<PAGE> 1
VANGUARD
SPECIALIZED PORTFOLIOS
ANNUAL REPORT 1995
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(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 PORTFOLIO IS DESIGNED FOR
INVESTORS WHO BELIEVE THAT THIS SECTOR 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:
During the fiscal year ended January 31, 1995, a period in which most
stocks--and most equity mutual funds--tumbled, the returns on our Vanguard
Specialized Portfolios ran the full gamut from solidly positive to sharply
negative. Each Portfolio's return was pretty much in line with the particular
market sector in which it invests; however, we outpaced "across the board" the
results of other mutual funds with similar investment policies.
This table compares the total returns (capital change plus income) of
our four Portfolios with their respective competitive fund standards and their
unmanaged performance benchmarks: for our "regular" equity Portfolios, the
Standard & Poor's 500 Composite Stock Price Index; and for our Gold & Precious
Metals Portfolio, the Morgan Stanley Capital International (MSCI) Gold Mines
Index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Total Return
-------------------
Fiscal Year Ended
January 31, 1995
- ---------------------------------------------------------------------------
<S> <C>
HEALTH CARE PORTFOLIO + 9.8%
AVERAGE HEALTH CARE FUND + 2.5
- ---------------------------------------------------------------------------
ENERGY PORTFOLIO - 9.1%
AVERAGE NATURAL RESOURCES FUND -11.9
- ---------------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO - 4.5%
AVERAGE UTILITY FUND - 6.1
- ---------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX + 0.5%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO -19.2%
AVERAGE GOLD FUND -24.2
- ---------------------------------------------------------------------------
MSCI GOLD MINES INDEX -21.9%
- ---------------------------------------------------------------------------
</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 6 of this Report.
THE FISCAL YEAR IN REVIEW
Fiscal 1995 was, in short, an up and down period for stocks as a group. On
balance, however, the price of the Standard & Poor's 500 Stock Index edged just
a notch lower, from 482 when the fiscal year began to 470 at its close, down
- -2.3%. The positive total return (+0.5%) on the Index, then, was more than
accounted for by the dividend income that it generated.
As always, there were some important cross-currents in the financial
markets. And in fiscal 1995, many of them were just the reverse of fiscal 1994.
In particular, a year ago value stocks (those with above-average yields and
below-average price-to-book value ratios) provided a return of +20.8%, and
overwhelmingly dominated the +5.0% return on growth stocks (those with the
opposite characteristics and with above-average prospects for consistent
earnings growth). This year, however, growth stocks have turned the tables and
led the way, if by a more modest margin (+3.5% versus -2.5%) than for value
stocks in fiscal 1994.
If the performance of the stock market was "so-so" during the year,
nothing that gentle could be said about the bond market. The total return on
the Lehman Long-Term U.S. Treasury Bond Index was -7.5% (-14.5% decline in
price, partly offset by interest income of +7.0%), as long Treasury yields rose
from 6.3% to 7.8%. Yields on short-term and intermediate-term bonds also rose
sharply; however, because of their shorter maturities, price declines were much
smaller. This rising rate environment was surely a
[FIGURE 1]
1
<PAGE> 4
CUMULATIVE PERFORMANCE 1991-1995
[FIGURE 2]
major factor in dampening the returns on stocks of all stripes.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.8% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%.* Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
To add some perspective to the financial market cross-currents in
fiscal 1995, the chart above compares the returns on growth stocks and value
stocks during the past five years. While you can see that "cycles of
superiority" occurred throughout the period, when all was said and done the
annual rates of return were quite similar: Growth, +11.1%; Value, +10.2%. This
outcome suggests the wisdom of consistently sticking to your objectives, rather
than endeavoring (fruitlessly, I believe) to switch back and forth between
various market segments in the search for higher returns.
I would call your particular attention to the modesty of both annual
rates of return. With the first half of the decade of the 1990s now behind us,
investors who had expected equity returns in this decade to be a reprise of the
"Golden Eighties" (when the average annual total return of the Standard &
Poor's 500 Index was +17.5%) are doubtless disappointed. Nonetheless, we should
not lose sight of the fact that the long-term (since 1926) return of the Index
has averaged +10.2% per annum. History, it seems clear, has a message to give
us about maintaining reasonable performance expectations.
THE PORTFOLIOS IN FISCAL 1995
UTILITIES INCOME PORTFOLIO
In an environment of sharply rising interest rates, our Utilities Income
Portfolio posted a negative return of -4.5%. This result compares to returns of
- -2.0% for the Composite Utilities Index (80% Standard & Poor's Utility Index
and 20% Lehman Utility Bond Index) and -6.1% for the average utility fund.
Our -2.5% shortfall relative to the Composite Index was largely
accounted for by our equity holdings, as the return on our bond position was
just a bit behind the return of the Lehman Utility Bond Index. On the equity
side, we were underweighted in the telephone sector, which actually provided a
modestly positive total return over the past year. To make matters worse, the
telephone stocks that we held were, on average, sub-par performers. Conversely,
we were overweighted in electric utility stocks, which suffered relatively
larger price declines than other utility sectors because of investor concerns
about the changing regulatory landscape and the rising interest rate
environment.
Our fiscal 1995 tally looks a bit better when measured against the
results of other utility funds. Surprisingly, our +1.6% advantage over the
average
- --------------------------
* A seventh rate increase on February 1, 1995, raised the Federal funds rate
to 6.00%.
2
<PAGE> 5
utility fund was achieved despite the fact that we held only about 2% of our
assets in cash reserves--the strongest of the three major asset classes in
fiscal 1995--compared to a 7% weighting for our competitors. Our average
competitor also held a 6% weighting in the market's best-performing major
sector--technology companies--compared to a weighting of "zero" in our
Portfolio. On balance, then, our margin over our competitors appears to be the
result of better stock selections within the major utility sectors.
As shown in the chart below, our return since we began operations in
May 1992 has averaged +8.6% annually, virtually identical to the +8.7% average
annual return for the Composite Index. Relative to what we would regard as the
most appropriate performance standard--the average utility fund--our
"long-term" record is fairly impressive, with utility funds as a group
achieving an average annual return of +5.4%--more than one-third below our
+8.6% average return.
CUMULATIVE PERFORMANCE
MAY 31, 1992, TO JANUARY 31, 1995
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
- --------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------
<S> <C> <C>
UTILITIES INCOME PORTFOLIO -4.47% +8.58%
AVERAGE UTILITY FUND -6.10 +5.44
COMPOSITE INDEX** -2.00 +8.68
</TABLE>
* Inception: May 15, 1992. Performance begins May 31, 1992, to show
competitive data.
** Composite Index is 80% S&P Utility Index and 20% Lehman Utility Bond Index.
Note: Past performance is not predictive of future performance.
For income-oriented investors, it is important to note that, in
addition to providing a higher total return than the average utility fund, our
Portfolio has also provided roughly 30% more spendable income each year. While
our relatively higher weighting in utility bonds has been a contributing factor
to this income advantage, we have also been aided by an expense ratio (expenses
as a percentage of average net assets) that is only about one-third that of our
competitors (0.50% versus 1.24%). The net result is that, since inception, our
Portfolio's yield has averaged 5.7% compared to 4.3% for our peer group of
funds.
