14) --
Distributions
from
Realized
Capital
Gains....... (1.38) (.18) (.42) (.88) (.57) -- (1.41) (.05) (.08) --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----------
TOTAL
DISTRI-
BUTIONS... (1.67) (.54) (.84) (1.34) (.93) (.37) (2.17) (.49) (.22) --
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NET ASSET
VALUE, END OF
PERIOD........ $15.77 $13.82 $12.73 $13.39 $14.94 $12.29 $10.22 $12.42 $9.93 $9.81
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TOTAL
RETURN**...... 27.31% 13.02% 1.27% (1.64)% 28.98% 24.16% 0.76% 31.88% 3.42% (1.90)%
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RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Period
(Millions).... $339 $164 $124 $114 $80 $43 $36 $29 $2 $1
Ratio of
Expenses to
Average Net
Assets........ .17% .21% .30% .35% .38% .40% .38% .65% .92% .55%*
Ratio of Net
Investment
Income to
Average
Net Assets.... 1.87% 2.47% 2.78% 3.24% 3.05% 3.07% 3.70% 3.43% 4.40% 3.75%*
Portfolio
Turnover
Rate.......... 41% 37% 42% 40% 44% 46% 84% 34% 156% 34%
</TABLE>
*Annualized.
**Total return figures do not reflect the redemption fee equaling 1% of
the value of shares redeemed, which is withheld from the redemption proceeds
and paid directly to the Portfolio. +Commencement of operations.
5
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GOLD & PRECIOUS METALS PORTFOLIO
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YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------------- MAY 23, 1984+,
1994 1993 1992 1991 1990 1989 1988 1987 1986 TO JAN. 31, 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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NET ASSET
VALUE,
BEGINNING OF
PERIOD........ $7.29 $9.41 $8.29 $12.49 $9.65 $9.35 $10.50 $7.60 $6.60 $10.00
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT
OPERATIONS
Net Investment
Income...... .20 .19 .24 .29 .27 .27 .35 .20 .20 .09
Net Realized
and
Unrealized
Gain (Loss)
on
Investments... 6.30 (2.13) 1.13 (4.17) 2.91 .29 .12 2.91 .86 (3.49)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM
INVESTMENT
OPERATIONS... 6.50 (1.94) 1.37 (3.88) 3.18 .56 .47 3.11 1.06 (3.40)
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DISTRIBUTIONS
Dividends from
Net
Investment
Income...... (.21) (.18) (.25) (.32) (.34) (.26) (.48) (.21) (.06) --
Distributions
from
Realized
Capital
Gains....... -- -- -- -- -- -- (1.14) -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL
DISTRIBU-
TIONS..... (.21) (.18) (.25) (.32) (.34) (.26) (1.62) (.21) (.06) --
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NET ASSET
VALUE, END OF
PERIOD........ $13.58 $7.29 $9.41 $8.29 $12.49 $9.65 $9.35 $10.50 $7.60 $6.60
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TOTAL
RETURN**...... 89.24% (20.58)% 16.67% (31.21)% 33.38% 6.14% 2.52% 42.17% 16.27% (34.00)%
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RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Period
(Millions).... $613 $175 $178 $144 $223 $126 $128 $70 $30 $7
Ratio of
Expenses to
Average Net
Assets........ .26% .36% .35% .42% .45% .48% .47% .59% .73% .87%*
Ratio of Net
Investment
Income to
Average
Net Assets.... 2.04% 2.50% 2.54% 2.78% 3.01% 2.67% 2.71% 3.36% 3.86% 3.25%*
Portfolio
Turnover
Rate.......... 14% 2% 3% 10% 17% 18% 44% 32% 40% 11%
</TABLE>
*Annualized.
**Total return figures do not reflect the redemption fee equaling 1% of the
value of shares redeemed, which is withheld from the redemption proceeds and
paid directly to the Portfolio.
+Commencement of operations.
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HEALTH CARE PORTFOLIO
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YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------------- MAY 23, 1984+,
1994 1993 1992 1991 1990 1989 1988 1987 1986 TO JAN. 31, 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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NET ASSET
VALUE,
BEGINNING OF
PERIOD........ $32.66 $35.54 $27.32 $22.16 $19.46 $17.53 $19.53 $15.61 $11.85 $10.00
----- ------ ------ ------ ------ ------ ------ ------ ------ -----------
INVESTMENT
OPERATIONS
Net Investment
Income...... .79 .70 .53 .52 .48 .36 .35 .25 .13 .09
Net Realized
and
Unrealized
Gain (Loss)
on
Investments... 5.79 (1.68) 8.75 6.03 3.43 3.20 (.39) 4.60 3.81 1.76
----- ----- ----- ----- ----- ----- ----- ----- ----- ----------
TOTAL FROM
INVESTMENT
OPERATIONS... 6.58 (.98) 9.28 6.55 3.91 3.56 (.04) 4.85 3.94 1.85
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DISTRIBUTIONS
Dividends from
Net
Investment
Income...... (.76) (.70) (.53) (.55) (.49) (.34) (.57) (.13) (.07) --
Distributions
from
Realized
Capital
Gains....... (1.97) (1.20) (.53) (.84) (.72) (1.29) (1.39) (.80) (.11) --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----------
TOTAL
DISTRIBU-
TIONS..... (2.73) (1.90) (1.06) (1.39) (1.21) (1.63) (1.96) (.93) (.18) --
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NET ASSET
VALUE, END OF
PERIOD........ $36.51 $32.66 $35.54 $27.32 $22.16 $19.46 $17.53 $19.53 $15.61 $11.85
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TOTAL
RETURN**...... 21.21% (2.92)% 33.97% 30.09% 20.22% 21.43% 0.35% 31.85% 33.69% 18.50%
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RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Period
(Millions).... $638 $562 $553 $189 $76 $58 $54 $49 $23 $3
Ratio of
Expenses to
Average Net
Assets........ .19% .22% .30% .36% .39% .62% .51% .61% .83% .59%*
Ratio of Net
Investment
Income to
Average
Net Assets.... 2.37% 2.06% 1.98% 2.54% 2.34% 1.85% 1.65% 1.47% 1.52% 2.41%*
Portfolio
Turnover
Rate.......... 19% 13% 7% 17% 28% 19% 41% 27% 59% 23%
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*Annualized.
**Total return figures do not reflect the redemption fee equaling 1% of the
value of shares redeemed, which is withheld from the redemption proceeds and
paid directly to the Portfolio.
+Commencement of operations.
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UTILITIES INCOME PORTFOLIO
-----------------------------------------
MAY 15, 1992+,
YEAR ENDED TO
JANUARY 31, 1994 JANUARY 31, 1993
<S> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD.................................................. $11.18 $10.00
---------- -----------
INVESTMENT OPERATIONS
Net Investment Income................................................................ .57 .41
Net Realized and Unrealized Gain (Loss)
on Investments..................................................................... .88 1.03
---------- ----------
TOTAL FROM INVESTMENT OPERATIONS................................................... 1.45 1.44
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DISTRIBUTIONS
Dividends from Net
Investment Income.................................................................. (.56) (.24)
Distributions from Realized
Capital Gains...................................................................... (.40) (.02)
---------- ----------
TOTAL DISTRIBUTIONS................................................................ (.96) (.26)
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NET ASSET VALUE, END OF PERIOD........................................................ $11.67 $11.18
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TOTAL RETURN.......................................................................... 13.08% 14.51%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................................................. $738 $361
Ratio of Expenses to Average Net Assets............................................... .42% .45%*
Ratio of Net Investment Income to Average
Net Assets........................................................................... 4.82% 4.70%*
Portfolio Turnover Rate............................................................... 46% 20%
*Annualized.
+Commencement of operations.
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YIELD AND From time to time a Portfolio may advertise its yield and total return.
TOTAL RETURN Both yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of return over
one-, five-and ten-year periods or for the life of the Portfolio (as
stated in the advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all dividend and
capital gains distributions.
The "30-day yield" of a Portfolio is calculated by dividing net
investment income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net investment
income includes interest and dividend income earned on a Portfolio's
securities; it is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over 30 days is
compounded monthly for six months and then annualized. Methods used to
calculate advertised yields are standardized for all stock and bond
mutual funds. However, these methods differ from the accounting methods
used by a Portfolio to maintain its books and records, and so the
advertised 30-day yield may not fully reflect the income paid to your
own account or the yield reported in a Portfolio's financial statements.
Also, the Portfolios may compare their performance to that of various
stock market indices, including the Standard & Poor's 500 Index.
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INVESTMENT The Fund is an open-end diversified investment company. The Fund
OBJECTIVE consists of four Portfolios that invest primarily in common stocks and
THREE PORTFOLIOS SEEK other equity securities concentrated in a particular industry or group
TO PROVIDE LONG-TERM of related industries.
GROWTH; A FOURTH The Energy, Gold & Precious Metals, and Health Care Portfolios seek to
PORTFOLIO SEEKS provide long-term capital appreciation. Although these three Portfolios
CURRENT INCOME may generate dividend income to a limited extent, current income will be
secondary to these Portfolios' primary objective of achieving capital
appreciation.
The Utilities Income Portfolio, in contrast, seeks to provide current
income as its primary objective. Its secondary objective is to provide
moderate growth of capital and income over time.
There is no assurance that any Portfolio of the Fund will achieve its
stated objective.
The investment objective of each Portfolio is fundamental and so cannot
be changed without the approval of a majority of a Portfolio's
shareholders.
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INVESTMENT Under normal circumstances, the Energy, Gold & Precious Metals, and
POLICIES Health Care Portfolios will each invest at least 80% of their net assets
EACH PORTFOLIO INVESTS in the equity securities (common stocks and securities convertible into
IN INDUSTRY-SPECIFIC common stocks) of companies in a particular industry or group of related
COMMON STOCKS industries. The Gold & Precious Metals Portfolio may also invest in gold
or other precious metal bullion and coins. A security will generally be
considered appropriate for a given Portfolio if, as determined by the
investment adviser, at least 50% of the company's assets, revenues or
net income are related to or derived from the industry or industries
designated for the Portfolio. The Fund is managed without regard to tax
ramifications.
Under normal circumstances, the Utilities Income Portfolio will invest
at least 75% of its assets in equity securities of companies in the
utilities industry. The remainder of the Portfolio's assets will be
invested in utility bonds rated A or better by Standard & Poor's
Corporation or Moody's Investors Service. Because of its emphasis on
higher-yielding utility stocks and its holdings of utility bonds, the
Portfolio is expected to offer a dividend yield well above the stock
market average.
The Portfolios of the Fund will invest primarily in securities that
trade in U.S. markets. However, the Gold & Precious Metals Portfolio may
invest up to 100% of its assets in foreign securities, and each other
Portfolio may invest up to 30% of its assets in foreign securities.
(Note, however, that the Utilities Income Portfolio has no present
intention of investing more than 10% of its assets in foreign
securities.) In order to protect against fluctuations in foreign
exchange rates, each Portfolio may invest in forward foreign currency
exchange contracts.
Besides investing primarily in equity securities, each Portfolio may
hold certain short-term fixed income securities as cash reserves. Each
Portfolio may also invest in stock futures contracts and options to a
limited extent. See "Implementation of Policies" for a description of
these and other investment practices of the Fund.
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<S> <C>
The specific investment policies of the four Portfolios are listed
below:
The ENERGY PORTFOLIO invests in the equity securities of companies
engaged in the following energy-related activities: the production,
transmission, marketing, control or measurement of energy or energy
fuels; the making of component products for such activities; energy
research or experimentation; and activities related to energy
conservation and pollution control. Such activities may involve newer
sources of energy, such as geothermal, nuclear and solar power, as well
as more traditional sources of energy, such as oil, natural gas and
coal. As new sources of energy are developed and current methods of
exploiting and developing energy are advanced, then companies in these
new areas will also be considered for the Energy Portfolio. The
Portfolio, however, will not purchase the securities of electric utility
companies, although it may invest in natural gas distributors and
natural gas pipeline concerns.
The GOLD & PRECIOUS METALS PORTFOLIO invests in the equity securities of
foreign and domestic companies engaged in the exploration, mining,
fabrication, processing, or marketing and distribution of gold, silver,
platinum, diamonds or other precious and rare metals and minerals. The
Portfolio may also invest up to 20% of its assets directly in gold,
silver or other precious metal bullion and coins.
Bullion and coins for the Gold & Precious Metals Portfolio will only be
bought from and sold to banks (both U.S. and foreign), and dealers who
are members of, or affiliated with members of, a regulated U.S.
commodities exchange, in accordance with applicable investment laws.
Gold, silver or other precious metal bullion will not be purchased in
any form that is not readily marketable. Coins will not be purchased for
their numismatic value and will not be considered for the Portfolio if
they cannot be bought or sold in an active market. Any bullion or coins
purchased by the Portfolio will be delivered to and stored with a
qualified custodian bank in the U.S.
Investors should be aware that bullion and coins do not generate income,
offering only the potential for capital appreciation or depreciation,
and may subject the Portfolio to higher custody and transactions costs
than those normally associated with the ownership of securities.
Investments relating to gold and other precious metals or minerals are
considered speculative. See "Investment Risks."
The HEALTH CARE PORTFOLIO invests in securities of companies engaged in
the development, production or distribution of products and services
related to the treatment or prevention of diseases and other medical
infirmities. Companies in these fields include, but are not limited to,
pharmaceutical firms; companies that design, manufacture or sell medical
supplies, equipment and support services; and companies that operate
hospitals and other health care facilities. The Portfolio will also
consider companies engaged in medical, diagnostic, biochemical, and
biotechnological research and development.
The Utilities Income Portfolio invests in equity and debt securities of
companies engaged in the generation, transmission, or distribution of
electricity, telecommunications, gas, or water. Such investments will be
selected on the basis of fundamen-
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<S> <C>
tal analysis to identify those securities that the adviser believes
will provide both current income and the potential for growth in
income and capital over time.
The utilities sector of the stock market, from which the UTILITIES
INCOME PORTFOLIO'S primary investments will be drawn, is dominated by
telephone and electric utility common stocks, with gas and water
companies playing an appreciably smaller role. For example, as of
January 31, 1994, the Standard & Poor's Utility Index was heavily
weighted towards telephone and electric stocks, as the following chart
illustrates:
</TABLE>
<TABLE>
<CAPTION>
% OF
UTILITY SECTOR INDEX
---------------------------- -----
<S> <C>
Telephone/Telecommunications 51%
Electric 40
Gas 9
-----
TOTAL 100%
=====
</TABLE>
<TABLE>
<S> <C>
Similarly, the market for utility bonds is dominated by telephone and
electric utility issuers. For example, as of March 31, 1994, telephone
company bonds represented 33% of the outstanding utility bonds rated A
or better (measured in terms of market value by the Lehman Brothers
Investment Grade Utility Bond Index). Electric utility issues accounted
for 35% of A-or-better utility bonds, while gas, water and other
utilities represented the remaining 32%.
Utilities are subject to strict regulatory oversight. However, in recent
years, changes in the regulatory climate have allowed utilities to
provide products and services outside their traditional geographic
areas, leading to increased competition and
expanded prospects for growth. The Portfolio seeks to take advantage of
favorable opportunities that are expected to arise from these structural
changes in regulation.
* * *
The investment policies of the Fund are not fundamental and so may be
changed by the Board of Directors without shareholder approval.
- --------------------------------------------------------------------------------------------------
INVESTMENT As equity mutual funds specializing in specific industries or groups of
RISKS industries, the Portfolios of the Fund are subject primarily to two
EACH PORTFOLIO IS types of risk: market risk and industry risk. Since the Portfolios may
SUBJECT TO MARKET AND invest in foreign securities, investors are also exposed to currency
INDUSTRY RISK risk and other risks of international investing.
