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VANGUARD
SPECIALIZED PORTFOLIOS
ANNUAL REPORT 1994
[PHOTO]
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A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major
asset classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in
history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES BAR CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
-----------------------------------
1973 1983 1994
- ------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- -------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
----------------------------------
1973 1981 1993
- -----------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- -----------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD SPECIALIZED PORTFOLIOS SEEKS TO MEET THE NEEDS OF LONG-TERM INVESTORS
WHO WISH TO CONCENTRATE IN SPECIFIC SECTORS OF THE STOCK MARKET AND ASSUME
ABOVE-AVERAGE RISKS IN DOING SO. THE HEALTH CARE, SERVICE ECONOMY, AND
TECHNOLOGY PORTFOLIOS ARE DESIGNED FOR INVESTORS WHO BELIEVE THAT THESE SECTORS
WILL PROVIDE ABOVE-AVERAGE LONG-TERM CAPITAL APPRECIATION. THE GOLD & PRECIOUS
METALS AND ENERGY PORTFOLIOS ARE DESIGNED FOR THOSE SEEKING TO INVEST IN
COMMODITY-LINKED STOCKS AS A HEDGE AGAINST SUBSTANTIAL LONG-TERM INFLATION. THE
UTILITIES INCOME PORTFOLIO IS DESIGNED FOR INVESTORS SEEKING CURRENT INCOME AND
THE POTENTIAL FOR MODERATE GROWTH OF CAPITAL AND INCOME.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
It is fair to describe the past fiscal year ended January 31, 1994, as the best
in the history of Vanguard Specialized Portfolios. Each of our five "regular"
Portfolios earned "double-digit" total returns, and four provided
greater-than-market returns. Our Gold & Precious Metals Portfolio, after years
of lassitude, turned in a stellar return of +89.2%.
Aided by strong returns in favorable financial markets, the assets of
Vanguard Specialized Portfolios rose by $1.1 billion, from $1.4 billion a year
ago to $2.5 billion at fiscal year-end. Dominating this growth was our
Utilities Income Portfolio, introduced less than two years ago and with present
assets of $738 million. Not far behind are our Health Care and Gold & Precious
Metals Portfolios, each with more than $600 million of assets. The assets of
the Energy Portfolio totaled $339 million, and the assets of the Service
Economy and the Technology Portfolios totaled, respectively, $35 million and
$87 million at year-end.
This table compares the total returns (capital change plus income) of
our Portfolios with their customary unmanaged benchmarks: for our regular
equity Portfolios, the Standard & Poor's 500 Composite Stock Price Index; for
the Gold & Precious Metals Portfolio, the Morgan Stanley Capital International
Gold Mines Index.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Total Return
-----------------
Fiscal Year Ended
Portfolio January 31, 1994
- ----------------------------------------------------------------------
<S> <C>
HEALTH CARE + 21.2%
SERVICE ECONOMY + 12.4
TECHNOLOGY + 14.6
ENERGY + 27.3
UTILITIES INCOME + 13.1
- ----------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX + 12.9%
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
GOLD & PRECIOUS METALS + 89.2%
- ----------------------------------------------------------------------
MSCI GOLD INDEX +121.5%
- ----------------------------------------------------------------------
</TABLE>
The components of each Portfolio's return, including the change in net asset
value, income dividends, and any capital gains distributions, are presented in
a table on page 7 of this Report.
[PHOTO]
IMPORTANT CHANGES TO BE PROPOSED
Vanguard Specialized Portfolios (VSP) will celebrate its tenth birthday on May
23, 1994. We have had a decade to appraise the effectiveness of our
"Specialized Fund" concept, the transaction activity of the shareholders we
have attracted, and the ability of our managers to provide competitive relative
returns.
Despite our overall success, some disquieting themes have emerged,
including uneven investment performance and high fund share turnover. The net
result is that we will soon be proposing to you a number of important changes
in VSP. The major changes are: (1) the merger of our Technology and Service
Economy Portfolios into two larger, more diversified Vanguard growth
portfolios; and (2) the revision of our handling of the 1% redemption
fee--designed to protect long-term investors by applying a penalty to
short-term traders--that is now levied only when a shareholder leaves the
entire VSP group. These matters are reviewed in a message on pages 8-9 of this
Report.
(continued)
1
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[CUMULATIVE PERFORMANCE GRAPH - GROWTH VERSUS VALUE -- SEE EDGAR APPENDIX]
THE YEAR IN THE STOCK MARKET
As noted at the outset, the fiscal year ended January 31, 1994, was a good year
for stocks in the aggregate. The Standard & Poor's 500 Index provided a return
of +12.9%, nicely surpassing its long-term (since 1926) average total return of
+10.3%. (This 68-year historical span is by far the longest of any diversified
stock market index.) With strong performance by smaller and medium-sized
corporations, the all-market Wilshire 5000 Index enjoyed a return of +13.4%.
During the year, the market's returns accumulated gradually and with
relative consistency, inch-by-inch, step-by-step, month-by-month. There were
neither explosive rises nor precipitate declines. It is probably fair to say
that such a steady course is the exception rather than the rule in market
history. It remains a virtual certainty that most years will witness the kind
of spasmodic market action--and hence the higher volatility and risk--that has
been typical of the stock market in the past.
The precipitating factor in the market's advance almost certainly was
the decline in long-term interest rates. The yield on long-term corporate
bonds, which opened the fiscal year at 7.8%, fell to 7.0% by fiscal year-end,
engendering a price increase of about +9%. This sharp rate decline seemed to be
driven largely by two factors: (1) a stubbornly weak economic recovery that
encouraged the Federal Reserve to make ample credit available; and (2)
continuing evidence that inflation remained under control. Indeed, the U.S.
Consumer Price Index (CPI) increased 2.5% during the past twelve months, down
from 3.3% during the prior twelve-month period. As a result, despite the
decline in interest rates, "real" yields (nominal yields less the inflation
rate) on long-term bonds remain at healthy levels.
Since one factor that investors consider in setting their asset
allocations is the relative yield of stocks versus bonds, falling bond yields
provided impetus to stock prices. During the past twelve months, the dividend
yield on stocks (as measured by the Standard & Poor's 500 Index) declined from
2.8% to 2.6%, enough, in and of itself, to add +8% to the price of the stocks
in the Index. This upward revaluation, when added to a dividend yield that is
extremely low by historical standards, accounted for the lion's share of the
+12.9% total return achieved by the Standard & Poor's 500 Index.
What was most interesting about fiscal 1994 was the striking bias that
the stock market exhibited toward "value" stocks--usually defined as those with
above-average dividend yields and below-average price-earnings ratios--over
"growth" stocks--those that provide lower yields but presumably richer
prospects for sustainable earnings growth. (The Standard & Poor's 500 Index is
divided so that one-half of its total market capitalization is included in each
category.) The disparity between the two groups' returns during the
twelve-month period was little short of astonishing: value stocks provided a
return of +20.8%, while growth stocks provided a return of but +5.0%.
I should note that, based on the historical record, such dichotomies are
unlikely to persist. As shown in the chart above--which contrasts the
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cumulative returns of the Standard & Poor's 500 Index, Growth Index, and Value
Index over the past five years--growth stocks were favored during the first
three years, only to lag value stocks during the final two years. For the full
period, however, the returns for each market segment have been remarkably
consistent--an annual return of +14.0% for the growth segment and +13.0% for
the value segment. Importantly, despite the general lag in growth stocks, the
various sectors of the overall stock market that our Portfolios emphasize
provided outstanding returns.
* THE ENERGY PORTFOLIO
The Energy Portfolio's return of +27.3% for the fiscal year was one of the best
in our history, just ahead of competitive norms (+26.7%) and more than double
the +12.9% return of the Standard & Poor's 500 Index. We were particularly
favored by our large position in foreign energy stocks (23% of net assets
versus 0% for the Standard & Poor's 500 Index), many of which provided returns
in the +25% to +40% range.
The most notable event affecting energy stocks during the year was the
decline in oil prices, which fell from a high of $20.50 per barrel last March
to a low of $14.00 in December. With the demand for oil remaining strong,
excess production was the main cause of lower prices. By virtue of a general
under-investment in new oil production during the past few years, most industry
commentators expect rising oil prices over the next few years.
(continued)
[CUMULATIVE PERFORMANCE GRAPH - ENERGY PORTFOLIO -- SEE EDGAR APPENDIX]
[CUMULATIVE PERFORMANCE GRAPH - HEALTH CARE PORTFOLIO -- SEE EDGAR APPENDIX]
3
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[CUMULATIVE PERFORMANCE GRAPH - GOLD & PRECIOUS METALS PORTFOLIO -- SEE EDGAR
APPENDIX]
[CUMULATIVE PERFORMANCE GRAPH - TECHNOLOGY PORTFOLIO -- SEE EDGAR APPENDIX]
While we have nicely topped our peer group of funds over our lifetime,
we have fallen short of the results of the Standard & Poor's 500 Index. The
principal reason for this shortfall is the remarkable decline in the general
level of inflation, as reflected in lower energy prices.
* THE HEALTH CARE PORTFOLIO
The Health Care Portfolio enjoyed a truly remarkable year, with its total
return of +21.2% well ahead of the +13.4% return of its peer group. Our
success was built on several factors. First, we avoided many of the
worst-performing U.S. drug manufacturers, whose stock prices fell early in the
year as these companies were faced with the implications of the
Administration's health care proposals. Second, the prices of many
biotechnology stocks (of which we hold few) also fell from the lofty heights
that they reached relative to their earnings, as some rationality returned to
the market. Finally, we benefited from our large holdings in international
companies, which fared better than their U.S. counterparts.
We enjoyed some nice successes in three of our key industry
concentrations: specialty pharmaceuticals (21% of our Portfolio) and medical
services and medical products (each 16%). Our position in international health
care stocks (19% of our Portfolio) also pulled a laboring oar in our success.
In contrast, our holdings in the
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major pharmaceutical companies (24%) were about neutral.
You will note that our lifetime return reflects a solid premium over the
Standard & Poor's 500 Index, one so large that it would be unwise to expect
that it will be sustained in the years ahead. More to the point, we have now
eked out a small lifetime gain over our peers. Since their portfolios tend to
be riskier and more aggressive, this is a fine accomplishment. We have achieved
our success from "slow and steady" growth, rather than volatile short-term
swings in net asset value.
* THE GOLD & PRECIOUS METALS PORTFOLIO
After years in the depths, gold stocks soared skyward during the past twelve
months. Our Portfolio provided a stunning return of +89.2%, nicely ahead of the
+80.0% return of the average gold fund, but well behind the +121.5% return for
the Morgan Stanley Gold Mines Index.
The strongest area for gold stocks was South Africa, based in part on
the developing national stability, albeit through a difficult and contentious
political process. The Index includes only South African gold companies; our
Portfolio's assets are more diversified, with a large position in South Africa
(32% of net assets), but also with hefty positions in North America (31%) and
Australia (24%).
That our lifetime rate of return exceeded both that of our peer group
and the Morgan Stanley Gold Mines Index is gratifying to a point. That all of
the returns are modest to a fault is largely the result of an extremely low
rate of worldwide price inflation from 1988 through 1993, which depressed gold
prices (generally in the $350 to $400 range). During fiscal 1994, inflation
expectations--if not the reality--rose sharply, reflected in increases in the
prices of many commodities. Indeed the gold price climbed from $331.66 to
$381.60. We see no reason that a relationship between gold stock performance
and inflation expectations will not continue in the future, and shape much of
our Portfolio's return.
* THE TECHNOLOGY PORTFOLIO
Fiscal 1994 was a fine one for technology stocks, which as a group provided
more than double the +12.9% return of the Standard & Poor's 500 Index.
Unfortunately, our Portfolio substantially lagged its peer group, due largely
to our underweighting in the telecommunications sector. These stocks were
strong performers over the past twelve months, as the multimedia boom "took
off."
Our Portfolio's results have also been quite disappointing over the long
term relative to both our peer group and the Standard & Poor's 500
[CUMULATIVE PERFORMANCE - SERVICE ECONOMY PORTFOLIO -- SEE EDGAR APPENDIX]
5
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[CUMULATIVE PERFORMANCE - UTILITIES INCOME PORTFOLIO -- SEE EDGAR APPENDIX]
Index. As a result of these shortfalls, your Officers and Directors considered
the replacement of Wellington Management Company as the Fund's adviser.
However, following a review of the entire Vanguard Specialized Portfolios
concept, covering ten years of our history, we decided to eliminate the
Portfolio from VSP, and will propose that it be merged into Vanguard/Explorer
Fund this spring. (Please see pages 8-9 for more details.)
* THE SERVICE ECONOMY PORTFOLIO
Our return for the 1994 fiscal year was disappointing. While it was generally a
good year for service-oriented stocks relative to the Standard & Poor's 500
Index, our Service Economy Portfolio actually fell short of the market's return
by -0.5%, and turned in a gain only about one-half that achieved by our
(admittedly small and very diverse) peer group. Given that these funds focus on
a much wider range of industries--from defense stocks to retailing to
silver--any comparison among these competitors is of limited value.
Our long-term results also remain disappointing relative to our peer
group and the Standard & Poor's 500 Index. As was the case with the Technology
Portfolio, your Officers and Directors considered the replacement of Wellington
Management Company as the Fund's adviser. However, again following a review of
the entire Vanguard Specialized Portfolios concept, we decided to eliminate the
Portfolio from VSP, and will propose that it be merged into Vanguard/Morgan
Growth Fund this spring. (Please see pages 8-9 for more details.)
* THE UTILITIES INCOME PORTFOLIO
The Utilities Income Portfolio (+13.1%) marginally topped the return of the
Standard & Poor's 500 Index (+12.9%) during the fiscal year, and earned a solid
advantage over our peer group (+11.8%). It was an unusual, and in many ways
difficult, year for utility stocks. While we tend to think of utility stocks as
a "group," it is not an entirely homogeneous one. For example, during the
fiscal year, natural gas stocks provided a total return of +25.2% and
telecommunications stocks a total return of +18.4%, while the return on the
stocks of electric utilities was but +6.9%.