HEALTH CARE PORTFOLIO
When I reported to you six months ago in our Semi-Annual Report, a pall still
hung over the health care industry, and our Health Care Portfolio's return was
well into negative territory. Since then, the U.S. Congress has undergone a
dramatic overhaul and the Administration's health care reform package has been
effectively "shelved." As a result of these developments, health care stocks
have rebounded sharply and our Portfolio has benefited accordingly, earning a
total return of +9.8% for the full fiscal year.
Given our Portfolio's favorable sector concentration, our +9.8% return
overwhelmed the +0.5% return of the Standard & Poor's 500 Index. However, we
also outpaced--by a substantial margin--the results of the average health care
fund, which rose +2.5% during the year. Two familiar themes contributed
importantly to our advantage over our peer group of funds. First, our
investment adviser continues to focus on larger, well-established companies
within the health care sector, while generally eschewing smaller biotechnology
stocks. During the past twelve months, it was the larger pharmaceutical and
health services companies that led the health sector advance. Second, our
larger international stake provided a modest boost to our performance relative
to competitive norms.
As shown in the chart on page 4, our success in fiscal 1995 has
extended our long-term margin over
3
<PAGE> 6
CUMULATIVE PERFORMANCE JANUARY 31, 1985, TO JANUARY 31, 1995
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns*--Periods Ended January 31, 1995
- ---------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE PORTFOLIO +9.79% +17.62% +19.25%
AVERAGE HEALTH CARE FUND +2.46 +18.01 +17.48
S&P 500 INDEX +0.53 +10.74 +13.77
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns*--Periods Ended January 31, 1995
- ---------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY PORTFOLIO - 9.15% + 5.42% +11.10%
AVG. NATURAL RESOURCES FUND -11.85 + 3.13 + 8.13
S&P 500 INDEX + 0.53 +10.74 +13.77
</TABLE>
* Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the Portfolios for less than one year.
Note: Past performance is not predictive of future performance.
the Standard & Poor's 500 Stock Index. Nonetheless, I would caution that such
extreme outperformance is unlikely to persist, since "the market" inevitably
turns its favor from one industry sector to another over the years. We have
also extended our long-term advantage over the average health care fund--a more
relevant standard. This superiority is a particularly noteworthy accomplishment
given our Portfolio's lower volatility. Relative to this peer group, we have
confidence in the ability of the Portfolio's adviser to continue to provide
fully competitive long-term returns, all the while assuming a lower risk
profile.
ENERGY PORTFOLIO
Following an outstanding fiscal 1994--which saw the Energy Portfolio achieve a
total return of +27.3%--the prices of energy stocks "came back to earth" in
fiscal 1995, and the Portfolio turned in a negative total return of -9.1%.
Ironically, last year's strong energy sector returns were achieved in an
environment of declining oil prices, while this year's weak performance
resulted despite an overall rise in oil prices from $15 a barrel to $18 a
barrel. The recovery in oil prices, however, was more than offset by a -30%
decline in the price of natural gas, as unusually mild weather around the
globe--and particularly in North America--sharply curtailed consumer demand.
Our total return in fiscal 1995 was behind the +0.5% return of the
Standard & Poor's 500 Index, but ahead of the -11.9% return of our peer group
of mutual funds. With energy stocks among the poorest performing sectors of the
stock market, our shortfall relative to the Index simply reflects our
commitment of 98% of net assets to energy stocks, while the highly diversified
Index carries but an 11% weighting. We can take some consolation from the fact
that we resisted the energy sector decline a bit better than our peer group
(-9.1% versus -11.9%). The competitive funds, on average, were hurt by their
relatively larger commitment to utility stocks--one of the worst-
4
<PAGE> 7
performing major market segments--and by their overweighting in natural gas
producers.
Our negative return in fiscal 1995 has widened the long-term shortfall
of the Energy Portfolio versus the Standard & Poor's 500 Index. However, our
long-term record reflects a solid advantage over our peer group of funds. Our
ability to close the gap on the broad market Index will be impacted both by the
future course of inflation and changes in the supply/demand relationship for
energy resources.
GOLD & PRECIOUS METALS PORTFOLIO
Given the remarkable performance of gold stocks in fiscal 1994, it is perhaps
not surprising that gold shares should retrace some of these gains in fiscal
1995. Still, the contrast between the two years is striking, with the Morgan
Stanley Gold Mines Index falling -21.9% during fiscal 1995, compared to a
+121.5% increase during fiscal 1994. The -19.2% return of our Gold & Precious
Metals Portfolio reflects the weakness of the gold market over the past twelve
months.
CUMULATIVE PERFORMANCE
JANUARY 31, 1985, TO JANUARY 31, 1995
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns*--Periods Ended January 31, 1995
- ---------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------
<S> <C> <C> <C>
GOLD & PRECIOUS
METALS PORTFOLIO -19.20% -0.51% +8.87%
AVERAGE GOLD FUND -24.20 -3.76 +4.66
MSCI GOLD MINES INDEX -21.87 -2.81 +5.14
</TABLE>
* Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the Portfolio for less than one year.
Note: Past performance is not predictive of future performance.
Our Portfolio held up somewhat better than our two primary performance
standards, the Morgan Stanley Gold Mines Index and the average natural
resources fund, which turned in returns of -21.9% and -24.2%, respectively. Our
small margin over the Index was derived largely from our 9% weighting in cash
reserves and gold bullion, both of which achieved superior returns relative to
gold shares. (The Index, of course, is 100% invested in gold shares.) We also
outpaced the -24.2% average return of our peer group of mutual funds. Compared
to these competitors, our Portfolio held a much larger percentage of its net
assets (34% for the Portfolio versus 18% for our peers) in South African gold
shares, the strongest sector of the gold market.
As you can see in the chart to the left, our Portfolio's ten-year
return reflects a solid margin over our comparative benchmarks. While we are
pleased that our adviser has achieved such a competitive advantage, the fact
remains that our absolute returns clearly leave something to be desired.
To be sure, investors should not expect international gold stock
returns to parallel the returns of the U.S. stock market as a whole. Indeed,
gold stocks hold their attraction for investors precisely because their returns
are generally non-correlated with the returns of stocks as a group, and thus
add a strong element of diversification to the typical portfolio. In addition,
gold stocks are sought as a hedge against hyper-inflation, and the relatively
low-inflation environment of the past ten years has not been particularly
beneficial to a gold-oriented investment strategy. Thus, any improvement in the
years ahead in our Portfolio's return--at least on an absolute basis--will
depend largely on the expectations of worldwide financial markets about the
threat of inflation.
IN SUMMARY
A year ago, I wrote to you that "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
5
<PAGE> 8
stock and bond markets, which are surely due for their share of difficult bumps
along the way." Certainly, fiscal 1995 constituted just such a bump for both
markets, and the possibility of future bumps cannot be ignored.
On this note, it is worth reemphasizing that investing in stocks is
risky, and investing in discrete segments of the stock market even more so.
That is, in essence, why stocks offer higher reward potential than bonds and
short-term reserves. The greatest risk is faced by short-term investors who
look for quick stock market returns or transitory stock market trends. The
lowest risk and the highest rewards--at least in the past--have been achieved
by long-term investors who have adhered to a sound investment approach that is
consistent with their own financial objectives.