Market risk is the possibility that stock prices in general will decline
over short or even extended periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline. In the period from 1926 to 1993, stocks
have provided an average annual total return (capital appreciation plus
dividend income) of +12.3%, as measured by the Standard & Poor's 500
Composite Stock Price Index. In contrast, the return on stocks in
individual years has varied from a low of -43.3% to a high of +53.9%,
reflecting the short-term volatility of stock prices.
These fluctuations in stock market prices are expected to have a
substantial influence on the value of each Portfolio. Moreover, the
Energy, Gold & Precious
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Metals, and Health Care Portfolios are likely to exhibit greater
volatility than the broad stock market, largely as a result of their
industry-specific holdings and, in several of the Portfolios, an
emphasis on the stocks of smaller companies.
By contrast, the Utilities Income Portfolio is expected to exhibit less
volatility than the stock market as a whole and the other Portfolios of
the Fund. Historically, utility stocks have been one of the least
volatile sectors of the stock market (when measured by such statistics
as standard deviation of returns or industry "beta"). Moreover, the
Portfolio's investment in utility bonds is expected to further dampen
the stock market's influence on the Portfolio. Of course, the
Portfolio's bond holdings will fluctuate in value, sometimes
substantially, as interest rates change.
In addition to stock market risk, each Portfolio is subject to industry
risk -- i.e., the possibility that a particular group of related stocks
will decline in price due to industry-specific developments. The special
industry risks of the Energy Portfolio are that earnings and dividends
of companies in the energy industry are greatly affected by changes in
the prices and supplies of oil and other energy fuels. Prices and
supplies can fluctuate significantly over a short period due to changes
in international politics, policies of the Organization of Petroleum
Exporting Countries (OPEC), relationships among OPEC members and between
OPEC and oil-importing nations, energy conservation, the regulatory
environment, governmental tax policies, and the economic growth and
stability of the main energy-consuming countries.
The industry risks of the Gold & Precious Metals Portfolio include the
sharp price volatility of gold and other precious metals and of mining
company shares. Investments related to gold or other precious metals or
minerals are considered speculative and are affected by a host of
world-wide economic, financial and political factors. Prices of gold and
other precious metals may fluctuate sharply over short periods due to
several factors: changes in inflation or expectations regarding
inflation in various countries; currency fluctuations; metal sales by
governments, central banks or international agencies; investment
speculation; changes in industrial and commercial demand; and
governmental prohibitions or restrictions on the private ownership of
certain precious metals or minerals.
Political and economic conditions in gold-producing countries may also
have a direct effect on the mining and distribution of gold and,
consequently, its price. At present, there are only four major producers
of gold bullion. In order of magnitude, they are: the Republic of South
Africa ("South Africa"), Russia, Canada and the United States.
Events in South Africa are of particular importance since the Portfolio
intends to invest a substantial portion of its assets in securities of
South African mining companies (22% of the Portfolio's net assets as of
January 31, 1994). In South Africa, the activities of gold-mining
companies are subject to policies promulgated by the Ministry of Mines.
The Reserve Bank of South Africa, as the sole authorized agent for South
African gold, influences the price and timing of sales of South African
gold. The South African government has also from time to time imposed
restrictions on the flow of international capital.
</TABLE>
11
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<S> <C>
Political and social problems in South Africa may also pose certain
risks to the Portfolio's investments in South African issuers. These
include the effect of social and political unrest on mining production
and gold prices, as well as the threat of nationalization or
expropriation by the current or future government of South Africa. Other
risks include potential U.S. Government regulation of South African
investments.
The special industry risks of the Health Care Portfolio are that the
economic prospects of health care companies can fluctuate dramatically
due to changes in the regulatory and competitive environment. A
substantial portion of health care services are funded or subsidized by
the government, and so changes in governmental policies at the federal
or state level may affect the demand for health care products and
services. Regulatory approvals, which often entail lengthy application
and testing procedures, are generally required before new drugs and
certain medical instrumentation may be introduced. Health care companies
may face lawsuits related to product liability issues. Also, many
products and services provided by health care companies are subject to
rapid obsolescence.
For the Utilities Income Portfolio, changing regulation constitutes one
of the key industry-specific risks. Regulators (largely at the state
level) monitor and control utility revenues and costs, and therefore may
limit utility profits and dividends paid to investors. Regulatory
authorities may also restrict a company's access to new markets, thereby
diminishing the firm's long-term prospects. Individual sectors of the
utility market are subject to the following additional risks:
- Electric utilities may be burdened by unexpected increases in fuel and
other operating costs. They are also adversely affected when long-term
interest rates rise. Long-term borrowings are used to finance most
utility investment, and rising interest rates lead to higher financing
costs and reduced earnings. There are also the considerable costs
associated with environmental compliance, nuclear waste clean-up, and
safety regulation. Increasingly, electric utilities are being called
upon by regulators to bear these added costs, and there is a risk that
these costs will not be fully recovered through an increase in
revenues.
- Telephone utilities have been buffeted by technological development
leading to increased competition, as well as changing regulation of
long-distance telephone service and other telecommunications
businesses. While certain companies have benefitted from the new
competitive climate, others have not, and increased competition in the
future may hinder the growth of more traditionally oriented telephone
companies.
- Among gas transmission and distribution companies, there has been a
move to diversify into oil and gas exploration and development, making
investment returns more sensitive to energy prices. In the case of the
water utility sector, the industry is highly fragmented, and most
water supply companies find themselves in mature markets, with little
potential for growth.
The Utilities Income Portfolio is also subject to interest rate
risk -- price fluctuations due to changing interest rates. In general,
fixed income investments, such as
</TABLE>
12
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<S> <C>
bonds, vary inversely with interest rates, falling in price when
interest rates rise, and rising in price when interest rates fall.
Utility stocks, more so than other stock market sectors, are often
influenced by these trends in interest rates, rather than price
movements in the broad stock market. At the same time, the
Portfolio's bond holdings are subject to interest rate risk. This
combination of interest-rate-sensitive stocks and bonds means that the
Portfolio may at times move in tandem with the bond market, rising and
falling as interest rates change, independent of the broad stock market.
Investors in the Utilities Income Portfolio should be aware that while
utility stocks have historically provided above-average dividend yields,
there is no guarantee that they will continue to do so in the future. As
of January 31, 1994, the Standard & Poor's Utility Index provided a
current yield of 5.1%, which was nearly two times as high as the yield
of 2.6% provided by the broad stock market (as measured by the Standard
& Poor's 500 Index). Many of the risks enumerated above have made it
increasingly difficult for utility companies to sustain such generous
dividend pay-outs, and future dividend yields of the utility sector
could decline.
Similarly, while utility stocks during recent years have provided total
investment returns (dividend yield plus capital change) above stock
market averages, there is again no guarantee that such returns will
continue. For example, during the ten-year period ended January 31,
1994, the Standard & Poor's Utility Index gained 17.1% per year on
average, while the Standard & Poor's 500 Index, a measure of the broad
stock market, returned 15.3% per year. Investors should recognize that a
period of above-average investment performance by a stock market sector,
such as that provided by utility stocks over the past ten years, is
often followed by a period of below-average investment performance. In
addition, investors should not anticipate that utility stocks will
outperform the broad stock market over the long haul, given the
generally limited growth prospects of the utilities industry.
EACH PORTFOLIO IS The investment advisers manage each Portfolio according to the
SUBJECT TO MANAGER traditional methods of "active" investment management, which involves
RISK the buying and selling of securities based upon economic, financial and
market analysis and investment judgment. Manager risk refers to the
possibility that each Portfolio's investment adviser may fail to execute
the Portfolio's investment strategy effectively. As a result, each
Portfolio may fail to achieve its stated objective.
FOREIGN SECURITIES Since each Portfolio may invest in foreign securities, investors in the
ENTAIL CURRENCY AND Fund are also exposed to the unique risks of international investing.
OTHER RISKS For U.S. investors, the returns of foreign securities are influenced by
not only the returns on foreign common stocks themselves, but also by
currency risk -- i.e., changes in the value of the currencies in which
the stocks are denominated. In a period when the U.S. dollar rises
against foreign currencies, the returns on foreign stocks for a U.S.
investor are diminished. By contrast, in a period when the U.S. dollar
declines, the returns on foreign stocks are enhanced.
Other risks and considerations of international investing include the
following: differences in accounting, auditing and financial reporting
standards; generally
</TABLE>
13
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<TABLE>
<S> <C>
higher commission rates on foreign portfolio transactions; the
smaller trading volumes and generally lower liquidity of foreign
stock markets, which may result in greater price volatility;
foreign withholding taxes payable on a Portfolio's foreign
securities, which may reduce dividend income payable to shareholders;
the possibility of expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations; political
instability which could affect U.S. investment in foreign countries;
difficulty in obtaining and enforcing foreign court judgements; and
potential restrictions on the flow of international capital.
- --------------------------------------------------------------------------------------------------
WHO SHOULD The Fund is designed for investors who are seeking the potential
INVEST rewards, and who are willing to accept the risks, associated with equity
investments concentrated in specific industries. Because of the risks
associated with common stock and bond investments, the Fund is intended
to be a long-term investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock and bond
market movements. Investors who engage in excessive account activity
generate additional costs which are borne by all of the Fund's
shareholders. In order to minimize such costs the Fund has adopted the
following policies. The Fund reserves the right to reject any purchase
request (including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient portfolio
management, either because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund has adopted
exchange privilege limitations as described in the section "Exchange
Privilege Limitations." Finally, the Fund reserves the right to suspend
the offering of its shares.
The Energy, Gold & Precious Metals, and Health Care Portfolios are
intended for investors with substantial financial resources who have the
perspective and patience to assume above-average interim investment
risks in pursuit of long-term capital growth. Since many of the
securities owned by these three Portfolios may be considered speculative
in nature or unseasoned by traditional investment standards,
substantially greater-than-average investment risk is involved. The
share prices of these three Portfolios are expected to be volatile.
In contrast, the Utilities Income Portfolio is designed for investors
who are seeking a more conservative, income-oriented stock market
investment. The Portfolio is likely to offer higher dividend yields than
the stock market average, with substantially lower volatility in share
price. The Portfolio may also offer modest growth in income and capital
over time. Nonetheless, because utility stock and bond prices will
fluctuate, sometimes substantially, investors in the Utilities Income
Portfolio should be willing to accept moderate to high fluctuations in
principal value.
There can be no assurance that the Fund will achieve its stated
objective, or that shareholders will be protected from the substantial
risks inherent in equity investing. Investors may wish to reduce the
potential risk of investing in a Portfolio by purchasing shares on a
periodic basis (dollar-cost averaging) rather than investing in one lump
sum.
Since each Portfolio concentrates its holdings in a particular industry
or group of industries, the Fund should not be considered a complete
investment program. Most
</TABLE>
14
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<TABLE>
<S> <C>
investors should maintain diversified holdings of securities with
different risk characteristics -- including common stocks, bonds and
money market instruments.
- --------------------------------------------------------------------------------------------------
IMPLEMENTATION Each Portfolio follows a number of investment practices in an effort to
OF POLICIES achieve its objective of long-term capital growth.
EACH PORTFOLIO MAY HOLD
FOREIGN SECURITIES Each Portfolio may invest up to 30% of its assets, and the Gold &
Precious Metals Portfolio may invest up to 100% of its assets, in
foreign securities. (At present, the Utilities Income Portfolio is not
expected to invest more than 10% of its net assets in foreign
securities.) Such a policy expands the investment opportunities
available to the Portfolios and may result in improved diversification
and performance.
All or a portion of the foreign securities purchased by a Portfolio may
be in the form of American Depository Receipts (ADRs) or European
Depository Receipts (EDRs). ADRs are receipts typically issued by a U.S.
bank or trust company that evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe that
evidence a similar ownership arrangement. Generally, ADRs are designed
for trading in the United States securities markets and EDRs are
designed for trading in European securities markets.
EACH PORTFOLIO MAY Each Portfolio of the Fund may enter into forward foreign currency
ENTER INTO FORWARD exchange contracts in order to protect against uncertainty in the level
CURRENCY CONTRACTS of future foreign exchange rates in the purchase and sale of investment
securities. A Portfolio may not enter into such contracts for
speculative purposes.
A forward foreign currency exchange contract is an obligation to
purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts may
be bought or sold to protect a Portfolio to a limited extent against
adverse changes in exchange rates between foreign currencies and the
U.S. dollar. Such contracts, which protect the value of a Portfolio's
investment securities against a decline in the value of a currency, do
not eliminate fluctuations in the underlying prices of the securities.
They simply establish an exchange rate at a future date. Also, although
such contracts tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of such currency
increase.
EACH PORTFOLIO MAY Although they normally seek to remain substantially fully invested in
INVEST IN SHORT-TERM equity securities (except the Utilities Income Portfolio, which may
FIXED-INCOME invest up to 25% of its assets in fixed income securities), the
SECURITIES Portfolios of the Fund may invest temporarily in certain short-term
fixed income securities. Such securities may be used to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to take a temporarily defensive position against
potential stock market declines. These securities include: obligations
of the United States Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by these
securities.
The use of repurchase agreements involves certain risks, including the
risk of losses caused by the default or insolvency of the other party to
the agreement. However,
</TABLE>
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<S> <C>
each Portfolio expects that it can control this risk through careful
evaluation of the creditworthiness of the other party to any repurchase
agreement and careful monitoring procedures.
EACH PORTFOLIO MAY Each Portfolio may utilize stock futures contracts and options to a
USE FUTURES CONTRACTS limited extent. Specifically, each Portfolio may enter into futures
AND OPTIONS contracts provided that not more than 5% of its assets are required as a
futures contract deposit; in addition, each Portfolio may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not more than
20% of the Portfolio's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher investment
returns when a futures contract is priced more attractively than the
underlying equity security. While futures contracts and options can be
used as leveraged instruments, the Fund may not use futures contracts or
options to leverage its net assets.
The risk of loss in trading futures contracts in some strategies can be
substantial due both to the low margin deposits required and the
extremely high degree of leveraging involved in futures pricing. As a
result, a relatively small price movement in a futures contract may
result in immediate and substantial loss or gain. However, a Portfolio
will not use futures contracts or options for speculative purposes.
EACH PORTFOLIO MAY LEND Each Portfolio may lend its securities on a short-term or long-term
ITS SECURITIES basis to qualified institutional investors for the purpose of realizing
additional income. With any loan of portfolio securities, there is a
risk that the borrowing institution will fail to redeliver the
securities when due. However, loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities.
EACH PORTFOLIO MAY Each Portfolio may borrow money, subject to the limits set forth below,
BORROW MONEY for temporary or emergency purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of
securities.
PORTFOLIO TURNOVER IS Although they generally seek to invest for the long term, the Portfolios
NOT EXPECTED TO EXCEED of the Fund retain the right to sell securities irrespective of how long
100% they have been held. It is anticipated that the annual portfolio
turnover of each Portfolio will not exceed 100%. A turnover rate of 100%
would occur, for example, if all the securities of a Portfolio were
replaced within one year.