This mixture of returns was not particularly helpful to the performance
of the Portfolio. While we were aided by our overweighting in the natural gas
sector relative to the utility group as a whole (13% of equities for the
Portfolio versus 8% for the Standard & Poor's Utilities Index), we were held
back by our overweighting in the market-lagging electric utility stocks (49%
versus 41%) and our underweighting in the better-performing telecommunication
stocks (34% versus 51%). Our
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position in long-term utility bonds (19% of Portfolio net assets) had a
marginally negative effect on our total return, but helped us to meet our
income objective.
As you know, this Portfolio began operations less than two years ago
(May 1992), and our lifetime record is somewhat more impressive, with a rate of
return that has nicely exceeded (by +3.8% annually) that of our peer group, and
substantially topped (by +4.9% annually) the return of the Standard & Poor's
500 Index. This period, of course, was marked by sharp declines in interest
rates, which favored the returns of "yield-sensitive" stocks such as those held
by the Portfolio.
Given the relative newness of our Utilities Income Portfolio, as well as
the disconcerting decline in the Utilities Index since mid- September 1993, we
have included a special section entitled "Plain Talk About The Utilities Income
Portfolio," which appears on pages 9-10 of this Report.
* IN SUMMARY
But for a brief interlude in 1990, the equity markets have risen fairly
steadily since the beginning of the 1980s. Stock yields are now near all-time
historical lows, and interest rates are at their lowest levels in two decades.
So, it would be imprudent not to offer a word of caution about the stock and
bond markets, which are surely both due for their share of difficult bumps
along the way.
What should an investor do in this environment? If you have a long-term
investment horizon and are willing to accept with equanimity the inevitable
peaks and valleys of the stock market, equities should remain a major component
of your portfolio. Funds emphasizing particular sectors of the financial
markets--typically much more volatile than the stock market as a whole--may
serve well for a portion of your total investment portfolio. While the
volatility risk incurred in our Utilities Income Portfolio is muted relative to
the other Specialized Portfolios, utility stocks are particularly sensitive to
changes in the level of interest rates. In any event, you should always
maintain an appropriate balance among stocks, bonds, and short-term reserves,
and additions to your equity investments should be made gradually over time,
rather than "at one fell swoop."
Whatever course you choose, we would recommend that you focus not on
annual fluctuations in absolute and relative performance, but on the long term.
Timing the markets is an inevitably fallible endeavor. We therefore believe
that, provided your overall account is soundly balanced, "stay the course" is
virtually always the best advice.
Sincerely,
/S/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
February 24, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Twelve-Month
Net Asset Value Per Share ----------------------
--------------------------------- Income Capital Twelve-Month
Portfolio January 31, 1993 January 31, 1994 Dividends Gains* Total Return
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE $32.66 $36.51 $.76 $1.97 +21.2%
SERVICE ECONOMY 22.36 23.94 .22 .93 +12.4
TECHNOLOGY 18.87 19.55 .13 1.75 +14.6
ENERGY 13.82 15.77 .29 1.38 +27.3
GOLD & PRECIOUS METALS 7.29 13.58 .21 -- +89.2
UTILITIES INCOME 11.18 11.67 .56 .40 +13.1
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes both long-term and short-term capital gains distributions.
7
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PLAIN TALK ABOUT THE PROPOSED CHANGES TO VSP
Nearly a decade ago, on May 23, 1984, Vanguard Specialized Portfolios commenced
operations. The Fund was designed primarily for investors with relatively
long-term time horizons, who desired to invest a portion of their own
portfolios in relatively narrow market segments in the search for above-average
growth (e.g., the Health Care Portfolio) or for hedging against the risks of
high worldwide inflation (e.g., the Gold & Precious Metals Portfolio).
Given our objective of limiting exchanges to the Vanguard Specialized
Portfolios themselves, we determined that a 1% redemption fee would be
payable--to benefit the Fund--when a shareholder moved out of the Portfolios
either by liquidation or by exchange of shares into another (non-VSP) Vanguard
Fund. (A Specialized Money Market Portfolio account was created so that no 1%
charge would be assessed for VSP shareholders who desired a temporary cash
haven.) This 1% charge remains today, although it does not apply to our
Utilities Income Portfolio (created in May 1992) since this Portfolio was
envisioned as one in which significant exchanges were deemed unlikely, given
its income (rather than growth) objective.
With the passage of a decade, we have carefully reviewed the record of
Vanguard Specialized Portfolios and have two major observations.
* First, our experience shows a high level of shareholder exchange activity
among the VSPs, indicating that there are relatively few "sector fund"
investors who are interested in long-term investing. What is more,
shareholder assets often have been invested counterproductively, moving
into a Portfolio after its net asset value has increased substantially and
out of a Portfolio after its net asset value has fallen.
* Second, investors seem to prefer a sector fund concept that requires not five
or six relatively diversified portfolios, but perhaps 30 portfolios or
more, narrowly focused on specific industries so that an investor looking
for the latest "hot" sector of the marketplace is never without an
alternative.
A strategy which entails high levels of shareholder activity combined with
highly concentrated portfolios, even if valid for a handful of more speculative
investors, simply does not comport with Vanguard's long-term strategy. Rather,
we think our strategy is best-served by focusing on broadly diversified equity
portfolios, while providing just a few clearly defined sector funds with
compelling investment characteristics, and then limiting excessive exchange
activity among these funds. In short, we strive to serve the long-term
investor.
Our review of our first decade, of course, also included an evaluation of
each Portfolio's performance. We found the performance results achieved by the
managers of our Technology and Service Economy Portfolios to be unsatisfactory.
Consequently, we will promptly propose to shareholders at a coming Special
Meeting that the Technology Portfolio be merged into Vanguard/Explorer Fund and
that the Service Economy Portfolio be merged into Vanguard/Morgan Growth Fund.
(Each of the two Vanguard Specialized Portfolios presently has assets of less
than $100 million; each of the Portfolios into which they would merge has
assets in the $1 billion range.)
The Board of Directors has also approved a change in the application of
the 1% redemption (and exchange) fee. The fee will apply to transactions that
take place on shares that are held in the VSP Portfolios for less than one year
(using your "oldest" holdings as the first to be redeemed), rather than as a
permanent 1% charge whenever a shareholder leaves the VSP "family." This new
policy will take effect beginning on June 3, 1994, and will apply only to
shares purchased on or after this date. To avoid any possible disadvantage to
existing VSP shareholders, the 1% fee will be waived, beginning on June 3,
1994, for any shares purchased prior to the June 3 policy change.
We would emphasize that, as at present, no 1% redemption or exchange fee
will be assessed on the Utilities Income Portfolio. Also, under the new
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and more limited concept of VSP, the Specialized Money Market Portfolio account
will no longer be required. Exchanges from VSP may be made into Vanguard's
"regular" money market funds at any time, under the conditions outlined above.
In summary, the marketplace did not accept our initial concept of Vanguard
Specialized Portfolios, and we determined not to get into the speculative
sector fund "game." What is more, the performance of two of our Portfolios
simply did not "measure up" to Vanguard's standards. These are the facts that
led us to propose the changes discussed herein. We are confident that the
concept of the "new" Vanguard Specialized Portfolios is valid and viable,
appealing to investors with longer time horizons who wish to focus on
relatively narrow market segments for possible growth, or inflation protection,
or enhanced income. We will keep you fully informed as we implement these
changes.
PLAIN TALK ABOUT THE UTILITIES INCOME PORTFOLIO
The net asset value of our Utilities Income Portfolio was $10.00 per share when
it was first introduced on May 15, 1992. As it happens, the timing of our new
offering was fortuitous, with the net asset value rising steadily, almost month
after month, through mid-September 1993. Our net asset value reached a high of
$12.92 per share on September 13, 1993.
The Utilities Income Portfolio was designed to meet an important need: to
provide a yield- oriented equity fund that would enable investors to enhance
their income by relying on the generally durable and gradually increasing
nature of utility dividends over the long term, and to do so without the larger
risks involved in many other types of stocks with above-average yields.
The environment for utility stocks was highly favorable during the
Portfolio's first one and one-half years of operations. Utility stocks are
considered "interest rate sensitive" (that is, changes in their yields and
prices are often caused by changes in interest rates), as suggested in the
yield comparison chart on page 10. More specifically, interest rates moved
steadily lower from the date of our inception through mid-October 1993. The
yield on the 10-year U.S. Treasury bond, for example, fell from 7.4% on May 14,
1992, to 5.2% on October 15, 1993, causing a +17% rise in bond prices. The
prices of utility stocks followed suit, with the Standard & Poor's Utility
Index rising +19% during the same period.
With utility stocks positioned to meet the needs of investors requiring
higher income, and at the same time giving such a favorable account of
themselves in the marketplace, the Utilities Income Portfolio flourished. Tens
of thousands of investors put their money to work in the Portfolio, and its
initial asset base of $261,000 grew steadily to a total of more than $800
million in mid-October 1993.
At this point, what might have been unexpected by many investors happened.
The course of interest rates reversed and turned upward, with commensurate
declines in the prices of bonds and utility stocks alike. The yield on the
10-year U.S. Treasury bond rose to 5.7% by January 31, 1994, engendering a
price decline of -4%. The net asset value of the Utilities Income Portfolio
declined to $11.67 per share, down 10% from the September high, but still far
above the initial net asset value of $10.00 per share. On balance, since the
Portfolio's inception, our annual rate of total return (capital change plus
income) was +17.2%, compared with a
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[YIELD COMPARISON GRAPH - 1980-1993 -- SEE EDGAR APPENDIX]
return of +13.4% for the average utility mutual fund and +12.3% for the broad
stock market, as measured by the Standard & Poor's 500 Stock Index. Our
"lifetime" record, then, has met--and exceeded--most competitive tests.
Nonetheless, since the September peak in our net asset value, the entry of
new investors to the Portfolio has dropped sharply; indeed, share
liquidations--presumably largely by investors who purchased their shares near
the highs in net asset value--have occurred with some regularity. The
combination of reduced market prices for utility stocks and net share
liquidations has of course reduced the Portfolio's asset base. However, at the
present asset total of $738 million, we remain one of the largest mutual funds
investing in public utility stocks.
Despite the retracement since September of some of our earlier gains in
net asset value, we believe that long-term investors in utility stocks should
"stay the course." But they should accept the risks of utility stocks (i.e.,
the exposure to interest rate fluctuations and the imponderability of the
impact of the decisions made by the regulatory commissions in the various
states) if they seek the rewards of utility stocks (i.e., enhanced income and
the opportunity for long-term returns commensurate with these risks). While it
is difficult to quantify future risk-return relationships, it is not difficult
to quantify current yields. Today, the income yield on the Utilities Income
Portfolio is 4.6%; the income yield of the average equity mutual fund is 1.3%
(in each case, net of expenses). The challenging events of recent months in the
market for utility stocks have done nothing to disturb this underlying reality.
10
<PAGE> 13
REPORT FROM M&G INVESTMENT MANAGEMENT LIMITED
Following the significant improvement in fortunes that we discussed in the
Semi-Annual Report, the Gold & Precious Metals Portfolio finished the fiscal
year ended January 31, 1994, with an impressive +89.2% total return. While our
return is below that of the South African-based Financial Times Gold Index
(+214.6%) and the Morgan Stanley Gold Mines Index (+121.5%), it is nonetheless
a pleasing and impressive result, substantially outperforming the price of gold
bullion (+15.1%).
Our underperformance relative to the indices was due to the strong
recovery of the South African gold shares from a very low base. The Financial
Times will be introducing a new Global Gold Mines Index this year, which will
include Australian, North American, and Southern African sub sections and
therefore will be more representative of the international nature of the
industry. This Index will replace the old South African-based Index and, in our
opinion, will become the prime performance benchmark for gold-related funds.
It has been an interesting, exciting, and rewarding year in the gold
markets, brought about not only by continued physical demand for gold but also
by a major turnaround in investor sentiment. The first half of the fiscal year
was most impressive, as the gold sector recovered strongly from a low base.
This recovery was most evident in South Africa, where the turnaround was
particularly dramatic. The second half was hardly uneventful, with the gold
price actually trading above $400 in mid-August 1993, just prior to the
reorganization of currencies within the European Exchange Rate Mechanism. This
euphoria, however, was short- lived. When George Soros, the international
investor, announced he had realized his profits in the gold sector, the metal
price quickly lost its upward momentum and retraced some of its previous gains.
The market rapidly recovered from this oversold position and has continued to
firm in relatively quiet trading.
During the course of the Portfolio's 1994 fiscal year, our assets
increased dramatically, in part due to the excellent performance, but also due
to substantial new cash inflows. Consequently, the geographical distribution of
the Portfolio shows some change, with increased weightings in Australia and
South Africa, and a decline in the North American holdings. Also, the
percentage holding of physical bullion shows a major decline, as cash flow has
been primarily directed towards equities.
In this respect, we have tended to add to many of the Portfolio's existing
holdings, such as Newcrest Mining in Australia, and Cambior, Euro Nevada, and
Freeport Copper and Gold in North America. In each case we have confidence in
the company's management team and their future development plans. We have also
added extensively to the Portfolio's South African holdings, as the political
outlook has continued to improve and financial sanctions against the country
have now been lifted, just ahead of multi-racial elections in April 1994.
We have also continued to introduce new names into the Portfolio,
primarily in Australia and North America. In the Semi-Annual Report we spoke of
successful new Australian investments in Highlands Gold, Plutonic Resources,
and Golden Shamrock. Another interesting new holding in Australia, Star Mining
Corporation, recently acquired a 37.5% interest in Lena Gold, a Russian
joint-stock mining company which currently has some production but has massive
undeveloped gold reserves in Siberia. While it is only a junior company, we
have been impressed by the particularly strong executive and non-executive
management. The political risk is undoubtedly high, but this factor is more
than offset by the sheer size and scale of the reserve base. Additionally, the
use of modern technology and improved mining methods should yield impressive
results on the existing production base.