As a portion of a balanced portfolio of mutual funds, including stock
funds, bond funds, and money market funds, Vanguard Specialized Portfolios may
well represent a suitable investment in helping you to implement the investment
course you have chosen to follow. But you should recognize that sector funds
entail a much higher level of volatility than a typical mutual fund, and you
should limit your aggregate specialized commitments to no more than, say, 10%
to 20% of your equity exposure. Finally, above all, you should be prepared to
"stay the course" in the face of wide market gyrations in these more volatile
concentrated sectors.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
February 16, 1995
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, 1994 January 31, 1995 Dividends Gains* Total Return
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE $36.51 $37.01 $.57 $2.31 + 9.8%**
ENERGY 15.77 13.82 .24 .29 - 9.1**
GOLD & PRECIOUS METALS 13.58 10.71 .31 -- -19.2**
UTILITIES INCOME 11.67 10.42 .59 .12 - 4.5
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes both long-term and short-term capital gains distributions.
** Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the Portfolio for less than one year.
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED DECEMBER 31,
1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-------------------------------------
INCEPTION TOTAL CAPITAL INCOME
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- ----------------------------- --------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
HEALTH CARE PORTFOLIO 5/23/84 +9.54% +15.55% +20.00% +17.91% +2.09%
ENERGY PORTFOLIO 5/23/84 -1.63 + 5.49 +12.02 + 8.64 +3.38
GOLD & PRECIOUS METALS PORTFOLIO 5/23/84 -5.42 + 4.27 +10.54 + 7.64 +2.90
UTILITIES INCOME PORTFOLIO 5/15/92 -8.55 -- + 6.50* + 1.56* +4.94*
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO
NOT REFLECT THE 1% FEE THAT IS ASSESSED ON REDEMPTIONS OF SHARES THAT ARE HELD
IN THE PORTFOLIOS FOR LESS THAN ONE YEAR.
* SINCE INCEPTION.
7
<PAGE> 10
REPORT FROM M&G INVESTMENT MANAGEMENT LTD.
GOLD & PRECIOUS METALS PORTFOLIO
After the spectacular +89.2% total return the Portfolio achieved in fiscal
1994, a more subdued fiscal 1995 was not unexpected, and the Gold & Precious
Metals Portfolio finished the year with a negative total return of -19.2%. This
extended the negative return that we reported in the Semi-Annual Report, but
was in line with the U.S. dollar returns of both the F.T. Global Gold Mines
Index (-22.2%) and the Morgan Stanley Gold Mines Index (-21.9%) for the full
year.
As can be seen by the performance of the gold share indices, gold
shares worldwide have fallen heavily, but this has been against the background
of an almost unchanged gold bullion price (down -0.6%). In fact, bullion traded
in a particularly narrow range between $370 and $385 during the course of the
year, with its brief moments of strength coinciding with periods of U.S. dollar
weakness.
The subdued nature of trading in the gold market led many investors
and speculators to concentrate their interest on the more volatile base metal
markets. The poor performance of gold shares relative to gold bullion once
again clearly highlights the increased leverage of equity investment. The South
African gold shares were the best relative performers, as the entire South
African stock market performed well following the successful conclusion of the
multi-racial elections held at the end of April 1994. The Portfolio's
weighting in South Africa shows a small increase, as we have added to some
holdings during the course of the year.
The Portfolio's holdings in Australia show little change, although
Samantha Gold successfully completed its takeover of Resolute Resources. In
North America, the Portfolio's weighting over the year shows a small decline,
although, as we mentioned in the Semi-Annual Report, new holdings in this area
are Atlas Corporation, Rayrock Yellowknife, and Santa Fe Pacific Gold.
During the second half of the fiscal year, the Portfolio participated
in the very successful initial public offering of Stillwater Mining Company,
North America's only platinum producer. Additionally, the Portfolio's shares in
Lac Minerals were tendered to American Barrick (now known as Barrick Gold),
which successfully completed the acquisition of that company in September 1994.
Another new holding is Nelson Trade & Finance. While this company is
listed in Canada, it is engaged in a major gold mining joint venture with the
government of Tajikistan, one of the new independent states within the former
Soviet Union. While the political risk is undoubtedly high, it is already
adequately reflected in the valuation, which currently does not give credit to
the sheer size and scale of the reserve base. Other investments involving the
former Soviet Union include Star Mining, listed in Australia, and another new
holding, Bakyrchik Gold, listed in London but actually producing gold in
Kazakhstan. Currently, these three investments represent less than 2% of the
Portfolio's total net assets, and we remain comfortable with the risk/reward
profile that these investments offer.
Elsewhere within the Portfolio, the holdings of physical bullion show
no change, although the percentage weighting reflects an increase due to the
strong performance of bullion relative to the shares. In conclusion, while it
has been a disappointing year for the Portfolio, it was pleasing to have
performed in line with the major gold share indices, and it once again goes to
highlight the fickle and volatile nature of the gold and gold shares markets.
Finally, it is worth reiterating our long-held philosophy of keeping the
Portfolio fully invested regardless of the market environment.
Respectfully,
David J. Hutchins
M&G Investment Management Ltd.
(Member of IMRO)
London, England
February 8, 1995
8
<PAGE> 11
REPORT FROM WELLINGTON MANAGEMENT COMPANY
UTILITIES INCOME PORTFOLIO
For the first three quarters of the fiscal year ended January 31, 1995, utility
investors experienced a punishing environment. Very little went right. Even
though utility stocks and bonds rallied in the last quarter of the fiscal year,
the performance numbers for the twelve months ended January 31, 1995, continued
to show losses:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Total Return
-------------------
Twelve Months Ended
January 31, 1995
- ---------------------------------------------------------------------------
<S> <C>
UTILITIES INCOME PORTFOLIO -4.5%
- ---------------------------------------------------------------------------
S&P UTILITY STOCK INDEX -1.4%
- ---------------------------------------------------------------------------
LEHMAN UTILITY BOND INDEX -4.4%
- ---------------------------------------------------------------------------
COMPOSITE INDEX* -2.0%
- ---------------------------------------------------------------------------
AVERAGE UTILITY FUND -6.1%
- ---------------------------------------------------------------------------
</TABLE>
* 80% S&P Utilities Index/20% Lehman Utility Bond Index
As we entered the past fiscal year, the bond market was heading sharply lower.
During calendar 1994, the bond market recorded one of its worst years in this
century. Because utility stocks are income oriented and interest rate
sensitive, the bond market's negative performance affected utilities not only
directly, but also indirectly by creating a vulnerable investing psychology
which was shattered by several disturbing events during the year.
Utility stocks, particularly electric utility stocks, came under
pressure from adverse regulatory proposals in several states, most notably in
California and New York, two regulatory bellwethers. California regulators
issued proposals regarding "retail wheeling," which went a step further than
the National Energy Policy Act of 1992, which essentially deregulated
electricity generation and opened up the transmission lines to wholesale
competition. This Act has had a limited impact on the industry, but the
California initiatives, if enacted nationwide, could potentially disrupt sales
relationships with large utility customers.
With the bond market falling and regulators highlighting business
risk, electric utility stocks were pressured lower. Adding to the industry
woes, FPL Group, a relatively healthy utility, shocked investors by cutting its
dividend 32% in an attempt to better position itself in a more competitive
industry. Suddenly, electric utilities were no longer perceived as a
conservative area for income-oriented investors.
Given technology developments and capital mobility as well as
regulatory initiatives, telephone utilities could be even more exposed to
competitive changes. Wireless telephone services are gathering momentum. While
telephone utilities benefit from their cellular telephone operations, new
wireless licenses are being auctioned and several large-scale satellite
projects are underway.