- --------------------------------------------------------------------------------------------------
INVESTMENT Each Portfolio has adopted certain limitations designed to reduce its
LIMITATIONS exposure to specific situations. Some of these limitations are that a
THE FUND HAS ADOPTED Portfolio will not:
CERTAIN FUNDAMENTAL
LIMITATIONS (a) with respect to 75% of the value of its total assets, invest more
than 5% of its assets in the securities of any single company;
(b) with respect to 75% of the value of its total assets, purchase more
than 10% of the voting securities of any issuer;
</TABLE>
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<S> <C>
(c) borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency (not leveraging) purposes, and
then not in an amount exceeding 10% of the value of the Fund's net
assets at the time the borrowing is made. Whenever borrowing exceeds
5% of the value of the Fund's net assets, the Fund will not make any
additional investments;
(d) engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1993, as
amended, in disposing of investment securities;
(e) purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid; and
(f) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (e) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by
lending its securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent
with the Investment Company Act or the Rules and Regulations or
interpretations of the Commission thereunder and the aggregate value
of all securities loaned does not exceed 33 1/3% of the market value
of the Portfolio's total assets.
These investment limitations are considered at the time investment
securities are purchased. The limitations described here and in the
Statement of Additional Information are fundamental and so may be
changed only with the approval of a majority of the Fund's shareholders.
- --------------------------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Companies, a
THE FUND family of 32 investment companies with 78 distinct investment portfolios
VANGUARD ADMINISTERS and total assets in excess of $120 billion. Through their jointly owned
AND DISTRIBUTES THE subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the
FUND other funds in the 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. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those of most
competing mutual funds. In 1993, the average expense ratio (annual costs
including advisory fees divided by total net assets) for the Vanguard
funds amounted to approximately .30% compared to an average of 1.02% for
the mutual fund industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Directors. The Directors set broad
policies for the Fund and choose its Officers. A list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years can be found in the
Statement of Additional Information.
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
</TABLE>
17
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<TABLE>
<S> <C>
Vanguard's net expenses, which are allocated among the funds under
methods approved by the Board of Directors (Trustees) of each fund. In
addition, each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to the funds. The
funds are available on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund employs two investment advisers. Wellington Management Company
ADVISERS serves as investment adviser to the Energy, Health Care, and Utilities
Income Portfolios of the Fund. M&G Investment Management Limited serves
as investment adviser to the Gold & Precious Metals Portfolio.
WELLINGTON Under an investment advisory agreement with the Fund, Wellington
MANAGEMENT COMPANY Management Company ("WMC"), 75 State Street, Boston, MA 02109, manages
MANAGES INVESTMENTS the investment and reinvestment of the assets of the Fund's Energy,
FOR THREE PORTFOLIOS Health Care, and Utilities Income Portfolios and continuously reviews,
supervises and administers each Portfolio's investment program. WMC
discharges its responsibilities subject to the control of the Officers
and Directors of the Fund.
WMC is a professional investment advisory firm which globally provides
services to investment companies, institutions and individuals. Among
the clients of WMC are 12 of the 32 investment companies of The Vanguard
Group. As of December 31, 1993,
WMC held discretionary management authority with respect to
approximately $82.8 billion of assets. WMC and its predecessor
organizations have provided investment advisory services to investment
companies since 1933 and to investment counseling clients since 1960.
Ernst H. von Metzsch, Senior Vice President of WMC, serves as the
portfolio manager of the Energy Portfolio. Mr. von Metzsch has been an
investment professional with WMC since 1973. Edward P. Owens, Senior
Vice President of WMC, serves as portfolio manager of the Health Care
Portfolio. Mr. Owens has been an investment professional with WMC since
1974. John R. Ryan, Senior Vice President of WMC, serves as the
portfolio manager of the Utilities Income Portfolio. Mr. Ryan is
assisted by Paul D. Kaplan, Senior Vice President of WMC, who manages
the Portfolio's fixed income investments. Messrs. Ryan and Kaplan have
been investment professionals with WMC since 1981 and 1978,
respectively. Messrs. von Metzsch and Owens have served as portfolio
managers since the Fund's inception in May 1984; Messrs. Ryan and Kaplan
have served as portfolio managers of the Utilities Income Portfolio
since its inception in May 1992. WMC's portfolio managers are supported
by research and other investment services provided by the professional
staff of WMC.
Under the investment advisory agreement, the three Portfolios are
required to pay WMC an aggregate fee at the end of the fiscal quarter,
calculated by applying the
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<S> <C>
following annual percentage rates to the average month-end net assets
for the quarter of the three Portfolios for which WMC serves as
investment adviser:
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------- -------
<S> <C>
First $100 million 0.300%
Next $150 million 0.200%
Next $250 million 0.150%
Next $500 million 0.125%
Over $1 billion 0.100%
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<TABLE>
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In addition, once the advisory fee to WMC is calculated for the three
Portfolios under this schedule, the total fee will be reduced in order
that the advisory fee paid by the Utilities Income Portfolio does not
exceed 0.125%.
The advisory fee is based on the total assets for the three Portfolios
and is allocated, except as noted above, to each Portfolio based on the
net assets of each. For the fiscal year ended January 31, 1994, the
investment advisory fee represented an effective annual rate of .14 of
1% of average net assets for each Portfolio. The investment advisory fee
for the Utilities Income Portfolio represented an effective annual rate
of .13 of 1% of average net assets. This rate was payable under the
investment advisory agreement in effect prior to May 31, 1993.
M&G INVESTMENT The Fund has also entered into an investment advisory agreement with M&G
MANAGEMENT LTD. Investment Management Limited ("M&G"), Three Quays, Tower Hill, London
MANAGES THE GOLD & EC3R 6BQ. Under that investment advisory agreement, M&G manages the
PRECIOUS METALS investment and reinvestment of the assets of the Fund's Gold & Precious
PORTFOLIO Metals Portfolio and continuously reviews, supervises and administers
the Portfolio's investment program. M&G discharges its responsibilities
subject to the control of the Officers and Directors of the Fund.
M&G is a wholly-owned subsidiary of the M&G Group Plc and is authorized
to carry on investment business under English law by the Investment
Management Regulatory Organisation Limited. The M&G Group, an
independent group of companies, began providing investment advisory
services to the public over 50 years ago, when they launched Great
Britain's first unit trust (mutual fund). Today, the principal operating
subsidiaries of the M&G Group manage funds for some 146 accounts,
including individual investors, company pension plans and charitable
foundations. In total, the M&G Group manages or advises approximately
$20.5 billion in assets. Among these assets are two unit trusts that
invest in the securities of gold and precious metals related companies.
David J. Hutchins, an Investment Manager of M&G, serves as portfolio
manager of the Gold & Precious Metals Portfolio, a position he has held
since January, 1987.
Under the investment advisory agreement, the Gold & Precious Metals
Portfolio pays M&G a fee at the end of each fiscal quarter, calculated
by applying the
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following annual percentage rates to the average
month-end net assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------------- -----
<S> <C>
First $100 million .30%
Next $300 million .25%
Over $400 million .20%
</TABLE>
<TABLE>
<S> <C>
For the fiscal year ended January 31, 1994, the investment advisory fee
paid by the Gold & Precious Metals Portfolio represented an effective
annual rate of .22 of 1% of average net assets.
The investment advisory agreements with WMC and M&G authorize the
advisers to select brokers or dealers to execute purchases and sales of
the Fund's portfolio securities, and direct the advisers to use their
best efforts to obtain the best available price and most favorable
execution with respect to all transactions.
The full range and quality of brokerage services are considered in
making these determinations.
The Fund has authorized WMC and M&G to pay higher commissions in
recognition of brokerage services felt necessary for the achievement of
better execution, provided the advisers believe this to be in the best
interest of the Fund. Although the Fund does not market its shares
through intermediary brokers or dealers, the Fund may place orders with
qualified broker-dealers who recommend the Fund to clients if the
Officers of the Fund believe that the quality of the transaction and the
commission are comparable to what they would be with other qualified
brokerage firms.
The Fund's Board of Directors may, without the approval of shareholders,
provide for: (a) the employment of a new investment adviser pursuant to
the terms of a new advisory agreement either as a replacement for an
existing adviser or as an additional adviser; (b) a change in the terms
of an advisory agreement; and (c) the continued employment of an
existing adviser on the same advisory contract terms where a contract
has been assigned because of a change in control of the adviser. Any
such change will only be made upon not less than 30 days prior written
notice to shareholders of the Fund which shall include substantially the
information concerning the adviser that would have normally been
included in a proxy statement.
- --------------------------------------------------------------------------------------------------
DIVIDENDS, The Utilities Income Portfolio pays dividends consisting of ordinary
CAPITAL GAINS income on a quarterly basis; the Energy, Gold & Precious Metals, and
AND TAXES Health Care Portfolios pay dividends annually. Capital gains
THE UTILITIES INCOME distributions, if any, are also made annually.
PORTFOLIO PAYS Dividend and capital gains distributions may be automatically reinvested
DIVIDENDS QUARTERLY; or received in cash. See "Choosing a Distribution Option" for a
THE OTHER PORTFOLIOS, description of these distribution methods.
ANNUALLY In order to satisfy certain distribution requirements of the Tax Reform
Act of 1986, each Portfolio may declare year-end dividend and capital
gains distributions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by the
Portfolio and received by shareholders on December 31 of the prior year.
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Each Portfolio of the Fund intends to continue to qualify for taxation
as a "regulated investment company" under the Internal Revenue Code so
that each Portfolio will not be subject to federal income tax to the
extent its income is distributed to shareholders. Dividends paid by a
Portfolio from net investment income, whether received in cash or
reinvested additional shares, will be taxable to shareholders as
ordinary income. For corporate investors, dividends from net investment
income will generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of the dividends so
qualified depends on the aggregate taxable qualifying dividend income
received by the Portfolio from domestic (U.S.) sources.
Distributions paid by a Portfolio from long-term capital gains, whether
received in cash or reinvested in additional shares, are taxable as
long-term capital gains, regardless of the length of time you have owned
shares in the Portfolio. Capital gains distributions are made when a
Portfolio realizes net capital gains on sales of portfolio securities
during the year. A Portfolio does not seek to realize any particular
amount of capital gains during a year; rather, realized gains are a
byproduct of portfolio management activities. Consequently, capital
gains distributions may be expected to vary considerably from year to
year; there will be no capital gains distributions in years when a
Portfolio realizes net capital losses.
Note that if you accept capital gains distributions in cash, instead of
reinvesting them in additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in mind that if you
purchase shares in a Portfolio shortly before the record date for a
dividend or capital gains distribution, a portion of your investment
will be returned to you as a taxable distribution, regardless of whether
you are reinvesting your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of dividend and
capital gains distributions paid by a Portfolio.
THE GOLD & PRECIOUS The Gold & Precious Metals Portfolio may elect to "pass through" to the
METALS PORTFOLIO MAY Portfolio's shareholders the amount of foreign income taxes paid by the
"PASS THROUGH" Portfolio. The
FOREIGN TAXES Portfolio will make such an election only if it deems it to be in the
best interests of its shareholders.
If this election is made, shareholders of the Gold & Precious Metals
Portfolio will be required to include in their gross income their pro
rata share of foreign taxes paid by the Portfolio. However, shareholders
will be able to treat their pro rata share of foreign taxes as either an
itemized deduction or a foreign tax credit against U.S. income taxes on
their tax return.
A CAPITAL GAIN OR LOSS A sale of shares of a Portfolio of the Fund is a taxable event and may
MAY BE REALIZED result in a capital gain or loss. A capital gain or loss may be realized
UPON EXCHANGE OR from an ordinary redemption of shares or an exchange of shares between
REDEMPTION two mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may be subject to state and
local taxes.
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The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification Number and by
certifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do business as a
foreign corporation in Pennsylvania and does business and maintains an
office in that state. In the opinion of counsel, the shares of the Fund
are exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.
- --------------------------------------------------------------------------------------------------
THE SHARE PRICE OF The share price or "net asset value" per share of each Portfolio is
EACH PORTFOLIO computed once each day at the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. Net asset value per share is computed by
dividing the total value of the investments and other assets of each
Portfolio, less any liabilities, by the total number of outstanding
shares of such Portfolio.
Securities listed on a U.S. exchange are valued at the latest quoted
sales prices on the day the valuation is made. Securities listed on a
U.S. exchange that are not traded on the valuation date are valued at
the mean of the bid and ask prices. Securities listed on a foreign
exchange are valued at the latest quoted sales price available before
the time when assets are valued. All prices of listed securities are
taken from the exchange where the security is primarily traded. Unlisted
securities for which market quotations are readily available are valued
at the latest quoted bid price. Other assets and securities for which no
market quotations are readily available are valued in good faith at fair
value using methods determined by, or under the supervision of, the
Board of Directors of the Fund. 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.
In determining each Portfolio's net asset value per share, all assets
and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against
U.S. dollars last quoted by a major bank or broker. If such quotations
are not available as of the close of the Exchange, the rate of exchange
will be determined in accordance with policies established in good faith
by the Board of Directors.
- --------------------------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of Incorporation permit
INFORMATION the Directors to issue 6,000,000,000 shares of common stock, with a
$.001 par value. The Board of Directors has the power to designate one
or more classes ("Portfolios")
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22
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<S> <C>
of shares of common stock and to classify or reclassify any unissued
shares with respect to such classes. Currently the Fund is offering
four classes of shares.
The shares of each Portfolio are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or other
features; and have no preemptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the Directors if
they so choose.
Annual meetings of shareholders will not be held except as required by
the Investment Company Act of 1940 and other applicable law. An annual
meeting will be held to vote on the removal of a Director or Directors
of the Fund if requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Energy, Health Care, and Utilities
Income Portfolios are held by State Street Bank and Trust Company,
Boston, MA. All securities and cash for the Gold & Precious Metals
Portfolio are held by Morgan Guaranty Trust Company, New York, NY. The
Vanguard Group, Inc., Valley Forge, PA, serves as the Fund's Transfer
and Dividend Disbursing Agent. Price Waterhouse serves as independent
accountants for the Fund and will audit its financial statements
annually. The Fund is not involved in any material litigation.
- --------------------------------------------------------------------------------------------------
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23
<PAGE> 24
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SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by mail or wire.
ACCOUNT AND Simply complete and return an Account Registration Form and any required
PURCHASING legal documentations indicating the amount you wish to invest. Your
SHARES purchase must be equal to or greater than the $3,000 minimum initial
investment requirement for each Portfolio ($500 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a new Individual
Retirement Account by mail (IRAs may not be opened by wire) using a
Vanguard IRA Adoption Agreement. Your purchase must be equal to or
greater than the $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA contribution. Rollover
contributions are generally limited to the amount withdrawn within the
past 60 days from an IRA or other qualified Retirement Plan. If you need
assistance with the forms or have any questions about the Fund, please
call our Investor Information Department (1-800-662-7447). NOTE: For
other types of account registrations (e.g., corporations, associations,
other organizations, trust or powers of attorney), please call us to
determine which additional forms you may need. The Fund's shares are
purchased at the next-determined net asset value after your investment
has been received. The Fund is offered on a no-load basis (i.e., there
are no sales commissions or 12b-1 fees).
Because of the risks associated with common stock and bond investments,
the Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
stock and bond market movements. Consequently, the Fund reserves the
right to reject any specific purchase (and exchange purchase) request.
The Fund also reserves the right to suspend the offering of shares for a
period of time.
IMPORTANT NOTE: Potential investors should note that a 1% redemption fee is charged for
1% REDEMPTION FEE the Energy, Gold & Precious Metals, and Health Care Portfolios. This
fee, which is paid to the Portfolios, applies to redemptions from these
three Portfolios or exchanges from these three Portfolios of shares held
for less than 12 months.
ADDITIONAL Subsequent investments to regular accounts may be made by mail ($100
INVESTMENTS minimum), wire ($1,000 minimum), exchange from another Vanguard Fund
account ($100 minimum), or Vanguard Fund Express. Subsequent investments
to Individual Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund Express. Please call
us for more information on these options.