(continued)
11
<PAGE> 14
In North America, new holdings include Golden Star Resources and
Venezuelan Goldfields--both of which are particularly active in Latin
America--and Campbell Resources, a high-cost producer which is under new
management. In a similar vein, we have substantially increased the Portfolio's
holdings in Amax Gold, which also has all the hallmarks of an interesting
recovery situation.
Against a background of renewed interest and enthusiasm for gold and
gold-related investments, it has been a spectacular year for the Portfolio.
While it is always difficult, and at times dangerous, to speculate on the
future direction of the gold price, we hope that this new- found positive
attitude towards the gold sector continues. It is worth mentioning once again
that, regardless of the current market environment, it remains our intention to
keep the Portfolio substantially fully invested.
Respectfully,
David J. Hutchins
M&G Investment Management Ltd.
(Member of IMRO)
London, England
February 8, 1994
12
<PAGE> 15
REPORT FROM WELLINGTON MANAGEMENT COMPANY
* MARKET OVERVIEW
During Vanguard Specialized Portfolios' tenth fiscal year ended January 31,
1994, the stock market, as measured by the Standard & Poor's 500 Index,
advanced +12.9%, marking the sixth consecutive year of good gains for the
broader market averages. Domestic economic activity is well into the recovery
mode. The better economic underpinnings coupled with tight expense controls has
allowed corporate profits to grow at improved rates. International economies,
however, remain subdued. Interest rates are low and have provided a beneficial
wind to our financial markets. Although market valuations are high, the flows
of funds into equities are brisk and at record levels. With interest rates
appearing to be bottoming and valuations stretched, the stock markets will need
solid profit growth to continue their recent string of good returns to
investors.
Over the past year, the Utilities Income, Energy, Health Care, and
Technology Portfolios outperformed their respective unmanaged market indexes.
The Service Economy Portfolio delivered a return that was in line with the
broader market average.
* UTILITIES INCOME PORTFOLIO
The performance of utility stocks told two stories during the twelve months
ended January 31, 1994. From the end of January 1993, until September 1993,
utility stocks raced ahead strongly, propelled by the decline in long-term
interest rates and strong cash inflows into utility stocks by income-hungry
investors. Since September, utility stock performance has been notably weak
based on a reversal of several favorable fundamental factors, including a
persistent rise in long-term interest rates from 5.75% to nearly 6.50%.
Investor confidence in the tremendous economic strength reported in the fourth
calendar quarter shifted their focus away from slower-growing utilities and
toward cyclicals and international stocks.
Our performance in the Utilities Income Portfolio during fiscal 1994
reflected the performance of the average utility stock, as shown in the
following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Total Return
-----------------
Fiscal Year Ended
January 31, 1994
- ---------------------------------------------------------
<S> <C>
VSP UTILITIES INCOME PORTFOLIO +13.1%
- ---------------------------------------------------------
S&P UTILITY STOCK INDEX +13.4
- ---------------------------------------------------------
LEHMAN UTILITY BOND INDEX +10.5
- ---------------------------------------------------------
BENCHMARK* +12.9
- ---------------------------------------------------------
</TABLE>
* 80% S&P Utilities/20% Lehman Utility Index.
The average utility stock returned nearly 19% in the first nine months of the
fiscal year but lost about 5% of its value from the appreciated top.
Other than the fundamental factors of economic strength and interest rates
already mentioned, it might be worth sharing a few additional thoughts about
the current utility stock environment. In an environment in which investors
expect very strong economic growth, above-average growth in corporate profits,
rising rates of inflation, and rising interest rates, utility stocks--with
their normally modest earnings growth rates and interest rate sensitivity--are
typically disadvantaged. Furthermore, investors who were not satisfied with the
low yields available on money market-type instruments over the past few years
have been chasing yield-rich instruments, such as utility stocks, to perhaps
unsustainably high valuations. This process unfolded against a background of
utility regulatory commissions awarding lower and lower authorized rates of
return (which reflected the previously declining long-term interest rates) into
companies' rate structures, thereby pressuring earnings growth. The confluence
of all these factors is unusual, but clearly they have exerted short-term
pressure on utility stock prices.
There is another abnormal factor at play which will have longer-term
ramifications. Dramatic technology developments and shifting regulatory
attitudes are allowing competitive entry into utility markets which have
operated for nearly a
13
<PAGE> 16
half-century under the rules of regulated monopoly. For example, wireless
telecommunications (cellular, SMR, PCS, satellite) are competing against
traditional telephone utilities, while long distance companies, cable TV
operations, and competitive access providers are maneuvering to capture a share
of local telecommunications revenues. On the electricity side, non-utility
generators have contracted for and built gas- fired cogenerators, and
regulators have encouraged new competition through decisions which favor these
entrants. Furthermore, utility cost structures by region are remarkably
different, and the low-cost providers are seeking new markets in neighboring
territories.
All of these developments are quite visible. Utility investors have
reacted and utility companies are responding through cost reduction and other
strategic initiatives. Unfortunately, several of these initiatives, which
involve the telephone holding companies acting out of fear about their
traditional businesses, resulted in reckless overpayment to enter new
businesses. For example, Bell Atlantic has proposed the acquisition of
Tele-Communications Inc., the nation's largest cable TV provider, paying nearly
twelve times cash flow with its own stock as currency, which had been valued at
about six times cash flow. One could argue that telephone holding companies, in
providing capital to build out-of-region broadband communications ability, are
accelerating the competitive timetable.
Overpaying for cable TV companies, which are reaching maturity and which
are finding increasing regulation of their rates, makes little sense. We prefer
the strategies of companies, such as Pacific Telesis, which are "building
rather than buying." Pacific Telesis is divesting its "high-priced spread"
wireless operation (PacTel) and building its own broadband capability which
will be able, with regulatory approval, to deliver in its own region advanced
voice, video, and data services.
As you might have guessed, our portfolio strategy is to underweight
telecommunications, particularly those holding companies which are establishing
a pattern of excessively dilutive acquisitions. We believe that eventually the
market will recognize that the diluters are allocating assets to these exciting
growth areas but are unlikely to ever earn their cost of capital. We are
overweighting the natural gas areas, given the improving gas demand and
deliverability dynamics, and we are overweighting the electrics. The electrics
have their own competitive problems, but the market has recognized, perhaps
excessively so, the competitive threats as reflected in their declining stock
prices.
Our strategy, which has been in place for perhaps six months or more, has
not been rewarded in the marketplace. The short-term negative effect of this
strategy has been offset by other beneficial judgments in the portfolio, with
the combined effects having produced average performance through the year. We
acknowledge the risk in our current positioning but believe that reward will be
forthcoming.
* ENERGY PORTFOLIO
The Energy Portfolio gained +27.3% for the year, well ahead of the broad stock
market. During the year, oil prices were in a declining trend, with very low
prices (below $15.00 per barrel) prevailing since late November 1993. Natural
gas prices, however, were firm at the $2.00 per MCF level, and rose above that
level when cold weather arrived in the U.S. towards the end of the year.
Refining and marketing improved modestly in 1993.
The respectable performance of the energy sector during the last two
fiscal years results from the beneficial effects on earnings from cost-cutting
efforts and the recognition that natural gas is no longer in surplus in North
America. There is also good reason to believe that oil prices are currently
unduly depressed.
Looking forward, we see upward pressure on the price of oil. Demand growth
in emerging markets is high and of increasing importance. Prospects for
production growth outside OPEC are poor. Demand growth longer term will have to
be met by substantial investments in four countries in
14
<PAGE> 17
the Middle East (Saudi Arabia, Kuwait, Iran, and Iraq). It will be difficult
both financially and politically to make the necessary investments in that
region in a timely fashion.
With this outlook in mind, the Portfolio emphasizes companies with
above-average oil and gas production growth prospects, such as Exxon,
Amerada-Hess, Unocal, Pogo Producing Company, and Total. We also maintain our
exposure to Canadian natural gas producers, which supply a large part of the
incremental needs for gas in the United States, and oil service companies,
which are oriented towards the North American gas business. The refining
sector's profit improvement, which started in 1993, should continue in 1994.
Utilization rates are high in the U.S., and even modest demand growth creates
upward pressure on margins.
The Energy Portfolio, in our view, is well positioned to benefit from the
trends that we see developing in a worldwide economic recovery.
* HEALTH CARE PORTFOLIO
Despite the well-publicized difficult environment for health care stocks--which
was evident in the +0.1% return of the S&P Health Index --the Health Care
Portfolio had an excellent fiscal year, with a total return of +21.2%.
Our consistent, relatively conservative, and diversified approach to
building a health care portfolio worked well this year. We held few of the
worst-performing stocks and many of the rewarding issues. The international
sector was a major factor in this performance, with the biggest contributions
coming from Ciba, Schering, Zeneca, and Sandoz. Beckman Instruments, our
largest position in the medical products category, was a strong performer.
Humana (and its spinout, now Columbia Healthcare), HBO & Co, McKesson, and
National Medical Enterprises were important stocks in the Health Service
category. In Specialty Pharmaceuticals, we were gratified by the performance of
Genentech, Genetics Institute, Biogen, and Magainin. Our results in the Major
Pharmaceutical category were neutral versus the market.
It became abundantly clear during the past year that the U.S. health care
system will be reformed by market forces, independent of whatever legislation
comes out of Washington. In this new environment, management skill and new
product development will be even more important than before. In the long term,
we remain optimistic about the health care industry. After all, we are in the
midst of the "Golden Age" of medical research, and commercializing these
discoveries will ensure growth for many decades.
* SERVICE ECONOMY PORTFOLIO
For the fiscal year ended January 31, 1994, the Service Economy Portfolio
performed about in-line with the broad market but lagged competitive funds. The
total return for the Portfolio was +12.4%, compared to +12.9% for the S&P 500
Index and +21.5% for the competitive group average. Returns for the
cap-weighted and equal-weighted service indices were +10.2% and +15.6%,
respectively.
Stocks of broadcasting, banks, and computer service companies were the
best performers during the fiscal year. For example, Infinity Broadcasting,
Comcast, North American Mortgage, and Home Shopping Network all appreciated
over 50% during the period. Lagging stocks included selected computer stocks
and some transportation issues.
The outlook for the major sectors of the service economy remains fairly
positive, but valuation levels are less attractive than last year. Retail
companies should continue to benefit from improving economic conditions in
1994. Competition, however, remains intense, with square footage growth still
exceeding the sales gains. We continue to emphasize "every day low price"
retailers rather than companies that utilize frequent discounting. Media
company fundamentals should similarly continue to exhibit better advertising
volume and pricing within a stronger overall environment. The Portfolio
continues to overweight media stocks. Financial intermediaries probably will
show slowing but still above-average
15
<PAGE> 18
earnings growth in 1994. While net interest margins have probably peaked, the
prospect of modest asset growth should move earnings higher. Within the
financial sector, the Fund has decreased the bank/S&L position somewhat in
favor of insurance stocks, which ought to benefit from a turn in industry
pricing. The business service area is broad enough to have different cross
currents within the group. We are emphasizing the data processing out-sourcing
theme. Consumer services should have a reasonably positive outlook, with
selected telephone companies and medical cost control service firms generating
relatively favorable results. The largest holdings in the portfolio include
Federal National Mortgage Association, American International Group, Automatic
Data Processing, Capital Cities/ABC, Vodafone Group ADR, Foster Wheeler, First
Data Corp., and Telefonica de Espana ADR.
* TECHNOLOGY PORTFOLIO
For the twelve-month period ended January 31, 1994, technology stocks fared
better than the broader market averages. For the fourth consecutive year, the
Portfolio outperformed the S&P 500 Index with a total return of +14.6% versus
the +12.9% increase for the broader market. The year was a tale of two halves.
As we wrote in our mid-year report, the Portfolio's first-half performance
(-4.6% versus the S&P 500's +3.6%) was not up to our expectations, as the
combination of too many "torpedo" stocks and our disciplined approach to
valuation in a market that was preoccupied with momentum hampered our results.
These two factors evened out during the second half as the Portfolio's
performance improved (+20.1% versus +9.0% for the S&P 500) and was more in
keeping with our expectations.
Fundamentally, demand for technology goods and services remains mixed,
with good domestic activity being somewhat offset by weaker economies abroad.
Looking ahead, we are hopeful that European demand patterns are bottoming,
which should fuel the sector's growth later this year and into 1995. Also, it
appears that interest rates are bottoming, suggesting that the group's P/E
ratios are unlikely to witness further expansion, which places a greater burden
on earnings in order to garner stock price appreciation. We continue to expect
that technology stocks will be volatile.
Longer term, continued innovation in the areas of semiconductor,
telephone, software, and medical technology bodes well for technology
investors. Intellectual capital remains our most valuable resource, and
technology offers a vital key to unlocking and realizing its overwhelming
potential. We remain optimistic that the technology sector can continue to
provide investors with ample opportunities to prosper in the 1990s.
Respectfully,
Edward P. Owens, Senior Vice President
Health Care Portfolio Manager
Matthew E. Megargel, Vice President
Service Economy Portfolio Manager
Perry M. Traquina, Senior Vice President
Technology Portfolio Manager
Ernst H. von Metzsch, Senior Vice President
Energy Portfolio Manager
John R. Ryan, Senior Vice President
Utilities Income Portfolio Manager
Wellington Management Company
February 10, 1994
16
<PAGE> 19
TOTAL INVESTMENT RETURN
The following five tables illustrate the results of single-share investments in
five of the six Portfolios from their inception on May 23, 1984, through
January 31, 1994. The percentage figures show results on a "total return" basis
and assume the reinvestment of both income and capital gains distributions.
During this period, stock prices fluctuated and were generally higher at the
end than at the beginning. The results shown should not be considered as a
representation of the dividend income or capital gain or loss that may be
realized from an investment made in the Portfolios today.