To add to the muddle, cable TV operators are planning to invest in
broadband digital technology which will be capable of providing
telephone service. Long distance operators want to provide local services and
gain alternative access to local services, while local service providers want to
enter long distance service. Technology is facilitating these changes and laws
likely will be passed to allow more open competition. In essence, telephone
utilities are presented with both opportunities and challenges; the outcome is
difficult to predict.
Because the gas utility sector already has passed through the turmoil
of deregulation, this sector holds much promise. This sector, however, was
burdened over the past year by the weak bond market, as well as the sharp
decline in the price of natural gas. The winter through January was
exceptionally mild, creating an oversupply of natural gas relative to demand,
and the price of gas fell accordingly.
As your portfolio manager, we were unable to overcome the multitude of
negative influences and at times were positioned incorrectly in electric and
gas utility stocks. Adding it all up, it was a poor year for the Portfolio.
We would note that by the Fall of 1994, investor pessimism had pushed
utility stock valuations to more attractive levels. Secondly, the California
and New York regulators appear to be backing away from the more disruptive
aspects of their earlier proposals. Third, the bond market has recovered
somewhat. As a result of these developments, the S&P Utility Index achieved a
total return of +4.7% over the past six
9
<PAGE> 12
months versus +4.2% for the broad-based S&P 500 Index. We will have rallies
periodically, but investor expectations should be modest at this time. The bond
market and interest rates will continue to play a major role in utility stock
performance, and the bond market could continue to be volatile. Utility
earnings growth likely will be only low single-digit. And there could be
continuing announcements regarding changing competition in the telephone and
electric utility sectors.
ENERGY PORTFOLIO
The Energy Portfolio declined -9.1% during the year, well behind the stock
market average. The performance contrasts with the +27.3% gain in fiscal 1994,
when the Portfolio outpaced the S&P 500 Index by a wide margin. Ironically,
during fiscal 1994 we witnessed a period of declining oil prices, while fiscal
1995 was characterized by a rising trend. However, the price of natural gas
declined sharply in the last three months of fiscal 1995, as a result of
unusually mild weather in North America. The shortfall in the Fund's
performance took place largely in the last three months of fiscal 1995.
Looking forward, we expect the upward pressure on the price of oil,
which we referred to last year, to continue. Oil demand is growing at a healthy
rate, reflecting the impact of low prices and the growing importance of
emerging markets. Operating rates in refining and petrochemical operations are
high and, in the case of the latter, have resulted in much better profits.
Finally, with respect to natural gas, if current prices (below $1.50 per Mcf in
North America) were to prevail for a long period, natural gas would continue to
gain market share, while supply would shrink. It is obvious that this anomaly
will not last. We expect a modest upward trend in oil prices into 1996, but an
even sharper recovery in gas prices, to the $2.00 per Mcf range.
The Portfolio emphasizes companies that have above-average prospects
for growth in oil and gas production. Among our major holdings, Exxon, Unocal,
and Amerada Hess meet this objective. We added Atlantic Richfield to the
Portfolio early in 1994, when low oil prices caused concerns--which have since
been dispelled--about the dividend.
We maintain a strong position in the independent producer sector in
North America, based on our belief that successful producers have good growth
prospects as measured by current demand trends and our view on future
hydrocarbon prices. Attractive companies in this sector include Vastar
Resources and Pogo Producing.
In Canada, the industry has also been negatively affected by the
current mild weather. Long-term prospects for growth in Canada are better than
in the U.S. because of lower finding and development costs. Companies such as
Alberta Energy, Home Oil, and Talisman Energy have attractive prospects.
Profitability in the oil service industry improved towards the end of
1994, and we expect the upward trend to continue into 1995, despite the current
weak gas market. Schlumberger in particular should benefit from increased
drilling activity overseas.
HEALTH CARE PORTFOLIO
The Health Care Portfolio had a solid performance in fiscal year 1995,
registering a +9.8% return. This result exceeded the S&P 500's return of +0.5%,
but trailed the S&P Health Sector return of +21%. The S&P Health Sector is
dominated by the larger health care companies, which did significantly better
than the smaller ones during the past year. Reviewing the five major categories
of health care, Medical Products, Health Services, and Major Pharmaceuticals
were all strong during the year. International was slightly positive, but
Specialty Pharmaceuticals, the most volatile sector of health care, was quite
weak.
Our two largest holdings, Pfizer and Johnson & Johnson, were strong
performers and contributed significantly to portfolio performance. We also
benefited from merger activity. McKesson was the biggest contributor to the
Portfolio's performance as a result of Eli Lilly's acquisition of the company's
PCS division. We also held Syntex and American Cyanamid at the time of their
acquisitions.
10
<PAGE> 13
Investor sentiment toward the health care sector improved
significantly during the year with the failure of the Administration's major
health care reform package and the change in control of Congress. Private
sector initiatives continue to rationalize health care and control costs so
that upside in the sector is not unlimited. We believe that the health care
sector is now near fair value. However, the long-term outlook remains highly
favorable, driven by the twin engines of positive demographics and scientific
progress.
Respectfully,
John R. Ryan, Senior Vice President
Utilities Income Portfolio Manager
Ernst H. von Metzsch, Senior Vice President
Energy Portfolio Manager
Edward P. Owens, Senior Vice President
Health Care Portfolio Manager
Wellington Management Company
February 10, 1995
11
<PAGE> 14
TOTAL INVESTMENT RETURN TABLES
The following three tables illustrate the results of single-share investments
in three of the four Portfolios from their inception on May 23, 1984, through
January 31, 1995. The percentage figures show results on a "total return" basis
and assume the reinvestment of both income and capital gains distributions.
During the period illustrated, stock prices fluctuated widely; the results
should not be considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in the Portfolios
today.