------------------------------------------------------------------------
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24
<PAGE> 25
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<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment and the include the Invest-by-Mail
Complete and sign the name of the Portfolio you have remittance form attached to your
enclosed Account selected on the registration Fund confirmation statements.
Registration Form form, make your check payable to Please make your check payable
The Vanguard Group-(Portfolio to The Vanguard Group-(Portfolio
Number) (see below), and mail Number) (see below), write your
to: account number on your check
and, using the return envelope
VANGUARD FINANCIAL CENTER provided, mail to the address
P.O. BOX 2600 indicated on the Invest-by-Mail
VALLEY FORGE, PA 19482 Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
Vanguard Specialized Portfolio
Numbers:
Energy Portfolio-51
Health Care Portfolio-52
Gold & Precious Metals
Portfolio-53
Utilities Income Portfolio-57
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD SPECIALIZED PORTFOLIOS
BEFORE WIRING PORTFOLIO NAME
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739)
</TABLE>
<TABLE>
<S> <C>
To assure proper receipt, please be sure your bank includes the
Portfolio name, the account number Vanguard has assigned to you and the
eight digit CoreStates number. If you are opening a new account, please
complete the Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
------------------------------------------------------------------------
PURCHASING BY You may open a new account or purchase additional shares by making an
EXCHANGE (from a exchange from an existing Vanguard account. However, the Fund reserves
Vanguard account) the right to refuse any exchange purchase request. Call our Client
Services Department (1-800-662-2739). The new account will have the same
registration as the existing account.
------------------------------------------------------------------------
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25
<PAGE> 26
<TABLE>
<S> <C>
PURCHASING BY The Fund Express Special Purchase option lets you move money from your
FUND EXPRESS bank account to your Vanguard account at your request. Or if you choose
Special Purchase and the Automatic Investment option, money will be moved from your bank
Automatic Investment account to your Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select. To establish these
Fund Express options, please provide the appropriate information on the
Account Registration Form. We will send you
a confirmation of your Fund Express service; please wait three weeks
before using
the service.
- --------------------------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and capital gains
distributions will be reinvested in additional Fund shares. This option
will be selected for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in cash and your
capital gains will be reinvested in additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains distributions will
be paid in cash.
In addition, an option to invest your cash dividends and/or capital
gains distributions in another Vanguard Fund account is available.
Please call our Client Services Department (1-800-662-2739) for
information. You may also elect Vanguard Dividend Express which allows
you to transfer your cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other Vanguard Services"
for more information.
- --------------------------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute net capital
INVESTORS SHOULD ASK gains and dividend income to Fund shareholders. These distributions are
ABOUT THE TIMING OF made to all shareholders who own Fund shares as of the distribution's
CAPITAL GAINS AND record date, regardless of how long the shares have been owned.
DIVIDEND DISTRIBUTIONS Purchasing shares just prior to the record date could have a significant
BEFORE INVESTING impact on your tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes on the amount
of the capital gain and/or dividend distribution later paid even though
you owned the Fund shares for just a short period of time. (Taxes are
due on the distributions even if the dividend or gain is reinvested in
additional Fund shares.) While the total value of your investment will
be the same after the distribution--the amount of the distribution will
offset the drop in the net asset value of the shares--you should be
aware of the tax implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about potential
distributions before investing. The Fund's annual capital gains
distribution normally occurs in December, while income dividends are
generally paid quarterly in March, June, September and December for the
Utilities Income Portfolio and annually in December for the Energy, Gold
& Precious Metals, and Health Care Portfolios. For additional
information on distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------------------------
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26
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IMPORTANT The easiest way to establish optional Vanguard services on your account
INFORMATION is to select the options you desire when you complete your Account
ESTABLISHING OPTIONAL Registration Form. If you wish to add shareholder options later, you may
SERVICES need to provide Vanguard with additional information and a signature
guarantee. Please call our Client Services Department (1-800-662-2739)
for further assistance.
SIGNATURE For our mutual protection, we may require a signature guarantee on
GUARANTEES certain written transaction requests. A signature guarantee verifies the
authenticity of your signature and may be obtained from banks, brokers
and any other guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request (with the exception of
the Utilities Income Portfolio, for which certificates are not
available). If a certificate is lost, you may incur an expense to
replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or adviser may
charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase, exchange or
redemption) believed to be authentic, received in writing or by
telephone, once the trade has been received.
- --------------------------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credited. If your
ACCOUNT WILL BE purchase is made by check, Federal Funds wire or exchange, and is
CREDITED received by the close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your trade date is
the next business day. Your shares are purchased at the net asset value
determined on your trade date.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, Vanguard will only accept a foreign check which has been
drawn in U.S. dollars and has been issued by a foreign bank with a U.S.
correspondent bank.
- --------------------------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by redeeming
SHARES shares at any time. You may initiate a request by writing or by
telephoning. Your redemption proceeds are normally mailed within two
business days after the receipt of the request in Good Order.
IMPORTANT NOTE: For investors in the Energy, Gold & Precious Metals, and
Health Care Portfolios, a redemption fee amounting to 1% of the value of
the shares redeemed will be deducted from the redemption proceeds if
shares held for less than one year are redeemed. This fee is paid
directly to the Portfolio.
------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER, VANGUARD
SPECIALIZED PORTFOLIOS, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For
express or registered mail, send your request to Vanguard Financial
Center, Vanguard Specialized Portfolios, 455 Devon Park Drive, Wayne, PA
19087.)
The redemption price of shares will be the Portfolio's net asset value
next determined after Vanguard has received all required documents in
Good Order.
------------------------------------------------------------------------
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27
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<TABLE>
<S> <C>
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or shares).
3. The signatures of all owners EXACTLY as they are registered on the
account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be required, in the
case of estates, corporations, trusts, and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO YOUR
REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT 1-800-662-2739.
------------------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized representative
TELEPHONE may call our Client Services Department at 1-800-662-2739. The proceeds
will be sent to you by mail. Please see "Important Information About
Telephone Transactions."
------------------------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal option, money will
EXPRESS be automatically moved from your Vanguard Fund account to your bank
Automatic Withdrawal account according to the schedule you have selected. The Special
& Special Redemption Redemption option lets you move money from your Vanguard account to your
bank account on your request. You may elect Fund Express on the Account
Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange into another Vanguard Fund
account. Please see "Exchanging Your Shares" for details.
------------------------------------------------------------------------
IMPORTANT REDEMPTION Shares purchased by check or Fund Express may not be redeemed until
INFORMATION payment for the purchase is collected, which may take up to ten calendar
days. Your money is invested during the holding period.
------------------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close of the New
REDEMPTION York Stock Exchange (generally 4:00 p.m. Eastern time) are processed on
PROCEEDS the day of receipt and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the close of the
Exchange are processed on the business day following receipt and the
proceeds are normally sent on the second business day following receipt.
Redemption proceeds must be sent to you within seven days of receipt of
your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption request
may be made by regular or express mail. It will be implemented at the
net asset value next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to revise or
terminate the telephone redemption privilege at any time.
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<TABLE>
<S> <C>
The Fund may suspend the redemption right or postpone payment at times
when the New York Stock Exchange is closed or under any emergency
circumstances as determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the Fund's remaining shareholders to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
------------------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard will send
COST STATEMENT you an Average Cost Statement which provides you with the tax basis of
the shares you redeemed. Please see "Other Vanguard Services" for
additional information.
------------------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller accounts, the
BALANCE Fund reserves the right to redeem shares in any account that is below
REQUIREMENT the minimum initial investment amount of $3,000. In addition, if at any
time your total investment in a Portfolio does not have a value of at
least $1,000, you may be notified that the value of your account is
below the Fund's minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the shareholder. This
minimum requirement does not apply to IRAs, other retirement accounts
and Uniform Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your shares of
SHARES Vanguard Specialized Portfolios for those of other available Vanguard
Funds.
IMPORTANT NOTE: For investors in the Energy, Gold & Precious Metals, and
Health Care Portfolios, a redemption fee amounting to 1% of the value of
the shares exchanged will be deducted from the exchange proceeds if
shares held for less than one year are exchanged. This fee is paid
directly to the Portfolio.
EXCHANGING BY When exchanging shares by telephone, please have ready the Portfolio
TELEPHONE name, account number, Social Security Number or Taxpayer Identification
Call Client Services Number listed on the account and account address. Requests for telephone
(1-800-662-2739) exchanges received prior to the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the close of
business that same day. Requests received after the close of the
Exchange are processed the next business day. Telephone exchanges are
not accepted into or from Vanguard Balanced Index Fund, Vanguard
Explorer Fund, Vanguard Index Trust, Vanguard International Equity Index
Fund-European, Pacific and Emerging Markets Portfolios, and Vanguard
Quantitative Portfolios. If you experience difficulty in making a
telephone exchange, your exchange request may be made by regular or
express mail, and it will be implemented at the closing net asset value
on the date received by Vanguard, provided the request is received in
Good Order.
------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name and account
number of your current Portfolio, the name of the Fund you wish to
exchange into, the amount you wish to exchange, and the signatures of
all registered account holders. Send
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<S> <C>
your request to VANGUARD FINANCIAL CENTER, VANGUARD SPECIALIZED
PORTFOLIOS, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard Financial Center,
Vanguard Specialized Portfolios, 455 Devon Park Drive, Wayne, PA 19087.)
------------------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the following:
INFORMATION - Please read the Fund's prospectus before making an exchange. For a
copy and for answers to any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption and a purchase. Therefore, you
could realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and the Taxpayer
Identification numbers of the two accounts are identical.
- The shares to be exchanged must be on deposit and not held in
certificate form.
- New accounts are not currently accepted in Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is the net asset
value next determined after Vanguard has received the required
documentation in Good Order.
- When opening a new account by exchange, you must meet the minimum
investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege. However,
the Fund reserves the right to revise or terminate its provisions, limit
the amount of or reject any exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford shareholders a
PRIVILEGE way to speculate on short-term movements in the market. Accordingly, in
LIMITATIONS order to prevent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and increase transaction
costs, the Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if limited to
THREE SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from a
Portfolio of the Fund during any twelve month period. Notwithstanding
these limitations, the Fund reserves the right to reject any purchase
request (including exchange purchases from other Vanguard Portfolios)
that is reasonably deemed to be disruptive to efficient portfolio
management.
- --------------------------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions) and
INFORMATION exchanges by telephone is automatically established on your account
ABOUT TELEPHONE unless you request in writing that telephone transactions on your
TRANSACTIONS account not be permitted.
To protect your account from losses resulting from unauthorized or
fraudulent telephone instructions, Vanguard adheres to the following
security procedures:
</TABLE>
30
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<TABLE>
<S> <C>
1. SECURITY CHECK. To request a transaction by telephone, the caller
must know (i) the name of the Portfolio; (ii) the 10-digit account
number; (iii) the exact name in which the account is registered; and
(iv) the Social Security or Taxpayer Identification number listed on
the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption by mail
will be made payable to the registered shareowner and mailed to the
address of record only.
Neither the Fund nor Vanguard will be responsible for the authenticity
of transaction instructions received by telephone, provided that
reasonable security procedures have been followed. Vanguard believes
that the security procedures described above are reasonable and that if
such procedures are followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone transactions on your
account. If Vanguard fails to follow reasonable security procedures, it
may be liable for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares to another
REGISTRATION person by completing a transfer form and sending it to: VANGUARD
FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482, ATTENTION:
TRANSFER DEPARTMENT. The request must be in Good Order. TO REQUEST A
TRANSFER FORM AND FULL INSTRUCTIONS PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call our
SERVICES Investor Information Department at 1-800-662-7447.
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time you initiate a
transaction in your account except for checkwriting redemptions from
Vanguard money market accounts. You will also receive a comprehensive
account statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the average cost of
shares redeemed from your account, using the average cost single
category method. This service is available for most taxable accounts
opened since January 1, 1986. In general, investors who redeemed shares
from a qualifying Vanguard account may expect to receive their Average
Cost Statement in February of the following year. Please call our Client
Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-annually,
according to the Fund's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government checks
DEPOSIT SERVICE (including Social Security and military pension checks) and private
payroll checks may be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for direct deposit
of U.S. Government and private payroll checks.
</TABLE>
31
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<S> <C>
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move money
EXCHANGE SERVICE automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or other
retirement plan.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between your Fund
EXPRESS account and your account at a bank, savings and loan association, or a
credit union that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447) for a Fund
Express application.
The minimum amount that can be transferred by telephone is $100.
However, if you have established one of the automatic options, the
minimum amount is $50. The maximum amount that can be transferred using
any of the options is $100,000.
Special rules govern how your Fund Express purchases or redemptions are
credited to your account. In addition, some services of Fund Express
cannot be used with specific Vanguard Funds. For more information,
please refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your dividends and/or
EXPRESS capital gains distributions automatically from your Fund account, one
business day after the Fund's payable date, to your account at a bank,
savings and loan association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this service on
the Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service that provides
TELE-ACCOUNT share price, price change and yield quotations on Vanguard Funds through
any TouchTone(TM) telephone. This free service also lets you obtain
information about your account balance, your last transaction, and your
most recent dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A free
brochure offering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------------------------
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32
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<PAGE> 34
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<PAGE> 35
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT MAY 31, 1994
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
PO51 (LOGO)
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 36
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--MAY 31, 1994
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT Vanguard Specialized Portfolios, Inc. (the "Fund") is an open-end
OBJECTIVES diversified investment company which consists of four Portfolios. This
AND POLICIES prospectus relates only to the Utilities Income Portfolio (the
"Portfolio"). The objective of the Portfolio is to provide current income
and growth of capital and income. The Portfolio invests primarily in common
stocks and bonds of utilities companies. There can be no assurance that the
Portfolio will achieve its stated objective. Given its specialized focus,
the Portfolio should not be considered a complete investment program.
- ------------------------------------------------------------------------------------------------------
OPENING AN To open a regular (non-retirement) account, please complete and return the
ACCOUNT Account Registration Form. If you need assistance in completing this Form,
please call our Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA Adoption Agreement, to
obtain a copy of this form, call 1-800-662-7447 Monday through Friday, from
8:00 a.m. to 9:00 p.m. (Eastern time), and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is $3,000 ($500 for
retirement accounts and Uniform Gifts/Transfers to Minors Act accounts).
The Portfolio is offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, the Portfolio incurs expenses for
investment advisory, management, administrative and distribution services.
- ------------------------------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the information you
PROSPECTUS should know about the Portfolio before you invest. It should be retained
for future reference. A "Statement of Additional Information" containing
additional information about the Portfolio has been filed with the
Securities and Exchange Commission. Such Statement is dated May 31, 1994,
and has been incorporated by reference into this Prospectus. A copy may be
obtained without charge by writing to the Portfolio or by calling the
Investor Information Department.
- ------------------------------------------------------------------------------------------------------
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Portfolio Expenses ............... 2 Management of the Portfolio ..... 11 SHAREHOLDER GUIDE
Financial Highlights ............. 2 Investment Adviser .............. 11 Opening an Account and
Yield and Total Return ........... 3 Dividends, Capital Gains Purchasing Shares ............... 16
FUND INFORMATION and Taxes ..................... 13 When Your Account Will
Investment Objective ............. 4 The Share Price of the Be Credited ................... 19
Investment Policies .............. 4 Portfolio ..................... 14 Selling Your Shares ............. 19
Investment Risks ................. 4 General Information ............. 15 Exchanging Your Shares .......... 21
Who Should Invest ................ 7 Important Information About
Implementation of Policies ....... 7 Telephone Transactions ........ 22
Investment Limitations ........... 10 Transferring Registration ....... 23
Other Vanguard Services ......... 23
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 37
<TABLE>
<S> <C>
PORTFOLIO The following table illustrates all expenses and fees that you would
EXPENSES incur as a shareholder of the Portfolio. The expenses and fees set forth
below are for the fiscal year ended January 31, 1994.