HEALTH CARE PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change
Value with Income --------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital Health Care S&P 500
January 31 Value Dividends Distributions Gains Reinvested Portfolio Index
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- --
- -----------------------------------------------------------------------------------------------------------------
1985 11.85 -- -- 11.85 + 18.5% + 21.1%
- -----------------------------------------------------------------------------------------------------------------
1986 15.61 $ .07 $ .11 15.84 + 33.7 + 22.9
- -----------------------------------------------------------------------------------------------------------------
1987 19.53 .13 .80 20.89 + 31.9 + 33.9
- -----------------------------------------------------------------------------------------------------------------
1988 17.53 .57 1.39 20.96 + 0.4 - 3.2
- -----------------------------------------------------------------------------------------------------------------
1989 19.46 .34 1.29 25.45 + 21.4 + 19.9
- -----------------------------------------------------------------------------------------------------------------
1990 22.16 .49 .72 30.60 + 20.2 + 14.4
- -----------------------------------------------------------------------------------------------------------------
1991 27.32 .55 .84 39.81 + 30.1 + 8.4
- -----------------------------------------------------------------------------------------------------------------
1992 35.54 .53 .53 53.33 + 34.0 + 22.6
- -----------------------------------------------------------------------------------------------------------------
1993 32.66 .70 1.20 51.77 - 2.9 + 10.6
- -----------------------------------------------------------------------------------------------------------------
1994 36.51 .76 1.97 62.75 + 21.2 + 12.9
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $4.14 $8.85 +527.5% +337.4%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 20.9% + 16.4%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SERVICE ECONOMY PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change
Value with Income ------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital Service Economy S&P 500
January 31 Value Dividends Distributions Gains Reinvested Portfolio Index
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- --
- -----------------------------------------------------------------------------------------------------------------
1985 12.69 -- -- 12.69 + 26.9% + 21.1%
- -----------------------------------------------------------------------------------------------------------------
1986 16.88 $ .09 $ .12 17.15 + 35.2 + 22.9
- -----------------------------------------------------------------------------------------------------------------
1987 19.45 .16 .70 20.71 + 20.8 + 33.9
- -----------------------------------------------------------------------------------------------------------------
1988 13.63 .88 2.05 17.32 - 16.4 - 3.2
- -----------------------------------------------------------------------------------------------------------------
1989 16.05 .25 -- 20.73 + 19.7 + 19.9
- -----------------------------------------------------------------------------------------------------------------
1990 16.87 .41 .84 23.29 + 12.3 + 14.4
- -----------------------------------------------------------------------------------------------------------------
1991 15.77 .39 .27 22.70 - 2.5 + 8.4
- -----------------------------------------------------------------------------------------------------------------
1992 19.89 .28 .04 29.13 + 28.3 + 22.6
- -----------------------------------------------------------------------------------------------------------------
1993 22.36 .17 -- 33.00 + 13.3 + 10.6
- -----------------------------------------------------------------------------------------------------------------
1994 23.94 .22 .93 37.11 + 12.4 + 12.9
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $2.85 $4.95 +271.1% +337.4%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 14.5% + 16.4%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
TOTAL INVESTMENT RETURN (continued)
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change
Value with Income ------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital Technology S&P 500
January 31 Value Dividends Distributions Gains Reinvested Portfolio Index
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- --
- -----------------------------------------------------------------------------------------------------------------
1985 11.57 -- -- 11.57 + 15.7% + 21.1%
- -----------------------------------------------------------------------------------------------------------------
1986 11.73 $ .05 $ .05 11.83 + 2.3 + 22.9
- -----------------------------------------------------------------------------------------------------------------
1987 13.77 .08 .30 14.33 + 21.1 + 33.9
- -----------------------------------------------------------------------------------------------------------------
1988 10.23 .18 .53 11.27 - 21.3 - 3.2
- -----------------------------------------------------------------------------------------------------------------
1989 11.50 .16 -- 12.86 + 14.1 + 19.9
- -----------------------------------------------------------------------------------------------------------------
1990 11.59 .15 -- 13.12 + 2.0 + 14.4
- -----------------------------------------------------------------------------------------------------------------
1991 12.69 .22 -- 14.65 + 11.7 + 8.4
- -----------------------------------------------------------------------------------------------------------------
1992 17.11 .20 -- 20.01 + 36.6 + 22.6
- -----------------------------------------------------------------------------------------------------------------
1993 18.87 .12 -- 22.21 + 11.0 + 10.6
- -----------------------------------------------------------------------------------------------------------------
1994 19.55 .13 1.75 25.46 + 14.6 + 12.9
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $1.29 $2.63 +154.6% +337.4%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 10.1% + 16.4%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
ENERGY PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change
Value with Income ------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital Energy S&P 500
January 31 Value Dividends Distributions Gains Reinvested Portfolio Index
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- --
- -----------------------------------------------------------------------------------------------------------------
1985 9.81 -- -- 9.81 - 1.9% + 21.1%
- -----------------------------------------------------------------------------------------------------------------
1986 9.93 $ .14 $ .08 10.15 + 3.4 + 22.9
- -----------------------------------------------------------------------------------------------------------------
1987 12.42 .44 .05 13.38 + 31.9 + 33.9
- -----------------------------------------------------------------------------------------------------------------
1988 10.22 .76 1.41 13.48 + 0.8 - 3.2
- -----------------------------------------------------------------------------------------------------------------
1989 12.29 .37 -- 16.74 + 24.2 + 19.9
- -----------------------------------------------------------------------------------------------------------------
1990 14.94 .36 .57 21.59 + 29.0 + 14.4
- -----------------------------------------------------------------------------------------------------------------
1991 13.39 .46 .88 21.24 - 1.6 + 8.4
- -----------------------------------------------------------------------------------------------------------------
1992 12.73 .42 .42 21.51 + 1.3 + 22.6
- -----------------------------------------------------------------------------------------------------------------
1993 13.82 .36 .18 24.31 + 13.0 + 10.6
- -----------------------------------------------------------------------------------------------------------------
1994 15.77 .29 1.38 30.94 + 27.3 + 12.9
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $3.60 $4.97 +209.4% +337.4%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 12.4% + 16.4%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
GOLD & PRECIOUS METALS PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- --------------------------------------------------------------------------------------------------------------------
Annual Percentage Change
Value with Income ----------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital Gold & Precious MSCI Gold
January 31 Value Dividends Distributions Gains Reinvested Metals Portfolio Mines Index
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- --
- --------------------------------------------------------------------------------------------------------------------
1985 6.60 -- -- 6.60 -34.9% - 35.3%
- --------------------------------------------------------------------------------------------------------------------
1986 7.60 $ .06 -- 7.67 +16.3 + 3.6
- --------------------------------------------------------------------------------------------------------------------
1987 10.50 .21 -- 10.91 +42.2 + 12.4
- --------------------------------------------------------------------------------------------------------------------
1988 9.35 .48 $1.14 11.18 + 2.5 + 4.5
- --------------------------------------------------------------------------------------------------------------------
1989 9.65 .26 -- 11.87 + 6.1 - 9.2
- --------------------------------------------------------------------------------------------------------------------
1990 12.49 .34 -- 15.83 +33.4 + 72.3
- --------------------------------------------------------------------------------------------------------------------
1991 8.29 .32 -- 10.89 -31.2 - 41.1
- --------------------------------------------------------------------------------------------------------------------
1992 9.41 .25 -- 12.70 +16.7 + 10.9
- --------------------------------------------------------------------------------------------------------------------
1993 7.29 .18 -- 10.09 -20.6 - 23.3
- --------------------------------------------------------------------------------------------------------------------
1994 13.58 .21 -- 19.09 +89.2 +121.5
- --------------------------------------------------------------------------------------------------------------------
LIFETIME* $2.31 $1.14 +88.4% + 36.6%
- --------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 6.8% + 3.3%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return performance for Gold & Precious Metals and the MSCI Gold Mines
Index begins on May 31, 1984.
19
<PAGE> 22
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
January 31, 1994
<TABLE>
<CAPTION>
Market
Value
HEALTH CARE PORTFOLIO Shares (000)+
- ----------------------------------------------------------
COMMON STOCKS (95.2%)
- ----------------------------------------------------------
MEDICAL TECHNOLOGY AND SERVICE (31.5%)
- ----------------------------------------------------------
<S> <C> <C>
HEALTH SERVICES (15.6%)
Columbia Healthcare Corp. 404,347 $ 15,315
* FHP International Corp. 450,000 12,037
*(1)Healthcare Services Group, Inc. 435,700 4,738
Hillhaven Corp. 186,740 3,735
Humana, Inc. 980,400 19,853
*(1)MDL Information Systems, Inc. 528,300 4,689
McKesson Corp. 240,000 14,010
* Medic Computer Systems, Inc. 200,000 3,350
National Health Laboratories Inc. 150,000 2,194
National Medical Enterprises, Inc. 663,300 10,530
Owens and Minor, Inc. 135,000 3,443
* Salick Health Care, Inc. 76,900 1,269
* Syncor International Corp. 175,159 4,160
------
99,323
------
- ----------------------------------------------------------
MEDICAL PRODUCTS (15.9%)
Abbott Laboratories, Inc. 570,000 16,815
*(1)Advanced Technologies
Laboratories, Inc. 661,200 10,910
Allergan, Inc. 340,000 7,905
Beckman Instruments 980,000 27,930
Becton, Dickinson & Co. 240,000 8,850
Kinetic Concepts, Inc. 495,400 1,981
* Lifequest Medical 100,000 950
Medtronic, Inc. 50,000 4,200
* Nellcor Inc. 180,000 5,040
Perkin-Elmer Corp. 142,720 5,584
* Protocol Systems Inc. 180,000 1,665
Puritan-Bennett Corp. 40,000 800
* Spacelabs Medical 280,000 7,070
West Co., Inc. 70,000 1,794
-------
101,494
-------
GROUP TOTAL 200,817
-------
- ----------------------------------------------------------
PHARMACEUTICALS (63.7%)
- ----------------------------------------------------------
MAJOR PHARMACEUTICALS (23.7%)
American Cyanamid Co. 110,000 5,541
American Home Products Corp. 85,000 5,397
Bristol-Myers Squibb Co. 350,000 20,256
Johnson & Johnson 520,000 22,035
Eli Lilly & Co. 263,300 15,765
Marion Merrell Dow, Inc. 362,300 6,340
Merck & Co., Inc. 235,225 8,586
Pfizer, Inc. 450,000 29,081
Rhone-Poulenc Rorer, Inc. 217,000 7,785
Schering-Plough Corp. 88,600 5,582
Syntex Corp. 565,000 8,687
Upjohn Co. 40,000 $ 1,200
Warner-Lambert Co. 230,000 14,979
-------
151,234
-------
- ----------------------------------------------------------
SPECIALTY PHARMACEUTICALS (20.8%)
A.L. Laboratories, Inc. 847,700 12,927
* Alliance Pharmaceutical Corp. 738,388 6,830
* Amylin Pharmaceuticals, Inc. 55,000 770
* Applied Immune Sciences 383,500 4,506
* Athena Neurosciences, Inc. 700,000 7,000
* Biogen, Inc. 350,000 18,200
Carter-Wallace, Inc. 266,000 6,583
Carter-Wallace, Inc. Class B 24,000 594
* Celtrix Labs 183,500 1,606
* Collagen Corp. 70,000 2,030
Dekalb Genetics Corp. Class B 370,050 12,304
(1) E-Z-EM Inc. Class A 219,258 1,124
(1) E-Z-EM Inc. Class B 232,412 1,046
* Genentech, Inc. 70,000 3,526
* Genetics Institute
Depository Shares 216,960 10,631
IMCERA Group, Inc. 360,000 13,635
* Immulogic Pharmaceutical Corp. 105,000 1,365
* Immunex Corp. 69,500 1,303
* Lynx Therapeutic 86,130 17
* Lynx Therapeutic Pfd. 125,280 125
*(1)Magainin Pharmaceuticals 644,000 11,270
* Marsam Pharmaceuticals, Inc. 200,000 3,750
* Scios Nova, Inc. 435,950 4,087
* Telios Pharm Inc. 688,000 3,354
* Theratech, Inc. 140,000 2,030
* Xoma Corp. 353,000 1,986
-------
132,599
-------
- ----------------------------------------------------------
INTERNATIONAL (19.2%)
Amersham International PLC 175,000 2,741
Bayer AG ADR 35,000 7,490
Ciba-Geigy 44,760 28,355
Fisons PLC 500,000 1,101
Fujisawa Pharmaceutical 400,000 4,220
London International Group PLC 300,000 733
Roche Holdings Ltd. 652 3,174
Sandoz AG (Ptg. Ctf.) 3,534 10,651
Schering AG 39,347 25,218
Smithkline Beecham Unit ADR 200,000 5,900
Synthelabo 10,270 406
Takeda Chemical Industries 200,000 2,422
Wellcome PLC 100,000 992
Zeneca Group ADR 814,524 29,425
-------
122,828
-------
GROUP TOTAL 406,661
-------
- ----------------------------------------------------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
TOTAL COMMON STOCKS
(Cost $476,821) $607,478
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.0%)
- ----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.17%, 2/1/94
(Cost $25,685) $25,685 25,685
- ----------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(Cost $502,506) 633,163
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.8%)
- ----------------------------------------------------------
Other Assets--Notes C and E 7,825
Liabilities--Note E (3,022)
-------
4,803
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 17,472,273 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $637,966
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $36.51
==========================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)Considered an affiliated company as the Portfolio owns
more than 5% of the outstanding voting securities of such
company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JANUARY 31, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital--Note F $497,815 $28.49
Undistributed Net
Investment Income 744 .04
Accumulated Net
Realized Gains--Note F 8,750 .50
Unrealized Appreciation
of Investments 130,657 7.48
- ----------------------------------------------------------
NET ASSETS $637,966 $36.51
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
SERVICE ECONOMY PORTFOLIO Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.8%)
- ----------------------------------------------------------
BUSINESS SERVICES (34.0%)
- ----------------------------------------------------------
Air Express International 31,000 $ 604
Automatic Data Processing, Inc. 18,400 964
Avnet, Inc. 12,800 528
* Bisys Group, Inc. 16,000 304
* Beverly Enterprises Inc. 45,000 585
Browning-Ferris Industries, Inc. 16,400 492
* Call-Net Enterprises, Inc. Class B 18,800 184
The Dun & Bradstreet Corp. 7,700 484
First Data Corp. 16,800 769
* FIserv, Inc. 31,725 611
Foster Wheeler Corp. 22,000 863
General Motors Corp. Class E 14,600 438
W.W. Grainger, Inc. 8,400 526
* Jacobs Engineering Group Inc. 16,200 417
* Manpower Inc. 30,000 540
Morrison-Knudsen Co., Inc. 22,000 577
* Policy Management Systems Corp. 10,000 330
Schlumberger Ltd. 9,900 588
Swift Transportation Co., Inc. 30,000 675
Sysco Corp. 13,000 354
* UAL Corp. 2,400 353
Union Pacific Corp. 7,000 458
* Waste Management International 18,300 373
-------
GROUP TOTAL 12,017
-------
- ----------------------------------------------------------
CONSUMER SERVICES (16.9%)
- ----------------------------------------------------------
* AMR Corp. 5,400 388
* FHP International Corp. 16,000 428
MCI Communications Corp. 25,200 693
McDonald's Corp. 9,000 547
* Medic Computer Systems, Inc. 10,000 168
* Paging Network Inc. 16,500 466
Telefonica de Espana ADR 17,000 733
Telefonos de Mexico SA ADR 6,600 488
Telephone & Data Systems, Inc. 12,000 593
U.S. Healthcare, Inc. 9,000 596
Vodafone Group PLC ADR 10,000 885
-------
GROUP TOTAL 5,985
-------
- ----------------------------------------------------------
FINANCIAL SERVICES (17.2%)
- ----------------------------------------------------------
American International Group, Inc. 10,687 990
Federal National Mortgage Assn. 13,000 1,136
First Bank System, Inc. 19,484 611
Margaretten Financial Corp. 29,000 395
Meridian Bancorp, Inc. 8,700 263
Morgan Stanley Group, Inc. 8,000 636
NAC Re Corp. 14,800 459
North American Mortgage 14,000 348
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
Republic New York Corp. 10,500 $ 534
Travelers Inc. 17,000 716
---------
GROUP TOTAL 6,088
---------
- ----------------------------------------------------------
MEDIA & RELATED SERVICES (17.8%)
- ----------------------------------------------------------
Capital Cities/ABC, Inc. 1,400 917
Comcast Corp. Class A Special 21,100 667
Gaylord Entertainment Class A 24,800 701
Infinity Broadcasting Corp. 19,800 643
* Multimedia, Inc. 18,100 629
Omnicom Group Inc. 10,000 490
* Scholastic Corp. 12,300 520
E.W. Scripps Co. Class A 23,000 621
Time Warner, Inc. 14,400 576
Washington Post Co. Class B 2,000 528
---------
GROUP TOTAL 6,292
---------
- ----------------------------------------------------------
RETAIL & DISTRIBUTION SERVICES (8.9%)
- ----------------------------------------------------------
Albertson's, Inc. 18,400 492
Bob Evans Farms, Inc. 16,200 344
Dillard Department Stores Class A 18,000 664
Genuine Parts Co. 12,000 465
* Home Shopping Network, Inc. 32,000 456
Wal-Mart Stores, Inc. 26,600 705
---------
GROUP TOTAL 3,126
---------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $23,325) 33,508
- ----------------------------------------------------------
CONVERTIBLE BOND (1.1%)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
------
<S> <C> <C>
Hillhaven Corp.