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Health Care Portfolio
Value With Income -------------------------------------- S&P 500
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Index Total
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1985 11.85 -- -- 11.85 +18.5% 0.0% +18.5% +21.1%
- -----------------------------------------------------------------------------------------------------------------------------------
1986 15.61 $ .11 $.07 15.84 +32.9 +0.8 +33.7 +22.9
- -----------------------------------------------------------------------------------------------------------------------------------
1987 19.53 .80 .13 20.89 +30.8 +1.0 +31.8 +33.9
- -----------------------------------------------------------------------------------------------------------------------------------
1988 17.53 1.39 .57 20.96 - 2.7 +3.0 + 0.3 - 3.2
- -----------------------------------------------------------------------------------------------------------------------------------
1989 19.46 1.29 .34 25.45 +19.3 +2.1 +21.4 +19.9
- -----------------------------------------------------------------------------------------------------------------------------------
1990 22.16 .72 .49 30.60 +17.7 +2.5 +20.2 +14.4
- -----------------------------------------------------------------------------------------------------------------------------------
1991 27.32 .84 .55 39.81 +27.4 +2.7 +30.1 + 8.4
- -----------------------------------------------------------------------------------------------------------------------------------
1992 35.54 .53 .53 53.33 +32.0 +2.0 +34.0 +22.6
- -----------------------------------------------------------------------------------------------------------------------------------
1993 32.66 1.20 .70 51.77 - 4.8 +1.9 - 2.9 +10.6
- -----------------------------------------------------------------------------------------------------------------------------------
1994 36.51 1.97 .76 62.75 +18.7 +2.5 +21.2 +12.9
- -----------------------------------------------------------------------------------------------------------------------------------
1995 37.01 2.31 .57 68.89 + 8.1 +1.7 + 9.8 + 0.5
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +588.9% +339.7%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +19.8% +14.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Energy Portfolio
Value With Income -------------------------------------- S&P 500
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Index Total
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1985 9.81 -- -- 9.81 - 1.9% 0.0% - 1.9% +21.1%
- -----------------------------------------------------------------------------------------------------------------------------------
1986 9.93 $ .08 $.14 10.15 + 2.0 +1.4 + 3.4 +22.9
- -----------------------------------------------------------------------------------------------------------------------------------
1987 12.42 .05 .44 13.38 +25.8 +6.1 +31.9 +33.9
- -----------------------------------------------------------------------------------------------------------------------------------
1988 10.22 1.41 .76 13.48 - 5.7 +6.5 + 0.8 - 3.2
- -----------------------------------------------------------------------------------------------------------------------------------
1989 12.29 -- .37 16.74 +20.3 +3.9 +24.2 +19.9
- -----------------------------------------------------------------------------------------------------------------------------------
1990 14.94 .57 .36 21.59 +26.1 +2.9 +29.0 +14.4
- -----------------------------------------------------------------------------------------------------------------------------------
1991 13.39 .88 .46 21.24 - 4.7 +3.1 - 1.6 + 8.4
- -----------------------------------------------------------------------------------------------------------------------------------
1992 12.73 .42 .42 21.51 - 1.9 +3.2 + 1.3 +22.6
- -----------------------------------------------------------------------------------------------------------------------------------
1993 13.82 .18 .36 24.31 +10.0 +3.0 +13.0 +10.6
- -----------------------------------------------------------------------------------------------------------------------------------
1994 15.77 1.38 .29 30.94 +25.0 +2.3 +27.3 +12.9
- -----------------------------------------------------------------------------------------------------------------------------------
1995 13.82 .29 .24 28.11 -10.6 +1.5 - 9.1 + 0.5
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +181.1% +339.7%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +10.2% +14.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Gold & Precious Metals Portfolio MSCI Gold
Value With Income -------------------------------------- Mines Index
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/84) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1985* 6.60 -- -- 6.60 -34.9% 0.0% -34.9% - 35.3%
- -----------------------------------------------------------------------------------------------------------------------------------
1986 7.60 -- $.06 7.67 +15.2 +1.1 +16.3 + 3.6
- -----------------------------------------------------------------------------------------------------------------------------------
1987 10.50 -- .21 10.91 +38.2 +4.0 +42.2 + 12.4
- -----------------------------------------------------------------------------------------------------------------------------------
1988 9.35 $1.14 .48 11.18 - 1.6 +4.1 + 2.5 + 4.5
- -----------------------------------------------------------------------------------------------------------------------------------
1989 9.65 -- .26 11.87 + 3.2 +2.9 + 6.1 - 9.2
- -----------------------------------------------------------------------------------------------------------------------------------
1990 12.49 -- .34 15.83 +29.4 +4.0 +33.4 + 72.3
- -----------------------------------------------------------------------------------------------------------------------------------
1991 8.29 -- .32 10.89 -33.6 +2.4 -31.2 - 41.1
- -----------------------------------------------------------------------------------------------------------------------------------
1992 9.41 -- .25 12.70 +13.5 +3.2 +16.7 + 10.9
- -----------------------------------------------------------------------------------------------------------------------------------
1993 7.29 -- .18 10.09 -22.5 +1.9 -20.6 - 23.3
- -----------------------------------------------------------------------------------------------------------------------------------
1994 13.58 -- .21 19.09 +86.3 +2.9 +89.2 +121.5
- -----------------------------------------------------------------------------------------------------------------------------------
1995 10.71 -- .31 15.43 -21.1 +1.9 -19.2 - 21.9
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +52.2% +6.7%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +4.0% +0.6%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return performance for Gold & Precious Metals and the MSCI Gold Mines
Index begins on May 31, 1984.
13
<PAGE> 16
FINANCIAL STATEMENTS
January 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
HEALTH CARE PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.2%)
- --------------------------------------------------------------------------------
MEDICAL TECHNOLOGY AND SERVICE (33.5%)
- --------------------------------------------------------------------------------
HEALTH SERVICES (15.1%)
Bergen Brunswig Corp. Class A 105,000 $ 2,402
Columbia/HCA Healthcare Corp. 314,347 12,613
* FHP International Corp. 450,000 11,588
* Healthdyne, Inc. 296,700 2,670
* Hillhaven Corp. 186,740 4,855
* Humana, Inc. 730,400 16,708
*(1)MDL Information Systems, Inc. 588,300 5,736
McKesson Corp. 810,600 29,891
National Health
Laboratories Holdings 750,000 10,031
* National Medical Enterprises, Inc. 580,000 8,483
Owens & Minor Holdings Co., Inc. 202,500 2,759
* Salick Health Care, Inc. 76,900 2,682
* Syncor International Corp. 526,559 4,476
Walgreen Co. 38,500 1,829
----------
116,723
----------
MEDICAL PRODUCTS (18.4%)
Abbott Laboratories, Inc. 620,000 21,932
* Advanced Technologies Laboratories, Inc. 661,200 10,414
Allergan, Inc. 340,000 9,860
C.R. Bard, Inc. 200,000 5,475
Beckman Instruments 845,000 25,878
Collagen Corp. 353,800 8,668
* Datascope Corp. 140,100 2,487
* Guidant Corp. 553,000 9,885
* Haemonetics Corp. 354,800 5,277
Kinetic Concepts, Inc. 716,000 5,012
* Medisense, Inc. 230,000 4,370
* Nellcor, Inc. 180,000 6,075
Perkin-Elmer Corp. 122,720 3,375
* Protocol Systems, Inc. 273,000 2,662
* Sci-Med Life Systems, Inc. 160,000 9,480
* Spacelabs Medical 280,000 6,510
United States Surgical Corp. 100,000 2,325
* Ventritex, Inc. 75,000 2,025
----------
141,710
----------
GROUP TOTAL 258,433
----------
- --------------------------------------------------------------------------------
PHARMACEUTICALS (60.7%)
- --------------------------------------------------------------------------------
MAJOR PHARMACEUTICALS (26.2%)
American Home Products Corp. 170,000 11,921
Bristol-Myers Squibb Co. 480,000 29,520
Johnson & Johnson 650,000 37,781
Eli Lilly & Co. 300,000 19,763
Marion Merrell Dow, Inc. 347,300 8,552
Merck & Co., Inc. 235,225 9,468
Pfizer, Inc. 460,000 37,605
Rhone-Poulenc Rorer, Inc. 632,700 24,675
Schering-Plough Corp. 73,600 5,778
Warner-Lambert Co. 220,000 17,160
----------
202,223
----------
SPECIALTY PHARMACEUTICALS (16.4%)
A. L. Pharma Inc. Class A 847,700 16,530
* Alliance Pharmaceutical Corp. 762,388 4,765
* ALZA Corp. 120,000 2,820
* Amylin Pharmaceuticals, Inc. 280,000 1,540
* Applied Immune Sciences 383,500 2,157
* Athena Neurosciences, Inc. 700,000 5,425
* Biogen, Inc. 350,000 12,687
Carter-Wallace, Inc. 266,000 2,860
Carter-Wallace, Inc. Class B 24,000 258
* Celtrix Pharmaceuticals, Inc. 183,500 505
Dekalb Genetics Corp. Class B 380,050 10,451
*(1)E-Z-EM Inc. Class A 219,258 877
*(1)E-Z-EM Inc. Class B 245,961 984
* Genetics Institute, Inc.