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Fees.............................. 0.27%
Investment Advisory Fees...................................... 0.13
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.00
Miscellaneous Expenses...................................... 0.02
----
Total Other Expenses.......................................... 0.02%
------
TOTAL OPERATING EXPENSES............................. 0.42%
------
------
The purpose of this table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an
investor in the Portfolio.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR
------- 3 YEARS 5 YEARS 10 YEARS
------- ------- --------
<S> <C> <C> <C>
$ 4 $13 $24 $ 53
</TABLE>
<TABLE>
<S> <C>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
- --------------------------------------------------------------------------------------------------
FINANCIAL The following financial highlights for the period ended January 31,
HIGHLIGHTS 1994, have been audited by Price Waterhouse, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the Fund's financial statements and notes thereto,
which are incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear, along with the
report of Price Waterhouse, in the Fund's 1994 Annual Report to
Shareholders. For a more complete discussion of the Fund's performance,
please see the Fund's 1994 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by calling our
Investor Information Department at 1-800-662-7447.
</TABLE>
2
<PAGE> 38
<TABLE>
<CAPTION>
---------------------------------------
UTILITIES INCOME PORTFOLIO
---------------------------------------
MAY 15, 1992+,
YEAR ENDED TO
JANUARY 31, 1994 JAN. 31, 1993
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $11.18 $10.00
------------- -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .57 .41
Net Realized and Unrealized Gain (Loss) on Investments.......... .88 1.03
------------ ------------
TOTAL FROM INVESTMENT OPERATIONS.............................. 1.45 1.44
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.56) (.24)
Distributions from Realized Capital Gains....................... (.40) (.02)
------------ ------------
TOTAL DISTRIBUTIONS........................................... (.96) (.26)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $11.67 $11.18
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN...................................................... 13.08% 14.51%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $738 $361
Ratio of Expenses to Average Net Assets........................... .42% .45%*
Ratio of Net Investment Income to Average Net Assets.............. 4.82% 4.70%*
Portfolio Turnover Rate........................................... 46% 20%
*Annualized.
+Commencement of operations.
- --------------------------------------------------------------------------------------------------
YIELD AND TOTAL From time to time the Portfolio may advertise its yield and total
RETURN return. Both yield and total return figures are based on historical
earnings and are not intended to indicate future performance. The "total
return" of the Portfolio refers to the average annual compounded rates
of return over one-, five-and ten-year periods or for the life of the
Portfolio (as stated in the advertisement) that would equate an initial
amount invested at the beginning of a stated period to the ending
redeemable value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
The "30-day yield" of the Portfolio is calculated by dividing net
investment income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net investment
income includes interest and dividend income earned on the Portfolio's
securities; it is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over 30 days is
compounded monthly for six months and then annualized. Methods used to
calculate advertised yields are standardized for all stock and bond
mutual funds. However, these methods differ from the accounting methods
used by the Portfolio to maintain its books and records, and so the
advertised 30-day yield may not fully reflect the income paid to your own
account or the yield reported in the Portfolio's financial statements.
</TABLE>
3
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<S> <C>
Also, the Portfolio may compare its performance to that of various stock
market indices, including the Standard & Poor's 500 Index and the
Standard & Poor's Utility Index.
- --------------------------------------------------------------------------------------------------
INVESTMENT The objective of the Portfolio is to provide current income and growth
OBJECTIVE of capital and income. There can be no assurance that the Portfolio will
THE PORTFOLIO SEEKS achieve its stated objective. The Portfolio is one of four Portfolios of
CURRENT INCOME Vanguard Specialized Portfolios, Inc. (the "Fund").
The investment objective of the Portfolio is fundamental and so cannot
be changed without the approval of a majority of the Portfolio's
shareholders.
- --------------------------------------------------------------------------------------------------
INVESTMENT Under normal circumstances, the Portfolio will invest at least 75% of
POLICIES its assets in equity securities of companies in the utilities industry.
THE PORTFOLIO INVESTS The remainder of the Portfolio's assets will be invested in utility
IN UTILITY STOCKS AND bonds rated A or better by Standard & Poor's Corporation or Moody's
BONDS Investors Service. Because of its emphasis on higher-yielding utility
stocks and its holdings of utility bonds, the Portfolio is expected to
offer a dividend yield well above the stock market average. The
Portfolio is managed without regard to tax ramifications.
The Portfolio will invest primarily in securities that trade in U.S.
markets. The Portfolio may invest up to 30% of its assets in foreign
securities, but has no present intention of investing more than 10% of
its assets in such securities. In order to protect against fluctuations
in foreign exchange rates, the Portfolio may invest in forward foreign
currency exchange contracts.
Besides investing primarily in equity securities, the Portfolio may hold
certain short-term fixed income securities as cash reserves. The
Portfolio may also invest in stock futures contracts and options to a
limited extent. See "Implementation of Policies" for a description of
these and other investment practices of the Fund.
The investment policies of the Portfolio are not fundamental and so may
be changed by the Board of Directors without shareholder approval.
- --------------------------------------------------------------------------------------------------
INVESTMENT RISKS As a mutual fund specializing in utility stocks and bonds, the Portfolio
is subject primarily to four types of risk: stock market risk, interest
rate risk, industry risk, and manager risk. Since the Portfolio may
invest in foreign securities, investors are also exposed to currency
risk and other risks of international investing.
MARKET RISK MAY BE Market risk is the possibility that stock prices in general will decline
SUBSTANTIAL over short or even extended periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline. In the period from 1926 to 1993, stocks
have provided an average annual total return (capital appreciation plus
dividend income) of +12.3%, as measured by the Standard & Poor's 500
Composite Stock Price Index. In contrast, the return on stocks in
individual years has varied from a low of -43.3% to a high of +53.9%,
reflecting the short-term volatility of stock prices.
</TABLE>
4
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<S> <C>
However, the Portfolio is expected to exhibit somewhat less volatility
than the stock market as a whole. Historically, utility stocks have been
one of the least volatile sectors of the stock market (when measured by
such statistics as standard deviation of returns or industry "beta").
Moreover, the Portfolio's investment in utility bonds is expected to
further dampen the stock market's influence on the Portfolio.
INTEREST RATE RISK MAY In addition to stock market risk, utility stocks and bonds are also
BE SUBSTANTIAL subject to interest rate risk--price fluctuations due to changing market
interest rates. In general, fixed income investments, such as bonds,
vary inversely with interest rates, falling in price when interest rates
rise, and rising in price when interest rates fall. Utility stocks, more
so than other stock market sectors, are often influenced by these trends
in interest rates, rather than price movements in the stock market. At
the same time, the Portfolio's bond holdings are subject to interest
rate risk. This combination of interest-rate-sensitive stocks and bonds
means that the Portfolio may at times move in tandem with the bond
market, rising and falling as interest rates change, independent of the
stock market.
INVESTORS ARE EXPOSED In addition to stock market and interest rate risk, the Portfolio is
TO INDUSTRY RISK subject to industry risk--i.e., the possibility that a particular group
of related stocks will decline in price due to industry-specific
developments.
Changing regulation constitutes one of the key industry specific risks
for the Portfolio. Regulators (largely at the state level) monitor and
control utility revenues and costs, and therefore may limit utility
profits and dividends paid to investors. Regulatory authorities may also
restrict a company's access to new markets, thereby diminishing the
firm's long-term prospects. Individual sectors of the utility market are
subject to the following additional risks:
- Electric utilities may be burdened by unexpected increases in fuel and
other operating costs. They are also adversely affected when long-term
interest rates rise. Long-term borrowings are used to finance most
utility investment, and rising interest rates lead to higher financing
costs and reduced earnings. There are also the considerable costs
associated with environmental compliance, nuclear waste clean-up, and
safety regulation. Increasingly, electric utilities are being called
upon by regulators to bear these added costs, and there is a risk that
these costs will not be fully recovered through an increase in
revenues.
- Telephone utilities have been buffeted by technological development
leading to increased competition, as well as changing regulation of
long-distance telephone service and other telecommunications
businesses. While certain companies have benefitted from the new
competitive climate, others have not, and increased competition in the
future may hinder the growth of more traditionally oriented telephone
companies.
- Among gas transmission and distribution companies, there has been a
move to diversify into oil and gas exploration and development, making
investment returns more sensitive to energy prices. In the case of the
water utility sector, the industry is highly fragmented, and most
water supply companies find themselves in mature markets, with little
potential for growth.
</TABLE>
5
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<S> <C>
THE PORTFOLIO IS In addition to the risks described above, the Portfolio is subject to
SUBJECT TO MANAGER manager risk. The investment adviser manages the Portfolio according to
RISK the traditional methods of "active" investment management, which
involves the buying and selling of securities based upon economic,
financial and market analysis and investment judgment. Manager risk
refers to the possibility that the Portfolio's investment adviser may
fail to execute the Portfolio's investment strategy effectively. As a
result, the Portfolio may fail to achieve its stated objective.
FOREIGN SECURITIES Since the Portfolio may invest in foreign securities, investors are also
ENTAIL CURRENCY AND exposed to the unique risks of international investing. For U.S.
OTHER RISKS investors, the returns of foreign securities are influenced by not only
the returns on foreign common stocks themselves, but also by currency
risk--i.e., changes in the value of the currencies in which the stocks
are denominated. In a period when the U.S. dollar rises against foreign
currencies, the returns on foreign stocks for a U.S. investor are
diminished. By contrast, in a period when the U.S. dollar declines, the
returns on foreign stocks are enhanced.
Other risks and considerations of international investing include the
following: differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio
transactions; the smaller trading volumes and generally lower liquidity
of foreign stock markets, which may result in greater price volatility;
foreign withholding taxes payable on a Portfolio's foreign securities,
which may reduce dividend income payable to shareholders; the
possibility of expropriation or confiscatory taxation; adverse changes
in investment or exchange control regulations; political instability
which could affect U.S. investment in foreign countries; difficulty in
obtaining and enforcing foreign court judgments; and potential
restrictions on the flow of international capital.
HIGHER YIELDS AND Investors in the Portfolio should be aware that while utility stocks
RETURNS MAY NOT have historically provided above-average dividend yields, there is no
PERSIST guarantee that they will continue to do so in the future. For example,
as of January 31, 1994, the Standard & Poor's Utility Index provided a
current yield of 5.1%, which was nearly two times as high as the yield
of 2.6% provided by the broad stock market (as measured by the Standard
& Poor's 500 Index). Many of the risks enumerated above have made it
increasingly difficult for utility companies to sustain such generous
dividend pay-outs, and future dividend yields of the utility sector
could decline.
Similarly, while utility stocks during recent years have provided total
investment returns (dividend yield plus capital change) above stock
market averages, there is again no guarantee that such returns will
continue. For example, during the ten-year period ended January 31,
1994, the Standard & Poor's Utility Index gained 17.1% per year on
average, while the Standard & Poor's 500 Index, a measure of the broad
stock market, returned 15.3% per year. Investors should recognize that a
period of above-average investment performance by a stock market sector,
such as that provided by utility stocks over the past ten years, is
often followed by a period of below-average investment performance. In
addition, investors should not
</TABLE>
6
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<TABLE>
<S> <C>
anticipate that utility stocks will outperform the broad stock market
over the long haul, given the generally limited growth prospects of the
utilities industry.
- --------------------------------------------------------------------------------------------------
WHO SHOULD The Utilities Income Portfolio is designed for investors who are seeking
INVEST a more conservative, income-oriented stock market investment. The
INVESTORS SEEKING AN Portfolio is likely to offer higher dividend yields than the stock
INCOME-ORIENTED STOCK market average, with substantially lower volatility in share price. The
INVESTMENT Portfolio may also offer modest growth in income and capital over time.
Nonetheless, because utility stock and bond prices will fluctuate,
sometimes substantially, investors should be willing to accept moderate
to high fluctuations in principal value. Because of the risks associated
with common stock and bond investments, the Portfolio is intended to be
a long-term investment vehicle and is not designed to provide investors
with a means of speculating on short-term common stock and bond market
movements. Investors who engage in excessive account activity generate
additional costs which are borne by all of the Portfolio shareholders.
In order to minimize such costs the Portfolio has adopted the following
policies. The Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient portfolio
management, either because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Portfolio has
adopted exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Portfolio reserves the
right to suspend the offering of its shares.
There can be no assurance that the Portfolio will achieve its stated
objective, or that shareholders will be protected from the substantial
risks inherent in equity investing. Investors may wish to reduce the
potential risk of investing in the Portfolio by purchasing shares on a
periodic basis (dollar cost averaging) rather than investing in one lump
sum.
Since the Portfolio concentrates its holdings in equity securities of
companies in the utilities industry, the Portfolio should not be considered
a complete investment program. Most investors should maintain diversified
holdings of securities with different risk characteristics--including common
stocks, bonds and money market instruments.
- --------------------------------------------------------------------------------------------------
IMPLEMENTATION OF The Portfolio follows a number of investment practices in an effort to
POLICIES achieve its objective of long-term capital growth.
THE PORTFOLIO INVESTS The Portfolio invests in equity and debt securities of companies engaged
IN A RANGE OF UTILITY in the generation, transmission, or distribution of electricity,
STOCKS AND BONDS telecommunications, gas, or water. Such investments will be selected on
the basis of fundamental analysis to identify those securities that the
adviser believes will provide both current income and the potential for
growth in income and capital over time.
The utilities sector of the stock market, from which the Portfolio's
primary investments will be drawn, is dominated by telephone and
electric utility common stocks, with gas and water companies playing an
appreciably smaller role. For
</TABLE>
7
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<TABLE>
<S> <C>
example, as of January 31, 1994, the Standard & Poor's Utility Index was
heavily weighted towards telephone and electric stocks, as the following
chart illustrates:
</TABLE>
<TABLE>
<CAPTION>
% OF
UTILITY SECTOR INDEX
<S> <C>
------------------------------- ---------
Telephone/Telecommunications 51%
Electric 40
Gas 9
----------
TOTAL 100%
=========
</TABLE>
<TABLE>
<S> <C>
Similarly, the market for utility bonds is dominated by telephone and
electric utility issuers. For example, as of March 31, 1994, telephone
company bonds represented 33% of the outstanding utility bonds rated A
or better (measured in terms of market value by the Lehman Brothers
Investment Grade Utility Bond Index). Electric utility issues accounted
for 35% of A-or-better utility bonds, while gas, water and other
utilities represented the remaining 32%.
Utilities are subject to strict regulatory oversight. However, in recent
years, changes in the regulatory climate have allowed utilities to
provide products and services outside their traditional geographic
areas, leading to increased competition and expanded prospects for
growth. The Portfolio seeks to take advantage of favorable opportunities
that are expected to arise from these structural changes in regulation.
THE PORTFOLIO MAY The Portfolio may invest up to 30% of its assets in foreign securities,
HOLD FOREIGN but at present is not expected to invest more than 10% of its net assets
SECURITIES in foreign securities. Such a policy expands the investment
opportunities available to the Portfolio and may result in improved
diversification and performance.
All or a portion of the foreign securities purchased by the Portfolio
may be in the form of American Depository Receipts (ADRs) or European
Depository Receipts (EDRs). ADRs are receipts typically issued by a U.S.
bank or trust company that evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe that
evidence a similar ownership arrangement. Generally, ADRs are designed
for trading in the United States securities markets and EDRs are
designed for trading in European securities markets.