7.75%, 11/1/02
(Cost $314) $300 408
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.5%)
- ----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.17%, 2/1/94
(Cost $868) 868 868
- ----------------------------------------------------------
TOTAL INVESTMENTS (98.4%)
(Cost $24,507) 34,784
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.6%)
- ----------------------------------------------------------
Other Assets--Note C 831
Liabilities (281)
-----
550
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
<S> <C>
Applicable to 1,475,684 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $35,334
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $23.94
==========================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JANUARY 31, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
----- -----
<S> <C> <C>
Paid in Capital--Note F $24,618 $16.68
Undistributed Net
Investment Income--Note F 5 --
Accumulated Net
Realized Gains--Note F 434 .29
Unrealized Appreciation
of Investments 10,277 6.97
- -------------------------------------------------------
NET ASSETS $35,334 $23.94
- -------------------------------------------------------
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
TECHNOLOGY PORTFOLIO Shares (000)+
- ----------------------------------------------------------
COMMON STOCKS (90.3%)
- ----------------------------------------------------------
COMMUNICATIONS (15.9%)
- ----------------------------------------------------------
<S> <C> <C>
ADC Telecommunications, Inc. 45,000 $ 1,631
* A+ Communications, Inc. 46,800 620
* Cencall Communications Corp. 25,000 763
Cisco Systems, Inc. 35,000 2,529
DSC Communications Corp. 29,000 1,733
Ericsson (L.M.) Telephone
ADR Class B 50,000 2,269
Newbridge Networks Corp. 20,000 1,335
* Nextel Communications 45,000 1,868
* Wellfleet Communications 15,000 1,110
------
GROUP TOTAL 13,858
------
- ----------------------------------------------------------
COMPUTER EQUIPMENT (17.8%)
- ----------------------------------------------------------
* Data General Corp. 220,000 1,815
* Gateway 2000 Inc. 90,000 2,160
Hewlett-Packard Co. 35,000 2,988
Merisel, Inc. 120,000 2,205
* Micropolis Corp. 100,000 600
* Netframe Systems Inc. 100,000 1,650
* Parallan Computer, Inc. 70,000 875
* Pyramid Technology Corp. 80,000 1,160
* Sequent Computer Systems, Inc. 70,000 1,102
* Stratus Computer, Inc. 27,000 823
* Zitel Corp. 48,000 168
------
GROUP TOTAL 15,546
------
- ----------------------------------------------------------
COMPUTER SERVICE & SOFTWARE (35.4%)
- ----------------------------------------------------------
Acclaim Entertainment Inc. 80,000 1,760
Automatic Data Processing, Inc. 24,000 1,257
* Bisys Group, Inc. 130,000 2,470
* Boole & Babbage, Inc. 57,700 1,356
* Cognos Inc. 120,000 1,545
Computer Sciences Corp. 67,000 2,311
* Compuware Corp. 65,000 2,129
* Consilium, Inc. 69,600 609
* Digital Link Corp. 35,000 612
* Egghead, Inc. 145,000 1,377
* FTP Software, Inc. 52,400 1,467
First Data Corp. 50,000 2,287
* FIserv, Inc. 61,500 1,184
General Motors Corp. Class E 46,000 1,380
* Marcam Corp. 75,000 937
* Microsoft Corp. 32,000 2,720
* Policy Management Systems Corp. 73,500 2,426
* Softimage, Inc. 81,500 1,263
* Systems & Computer
Technology Corp. 90,000 1,823
------
GROUP TOTAL 30,913
------
- ----------------------------------------------------------
ELECTRICAL EQUIPMENT (1.7%)
- ----------------------------------------------------------
Raychem Corp. 40,000 $ 1,460
--------
- ----------------------------------------------------------
ELECTRONICS & RELATED (16.4%)
- ----------------------------------------------------------
Applied Materials, Inc. 33,000 1,452
* Asyst Technologies, Inc. 60,000 945
* Brooktree Corp. 75,000 806
* Conductus, Inc. 135,000 1,266
Helix Technology Corp. 150,000 2,213
Intel Corp. 40,000 2,610
* Novellus Systems, Inc. 35,000 1,418
* Spectrum Signal Processing, Inc. 100,000 775
* Triquint Semiconductor, Inc. 90,000 1,350
* Viewlogic Systems, Inc. 60,000 1,470
------
GROUP TOTAL 14,305
------
- ----------------------------------------------------------
MEDICAL TECHNOLOGY (3.1%)
- ----------------------------------------------------------
* Amylin Pharmaceuticals, Inc. 90,000 1,260
* Athena Neurosciences, Inc. 75,000 750
Pfizer, Inc. 11,000 711
------
GROUP TOTAL 2,721
------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $69,474) 78,803
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (13.0%)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.17%, 2/1/94
(Cost $11,391) $11,391 11,391
- ----------------------------------------------------------
TOTAL INVESTMENTS (103.3%)
(Cost $80,865) 90,194
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.3%)
- ----------------------------------------------------------
Other Assets--Notes C and E 1,224
Liabilities--Note E (4,105)
------
(2,881)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 4,466,752 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $87,313
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $19.55
==========================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
23
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JANUARY 31, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
------- ------
<S> <C> <C>
Paid in Capital--Note F $77,083 $17.26
Undistributed Net
Investment Income--Note F -- --
Accumulated Net
Realized Gains--Note F 901 .20
Unrealized Appreciation
of Investments 9,329 2.09
- ----------------------------------------------------------
NET ASSETS $87,313 $19.55
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
ENERGY PORTFOLIO Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.4%)
- ----------------------------------------------------------
PETROLEUM (48.1%)
- ----------------------------------------------------------
INTERNATIONAL OIL (9.5%)
British Petroleum Co. PLC ADR 95,000 $ 6,484
Exxon Corp. 180,000 11,970
Mobil Corp. 35,000 2,835
Texaco, Inc. 160,000 10,820
-------
32,109
-------
- ----------------------------------------------------------
DOMESTIC INTEGRATED OIL (19.3%)
Amerada Hess Corp. 230,000 11,155
Amoco Corp. 220,000 11,825
Kerr-McGee Corp. 150,000 6,900
Pennzoil Co. 137,000 7,569
Phillips Petroleum Co. 340,000 10,030
USX-Marathon Group 470,000 8,695
Unocal Corp. 315,000 9,253
-------
65,427
-------
- ----------------------------------------------------------
DOMESTIC REFINING AND MARKETING (6.8%)
Ashland Oil, Inc. 280,000 10,500
Castle Energy Corp. 135,000 1,350
Diamond Shamrock, Inc. 140,000 3,920
Total Petroleum (North
America) Ltd. 280,000 3,745
Ultramar Corp. 120,000 3,510
-------
23,025
-------
- ----------------------------------------------------------
DOMESTIC PRODUCERS (12.5%)
Apache Corp. 150,000 3,750
* Benton Oil & Gas Co. 429,300 1,932
Cabot Oil & Gas Corp. 138,100 3,055
* Dekalb Energy Co. Class B 180,000 2,565
Devon Energy Corp. 100,000 2,050
* Maxus Energy Corp. 940,700 4,939
Mitchell Energy & Development
Corp. Class B 200,000 4,325
Oryx Energy Co. 260,000 4,680
* Pogo Producing Co. 350,000 7,175
Santa Fe Energy Resources Inc. 500,000 4,625
* Triton Energy Corp. 110,000 3,383
-------
42,479
-------
GROUP TOTAL 163,040
-------
- ----------------------------------------------------------
ENERGY EQUIPMENT AND SERVICES (15.3%)
- ----------------------------------------------------------
* Arethusa Zapata Ltd. 65,000 756
BJ Services Co. 180,000 3,330
Baker Hughes, Inc. 320,000 6,440
Dresser Industries, Inc. 288,000 6,372
* Energy Services, Inc. 207,600 778
* Enterra Corp. 83,300 1,718
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
* Global Marine Inc. 400,000 $ 1,600
Halliburton Co. 130,000 4,192
Helmerich & Payne, Inc. 90,000 2,486
* Nabors Industries, Inc. 220,000 1,677
* Noble Drilling Corp. 600,000 4,725
* Parker Drilling Co. 400,000 2,400
* Rowan Cos., Inc. 300,000 2,362
Schlumberger Ltd. 100,000 5,937
* Smith International, Inc. 90,000 889
Sonat Offshore Drilling Co. 100,000 1,700
* Varco International, Inc. 250,000 1,594
* Weatherford International, Inc. 320,000 3,080
-------
GROUP TOTAL 52,036
-------
- ----------------------------------------------------------
ENERGY TRANSPORTATION
AND DISTRIBUTION (6.7%)
- ----------------------------------------------------------
ENSERCH Corp. 169,880 3,079
London & Overseas Freighters
Ltd. ADR 290,000 4,422
OMI Corp. 600,000 4,425
Overseas Shipholding Group Inc. 170,000 4,101
Seagull Energy Corp. 150,000 3,994
Smedvig Tankers 300,000 2,723
-------
GROUP TOTAL 22,744
-------
- ----------------------------------------------------------
FOREIGN INTEGRATED (6.0%)
- ----------------------------------------------------------
Norsk Hydro AS ADR 190,000 6,579
Petro-CDA 272,300 2,772
Repsol SA ADR 160,000 5,460
Total Co. Francaise Petro-ADR 200,000 5,500
-------
GROUP TOTAL 20,311
-------
- ----------------------------------------------------------
FOREIGN PRODUCING (17.3%)
- ----------------------------------------------------------
* Anderson Exploration Ltd. 30,000 752
Burmah Castrol PLC 350,000 4,344
* C S Resources Ltd. 500,000 2,498
* Cabre Exploration 95,500 882
* Can Fracmaster 60,000 605
* Elan Energy Inc. 150,000 1,089
* Enerflex Systems Ltd. 40,000 475
* Home Oil Co. Ltd. 237,000 3,306
* International Petroleum Corp. 200,000 240
* Jordan Petroleum Ltd. 390,000 2,757
* Jordan Petroleum Ltd. Class A 141,000 997
Lasmo PLC 2,000,000 3,807
* Mark Resources, Inc. 400,000 2,639
* Morgan Hydrocarbons 600,000 1,990
Morrison Petroleum 268,000 2,021
* Northstar Energy Corp. 110,000 2,322
Nowsco Well Service, Ltd. 140,000 2,177
Paramount Resources Ltd. 160,300 2,659
* Pinnacle Resources Ltd. 140,000 2,006
* Poco Petes Ltd. 500,000 $ 3,958
* Ranchmens Resource 500,000 2,262
* Rigel Energy 200,000 2,903
Saga Petroleum B 207,000 2,487
* Talisman Energy, Inc. 100,000 2,205
* Talisman Energy Installment
Receipt 90,000 1,705
* Taro Industries, Ltd. Special
Warrants Exp. 5/2/94 1,000,000 829
Tarragon Oil & Gas Ltd. 130,000 1,593
* Wascana Energy Inc. 470,000 3,101
-------
GROUP TOTAL 58,609
-------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $293,874) 316,740
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (10.1%)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-------
<S>> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.17%, 2/1/94
(Cost $34,391) $34,391 34,391
- ----------------------------------------------------------
TOTAL INVESTMENTS (103.5%)
(Cost $328,265) 351,131
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.5%)
- ----------------------------------------------------------
Other Assets--Notes C and E 2,477
Liabilities--Note E (14,339)
-------
(11,862)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 21,512,515
outstanding $.001 par
value shares
(authorized 1,000,000,000
shares) $339,269
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $15.77