Depository Shares 266,960 9,143
* Genzyme Corp. 91,200 3,215
* Immunex Corp. 425,100 6,483
* Lynx Therapeutic 211,410 21
*(1)Magainin Pharmaceuticals 694,400 1,996
Mallinckrodt Group, Inc. 803,000 24,291
* Marsam Pharmaceuticals, Inc. 340,800 3,791
* Perrigo 739,400 9,520
* Scios Nova, Inc. 491,750 3,688
* Theratech, Inc. 140,000 1,225
* Xoma Corp. 353,000 927
----------
126,159
----------
INTERNATIONAL (18.1%)
Amersham International PLC 175,000 2,314
Bayer AG ADR 350,000 8,050
Ciba Geigy 40,760 24,623
Eisai Co., Ltd. 300,000 4,778
Fisons PLC 500,000 883
Fujisawa Pharmaceutical 950,000 10,119
Hafslund Nycomed 144,000 3,151
Pharmacia AB Series A Free 592,000 10,605
Sandoz AG (Registered) 17,670 9,034
Schering AG 19,347 13,914
Smithkline Beecham Unit ADR 324,800 11,328
Synthelabo 78,270 3,373
Takeda Chemical Industries 297,000 3,706
Zeneca Group ADR 794,524 33,271
----------
139,149
----------
GROUP TOTAL 467,531
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $576,468) 725,964
- --------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (6.3%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.82%, 2/1/95
(Cost $48,538) $48,538 $ 48,538
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(Cost $625,006) 774,502
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.5%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F 8,146
Liabilities--Note F (11,934)
----------
(3,788)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 20,823,484 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $770,714
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $37.01
================================================================================
</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.
ADR--American Depository Receipt
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $619,401 $29.74
Undistributed Net
Investment Income 328 .02
Accumulated Net Realized Gains 1,489 .07
Unrealized Appreciation
of Investments--Note D 149,496 7.18
- --------------------------------------------------------------------------------
NET ASSETS $770,714 $37.01
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
ENERGY PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.3%)
- --------------------------------------------------------------------------------
PETROLEUM (54.6%)
- --------------------------------------------------------------------------------
INTERNATIONAL OIL (8.3%)
Chevron Corp. 150,000 $ 6,694
Exxon Corp. 310,000 19,375
Texaco, Inc. 160,000 9,860
----------
35,929
----------
DOMESTIC INTEGRATED OIL (24.1%)
Amerada Hess Corp. 270,000 12,251
Amoco Corp. 210,000 12,180
Atlantic Richfield Co. 140,000 14,910
Kerr-McGee Corp. 300,000 14,212
Murphy Oil Corp. 100,100 4,354
Pennzoil Co. 150,000 6,750
Phillips Petroleum Co. 280,000 8,925
USX-Marathon Group 850,000 13,600
Unocal Corp. 646,000 16,877
----------
104,059
----------
DOMESTIC REFINING AND MARKETING (4.6%)
Ashland Oil, Inc. 380,000 12,398
Diamond Shamrock, Inc. 200,000 4,675
Ultramar Corp. 120,000 2,910
----------
19,983
----------
DOMESTIC PRODUCERS (17.6%)
Anadarko Petroleum Corp. 100,000 3,825
Apache Corp. 100,000 2,325
* Benton Oil & Gas Co. 230,000 2,185
Cabot Oil & Gas Corp. 138,100 1,726
* Dekalb Energy Co. Class B 300,000 6,000
Devon Energy Corp. 250,000 4,250
* Maxus Energy Corp. 2,000,000 7,000
Mitchell Energy & Development
Corp. Class B 220,000 3,658
Oryx Energy Co. 850,000 8,819
Parker & Parsley Petroleum Co. 68,300 1,246
Pogo Producing Co. 400,000 6,600
* Santa Fe Energy Resources, Inc. 500,000 4,250
* TransTexas Gas Corp. 600,000 6,300
* Triton Energy Corp. 150,000 4,800
Union Texas Petroleum
Holdings, Inc. 300,000 5,513
Vastar Resources, Inc. 326,000 7,620
----------
76,117
----------
GROUP TOTAL 236,088
----------
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT AND SERVICES (13.5%)
- --------------------------------------------------------------------------------
* BJ Services Co. 200,000 3,425
Baker Hughes, Inc. 420,000 7,402
Camco International, Inc. 99,000 1,745
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
* Energy Service Co., Inc. 127,850 $ 1,518
Enterra Corp. 173,300 2,903
* Global Marine, Inc. 400,000 1,500
Halliburton Co. 100,000 3,625
Helmerich & Payne, Inc. 90,000 2,295
McDermott International, Inc. 170,000 4,377
* Nabors Industries, Inc. 220,000 1,430
* Noble Drilling Corp. 700,000 3,500
Nowsco Well Service, Ltd. 250,000 2,318
* Numar Corp. 100,000 975
* Pride Petroleum Services 100,000 487
* Rowan Cos., Inc. 300,000 1,725
Schlumberger Ltd. 200,000 10,550
* Taro Industries, Ltd. 1,567,500 831
* Varco International, Inc. 750,000 4,688
* Weatherford International, Inc. 350,000 3,150
----------
GROUP TOTAL 58,444
----------
- --------------------------------------------------------------------------------
ENERGY TRANSPORTATION AND
DISTRIBUTION (6.0%)
- --------------------------------------------------------------------------------
Burmah Castrol PLC 354,216 4,613
ENSERCH Corp. 242,180 3,148
London & Overseas
Freighter Ltd. ADR 290,000 3,263
* OMI Corp. 700,000 3,938
Overseas Shipholding Group, Inc. 250,000 5,406
* Seagull Energy Corp. 200,000 3,200
* Smedvig Tankships 300,000 2,354
----------
GROUP TOTAL 25,922
----------
- --------------------------------------------------------------------------------
FOREIGN ENERGY (24.2%)
- --------------------------------------------------------------------------------
CANADA (15.9%)
* Alberta Energy 300,000 3,841
* Anderson Exploration Ltd. 60,000 509
* Barrington Petroleum 300,000 912
* C S Resources Ltd. 500,000 2,340
* Cabre Exploration 310,000 2,683
* Canadian Natural Resources 407,000 3,234
* Elan Energy Inc. 150,000 768
* Gulf Canada Resources Ltd. 204,000 587
* Gulf Canada Resources Ltd.