THE PORTFOLIO MAY The Portfolio may enter into forward foreign currency exchange contracts
ENTER INTO FORWARD in order to protect against uncertainty in the level of future foreign
CURRENCY CONTRACTS exchange rates in the purchase and sale of investment securities. The
Portfolio may not enter into such contracts for speculative purposes.
A forward foreign currency exchange contract is an obligation to
purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts may
be bought or sold to protect the Portfolio to a limited extent against
adverse changes in exchange rates between foreign currencies and the
U.S. dollar. Such contracts, which protect the value of the Portfolio's
investment securities against a decline in the value of a currency, do
not eliminate fluctuations in the underlying prices of the securities.
They simply establish an exchange rate at
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a future date. Also, although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might
be realized should the value of such currency increase.
THE PORTFOLIO MAY The Portfolio may invest temporarily in certain short-term fixed income
INVEST IN SHORT-TERM securities. Such securities may be used to invest uncommitted cash
FIXED INCOME balances, to maintain liquidity to meet shareholder redemptions, or to
SECURITIES take a temporarily defensive position against potential stock market
declines. These securities include: obligations of the United States
Government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
The use of repurchase agreements involves certain risks, including the
risk of losses caused by the default or insolvency of the other party to
the agreement. However, the Portfolio expects that it can control this
risk through careful evaluation of the creditworthiness of the other
party to any repurchase agreement and careful monitoring procedures.
THE PORTFOLIO MAY USE The Portfolio may utilize stock futures contracts and options to a
FUTURES CONTRACTS AND limited extent. Specifically, the Portfolio may enter into futures
OPTIONS contracts provided that not more than 5% of its assets are required as a
futures contract deposit; in addition, the Portfolio may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not more than
20% of the Portfolio's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher investment
returns when a futures contract is priced more attractively than the
underlying equity security. While futures contracts and options can be
used as leveraged instruments, the Portfolio may not use futures
contracts or options to leverage its net assets.
The risk of loss in trading futures contracts in some strategies can be
substantial due both to the low margin deposits required and the
extremely high degree of leveraging involved in futures pricing. As a
result, a relatively small price movement in a futures contract may
result in immediate and substantial loss or gain. However, the Portfolio
will not use futures contracts or options for speculative purposes.
THE PORTFOLIO MAY The Portfolio may lend its investment securities on a short-term or
LEND ITS SECURITIES long-term basis to qualified institutional investors for the purpose of
realizing additional income. A loan of portfolio securities may be
either short-term (less than nine months) or long-term. With any loan of
portfolio securities, there is a risk that the borrowing institution
will fail to redeliver the securities when due. However, loans of
securities by the Portfolio will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the current market
value of the loaned securities.
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THE PORTFOLIO MAY The Portfolio may borrow money, subject to the limits set forth below,
BORROW MONEY for temporary or emergency purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of
securities.
PORTFOLIO TURNOVER IS Although it generally seeks to invest for the long term, the Portfolio
NOT EXPECTED TO retains the right to sell securities irrespective of how long they have
EXCEED 100% been held. It is anticipated that the annual portfolio turnover of the
Portfolio will not exceed 100%. A turnover rate of 100% would occur, for
example, if all of the securities held by the Portfolio were replaced
within one year.
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INVESTMENT The Portfolio has adopted certain limitations designed to reduce its
LIMITATIONS exposure to specific situations. Some of these limitations are that the
THE FUND HAS ADOPTED Portfolio will not:
CERTAIN FUNDAMENTAL
LIMITATIONS (a) with respect to 75% of the value of its total assets, invest more
than 5% of its assets in the securities of any single company;
(b) with respect to 75% of the value of its total assets, purchase more
than 10% of the voting securities of any issuer;
(c) borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency (not leveraging) purposes, and
then not in an amount exceeding 10% of the value of the Fund's net
assets at the time the borrowing is made. Whenever borrowing exceeds
5% of the value of the Fund's net assets, the Fund will not make any
additional investments;
(d) engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
(e) purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid; and
(f) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (e) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by
lending its securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent
with the Investment Company Act or the Rules and Regulations or
interpretations of the Commission thereunder and the aggregate
value of all securities loaned does not exceed 33 1/3% of the
market value of the Portfolio's total assets.
These investment limitations are considered at the time investment
securities are purchased. The limitations described here and in the
Statement of Additional Information are fundamental and so may be
changed only with the approval of a majority of the Portfolio's
shareholders.
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MANAGEMENT OF The Portfolio is one of four Portfolio's of Vanguard Specialized
THE PORTFOLIO Portfolios, Inc. (the "Fund"), a member of The Vanguard Group of
VANGUARD ADMINISTERS Investment Companies, a family of 32 investment companies with 78
AND DISTRIBUTES THE distinct investment portfolios and total assets in excess of $120
PORTFOLIO billion. Through their jointly owned subsidiary, The Vanguard Group,
Inc. ("Vanguard"), the Fund and the other funds in the 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. As a result of
Vanguard's unique corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual funds. In 1993,
the average expense ratio (annual costs including advisory fees divided
by total net assets) for the Vanguard funds amounted to approximately
.30% compared to an average of 1.02% for the mutual fund industry (data
provided by Lipper Analytical Services).
The Officers of the Portfolio manage the day to day operations of the
Portfolio and are responsible to the Portfolio's Board of Directors. The
Directors set broad policies for the Portfolio and choose its Officers.
A list of the Directors and Officers of the Portfolio and a statement of
their present positions and principal occupations during the past five
years can be found in the Statement of Additional Information.
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 net expenses, which
are allocated among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each fund bears its own
direct expenses, such as legal, auditing and custodian fees.
Vanguard provides distribution and marketing services to the funds. The
funds are available on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
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INVESTMENT Under an investment advisory agreement with the Fund, Wellington
ADVISER Management Company ("WMC"), 75 State Street, Boston, MA 02109, manages
WELLINGTON the investment and reinvestment of the assets of the Utilities Income
MANAGEMENT Portfolio, and continuously reviews, supervises and administers the
COMPANY MANAGES Portfolio's investment program. WMC discharges its responsibilities
INVESTMENTS FOR THE subject to the control of the Officers and Directors of the Fund.
PORTFOLIO
WMC is a professional investment advisory firm which globally provides
services to investment companies, institutions and individuals. Among
the clients of WMC are 12 of the 32 investment companies of The Vanguard
Group. As of December 31, 1993, WMC held discretionary management
authority with respect to approximately $82.8 billion of assets. WMC and
its predecessor organizations have provided advisory services to
investment companies since 1933 and to investment counseling clients
since 1960.
John R. Ryan, Senior Vice President of WMC, serves as the portfolio
manager of the Utilities Income Portfolio. Mr. Ryan is assisted by Paul
D. Kaplan, Senior Vice
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President of WMC, who manages the Portfolio's fixed income investments.
Messrs. Ryan and Kaplan have served as portfolio managers of the
Utilities Income Portfolio since its inception in May 1992. Messrs. Ryan
and Kaplan have been investment professionals with WMC since 1981 and
1978, respectively. WMC's portfolio managers are supported by research
and other investment services provided by the professional staff of WMC.
Under the Fund's investment advisory agreement, the fee paid to WMC is
based on the total assets of the Utilities Income Portfolio and the
total assets of two other Portfolios of Vanguard Specialized Portfolios,
Inc. managed by WMC (Energy and Health Care Portfolios). The three
Portfolios are required to pay WMC an aggregate fee at the end of the
fiscal quarter, calculated by applying the following annual percentage
rates to the average month-end net assets for the quarter of the
three Portfolios:
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<CAPTION>
NET ASSETS RATE
<S> <C>
------------------- ------
First $100 million 0.300%
Next $150 million 0.200%
Next $250 million 0.150%
Next $500 million 0.125%
Over $1 billion 0.100%
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In addition, once the advisory fee to WMC is calculated for the three
Portfolios under this schedule, the total fee will be reduced in order
that the advisory fee paid by the Utilities Income Portfolio does not
exceed 0.125%.
The advisory fee is based on the total assets for the three Portfolios
and is allocated, except as noted above, to each Portfolio based on the
net assets of each. For the fiscal year ended January 31, 1994, the
investment advisory fee represented an effective annual rate of .13 of
1% of average net assets for each Portfolio. This rate was payable under
the investment advisory agreement in effect prior to May 31, 1993.
The investment advisory agreement with WMC authorizes the adviser to
select brokers or dealers to execute purchases and sales of the
Portfolio's securities, and direct the advisers to use their best
efforts to obtain the best available price and most favorable execution
with respect to all transactions. The full range and quality of
brokerage services are considered in making these determinations.
The Portfolio has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the achievement of
better execution, provided the adviser believes this to be in the best
interest of the Portfolio. Although the Portfolio does not market its
shares through intermediary brokers or dealers, the Portfolio may place
orders with qualified broker-dealers who recommend the Portfolio to
clients if the Officers of the Fund believe that the quality of the
transaction and the commission are comparable to what they would be with
other qualified brokerage firms.
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The Portfolio's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new investment
adviser pursuant to the terms of a new advisory agreement either as a
replacement for an existing adviser or as an additional adviser; (b) a
change in the terms of an advisory agreement; and (c) the continued
employment of an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in control of the
adviser. Any such change will only be made upon not less than 30 days
prior written notice to shareholders of the Portfolio which shall
include substantially the information concerning the adviser that would
have normally been included in a proxy statement.
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DIVIDENDS, The Utilities Income Portfolio pays dividends consisting of ordinary
CAPITAL GAINS income on a quarterly basis. Capital gains distributions, if any, are
AND TAXES made annually.
THE UTILITIES INCOME Dividend and capital gains distributions may be automatically reinvested
PORTFOLIO PAYS or received in cash. See "Choosing a Distribution Option" for a
QUARTERLY DIVIDENDS description of these distribution methods.
In order to satisfy certain distribution requirements of the Tax Reform
Act of 1986, the Portfolio may declare year-end dividend and capital
gains distributions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by the
Portfolio and received by shareholders on December 31 of the prior year.
The Portfolio intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code so that
the Portfolio will not be subject to federal income tax to the extent
its income is distributed to shareholders. Dividends paid by the
Portfolio from net investment income, whether received in cash or
reinvested in additional shares, will be taxable to shareholders as
ordinary income. For corporate investors, dividends from net investment
income will generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of the dividends so
qualified depends on the aggregate taxable qualifying dividend income
received by the Portfolio from domestic (U.S.) sources.
Distributions paid by the Portfolio from long-term capital gains,
whether received in cash or reinvested in additional shares, are taxable
as long-term capital gains, regardless of the length of time you have
owned shares in the Portfolio. Capital gains distributions are made when
the Portfolio realizes net capital gains on sales of portfolio
securities during the year. The Portfolio does not seek to realize any
particular amount of capital gains during a year; rather, realized gains
are a byproduct of portfolio management activities. Consequently,
capital gains distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions in years when
the Portfolio realizes net capital losses.
Note that if you accept capital gains distributions in cash, instead of
reinvesting them in additional shares, you are in effect reducing the
capital at work for you in the Portfolio. Also, keep in mind that if you
purchase shares in a Portfolio shortly before the record date for a
dividend or capital gains distribution, a portion of your
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investment will be returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving them in cash.
The Portfolio will notify you annually as to the tax status of dividend
and capital gains distributions paid by the Portfolio.
A CAPITAL GAIN OR A sale of shares of the Portfolio is a taxable event and may result in a
LOSS MAY BE REALIZED capital gain or loss. A capital gain or loss may be realized from an ordinary
UPON EXCHANGE OR redemption of shares or an exchange of shares between two mutual funds (or two
REDEMPTION portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may be subject to state and
local taxes.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid
this withholding requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification Number and by certifying
that you are not subject to backup withholding.
The Portfolio has obtained a Certificate of Authority to do business as
a foreign corporation in Pennsylvania and does business and maintains an
office in that state. In the opinion of counsel, the shares of the
Portfolio are exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.
- --------------------------------------------------------------------------------------------------
THE SHARE PRICE The share price or "net asset value" per share of the Portfolio is
OF THE PORTFOLIO computed once each day at the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. Net asset value per share is computed by
dividing the total value of the investments and other assets of the
Portfolio, less any liabilities, by the total number of outstanding
shares of the Portfolio.
Securities listed on a U.S. exchange are valued at the latest quoted
sales prices on the day the valuation is made. Securities listed on a
U.S. exchange that are not traded on the valuation date are valued at
the mean of the bid and ask prices. Securities listed on a foreign
exchange are valued at the latest quoted sales price available before
the time when assets are valued. All prices of listed securities are
taken from the exchange where the security is primarily traded. Unlisted
securities for which market quotations are readily available are valued
at the latest quoted bid price. Other assets and securities for which no
market quotations are readily available are valued in good faith at fair
value using methods determined by, or under the supervision of, the
Board of Directors of the Fund. 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.
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In determining the Portfolio's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted
into U.S. dollars at the bid price of such currencies against U.S.
dollars last quoted by a major bank or broker. If such quotations are
not available as of the close of the Exchange, the rate of exchange will
be determined in accordance with policies established in good faith by
the Board of Directors.
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GENERAL The Portfolio is one of four Portfolios of Vanguard Specialized
INFORMATION Portfolios, Inc. (the "Fund"). The Fund is a Maryland corporation. The
Articles of Incorporation permit the Directors to issue 6,000,000,000
shares of common stock, with a $.001 par value. The Board of Directors
has the power to designate one or more classes ("Portfolios") of shares
of common stock and to classify or reclassify any unissued shares with
respect to such classes. Currently the Fund is offering four classes
of shares.
The shares of each Portfolio are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or other
features; and have no preemptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the Directors if
they so choose.
Annual meetings of shareholders will not be held except as required by
the Investment Company Act of 1940 and other applicable law. An annual
meeting will be held to vote on the removal of a Director or Directors
of the Fund if requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Utilities Income Portfolio are held by
State Street Bank and Trust Company, Boston, MA. The Vanguard Group,
Inc., Valley Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse serves as independent accountants for
the Fund and will audit its financial statements annually. The Fund is
not involved in any material litigation.
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SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by mail or wire.
ACCOUNT AND Simply complete and return an Account Registration Form and any required
PURCHASING documentation, indicating the amount you wish to invest. Your purchase
SHARES must be equal to or greater than the $3,000 minimum initial investment
requirement for the Portfolio ($500 for Uniform Gifts/Transfers to
Minors Act accounts). You must open a new Individual Retirement Account
by mail (IRAs may not be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater than the $500
minimum initial investment requirement, but no more than $2,000 if you
are making a regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past 60 days from
an IRA or other qualified Retirement Plan. If you need assistance with
the forms or have any questions about the Portfolio, please call our
Investor Information Department (1-800-662-7447). NOTE: For other types
of account registrations (e.g., corporations, associations, other
organizations, trusts or powers of attorney), please call us to
determine which additional forms you may need.
Because of the risks associated with common stock and bond investments,
the Portfolio is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on
short-term stock and bond market movements. Consequently, the Portfolio
reserves the right to reject any specific purchase (and exchange
purchase) request. The Portfolio also reserves the right to suspend the
offering of shares for a period of time.
The Portfolio's shares are purchased at the next-determined net asset
value after your investment has been received. The Portfolio is offered
on a no-load basis (i.e., there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by mail ($100
INVESTMENTS minimum), wire ($1,000 minimum), exchange from another Vanguard Fund
account ($100 minimum), or Vanguard Fund Express. Subsequent investments
to Individual Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some instances,
contributions may be made
by wire or Vanguard Fund Express. Please call us for more information on
these options.