==========================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
25
<PAGE> 28
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JANUARY 31, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital--Note F $314,452 $14.62
Undistributed Net
Investment Income 425 .02
Accumulated Net
Realized Gains--Note F 1,526 .07
Unrealized Appreciation
of Investments 22,866 1.06
- ----------------------------------------------------------
NET ASSETS $339,269 $15.77
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
GOLD & PRECIOUS METALS PORTFOLIO Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (89.9%)
- ----------------------------------------------------------
AUSTRALIA (23.7%)
- ----------------------------------------------------------
GOLD MINES (19.3%)
Dominion Mining 17,000,000 $ 5,788
Emperor Mines 2,000,000 5,249
Gold Mines of Australia 2,250,000 1,101
Golden Shamrock Mines Ltd. 8,000,000 6,639
Highlands Gold 12,000,000 14,980
Kidston Gold Mines 2,300,000 4,421
Newcrest Mining Ltd. 4,000,000 20,257
Perseverance Corp. 1,500,000 574
Placer Pacific Ltd. 3,500,000 8,341
Plutonic Resources 2,250,000 13,246
Poseidon Gold 3,500,000 10,178
Renison Goldfields
Consolidated Ltd. 3,000,000 12,554
Resolute Resources Ltd. 7,000,000 10,774
* Star Mining Corp. 15,000,000 3,830
-------
117,932
-------
- ----------------------------------------------------------
OTHER (4.4%)
Bougainville Copper 2,000,000 1,560
CRA Ltd. 600,000 7,822
Normandy Poseidon Ltd. 3,750,000 6,809
Western Mining Corp. 2,000,000 11,249
-------
27,440
-------
GROUP TOTAL 145,372
-------
- ----------------------------------------------------------
NORTH AMERICA (31.2%)
- ----------------------------------------------------------
GOLD MINES (29.2%)
Agnico-Eagle Mines Ltd. 150,000 1,687
Amax Gold, Inc. 1,250,000 8,594
* Amax Gold Warrants Exp. 1/8/96 51,550 35
American Barrick Resources 425,000 11,847
Cambior Inc. 600,000 10,179
*(1)Campbell Resources 5,000,000 3,437
* Crown Resource Corp. 480,000 2,580
Euro Nevada 500,000 16,588
Franco Nevada 275,000 18,168
Freeport McMoRan Copper &
Gold Inc. Class A 400,000 10,650
Freeport McMoRan Copper &
Gold Inc. 7% Convertible
Preferred Shares 150,000 4,519
Freeport McMoRan Copper &
Gold Inc. .05 Gold
Denomination Shares 150,000 6,037
* Golden Star Resources Ltd. 350,000 5,410
Homestake Mining Co. 500,000 11,000
Lac Minerals Ltd. 800,000 7,200
Newmont Gold Co. 125,000 5,687
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
Pegasus Gold 375,000 $ 8,250
Placer Dome Group, Inc. 450,000 11,419
* Prime Resources 1,250,000 9,425
* Royal Oak Mines Ltd. 2,000,000 9,625
* TVX Gold Mining 2,000,000 12,818
* Venezuelan Gold Fields 400,000 3,996
-------
179,151
-------
- ----------------------------------------------------------
OTHER (2.0%)
Newmont Mining Corp. 200,000 10,725
* Texas Star Resources Corp. 500,000 1,301
-------
12,026
-------
GROUP TOTAL 191,177
-------
- ----------------------------------------------------------
SOUTH AFRICA (32.4%)
- ----------------------------------------------------------
GOLD MINES (22.0%)
Beatrix Gold Mines ADR 1,250,000 6,656
Driefontein Consolidated
Ltd. ADR 1,000,000 12,125
Elandsrand Gold Mining
Ltd. ADR 1,250,000 8,125
Free State Consolidated
Gold Mines Ltd. ADR 850,000 12,006
Hartebeestfontein Gold Mining
Co. Ltd. ADR 2,000,000 11,250
Kinross ADR 425,000 6,587
Kloof Gold Mining Ltd. ADR 850,000 9,562
Orange Free State
Investments Ltd. ADR 350,000 12,775
Randfontein Estates Gold
Mining Co. Ltd. ADR 1,650,000 15,262
Southvaal Holdings ADR 330,000 9,653
Vaal Reefs Exploration &
Mining Co. Ltd. ADR 2,000,000 18,250
Western Deeplevel ADR 350,000 12,688
-------
134,939
-------
- ----------------------------------------------------------
OTHER (10.4%)
Anglo American Corp. ADR 275,000 12,100
De Beers Centenary Units ADR 650,000 14,788
Gold Fields of South Africa ADR 400,000 8,450
Impala Platinum
Holdings Ltd. ADR 750,000 9,563
Minorco Ltd. ADR 400,000 8,550
Rustenberg Platinum
Holdings Ltd. ADR 600,000 10,125
-------
63,576
-------
GROUP TOTAL 198,515
-------
- ----------------------------------------------------------
UNITED KINGDOM (1.6%)
- ----------------------------------------------------------
RTZ Corp. 700,000 9,390
- ----------------------------------------------------------
JAPAN (1.0%)
- ----------------------------------------------------------
Sumitomo Metal Mining 750,000 $ 6,227
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $403,555) 550,681
- ----------------------------------------------------------
CONVERTIBLE BONDS (.4%)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-------
<S> <C> <C>
Canyon Resources Corp.
6.0%, 6/1/98 $1,000 1,210
Renison Goldfields
Consolidated, Ltd.
8.0%, 11/30/96 200 1,489
- ----------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $2,120) 2,699
- ----------------------------------------------------------
PRECIOUS METALS (5.7%)
- ----------------------------------------------------------
* Gold (89,872 ounces) 34,295
* Platinum (2,009 ounces) 772
- ----------------------------------------------------------
TOTAL PRECIOUS METALS
(Cost $37,012) 35,067
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.7%)
- ----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.17%, 2/1/94
(Cost $22,561) 22,561 22,561
- ----------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $465,248) 611,008
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- ----------------------------------------------------------
Other Assets--Notes C and E 19,616
Liabilities--Note E (18,079)
-------
1,537
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 45,100,953 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $612,545
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $13.58
==========================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)Considered an affiliated company as the Portfolio owns more than 5% of the
outstanding voting securities of the company.
27
<PAGE> 30
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JANUARY 31, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital--Note F $491,407 $10.90
Overdistributed Net
Investment Income--Note F (413) (.01)
Accumulated Net
Realized Losses--Note F (24,209) (.54)
Unrealized Appreciation
of Investments 145,760 3.23
- ----------------------------------------------------------
NET ASSETS $612,545 $13.58
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
UTILITIES INCOME PORTFOLIO Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (76.7%)
- ----------------------------------------------------------
ELECTRIC (37.9%)
Carolina Power & Light Co. 87,500 $ 2,603
Central Hudson Gas &
Electric Corp. 231,300 6,968
Central Maine Power Co. 73,400 1,055
Cincinnati Gas & Electric Co. 263,150 6,974
Commonwealth Edison Co. 532,900 15,121
Consolidated Edison Co. of
New York, Inc. 291,600 9,076
DQE, Inc. 536,100 17,825
DPL, Inc. 100,000 2,125
Detroit Edison Co. 441,000 13,065
Eastern Utilities Associates 334,200 9,024
Entergy Corp. 253,200 9,432
General Public Utilities Corp. 310,700 9,476
Houston Industries, Inc. 265,400 12,109
Illinois Power Co. 299,900 6,523
Long Island Lighting Co. 384,300 9,031
Montana Power Co. 663,700 16,592
New England Electric System 63,100 2,421
Niagara Mohawk Power Corp. 381,800 7,731
PECO Energy Corp. 603,500 17,426
PSI Resources, Inc. 166,600 4,269
Pacific Gas & Electric Co. 646,700 21,907
Pennsylvania Power and Light Co. 196,300 4,957
Pinnacle West Capital Corp. 20,000 447
Public Service Co. of Colorado 110,000 3,451
Public Service Enterprise
Group Inc. 181,600 5,743
Puget Sound Power & Light Co. 182,600 4,405
Rochester Gas and Electric Corp. 246,400 6,345
SCE Corp. 424,600 8,280
Sierra Pacific Resources 624,900 12,420
Southern Co. 130,000 5,655
Texas Utilities Co. 185,817 7,177
United Illuminating Co. 222,300 8,281
Western Resources, Inc. 189,700 6,331
Wisconsin Energy Corp. 200,600 5,366
-------
GROUP TOTAL 279,611
-------
- ----------------------------------------------------------
NATURAL GAS (10.3%)
Arkla, Inc. 143,000 1,215
Coastal Corp. 204,500 6,314
Consolidated Natural Gas Co. 80,700 3,712
Eastern Enterprises 29,100 757
Equitable Resources, Inc. 3,400 129
National Fuel Gas Co. 210,800 7,352
NICOR, Inc. 282,600 8,125
Nova Corp. of Alberta 545,800 3,957
ONEOK, Inc. 185,400 3,662
Pacific Enterprises 148,200 3,335
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
Questar Corp. 202,300 $ 6,549
Sonat, Inc. 155,000 4,824
TransCanada Pipelines 377,500 5,764
Washington Energy Co. 393,500 7,034
Westcoast Energy, Inc. 693,400 11,510
Williams Cos., Inc. 77,000 2,012
-------
GROUP TOTAL 76,251
-------
- ----------------------------------------------------------
TELEPHONE (25.9%)
American Telephone &
Telegraph Co. 239,900 13,614
Ameritech Corp. 414,200 17,396
BCE, Inc. 401,600 14,558
BC Telecom, Inc. 89,200 1,723
BellSouth Corp. 186,800 11,488
Comsat Corp. 404,300 10,967
GTE Corp. 724,100 24,891
NYNEX Corp. 714,200 29,282
Pacific Telesis Group 309,300 17,823
Southern New England
Telecom Corp. 373,700 12,799
Southwestern Bell Corp. 555,700 23,270
Telus Corp 283,100 3,709
U.S. West Corp. 219,900 9,621
-------
GROUP TOTAL 191,141
-------
- ----------------------------------------------------------
WATER & OTHER (2.6%)
American Water Works Co., Inc. 527,000 16,337
Southern California Water Co. 139,800 2,674
-------
GROUP TOTAL 19,011
-------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $559,662) 566,014
- ----------------------------------------------------------
BONDS (19.0%)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
ELECTRIC (13.0%)
Atlanta Gas Light MTN
5.90%, 10/06/03 $5,000 4,868
Baltimore Gas & Electric Co.
7.25%, 7/1/02 3,000 3,194
Carolina Power & Light Co.
8.625%, 9/15/21 3,000 3,606
Central Illinois Light Co.
7.80%, 2/9/23 2,000 2,231
Central Power & Light Co.
7.25%, 10/1/04 2,000 2,122
Dayton Power & Light Co.
8.15%, 1/15/26 3,000 3,312
Duke Power Co.
6.625%, 2/1/03 4,000 4,158
Florida Power & Light Co.
7.0%, 9/1/25 $6,000 $ 5,908
Georgia Power Co.
6.125%, 9/1/99 3,000 3,066
Houston Lighting & Power Co.
8.75%, 3/1/22 2,000 2,340
7.50%, 7/01/23 5,000 5,139
Hydro-Quebec Electric
8.0%, 2/1/13 2,000 2,209
Kansas Gas & Electric Co.
7.60%, 12/15/03 4,000 4,332
Northern States Power Co.
5.75%, 10/1/03 6,000 5,870
Old Dominion Electric
8.76%, 12/1/22 3,000 3,566
Pacific Gas & Electric Co.
5.375%, 8/1/98 3,000 3,011
8.375%, 5/1/25 2,000 2,208
Potomac Edison Power Co.
8.0%, 12/1/22 2,000 2,193
Public Service Electric & Gas
6.875%, 1/1/03 5,000 5,200
Southwestern Public Service Co.
8.20%, 12/1/22 3,000 3,276
Tampa Electric Co.
7.75%, 11/1/22 3,000 3,139
Union Electric Power Co.
8.75%, 12/1/21 2,000 2,266
Virginia Electric & Power Co.
6.0%, 8/1/01 6,000 5,995
West Penn Power Co.
6.375%, 6/1/03 4,000 4,092
West Texas Utilities
7.75%, 6/1/07 1,500 1,652
Wisconsin Electric Power Co.
7.75%, 1/15/23 2,000 2,168
Wisconsin Public Service Co.