1.00% Pref. 500,000 1,130
* Home Oil Co. Ltd. 662,380 6,961
* International Colin Energy 531,150 3,652
International Petroleum Corp. 200,000 240
* Jordan Petroleum Ltd. 531,000 2,626
* Mark Resources, Inc. 800,000 3,744
* Morgan Hydrocarbons 600,000 1,526
Morrison Petroleum 268,000 1,231
* Norcen Energy Resources Ltd. 300,000 3,285
* Northern Reef Exploration Ltd. 325,000 368
* Northrock Resources Ltd. 70,000 389
* Northstar Energy Corp. 320,000 2,374
Paramount Resources Ltd. 360,300 3,182
* Penn West Petroleum 200,000 742
Petro-Canada 272,300 2,164
* Pinnacle Resources Ltd. 200,000 1,907
* Poco Petes Ltd. 800,000 4,097
* Ranchmens Resource 500,000 1,749
* Rigel Energy Corp. 183,790 1,980
* Rio Alto Exploration Ltd. 300,000 880
* Talisman Energy, Inc. 255,000 4,053
* Tarragon Oil & Gas Ltd. 280,000 2,398
* Wascana Energy Inc. 470,000 3,196
----------
68,748
----------
- --------------------------------------------------------------------------------
OTHER (8.3%)
* Lasmo PLC 3,357,141 7,755
Norsk Hydro AS ADR 200,000 7,900
Repsol SA ADR 180,000 5,040
Saga Petroleum B 207,000 2,281
Total Co. Francaise Petro ADR 305,418 8,666
* YPF Sociedad Anonima ADR 220,000 4,537
----------
36,179
----------
GROUP TOTAL 104,927
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $461,804) 425,381
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.0%)
- --------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.82%, 2/1/95
(Cost $8,699) $8,699 8,699
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $470,503) 434,080
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- --------------------------------------------------------------------------------
Other Assets--Note C 4,757
Liabilities (5,945)
----------
(1,188)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 31,333,695 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $432,892
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.82
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt
16
<PAGE> 19
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- --------
<S> <C> <C>
Paid in Capital $468,514 $14.95
Undistributed Net
Investment Income 239 .01
Accumulated Net Realized Gains 562 .02
Unrealized Depreciation
of Investments--Note D (36,423) (1.16)
- --------------------------------------------------------------------------------
NET ASSETS $432,892 $13.82
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
GOLD & PRECIOUS Value
METALS PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (90.8%)
- --------------------------------------------------------------------------------
AUSTRALIA (23.4%)
- --------------------------------------------------------------------------------
GOLD MINES (18.6%)
Dominion Mining 12,000,000 $ 2,727
* Emperor Mines 2,000,000 3,030
* Gold Mines of Australia 7,000,000 2,015
* Golden Shamrock Mines Ltd. 8,000,000 5,151
* Great Central Mines 3,000,000 6,022
Highlands Gold 15,000,000 10,794
Kidston Gold Mines 3,000,000 5,454
Newcrest Mining Ltd. 4,000,000 14,604
Perseverance Corp. 1,500,000 614
Placer Pacific Ltd. 3,500,000 7,423
Plutonic Resources 2,250,000 8,521
Poseidon Gold 4,500,000 7,567
* Renison Goldfields
Consolidated Ltd. 3,500,000 12,301
Samantha Gold 4,000,000 8,120
* Star Mining Corp. 18,000,000 4,499
----------
98,842
----------
OTHER (4.8%)
* Bougainville Copper 2,000,000 833
CRA Ltd. 600,000 7,490
Normandy Poseidon Ltd. 4,000,000 5,605
Western Mining Corp. 2,250,000 11,589
----------
25,517
----------
GROUP TOTAL 124,359
----------
- --------------------------------------------------------------------------------
NORTH AMERICA (28.9%)
- --------------------------------------------------------------------------------
GOLD MINES (28.2%)
* Amax Gold, Inc. 1,500,000 7,125
* Amax Gold, Inc.
Warrants Exp. 1/8/96 51,550 6
* Atlas Corp. 700,000 1,575
Barrick Gold Corp. 750,000 14,906
Cambior, Inc. 700,000 6,614
* Campbell Resources 5,000,000 3,437
* Crown Resource Corp. 600,000 2,100
Euro Nevada 500,000 9,361
Franco Nevada 275,000 12,239
Freeport McMoRan Copper &
Gold, Inc. Class A 400,000 8,200
Freeport McMoRan Copper &
Gold, Inc.
7% Convertible Pfd. 150,000 3,431
Freeport McMoRan Copper &
Gold, Inc. Gold
Denomination Shares 150,000 4,687
* Golden Star Resources Ltd. 350,000 2,349
Homestake Mining Co. 500,000 7,687
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
* Nelson Trade & Finance 2,000,700 $ 3,533
Newmont Gold Co. 125,000 4,078
Newmont Mining Corp. 275,000 9,453
Placer Dome Group, Inc. 500,000 9,375
* Prime Resources 1,250,000 7,727
* Rayrock Yellowknife 750,000 7,948
* Royal Oak Mines Ltd. 2,000,000 5,750
* Santa Fe Pacific Gold Corp. 500,000 5,063
* TVX Gold Mining 2,000,000 11,833
* Vengold, Inc. 500,000 1,113
----------
149,590
----------
OTHER (.7%)
* Stillwater Mining 250,000 3,781
*(1)Texas Star Resources Corp. 900,000 254
----------
4,035
----------
GROUP TOTAL 153,625
----------
- --------------------------------------------------------------------------------
SOUTH AFRICA (33.7%)
- --------------------------------------------------------------------------------
GOLD MINES (20.9%)
Beatrix Gold Mines ADR 1,350,000 6,750
Driefontein Consolidated
Ltd. ADR 1,000,000 11,500
Elandsrand Gold Mining
Ltd. ADR 1,500,000 7,125
Free State Consolidated Gold
Mines Ltd. ADR 1,750,000 19,906
Hartebeestfontein Gold
Mining Co. Ltd. ADR 2,300,000 7,820
Kinross ADR 425,000 5,525
Kloof Gold Mining Ltd. ADR 850,000 8,288
Randfontein Estates Gold
Mining Co. Ltd. ADR 1,800,000 11,700
Southvaal Holdings ADR 330,000 7,425
Vaal Reefs Exploration &
Mining Co. Ltd. ADR 2,125,000 15,008
Western Deeplevel ADR 350,000 10,019
----------
111,066
----------
OTHER (12.8%)
Anglo American Corp. ADR 275,000 12,375
De Beers Centenary Units ADR 700,000 13,913
Gold Fields of South Africa ADR 400,000 8,850
Impala Platinum Holdings
Ltd. ADR 700,000 12,425
Minorco Ltd. ADR 400,000 8,200
Rustenberg Platinum Holdings
Ltd. ADR 600,000 12,075
----------
67,838
----------
GROUP TOTAL 178,904
----------
- --------------------------------------------------------------------------------
UNITED KINGDOM (3.6%)
- --------------------------------------------------------------------------------
GOLD MINES (2.0%)
* Ashanti Goldfields GDS 425,000 $ 8,819
* Bakyrchik Gold 650,000 1,833
----------
10,652
----------
OTHER (1.6%)
RTZ Corp. 700,000 8,671
----------
GROUP TOTAL 19,323
----------
- --------------------------------------------------------------------------------
JAPAN (1.2%)
- --------------------------------------------------------------------------------
Sumitomo Metal Mining 750,000 6,087
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $483,181) 482,298
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS (.4%)
- --------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
Canyon Resources Corp.
6.00%, 6/1/98 $ 1,000 688
Renison Goldfields
Consolidated, Ltd.