------------------------------------------------------------------------
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ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group - 57, and mail to: Please make your check payable
to The Vanguard Group - 57,
VANGUARD FINANCIAL CENTER write your account number on
P.O. BOX 2600 your check and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the In-
vest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------------------
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PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
BEFORE WIRING VANGUARD SPECIALIZED PORTFOLIOS
UTILITIES INCOME PORTFOLIO
Please contact ACCOUNT NUMBER
Client Services ACCOUNT REGISTRATION
(1-800-662-2739)
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<S> <C>
To assure proper receipt, please be sure your bank includes the
Portfolio name, the account number Vanguard has assigned to you and the
eight digit CoreStates number. If you are opening a new account, please
complete the Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement. NOTE: Federal
Funds wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
------------------------------------------------------------------------
PURCHASING BY You may open a new account or purchase additional shares by making an
EXCHANGE (from a exchange from an existing Vanguard account. However, the Portfolio
Vanguard account) reserves the right to refuse any exchange purchase request. Call our
Client Services Department (1-800-662-2739). The new account will have
the same registration as the
existing account.
------------------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money from your
FUND EXPRESS bank account to your Vanguard account at your request. Or if you choose
Special Purchase and the Automatic Investment option, money will be moved from your bank
Automatic Investment account to your Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select. To establish these
Fund Express options, please provide the
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appropriate information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please wait three weeks
before using the service.
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CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and capital gains
distributions will be reinvested in additional Fund shares. This option
will be selected for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in cash and your
capital gains will be reinvested in additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains distributions will
be paid in cash.
In addition, an option to invest your cash dividends and/or capital
gains distributions in another Vanguard Fund account is available.
Please call our Client Services Department (1-800-662-2739) for
information. You may also elect Vanguard Dividend Express which allows
you to transfer your cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other Vanguard Services"
for more information.
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TAX CAUTION Under Federal tax laws, the Portfolio is required to distribute net
INVESTORS SHOULD ASK capital gains and dividend income to Portfolio shareholders. These
ABOUT THE TIMING OF distributions are made to all shareholders who own Portfolio shares as
CAPITAL GAINS AND of the distribution's record date, regardless of how long the shares
DIVIDEND DISTRIBUTIONS have been owned. Purchasing shares just prior to the record date could
BEFORE INVESTING have a significant impact on your tax liability for the year. For
example, if you purchase shares immediately prior to the record date of
a sizable capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Portfolio shares for
just a short period of time. (Taxes are due on the distributions even if
the dividend or gain is reinvested in additional Portfolio shares.)
While the total value of your investment will be the same after the
distribution -- the amount of the distribution will offset the drop in
the net asset value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about potential
distributions before investing. The Portfolio's annual capital gains
distribution normally occurs in December, while income dividends are
generally paid quarterly in March, June, September and December. For
additional information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
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IMPORTANT The easiest way to establish optional Vanguard services on your account
INFORMATION is to select the options you desire when you complete your Account
ESTABLISHING OPTIONAL Registration Form. If you wish to add shareholder options later, you may
SERVICES need to provide Vanguard with additional information and a signature
guarantee. Please call our Client Services Department (1-800-662-2739)
for further assistance.
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SIGNATURE For our mutual protection, we may require a signature guarantee on
GUARANTEES certain written transaction requests. A signature guarantee verifies the
authenticity of your signature and may be obtained from banks, brokers
and any other guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates are not available for the Utilities Income Portfolio.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or adviser may
charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase, exchange or
redemption) believed to be authentic, received in writing or by
telephone, once the trade has been received.
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WHEN YOUR Your trade date is the date on which your account is credited. If your
ACCOUNT WILL BE purchase is made by check, Federal Funds wire or exchange, and is
CREDITED received by the close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your trade date is
the next business day. Your shares are purchased at the net asset value
determined on your trade date.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, Vanguard will only accept a foreign check which has been
drawn in U.S. dollars and has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
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SELLING YOUR You may withdraw any portion of the funds in your account by redeeming
SHARES shares at any time. You may initiate a request by writing or by
telephoning. Your redemption proceeds are normally mailed within two
business days after the receipt of the request in Good Order.
SELLING BY MAIL Requests should be mailed to Vanguard Financial Center, Vanguard
Specialized Portfolios, P.O. Box 1120, Valley Forge, PA 19482. (For
express or registered mail, send your request to Vanguard Financial
Center, Vanguard Specialized Portfolios, 455 Devon Park Drive, Wayne, PA
19087.)
The redemption price of shares will be the Portfolio's net asset value
next determined after Vanguard has received all required documents in
Good Order.
------------------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER 1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or shares).
3. The signatures of all owners EXACTLY as they are registered on the
account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be required in the
case of estates, corporations, trusts, and certain other accounts.
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IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO YOUR
REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT 1-800-662-2739.
------------------------------------------------------------------------
SELLING BY To sell shares by telephone you or your pre-authorized representative
TELEPHONE may call our Client Services Department at 1-800-662-2739. The proceeds
will be sent to you by mail. Please see "Important Information About
Telephone Transactions."
------------------------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal option, money will
EXPRESS be automatically moved from your Vanguard Fund account to your bank
AUTOMATIC account according to the schedule you have selected. The Special
WITHDRAWAL Redemption option lets you move money from your Vanguard account to your
& SPECIAL REDEMPTION bank account on your request. You may elect Fund Express on the Account
Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
------------------------------------------------------------------------
SELLING BY You may sell shares by making an exchange into another Vanguard Fund
EXCHANGE account. Please see "Exchanging Your Shares" for details.
------------------------------------------------------------------------
IMPORTANT REDEMPTION Shares purchased by check or Fund Express may not be redeemed until
INFORMATION payment for the purchase is collected, which may take up to ten calendar
days. Your money is invested during the holding period.
DELIVERY OF Redemption requests received by telephone prior to the close of the New
REDEMPTION York Stock Exchange (generally 4:00 p.m. Eastern time) are processed on
PROCEEDS the day of receipt and the redemption proceeds are normally sent on the
following business day.
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Redemption requests received by telephone after the close of the
Exchange are processed on the business day following receipt and the
proceeds are normally sent on the second business day following receipt.
Redemption proceeds must be sent to you within seven days of receipt of
your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption request
may be made by regular or express mail. It will be implemented at the
net asset value next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to revise or
terminate the telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment at times
when the New York Stock Exchange is closed or under any emergency
circumstances as determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the Fund's remaining shareholders to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
------------------------------------------------------------------------
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VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard will send
COST STATEMENT you an Average Cost Statement which provides you with the tax basis of
the shares you redeemed. Please see "Other Vanguard Services" for
additional information.
------------------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller accounts, the
BALANCE REQUIREMENT Fund reserves the right to redeem shares in any account that is below
the minimum initial investment amount of $3,000. In addition, if at any
time your total investment in the Portfolio does not have a value of at
least $1,000, you may be notified that the value of your account is
below the Fund's minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the shareholder. This
minimum requirement does not apply to IRAs, other retirement accounts
and Uniform Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your shares of the
SHARES Utilities Income Portfolio of Vanguard Specialized Portfolios for those
of other available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the Portfolio
TELEPHONE name, account number, Social Security Number or Taxpayer Identification
Call Client Services Number listed on the account, and account address. Requests for
(1-800-662-2739) telephone exchanges received prior to the close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time) are processed at the close
of business that same day. Requests received after the close of the
Exchange are processed the next business day. TELEPHONE EXCHANGES ARE
NOT ACCEPTED INTO OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD
EXPLORER FUND, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY INDEX
FUND-EUROPEAN, PACIFIC AND EMERGING MARKETS PORTFOLIOS, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by regular or
express mail, and it will be implemented at the closing net asset value
on the date received by Vanguard, provided the request is received in
Good Order.
------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name and account
number of your current Portfolio, the name of the Fund you wish to
exchange into, the amount you wish to exchange, and the signatures of
all registered account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD SPECIALIZED PORTFOLIOS, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to Vanguard
Financial Center, Vanguard Specialized Portfolios, 455 Devon Park Drive,
Wayne, PA 19087.)
------------------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the following:
INFORMATION
- Please read the Fund's prospectus before making an exchange. For a
copy and for answers to any questions you may have, call our Investor
Information Department (1-800-662-7447).
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- An exchange is treated as a redemption and a purchase. Therefore, you
could realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations of the two accounts
are identical.
- The shares to be exchanged must be on deposit and not held in
certificate form.
- New accounts are not currently accepted in Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is the net asset
value next determined after Vanguard has received the required
documentation in Good Order.
- When opening a new account by exchange, you must meet the minimum
investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege. However,
the Fund reserves the right to revise or terminate its provisions, limit
the amount of or reject any exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford shareholders a
PRIVILEGE way to speculate on short-term movements in the market. Accordingly, in
LIMITATIONS order to prevent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and increase transaction
costs, the Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if limited to
THREE SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from the
Portfolio during any twelve month period. Notwithstanding these
limitations, the Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient portfolio
management.
- --------------------------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions) and
INFORMATION exchanges by telephone is automatically established on your account
ABOUT TELEPHONE unless you request in writing that telephone transactions on your
TRANSACTIONS account not be permitted.
To protect your account from losses resulting from unauthorized or
fraudulent telephone instructions, Vanguard adheres to the following
security procedures:
1. SECURITY CHECK. To request a transaction by telephone, the caller
must know (i) the name of the Portfolio; (ii) the 10-digit account
number; (iii) the exact name in which the account is registered; and
(iv) the Social Security or Taxpayer Identification number listed on
the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption by mail
will be made payable to the registered shareowner and mailed to the
address of record only.
Neither the Portfolio nor Vanguard will be responsible for the
authenticity of transaction instructions received by telephone, provided
that reasonable security procedures have been followed. Vanguard
believes that the security procedures
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decribed above are reasonable and that if such procedures are followed,
you will bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable for any
losses resulting from unauthorized or fraudulent telphone transactions
on your account.
- --------------------------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares to another
REGISTRATION person by completing a transfer form and sending it to: VANGUARD
FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482, ATTENTION:
TRANSFER DEPARTMENT. The request must be in Good Order. TO REQUEST A
TRANSFER FORM AND FULL INSTRUCTIONS PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call our
SERVICES Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time you initiate a
REPORTS transaction in your account except for checkwriting redemptions from
Vanguard money market accounts. You will also receive a comprehensive
account statement at the end of each calendar quarter. The fourth
quarter statement will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the average cost of
shares redeemed from your account, using the average cost single
category method. This service is available for most taxable accounts
opened since January 1, 1986. In general, investors who redeemed shares
from a qualifying Vanguard account may expect to receive their Average
Cost Statement in February of the following year. Please call our Client
Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-annually,
according to the Fund's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government checks
DEPOSIT SERVICE (including Social Security and military pension checks) and private
payroll checks may be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for direct deposit
of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move money
EXCHANGE SERVICE automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or other
retirement plan.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between your Fund
EXPRESS account and your account at a bank, savings and loan association, or a
credit union that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447) for a Fund
Express application.
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The minimum amount that can be transferred by telephone is $100.
However, if you have established one of the automatic options, the
minimum amount is $50. The maximum amount that can be transferred using
any of the options is $100,000.
Special rules govern how your Fund Express purchases or redemptions are
credited to your account. In addition, some services of Fund Express
cannot be used with specific Vanguard Funds. For more information,
please refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your dividends and/or
EXPRESS capital gains distributions automatically from your Fund account, one
business day after the Fund's payable date, to your account at a bank,
savings and loan association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this service on
the Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service that provides
TELE-ACCOUNT share price, price change and yield quotations on Vanguard Funds through
any TouchTone(TM) telephone. This service also lets you obtain information
about your account balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our Investor
Information Department (1-800-662-7447).
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--------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT MAY 31, 1994
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
PO57 (LOGO)
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<PAGE> 63
PART B
VANGUARD SPECIALIZED PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
MAY 31, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated May 31, 1994). To obtain the Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
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Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 2
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 7
Investment Advisory Services.............................................................. 9
Securities Transactions................................................................... 10
Purchase of Shares........................................................................ 11
Redemption of Shares...................................................................... 12
Comparative Indexes....................................................................... 12
Yield and Total Return.................................................................... 14
Financial Statements...................................................................... 14
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INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
FOREIGN INVESTMENTS As indicated in the Prospectus, each Portfolio may
include foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies. Since the stocks of
foreign companies are frequently denominated in foreign currencies, and since
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the Portfolio 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 each Portfolio permit it to enter into forward foreign currency
exchange contracts in order to hedge the Portfolio's 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.
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 each Portfolio 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
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arrangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodian arrangements for handling U.S. securities of
equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Portfolio receives from its foreign investments. However, these
foreign withholding taxes are not expected to have a significant impact on the
Portfolios, since each Portfolio's investment objective is to seek long-term
capital appreciation and any income should be considered incidental.
PORTFOLIO TURNOVER While the rate of Portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that each
Portfolio's annual portfolio turnover rate will not normally exceed 100%. One
way a portfolio turnover rate of 100% can occur is if all of the Portfolio's
securities, exclusive of U.S. Government securities and other securities whose
maturities at the time of acquisition are one year or less, are replaced in the
period of one year. Turnover rates may vary greatly from year to year as well as
within a particular year and may also be affected by cash requirements for
redemptions of each Portfolio's shares and by requirements which enable the Fund
to receive certain favorable tax treatments. The portfolio turnover rates will,
of course, depend in large part on the level of purchases and redemptions of
shares of each Portfolio. Higher portfolio turnover can result in corresponding
increases in brokerage costs to the Portfolios of the Fund and their
shareholders.
INVESTMENT POLICIES
FUTURES CONTRACTS The Fund may enter into futures contracts, options, and
options on futures contracts for several reasons: to maintain cash reserves
while remaining fully invested, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures contract is priced
more attractively than the underlying equity security or index. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
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. The Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. 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
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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.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio 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 Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio 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 A Portfolio 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 its total assets. In addition, a Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio 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, a
Portfolio 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.
Each Portfolio 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 risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. 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. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio 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 a Portfolio 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 a Portfolio 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 a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related
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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 Except for transactions the
Fund has identified as hedging transactions, each Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition.
In order for a Portfolio 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 foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
REPURCHASE AGREEMENTS Each Portfolio 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 money
market instrument (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 Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Fund's Custodian Bank
until repurchased. In addition, the Fund's Board of Directors will monitor each
Portfolio'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 any Portfolio of the Fund. No more than an aggregate of 10% of a
Portfolio's assets, at the time of investment, will be invested in
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repurchase agreements having maturities longer than seven days and securities
subject to legal or contractual restrictions on resale, or for which there are
no readily available market quotations.
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 security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities on a
short-term basis (less than nine months) to qualified institutional investors
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 securities, the Portfolio will be
attempting 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
Portfolio. Each Portfolio may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States 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 Portfolio at any time and (d) the
Portfolio receives reasonable interest on the loan which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments, any distribution on the loaned securities and any increase in their
market value. A Portfolio will not lend its portfolio securities, if as a
result, the aggregate value of such loans exceeds 33 1/3% of the value of the
Portfolio's total assets. Loan arrangements made by a Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the credit-worthiness 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
Directors.
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 Directors (Trustees). In addition, voting
rights may 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.