6.80%, 2/1/03 4,500 4,706
-------
GROUP TOTAL 95,827
-------
- ----------------------------------------------------------
NATURAL GAS (.5%)
Southern California Gas
8.75%, 10/1/21 3,000 3,474
- ----------------------------------------------------------
TELEPHONE (5.5%)
American Telephone & Telegraph Co.
8.125%, 1/15/22 2,000 2,208
Bell Telephone Co. of Pennsylvania
6.625%, 9/15/02 3,500 3,608
Carolina Telephone & Telegraph
5.75%, 8/15/00 5,000 5,053
</TABLE>
29
<PAGE> 32
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------
<S> <C> <C>
Chesapeake & Potomac
Telephone Co. of Maryland
7.15%, 5/01/23 $3,000 $ 3,120
GTE Northwest
6.125%, 2/15/99 6,000 6,170
Michigan Bell Telephone Co.
6.375%, 9/15/02 2,000 2,049
New York Telephone & Telegraph Co.
8.625%, 11/15/10 2,500 3,008
Pacific Bell Telephone Co.
7.25%, 7/1/02 4,000 4,325
Southwestern Bell
6.625%, 4/01/05 6,000 6,188
United Telephone Florida
6.25%, 5/15/03 3,000 3,025
United Telephone Ohio
6.625%, 10/1/02 2,000 2,049
-------
40,803
-------
- ----------------------------------------------------------
TOTAL BONDS
(Cost $135,140) 140,104
- ----------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.5%)
- ----------------------------------------------------------
U.S. TREASURY NOTE
5.50%, 4/15/00 (Cost $11,088) 11,000 11,196
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.7%)
- ----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.17%, 2/1/94
(Cost $12,635) 12,635 12,635
- ----------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $718,525) 729,949
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- ----------------------------------------------------------
Other Assets--Notes C and E 24,963
Liabilities--Note E (16,506)
-------
8,457
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 63,272,258 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $738,406
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $11.67
==========================================================
</TABLE>
+See Note A to Financial Statements.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JANUARY 31, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $708,486 $11.20
Undistributed Net
Investment Income 11,414 .18
Accumulated Net
Realized Gains 7,082 .11
Unrealized Appreciation
of Investments 11,424 .18
- ----------------------------------------------------------
NET ASSETS $738,406 $11.67
- ----------------------------------------------------------
</TABLE>
30
<PAGE> 33
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HEALTH CARE SERVICE ECONOMY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1994 January 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . $ 13,181 $ 383
Interest. . . . . . . . . . . . . . . . . . . . . . . 709 65
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 13,890 448
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B. . . . . . . . . . . 750 46
The Vanguard Group--Note C. . . . . . . . . . . . . . -- 64
Taxes (other than income taxes)--Note A . . . . . . . 41 3
Custodians' Fees. . . . . . . . . . . . . . . . . . . 109 11
Auditing Fees . . . . . . . . . . . . . . . . . . . . 6 5
Shareholders' Reports . . . . . . . . . . . . . . . . 79 4
Annual Meeting and Proxy Costs. . . . . . . . . . . . 18 1
Directors' Fees and Expenses. . . . . . . . . . . . . 3 --
- -------------------------------------------------------------------------------------------------------------------
Total Expenses. . . . . . . . . . . . . . . . 1,006 134
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . 12,884 314
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD--Note D. . . . . . . . . . . . . . . . . 30,424 1,887
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES--Note D . . . . . . . . . . . . 63,279 1,551
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . $106,587 $3,752
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
TECHNOLOGY ENERGY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1994 January 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 383 $ 4,576
Interest . . . . . . . . . . . . . . . . . . . . . . . . 219 466
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . 602 5,042
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B. . . . . . . . . . . . . 89 351
The Vanguard Group--Note C. . . . . . . . . . . . . . . . -- --
Taxes (other than income taxes)--Note A . . . . . . . . . 5 18
Custodians' Fees. . . . . . . . . . . . . . . . . . . . . 15 21
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . 6 6
Shareholders' Reports . . . . . . . . . . . . . . . . . . 6 19
Annual Meeting and Proxy Costs . . . . . . . . . . . . . 2 5
Directors' Fees and Expenses . . . . . . . . . . . . . . -- 1
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . 123 421
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . 479 4,621
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD--Note D. . . . . . . . . . . . . . . . . . . 10,277 22,730
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES--Note D . . . . . . . . . . . . . . (2,336) 23,473
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . $ 8,420 $50,824
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
GOLD & PRECIOUS UTILITIES INCOME
METALS PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1994 January 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,971 $24,630
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 805 9,445
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . 9,776 34,075
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . 924 843
The Vanguard Group--Note C . . . . . . . . . . . . . . . . -- 1,707
Taxes (other than income taxes)--Note A . . . . . . . . . . 33 58
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . 91 31
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . 7 6
Shareholders' Reports . . . . . . . . . . . . . . . . . . . 30 41
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . 7 15
Directors' Fees and Expenses . . . . . . . . . . . . . . . 2 3
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 1,094 2,704
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . 8,682 31,371
- ------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD--Note D . . . . . . . . . . . . . . . . . . . 6,931 31,762
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES--Note D . . . . . . . . . . . . . . . 200,021 (5,047)
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . $215,634 $58,086
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO SERVICE ECONOMY PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1994 January 31, 1993 JANUARY 31, 1994 January 31, 1993
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . $ 12,884 $ 11,917 $ 314 $ 228
Realized Net Gain (Loss)--Note D . . . . . . . . 30,424 28,225 1,887 125
Change in Unrealized Appreciation
(Depreciation)--Note D . . . . . . . . . . 63,279 (57,434) 1,551 2,857
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 106,587 (17,292) 3,752 3,210
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (12,384) (11,892) (309) (221)
Realized Net Gain . . . . . . . . . . . . . (31,623) (20,312) (1,305) --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (44,007) (32,204) (1,614) (221)
- -----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . 85,116 127,084 5,657 2,863
-- In Lieu of Cash Distributions 42,105 31,056 1,555 207
-- Exchange . . . . . . . . . . . . 150,660 128,854 21,885 16,556
Redeemed -- Regular . . . . . . . . . . . . (62,573) (49,203) (3,228) (1,620)
-- Exchange . . . . . . . . . . . . (201,763) (179,671) (22,721) (13,097)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . 13,545 58,120 3,148 4,909
- -----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 76,125 8,624 5,286 7,898
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . 561,841 553,217 30,048 22,150
- -----------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . $ 637,966 $ 561,841 $ 35,334 $ 30,048
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $ .76 $ .70 $ .22 $ .17
Realized Net Gain . . . . . . . . . . . $ 1.97 $ 1.20 $ .93 --
- -----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 7,171 7,473 1,198 958
Issued in Lieu of Cash Distributions . . 1,277 918 68 10
Redeemed . . . . . . . . . . . . . . . . (8,180) (6,754) (1,134) (738)
- -----------------------------------------------------------------------------------------------------------------------
268 1,637 132 230
- -----------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F. . . . . . $ 744 $ 245 $ 5 $ (39)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO ENERGY PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1994 January 31, 1993 JANUARY 31, 1994 January 31, 1993
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C> <C> <C>
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 479 $ 373 $ 4,621 $ 3,781
Realized Net Gain (Loss)--Note D . . . . . . 10,277 (825) 22,730 1,351
Change in Unrealized Appreciation . . . . . .
(Depreciation)--Note D . . . . . . . . . . (2,336) 5,425 23,473 12,798
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . 8,420 4,973 50,824 17,930
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (480) (365) (4,161) (4,061)
Realized Net Gain . . . . . . . . . . . . . (6,455) -- (19,802) (2,039)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (6,935) (365) (23,963) (6,100)
- -----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . 15,241 7,792 101,220 42,532
-- In Lieu of Cash Distributions . 6,730 349 22,424 5,659
-- Exchange . . . . . . . . . . . . 86,480 73,660 222,492 63,276
Redeemed -- Regular . . . . . . . . . . . . (8,759) (3,333) (38,474) (21,400)
-- Exchange . . . . . . . . . . . . (84,140) (45,548) (158,967) (62,070)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . 15,552 32,920 148,695 27,997
- -----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 17,037 37,528 175,556 39,827
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . 70,276 32,748 163,713 123,886
- -----------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . $ 87,313 $ 70,276 $ 339,269 $ 163,713
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $ .13 $ .12 $ .29 $ .36
Realized Net Gain . . . . . . . . . . . $ 1.75 -- $ 1.38 $ .18
- -----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 5,341 4,751 19,803 7,913
Issued in Lieu of Cash Distributions . . 381 19 1,553 429
Redeemed . . . . . . . . . . . . . . . . (4,979) (2,960) (11,687) (6,228)
- -----------------------------------------------------------------------------------------------------------------------
743 1,810 9,669 2,114
- -----------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F. . . . . . $ -- $ 53 $ 425 $ (35)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 38
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO UTILITIES INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED May 15, 1992, to
JANUARY 31, 1994 January 31, 1993 JANUARY 31, 1994 January 31, 1993
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 8,682 $ 4,527 $ 31,371 $ 6,934
Realized Net Gain (Loss)--Note D . . . . . . 6,931 (2,577) 31,762 1,461
Change in Unrealized Appreciation
(Depreciation)--Note D . . . . . . . . . . 200,021 (44,984) (5,047) 16,471
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . 215,634 (43,034) 58,086 24,866
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (9,095) (4,266) (29,934) (5,729)
Realized Net Gain . . . . . . . . . . . . . . -- -- (25,584) (557)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (9,095) (4,266) (55,518) (6,286)
- -----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . -- -- 4,629 4,142
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . 175,749 38,934 339,906 204,090
-- In Lieu of Cash Distributions 8,030 3,863 46,953 5,095
-- Exchange . . . . . . . . . . . . 584,688 97,305 254,384 168,460
Redeemed -- Regular . . . . . . . . . . . . (57,064) (19,027) (52,584) (4,661)
-- Exchange . . . . . . . . . . . . (480,684) (76,241) (218,225) (34,931)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . 230,719 44,834 370,434 338,053
- -----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 437,258 (2,466) 377,631 360,775
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . 175,287 177,753 360,775 --
- -----------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . $ 612,545 $ 175,287 $ 738,406 $ 360,775
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $ .21 $ .18 $ .56 $ .24
Realized Net Gain . . . . . . . . . . . -- -- $ .40 $ .02
- -----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 67,267 16,162 49,884 35,555
Issued in Lieu of Cash Distributions . . 608 540 4,010 476
Redeemed . . . . . . . . . . . . . . . . (46,829) (11,536) (22,891) (3,761)
- -----------------------------------------------------------------------------------------------------------------------
21,046 5,166 31,003 32,270
- -----------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F . . . . . $ (413) $ (293) $ 11,414 $ 5,348
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $32.66 $35.54 $27.32 $22.16 $19.46
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .79 .70 .53 .52 .48
Net Realized and Unrealized Gain . . . . . . . . . .
(Loss) on Investments . . . . . . . . . . . . . . 5.79 (1.68) 8.75 6.03 3.43
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . 6.58 (.98) 9.28 6.55 3.91
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.76) (.70) (.53) (.55) (.49)
Distributions from Realized Capital Gains . . . . . . (1.97) (1.20) (.53) (.84) (.72)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (2.73) (1.90) (1.06) (1.39) (1.21)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $36.51 $32.66 $35.54 $27.32 $22.16
==================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . . . +21.21% -2.92% +33.97% +30.09% +20.22%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . $638 $562 $553 $189 $76
Ratio of Expenses to Average Net Assets . . . . . . . . .19% .22% .30% .36% .39%
Ratio of Net Investment Income to Average Net Assets . . 2.37% 2.06% 1.98% 2.54% 2.34%
Portfolio Turnover Rate 19% 15% 7% 17% 28%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Service Economy Portfolio
- -------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $22.36 $19.89 $15.77 $16.87 $16.05
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .22 .17 .28 .34 .41
Net Realized and Unrealized Gain . . . . . . . . . .
(Loss) on Investments . . . . . . . . . . . . . . . 2.51 2.47 4.16 (.78) 1.66
---- ---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . 2.73 2.64 4.44 (.44) 2.07
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.22) (.17) (.28) (.39) (.41)
Distributions from Realized Capital Gains . . . . . . (.93) -- (.04) (.27) (.84)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (1.15) (.17) (.32) (.66) (1.25)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $23.94 $22.36 $19.89 $15.77 $16.87
===================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . . . +12.45% +13.30% +28.31% -2.54% +12.33%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . $35 $30 $22 $17 $21
Ratio of Expenses to Average Net Assets . . . . . . . . .41% .56% .48% .59% .43%
Ratio of Net Investment Income to Average Net Assets . . .96% .93% 1.47% 1.99% 2.10%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 29% 36% 43% 34% 53%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
37
<PAGE> 40
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
----------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR. . . . . . . . . . . . . $18.87 $17.11 $12.69 $11.59 $11.50
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .13 .12 .20 .22 .16
Net Realized and Unrealized Gain . . . . . . . . . . . .