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment limitations set
forth in the Prospectus. It is a fundamental policy of each Portfolio not to
engage in any of the following activities or business practices. These
restrictions may not be changed with respect to a particular Portfolio without
the approval of a majority of the outstanding shares (as defined in the
Investment Company Act of 1940) of that Portfolio. A Portfolio may not:
1) Issue senior securities;
2) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
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<PAGE> 68
otherwise require the untimely disposition of securities, in an amount
not in excess of 15% of the value of the net assets of the Portfolio
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the net assets of the Portfolio,
the Portfolio will not make any additional investments;
3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
5) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described on page 7);
6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
total assets;
7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;
8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or engage in short sales (unless by virtue of its ownership of other
securities it has a right to obtain at no added cost securities
equivalent in kind and amount to the securities sold) except as set
forth below in (12);
9) Purchase or sell puts or calls, or combinations thereof; provided
however, that a Portfolio may enter into forward foreign currency
exchange transactions except as set forth below in (12);
10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate interests
or interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein);
11) The Fund will not invest in securities of other investment companies,
except as may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the Fund's shareholders or otherwise
to the extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund;
12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% of the portfolios
assets are required as deposit to secure obligations under futures
contracts and not more than 20% of a portfolio's assets are invested in
futures contracts and options at any time;
13) Invest in companies for the purpose of exercising control of
management.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, make loans to, or contribute to the costs or other financial
requirements of, any company which will be wholly owned by the Fund and one or
more other investment companies and is primarily engaged in the business of
providing
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<PAGE> 69
at cost services, such as management, administrative, distribution or other
related services to the Fund and other investment companies. (See "Management of
the Fund").
In addition, no Portfolio may engage in any of the following activities;
however, these restrictions may be changed by the Directors without shareholder
approval or prior notification:
1) Invest directly in oil, gas, or other mineral exploration or
development programs, including oil & gas or other mineral leases;
provided, however, that if consistent with the designated business
activities of a particular Portfolio, a Portfolio may purchase
securities of issuers whose principal business activities fall within
such areas;
2) Purchase warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Including within that amount,
but not to exceed 2% of the value of the Fund's net assets, may be
warrants which are not listed on the New York or American Stock
Exchange. Warrants acquired by a Portfolio at any time in units or
attached to securities are not subject to this restriction.
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders it will revoke the commitment by terminating sales of
its shares in the state(s) involved.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of the 32 investment companies. Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Vanguard Funds 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 Vanguard Money Market Reserves,
Vanguard Index Trust, Vanguard Admiral Funds, Vanguard International Equity
Index Fund, Vanguard Balanced Index Fund, Vanguard Institutional Index Fund,
Vanguard Bond Index Fund, Vanguard Institutional Money Market Portfolio,
Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed Income
Securities Fund, several Portfolios of Vanguard Variable Insurance Fund and
Vanguard's State Tax-Free Funds (California, Florida, New York, New Jersey, Ohio
and Pennsylvania).
Vanguard employs a supporting staff of management 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 net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At the year ended January
31, 1994 the Fund had contributed capital of $382,000 to Vanguard representing
1.9% of its capitalization. The Fund's Service Agreement provides as follows:
(a) each Vanguard Fund may invest up to .40% of its current assets in Vanguard,
and (b) there is no other limitation on the amount that each Vanguard Fund may
contribute to Vanguard's capitalization. The amount contributed to Vanguard by
the Fund's Portfolios included the Service Economy and Technology Portfolios
which are no longer in existence.
The Officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
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<PAGE> 70
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Director
Executive Officer and Director* President and Chief Executive Officer, The
Chairman, Chief Executive Officer and Nature Conservancy; formerly, Director and
Director of The Vanguard Group, Inc. and of Senior Partner, McKinsey & Co.; and
each of the investment companies in The President, New York University; Director of
Vanguard Group; Director of The Mead Pacific Gas and Electric Company and NACCO
Corporation and General Accident Insurance. Industries.
JOHN J. BRENNAN, President and Director* JAMES O. WELCH, JR., Director
President and Director of The Vanguard Retired Chairman of Nabisco Brands, Inc.,
Group, Inc. and of each of the investment retired Vice Chairman and Director of RJR
companies in The Vanguard Group. Nabisco; Director of TECO Energy, Inc.
ROBERT E. CAWTHORN, Director J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer, Chairman and Director of Rohm & Haas Company;
Rhone-Poulenc Rorer, Inc.; Director of Director of Cummins Energy Company, Vanderbilt
Immune Response Corp. and Sun Company, Inc.; University, and Trustee of the Culver
Trustee, Universal Health Realty Income Educational Foundation.
Trust. RAYMOND J. KLAPINSKY, Secretary*
BARBARA BARNES HAUPTFUHRER, Director Senior Vice President and Secretary of The
Director of The Great Atlantic and Pacific Vanguard Group, Inc.; Secretary of each of the
Tea Company, Alco Standard Corp., Raytheon investment companies in The Vanguard Group.
Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co. RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of
BRUCE K. MACLAURY, Director each of the investment companies in The
President, The Brookings Institution; Vanguard Group.
Director of Dayton Hudson Corporation,
American Express Bank, Ltd. and The St. Paul KAREN E. WEST, Controller*
Companies, Inc. Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies
BURTON G. MALKIEL, Director in The Vanguard Group.
Chemical Bank Chairman's Professor of ---------------
Economics, Princeton University; Director of *Officers of the Fund are "interested persons"
Prudential Insurance Co. of America, Amdahl as defined in the Investment Company Act of
Corporation, Baker Fentress & Co., Jeffrey 1940.
Co. and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., Director
President, Chief Executive Officer and
Director of NACCO Industries, Inc.; Director
of The BFGoodrich Company, The Standard
Products Company and The Reliance Electric
Company.
</TABLE>
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 Vanguard Funds by third parties. The
fees charged to shareholders in the redemption of capital shares of the Fund are
credited by Vanguard to the respective Portfolio (except for the Utilities
Income Portfolio) and are utilized to reduce the cost of such services. The
Utilities Income Portfolio does not assess a redemption fee; its costs for
corporate, management and administrative services during the period ended
January 31, 1994 were $1,707,000. During the year ended January 31, 1994 the
Fund's share of these costs for the other Portfolios was completely offset by
the 1% fee charged on redemptions from the Fund for all Portfolios (except for
the Utilities Portfolio) of the Fund.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors 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 their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard 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 Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution
8
<PAGE> 71
expense rate for the Group, and that no Fund shall incur annual distribution
expenses in excess of 20/100 of 1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard provides investment advisory services to Vanguard
Money Market Reserves, Vanguard Institutional Money Market Portfolio, Vanguard
Municipal Bond Fund, several Portfolios of Vanguard Fixed Income Securities Fund
and Vanguard's State Tax-Free Funds (California, New York, New Jersey, Florida,
Ohio and Pennsylvania). The compensation and other expenses of this staff are
paid by the Portfolios and Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund will pay each Director who
is not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended January 31, 1994 the Fund paid
approximately $9,000 in Director's fees. Directors who are also Officers receive
no remuneration for their services as Directors. The Fund's Officers and
employees are paid by Vanguard which, in turn, is reimbursed by the Fund, and
each other Fund in the Group, for its proportionate share of Officers' and
employees' salaries and retirement benefits. The Fund's proportionate share of
remuneration paid by Vanguard (and reimbursed by the Fund) during the fiscal
year to all Officers of the Fund, as a group, was approximately $84,941.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard are permitted to make pre-tax basic contributions in a maximum amount
equal to 4% of total compensation. Vanguard matches the basic contributions on a
100% basis. The Fund's proportionate share of benefits paid by Vanguard under
its retirement and thrift plans to all Officers of the Fund, as a group, during
the fiscal year ended January 31, 1994 was approximately $11,663.
DIRECTORS' RETIREMENT FEES A Retirement Plan for Directors has been
implemented to provide a fee to retired Directors equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Director's retirement for a period of 10 years or until a
retired Director's death.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH WELLINGTON MANAGEMENT COMPANY The Fund
employs Wellington Management Company ("WMC") under an investment advisory
agreement dated as of May 1, 1984 to manage the investment and reinvestment of
the assets of the Fund's Energy, Health Care, and Utilities Income Portfolios
and to continuously review, supervise and administer each Portfolio's investment
program. WMC discharges its responsibilities subject to the control of the
officers and Directors of the Fund.
Under the investment advisory agreement, the three Portfolios are required
to pay the Adviser an aggregate fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the aggregate average month-end net assets of the
Portfolios for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------------------------------------------------------------------- ------
<S> <C>
First $100 million.............................................................. 0.300%
Next $150 million............................................................... 0.200%
Next $250 million............................................................... 0.150%
Next $500 million............................................................... 0.125%
Over $1 billion................................................................. 0.100%
</TABLE>
The advisory fee is based on the total assets of the Portfolios and is
allocated to each Portfolio based on the relative net assets of each. In
addition, once the advisory fee to WMC is calculated for the five Portfolios
under this schedule, the total fee will be reduced in order that the advisory
fee paid by the Utilities Income Portfolio does not exceed 0.125%. During the
years ended January 31, 1992, 1993 and 1994 the Fund paid to WMC advisory fees
totaling $1,409,000, $1,481,000 and $2,079,000 respectively, which represented
an effective annual rate of .25 of 1%, .16 of 1%, .14 of 1% respectively, of
average net assets of the Energy, Health Care, and Utilities Income Portfolios.
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<PAGE> 72
WMC's fees during the fiscal years ended January 31, 1992, 1993 and 1994
were payable under a prior investment advisory agreement. The assets on which
advisory fees for the 1994 fiscal year were based included the Service Economy
and Technology Portfolios, which are no longer in existence.
The current agreement will continue until May 30, 1995 and will be
renewable thereafter, for successive one year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, WMC may continue to serve as investment
adviser to each Portfolio which approved the agreement, and to any Portfolio
which did not approve the agreement until new arrangements have been made. The
agreement is automatically terminated if assigned, and may be terminated by any
Portfolio without penalty, at any time, (1) either by vote of the Board of
Directors or by vote of the outstanding voting securities of the Portfolio on
sixty (60) days' written notice to WMC, or (2) by WMC upon ninety (90) days'
written notice to the Fund.
DESCRIPTION OF WMC WMC is a Massachusetts general partnership, of which
the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland, and John B. Neff.
INVESTMENT ADVISORY AGREEMENT WITH M & G GROUP P.L.C. The Fund has also
entered into an investment advisory agreement with M & G Investment Management
Limited ("M & G"), effective February 1, 1987 to manage the assets of the Gold &
Precious Metals Portfolio. Under this agreement M & G manages the investment and
reinvestment of the assets of the Gold & Precious Metals Portfolio and
continuously renews, supervises and administers the Portfolio's investment
program. M & G will discharge its responsibilities subject to the control of the
officers and Directors of the Fund.
DESCRIPTION OF M & G M & G is a wholly-owned subsidiary of the M & G Group
P.L.C. M & G Group P.L.C. is a public company whose shares are quoted on the
London Stock Exchange. Kleinwort, Benson Limited, a merchant bank, and the Esmee
Fairbairn Charitable Trust own respectively 42% and 32% of
total shares outstanding. The remaining 26% of shares are held by individuals,
nominees, pension plans and
M & G employees.
The Gold & Precious Metals Portfolio will pay M & G a fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the aggregate average month-end net assets
of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------------------------------------------------------------------- ------
<S> <C>
First $100 million.............................................................. 0.30%
Next $300 million............................................................... 0.25%
Over $400 million............................................................... 0.20%
</TABLE>
During the years ended January 31, 1992, 1993 and 1994, the Gold & Precious
Metals Portfolio paid an advisory fees of $477,000, $506,000, and $924,000
respectively, to M & G which represented an effective annual rate of .28 of 1%,
.28 of 1%, and .22 of 1% respectively, of average net assets.
SECURITIES TRANSACTIONS
The investment advisory agreements with WMC and M & G authorize the
investment adviser (with the approval of the Fund's Board of Directors) to
select the brokers or dealers that will execute the purchases and sales of
securities for the Fund's Portfolio(s) and directs the investment adviser to use
its best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolio(s). Each investment adviser
has 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.
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<PAGE> 73
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information, and provide other services in addition to execution services to the
Fund and/or the investment adviser. Each investment adviser considers the
investment services it receives useful in the performance of its obligations
under the agreement but is 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 Fund's Board of Directors, each investment adviser 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 investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser 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. An investment adviser will only pay such
higher commissions if it believes 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 investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Fund and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
The total brokerage commissions paid by each of the Fund's Portfolios
during the fiscal years ended January 31, 1992, 1993 and 1994 totaled $700,790,
$1,346,501, and $3,334,211, respectively.
Some securities considered for investment by one Portfolio may also be
appropriate for the other Portfolios and the other Funds and/or clients served
by the investment advisers. If purchase or sale of securities consistent with
the investment policies of a Portfolio, the other Portfolios and/or one or more
of these other Funds or clients are considered at or about the same time,
transactions in such securities will be allocated among the Portfolios and the
several Funds and clients in a manner deemed equitable by the respective
investment adviser. Although there will be no specified formula for allocating
such transactions, the allocation methods used, and the results of such
allocations, will be subject to periodic review by the Fund's Board of
Directors.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund or any Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent investments
for certain fiduciary accounts such as employee benefit plans or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
STOCK CERTIFICATES Your purchase will be made in full and fractional
shares of a Portfolio calculated to three decimal places. Shares are normally
held on deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the
11
<PAGE> 74
trouble of safe-keeping the certificates, and saves the Fund the cost of issuing
certificates. Except in the case of the Utilities Income Portfolio, share
certificates are available at any time upon written request at no additional
cost to shareholders. No certificates will be issued for the Utilities Income
Portfolio or for any fractional shares of the Fund's other Portfolios.
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 is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
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% or the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including
Vanguard Specialized Portfolios, Inc., may, from time to time, use one or more
of the following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and 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 and the
Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
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.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
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<PAGE> 75
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- 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 -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely used benchmark for small capitalization common
stocks.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 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 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND 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 10 years.
The index has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, 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 Analytical Services, 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 Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, 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.)
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<PAGE> 76
RUSSELL 3000 INDEX -- consists of 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.
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.
YIELD AND TOTAL RETURN
The yield* of each Portfolio of the Fund for the 30 day period ended
January 31, 1994 was as follows:
<TABLE>
<S> <C>
Energy Portfolio..................................... 1.78%
Gold & Precious Metals Portfolio..................... N/A
Health Care Portfolio................................ 1.48%
Utilities Income Portfolio........................... 5.12%
*Yield is calculated daily.
</TABLE>
The average annual total return of each Portfolio of the Fund for the
one-and five-year periods ended January 31, 1994 and since the inception of each
Portfolio on May 23, 1984 was as follows.
<TABLE>
<CAPTION>
YEAR ENDED FIVE YEARS ENDED
JANUARY 31, 1994 JANUARY 31, 1994 SINCE INCEPTION**
---------------- ---------------- -----------------
<S> <C> <C> <C>
Energy Portfolio*....................... +26.03% +12.85% +12.25%
Gold & Precious Metals Portfolio*....... +87.35% +9.76% +6.79%
Health Care Portfolio*.................. +20.00% +19.54% +20.74%
Utilities Income Portfolio.............. +13.08% -- +16.28%
</TABLE>
*Includes 1% portfolio redemption fee.
**Inception for Utilities Income Portfolio, May 15, 1992; inception for all
other Portfolios, May 23, 1984.
Total return is computed by finding the average compounded rate of return
over the one year period set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended January 31, 1994,
including the financial highlights for each of the five fiscal years in the
period ended January 31, 1994, as applicable, appearing in the Vanguard
Specialized Portfolios Annual Report to Shareholders, and the report thereon of
Price Waterhouse, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Fund's 1994 Annual Report to Shareholders is enclosed with this Statement of
Additional Information.
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