(Loss) on Investments . . . . . . . . . . . . . . . . 2.43 1.76 4.42 1.10 .08
---- ---- ---- ---- ---
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 2.56 1.88 4.62 1.32 .24
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.13) (.12) (.20) (.22) (.15)
Distributions from Realized Capital Gains . . . . . . . (1.75) -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (1.88) (.12) (.20) (.22) (.15)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year . . . . . . . . . . . . . . . $19.55 $18.87 $17.11 $12.69 $11.59
==================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . . . . +14.63% +11.02% +36.56% +11.66% +2.05%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $87 $70 $33 $20 $11
Ratio of Expenses to Average Net Assets . . . . . . . . . . .19% .25% .36% .48% .48%
Ratio of Net Investment Income to Average Net Assets .75% .90% 1.25% 1.64% 1.20%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 115% 65% 57% 55% 35%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . $13.82 $12.73 $13.39 $14.94 $12.29
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .31 .34 .42 .45 .38
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . 3.31 1.29 (.24) (.66) 3.20
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . .3.62 1.63 .18 (.21) 3.58
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.29) (.36) (.42) (.46) (.36)
Distributions from Realized Capital Gains (1.38) (.18) (.42) (.88) (.57)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (1.67) (.54) (.84) (1.34) (.93)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . $15.77 $13.82 $12.73 $13.39 $14.94
==================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . . . . +27.31% +13.02% +1.27% -1.64% +28.98%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $339 $164 $124 $114 $80
Ratio of Expenses to Average Net Assets . . . . . . . . . . .17% .21% .30% .35% .38%
Ratio of Net Investment Income to Average Net Assets 1.87% 2.47% 2.78% 3.24% 3.05%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 41% 37% 42% 40% 44%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
38
<PAGE> 41
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
- -------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . $ 7.29 $9.41 $8.29 $12.49 $ 9.65
------- ----- ----- ------ --------
INVESTMENT OPERATIONS
Net Investment Income. . . . . . . . . . . . . .20 .19 .24 .29 .27
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . 6.30 (2.13) 1.13 (4.17) 2.91
------- ----- ----- ------ --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 6.50 (1.94) 1.37 (3.88) 3.18
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.21) (.18) (.25) (.32) (.34)
Distributions from Realized Capital Gains . . . -- -- -- -- --
------- ----- ----- ------ --------
TOTAL DISTRIBUTIONS. . . . . . . . . . . . (.21) (.18) (.25) (.32) (.34)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . $13.58 $7.29 $9.41 $ 8.29 $12.49
=======================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . +89.24% -20.58% +16.67% -31.21% +33.38%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . $613 $175 $178 $144 $223
Ratio of Expenses to Average Net Assets. . . . . . .26% .36% .35% .42% .45%
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . . . . 2.04% 2.50% 2.54% 2.78% 3.01%
Portfolio Turnover Rate. . . . . . . . . . . . . . 14% 2% 3% 10% 17%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*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.
<TABLE>
<CAPTION>
UTILITIES INCOME PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED May 15, 1992, to
For a Share Outstanding Throughout Each Period JANUARY 31, 1994 January 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.
</TABLE>
39
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
Vanguard Specialized Portfolios is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the Health
Care, Service Economy, Technology, Energy, Gold & Precious Metals, and
Utilities Income Portfolios. The Portfolios may invest in securities of foreign
issuers which may subject them to investment risks not normally associated with
investing in securities of United States corporations. Certain investments of
the Utilities Income Portfolio are in debt instruments for which the issuers'
abilities to meet their obligations may be affected by economic developments in
the utilities industry.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of
financial statements.
1. SECURITY VALUATION: Market values for securities listed on the New York
Stock Exchange or other U.S. exchanges are based upon the latest quoted
sales prices for such securities on the appropriate exchange as of 4:00
PM on the valuation date; such securities not traded are valued at the
mean of the latest quoted bid and asked prices. Securities listed on
foreign exchanges are valued at the latest quoted sales prices.
Securities (including precious metals) not listed are valued at the
latest quoted bid prices. Bonds are valued utilizing the latest bid
prices and on the basis of a matrix system (which considers such
factors as security prices, yields, maturities and ratings), both as
furnished by independent pricing services. Temporary cash investments
are valued at cost which approximates market value. Foreign currency
amounts are translated into U.S. dollars at the bid prices of such
currencies against U.S. dollars quoted by major banks as of 4:00 PM
Central Europe Time.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its
taxable income. Accordingly, no provision for federal income taxes is
required in the financial statements.
3. EQUALIZATION: The Utilities Income Portfolio follows the accounting
practice known as "equalization," under which a portion of the price of
capital shares issued and redeemed, equivalent to undistributed net
investment income per share on the date of the transaction, is credited
or charged to undistributed income. As a result, undistributed income
per share is unaffected by Portfolio share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase agreements
are held by the Fund's custodian banks until maturity of each
repurchase agreement. Provisions of each agreement ensure that the
market value of the collateral is sufficient in the event of default;
however, in the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may
differ from net investment income and realized capital gains for
financial reporting purposes. In the Gold & Precious Metals Portfolio,
such differences relate to investments in securities considered to be
40
<PAGE> 43
"passive foreign investment companies", for which any unrealized
appreciation and/or realized gains are required to be included in
distributable net investment income for tax purposes. Distributions
from passive foreign investment company income totalled $748,000 during
the current year.
6. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Discounts and
premiums on debt securities purchased are amortized to interest income
over the lives of the respective securities.
* B. Under the terms of a contract which expires May 30, 1995, Wellington
Management Company provides investment advisory services to the Health
Care, Service Economy, Technology, Energy and Utilities Income Portfolios
in return for a fee calculated at an annual percentage rate of average net
assets. For the year ended January 31, 1994, the investment advisory fees
of the Health Care, Service Economy, Technology and Energy Portfolios each
represent an effective annual rate of .14 of 1% of average net assets, and
the investment advisory fee of the Utilities Income Portfolio represents
an effective annual rate of .13 of 1% of average net assets.
Under the terms of a contract which expires January 31, 1995, M & G
Investment Management Limited provides investment advisory services to the
Gold & Precious Metals Portfolio in return for a fee calculated at an
annual percentage rate of average net assets. For the year ended January
31, 1994, the investment advisory fee of the Gold & Precious Metals
Portfolio represents an effective annual rate of .22 of 1% of average net
assets after giving effect to a fee waiver of $182,000 (.04 of 1%).
* C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such
services are allocated to each Portfolio of the Fund under methods
approved by the Board of Directors. Fees charged to shareholders of the
Health Care, Service Economy, Technology, Energy and Gold & Precious
Metals Portfolios in the redemption of capital shares are credited by
Vanguard to the respective Portfolio and are utilized to reduce such
costs. The Fund has contributed capital of $382,000 to Vanguard (included
in Other Assets), representing 1.9% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
* D. During the year ended January 31, 1994, purchases and sales of
investment securities other than U.S. Government securities and temporary
cash investments were:
<TABLE>
<CAPTION>
-----------------------------------------------------------
(000)
-----------------------
Portfolio Purchases Sales
-----------------------------------------------------------
<S> <C> <C>
HEALTH CARE $ 97,895 $132,917
----------------------------------------------------------
SERVICE ECONOMY 10,619 9,106
----------------------------------------------------------
TECHNOLOGY 76,063 66,359
----------------------------------------------------------
ENERGY 202,612 96,428
----------------------------------------------------------
GOLD & PRECIOUS METALS 275,016 60,897
----------------------------------------------------------
UTILITIES INCOME 642,202 296,623
----------------------------------------------------------
</TABLE>
At January 31, 1994, the Gold & Precious Metals Portfolio had available a
capital loss carryforward of $24,209,000 to offset future net capital
gains of $6,596,000, $3,836,000, $4,525,000, $5,781,000 and $3,471,000
through January 31, 1997, 1998, 1999, 2000 and 2001, respectively.
The Technology Portfolio utilized a capital loss carryforward of
$2,921,000 to offset capital gains realized during the year ended January
31, 1994.
41
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS (Continued)
At January 31, 1994, unrealized appreciation for federal income tax
purposes was:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
(000)
----------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
-----------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE $164,189 $ (33,532) $130,657
-----------------------------------------------------------------
SERVICE ECONOMY 10,723 (446) 10,277
-----------------------------------------------------------------
TECHNOLOGY 13,144 (3,815) 9,329
-----------------------------------------------------------------
ENERGY 35,900 (13,034) 22,866
-----------------------------------------------------------------
GOLD & PRECIOUS
METALS 156,676 (13,420) 143,256
-----------------------------------------------------------------
UTILITIES INCOME 28,884 (17,460) 11,424
-----------------------------------------------------------------
</TABLE>
* E. The market values of securities on loan to broker/dealers at January
31, 1994, and the cash collateral received with respect to such loans,
were:
<TABLE>
<CAPTION>
-------------------------------------------------------
(000)
-----
Market Value Cash
of Loaned Collateral
Portfolio Securities Received
-------------------------------------------------------
<S> <C> <C>
HEALTH CARE $ 28 $ 31
-------------------------------------------------------
TECHNOLOGY 501 549
-------------------------------------------------------
ENERGY 205 213
-------------------------------------------------------
GOLD & PRECIOUS METALS 13,836 14,672
-------------------------------------------------------
UTILITIES INCOME 10,342 10,550
-------------------------------------------------------
</TABLE>
* F. Effective in 1993, generally accepted accounting principles require
that differences between undistributed net investment income or
accumulated net realized capital gains/losses for financial reporting and
tax purposes, if permanent, be reclassified to/from paid in capital. In
connection with the adoption of this accounting method, the
following permanent book/tax differences have been reclassified:
<TABLE>
<CAPTION>
-------------------------------------------------------
Increase (Decrease)
Paid in Capital
Portfolio (000)
-------------------------------------------------------
<S> <C>
HEALTH CARE
ACCUMULATED NET REALIZED GAINS $ 340
-------------------------------------------------------
SERVICE ECONOMY
UNDISTRIBUTED NET INVESTMENT INCOME (39)
ACCUMULATED NET REALIZED GAINS 607
-------------------------------------------------------
TECHNOLOGY
UNDISTRIBUTED NET INVESTMENT INCOME 52
ACCUMULATED NET REALIZED GAINS (189)
-------------------------------------------------------
ENERGY
ACCUMULATED NET REALIZED GAINS 255
-------------------------------------------------------
GOLD & PRECIOUS METALS
UNDISTRIBUTED NET INVESTMENT INCOME (293)
ACCUMULATED NET REALIZED LOSSES (1,086)
-------------------------------------------------------
</TABLE>
These reclassifications have no effect on net assets or net asset values
per share.
* G. At a meeting held on January 21, 1994, the Board of Directors
approved, subject to shareholder approval, a plan of reorganization which
provides for the transfer of assets of the Service Economy Portfolio and
the Technology Portfolio in exchange for shares issued by Vanguard/Morgan
Growth Fund and Vanguard Explorer Fund, respectively.
42
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Specialized Portfolios
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in the net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Health Care, Service Economy, Technology, Energy, Gold & Precious Metals,
and Utilities Income Portfolios of Vanguard Specialized Portfolios (the "Fund")
at January 31, 1994, the results of each of their operations, the changes in
each of their net assets and the financial highlights for each of the
respective periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at January 31, 1994 by correspondence with the
custodians and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 28, 1994
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD SPECIALIZED PORTFOLIOS, INC.
Corporate shareholders should note that for the fiscal year ended January 31,
1994, the percentage of investment income (i.e., dividend income plus
short-term capital gains, if any) which qualifies for the intercorporate
dividends received deduction is as follows:
Health Care Portfolio . . . . . . . . . . . . 55.6%
Service Economy Portfolio . . . . . . . . . . 43.9%
Technology Portfolio . . . . . . . . . . . . 12.2%
Energy Portfolio . . . . . . . . . . . . . . 24.5%
Gold & Precious Metals Portfolio . . . . . . 2.2%
Utilities Income Portfolio . . . . . . . . . 53.0%
43
<PAGE> 46
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President President and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group. Other
vanguard group Officers
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
44
<PAGE> 47
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if
withdrawing from the stock market proves to be justified, the next
decision--when to return--will one day be required. "Being right
twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing
so, you buy more shares of a mutual fund when its price falls, and
fewer shares when its price rises, virtually assuring a reasonable
average cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any
changes should be limited to, say, 15 percentage points. That is, if
your normal portfolio allocation is 60% in stock funds, it might be
reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of
the added principal risk involved in shifting from money market
funds to bond funds. Long-term bond funds provide a generous and
durable income stream, but their prices are highly volatile. Short-term
and intermediate-term bond funds offer a "middle way" of increasing
income with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously
replacing certificates of deposit with broad-based common stock funds
verges on the irrational. Funds investing in other securities
markets--emerging nations, international stocks and bonds, and small
U.S. companies--carry their own special risks. Generally, limit such
alternative investments to, say, 20% of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate elements
of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put another
way, high-cost funds must select investments with higher prospective gross
returns--which entail higher risks--to match the net returns earned by
low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 48
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD GROUP LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q510-01/94
<PAGE> 49
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 44.
A photograph of John C. Bogle appears at the upper-right of page one.
Line charts illustrating cumulative performance of the Vanguard
Specialized Portfolios compared to (i) the S&P 500 Index, (ii) the S&P Value
Index and (iii) the S&P Growth Index for the Fiscal Years 1990 through 1994
appear on page two.
Line charts illustrating cumulative performance of three Energy
Portfolios, (Standard & Poor's, Energy Portfolio and Average Natural Resources
Fund) are shown for Fiscal Years 1986 through 1994 and appear on page 3.
Line charts illustrating cumulative performance of three Health Care
Portfolios, (Health Care Portfolio, Average Health Care Fund and Standard &
Poor's 500 Index) are shown for Fiscal Years 1986 through 1994 and appear on
page 3.
Line charts illustrating cumulative performance of three Gold &
Precious Metals Portfolios, (Gold & Precious Metals Portfolios, Average Gold
Fund, and MSCI Gold Mines) are shown for Fiscal Years 1986 through 1994 and
appear on page 4.
Line charts illustrating cumulative performance of the Technology
Portfolios, (Technology Portfolio, Average Science & Technology and S&P 500
Index) are shown for Fiscal Years 1986 through 1994 and appear on page 4.
Line charts illustrating cumulative performance of the Service Economy
Portfolios, (Service Economy Portfolio, S&P 500 Index and Average Service
Economy) are shown for Fiscal Years 1986 through 1994 and appear on page 5.
Line charts illustrating cumulative performance of the Utilities Income
Portfolios (Utilities Income Portfolio, Composite Index and Average Utility
Fund) are shown for Fiscal Years 1993 and 1994 and appear on page 6.
Line charts showing yield comparison between Standard & Poor's Utility
Index and 10 Year U.S. Treasury Bonds are indicated for the Fiscal Years 1980
through 1993 and appear on page 10.