8.00%, 11/30/96 200 1,517
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $2,120) 2,205
- --------------------------------------------------------------------------------
PRECIOUS METALS (6.5%)
- --------------------------------------------------------------------------------
* Gold (89,872 ounces) 33,702
* Platinum (2,009 ounces) 832
- --------------------------------------------------------------------------------
TOTAL PRECIOUS METALS
(Cost $37,012) 34,534
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.2%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.82%, 2/1/95
(Cost $11,351) 11,351 11,351
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $533,664) 530,388
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.1%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F 6,948
Liabilities--Note F (6,249)
----------
699
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 49,589,908 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $531,087
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.71
================================================================================
</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.
ADR--American Depository Receipt
GDS--Global Depository Share
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $557,997 $11.25
Overdistributed Net
Investment Income--Note E (2,637) (.05)
Accumulated Net
Realized Losses--Note D (20,997) (.42)
Unrealized Depreciation
of Investments--Note D (3,276) (.07)
- --------------------------------------------------------------------------------
NET ASSETS $531,087 $10.71
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
UTILITIES INCOME PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (75.8%)
- --------------------------------------------------------------------------------
COAL, GAS, & PIPE (.7%)
Coastal Corp. 100,000 $ 2,700
Mitchell Energy & Development
Corp. Class B 100,000 1,663
----------
GROUP TOTAL 4,363
----------
- --------------------------------------------------------------------------------
DIVERSIFIED (.6%)
Tenneco, Inc. 87,400 3,846
----------
- --------------------------------------------------------------------------------
ELECTRICAL POWER (29.2%)
Allegheny Power System, Inc. 110,000 2,626
CMS Energy Corp. 60,000 1,410
Central Hudson Gas &
Electric Corp. 216,300 5,759
Central Maine Power Co. 137,600 1,909
CINergy Corp. 320,821 7,900
Consolidated Edison Co. of
New York, Inc. 146,600 4,141
DQE, Inc. 446,500 14,176
Detroit Edison Co. 271,000 7,588
Eastern Utilities Associates 149,200 3,413
Entergy Corp. 406,600 9,911
FPL Group, Inc. 156,900 5,746
General Public Utilities Corp. 350,700 9,907
Houston Industries, Inc. 105,400 4,203
New York State Electric &
Gas Corp. 310,000 6,471
Niagara Mohawk Power Corp. 181,800 2,818
Ohio Edison Co. 65,000 1,373
PECO Energy Corp. 85,400 2,284
Pacific Gas & Electric Co. 546,700 13,804
PacifiCorp 160,000 3,120
Pinnacle West Capital Corp. 530,200 11,002
Public Service Co. of Colorado 264,600 8,004
SCE Corp. 388,000 6,354
Sierra Pacific Resources 524,900 10,564
Texas Utilities Co. 103,517 3,597
Unicom Corp. 364,400 9,474
United Illuminating 141,800 4,520
Western Resources, Inc. 237,700 7,577
Wisconsin Energy Corp. 130,600 3,657
----------
GROUP TOTAL 173,308
----------
- --------------------------------------------------------------------------------
NATURAL GAS (11.6%)
Consolidated Natural Gas Co. 111,900 3,861
Equitable Resources, Inc. 231,900 6,638
KN Energy, Inc. 10,500 228
* Metrogas ADS 210,000 1,916
National Fuel & Gas Co. 275,000 7,288
NICOR, Inc. 147,600 3,524
Nova Corp. of Alberta 295,800 2,477
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
ONEOK, Inc. 185,400 $ 3,245
Pacific Enterprises 167,200 3,804
Panhandle Eastern Corp. 100,000 2,100
Questar Corp. 227,300 6,080
Sonat, Inc. 215,000 5,778
TransCanada Pipelines 407,500 5,038
Washington Energy Co. 383,500 5,417
Westcoast Energy, Inc. 541,900 7,944
Westcoast Energy, Inc. Class B 30,000 440
Williams Cos., Inc. 100,000 2,700
----------
GROUP TOTAL 68,478
----------
- --------------------------------------------------------------------------------
TELEPHONE (32.7%)
AT&T Corp. 388,900 19,396
BCE, Inc. 307,600 9,228
Bell Atlantic Corp. 383,000 20,778
BellSouth Corp. 220,000 13,035
Comsat Corp. 571,800 11,293
Frontier Corp. 244,200 5,128
GTE Corp. 674,100 22,835
NYNEX Corp. 530,200 20,943
Pacific Telesis Group 337,300 10,330
Southern New England
Telecom Corp. 321,700 10,697
SBC Communications, Inc. 255,700 10,899
Sprint Corp. 250,000 7,125
* Tele Danmark ADR 132,500 3,313
Telus Corp. 333,100 3,706
U.S. West Corp. 637,600 24,946
----------
GROUP TOTAL 193,652
----------
- --------------------------------------------------------------------------------
WATER & OTHER (1.0%)
American Water Works Co., Inc. 90,000 2,576
Southern California Water Co. 150,700 2,637
----------
GROUP TOTAL 5,213
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $471,063) 448,860
- --------------------------------------------------------------------------------
BONDS (18.9%)
- --------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
ELECTRICAL POWER (10.4%)
Carolina Power & Light Co.
8.625%, 9/15/21 $3,000 3,083
Central Power & Light Co.
7.25%, 10/1/04 2,000 1,848
Dayton Power & Light Co.
8.15%, 1/15/26 3,000 2,889
Duke Power Co.
6.625%, 2/1/03 4,000 3,654
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Florida Power & Light Co.
7.00%, 9/1/25 $6,000 $ 5,116
Houston Lighting & Power Co.
7.50%, 7/01/23 2,000 1,761
8.75%, 3/1/22 2,000 2,007
Kansas Gas & Electric Co.
7.60%, 12/15/03 4,000 3,826
Northern States Power Co.
5.75%, 10/1/03 6,000 5,165
Pacific Gas & Electric Co.
5.375%, 8/1/98 3,000 2,747
8.375%, 5/1/25 2,000 1,916
Southern California Electric & Gas
8.75%, 10/1/21 3,000 3,002
Southern Indiana Gas & Electric
8.875%, 6/1/16 3,400 3,566
Tampa Electric Co.
7.75%, 11/1/22 3,000 2,685
Union Electric Power Co.
8.75%, 12/1/21 2,000 2,013
U.S. West Communications
6.125%, 11/15/05 4,000 3,424
Virginia Electric & Power Co.
6.00%, 8/1/01 6,000 5,426
West Texas Utilities
7.75%, 6/1/07 1,500 1,409
Wisconsin Electric Power Co.
7.75%, 1/15/23 2,000 1,841
Wisconsin Public Service Co.
6.80%, 2/1/03 4,500 4,157
----------
GROUP TOTAL 61,535
----------
- --------------------------------------------------------------------------------
NATURAL GAS (.7%)
Atlanta Gas & Light
5.90%, 10/6/03 5,000 4,254
----------
- --------------------------------------------------------------------------------
TELEPHONE (7.8%)
AT&T Corp.
7.50%, 6/1/06 5,000 4,784
BellSouth Telecommunication
6.75%, 10/15/33 5,000 4,038
Bell Telephone Co. of Pennsylvania
6.625%, 9/15/02 3,500 3,246
Carolina Telephone & Telegraph
5.75%, 8/15/00 5,000 4,486
GTE Northwest
6.125%, 2/15/99 5,000 4,650
Illinois Bell Telephone Co.
7.25%, 3/15/24 2,000 1,730
Michigan Bell Telephone Co.
6.375%, 9/15/02 2,000 1,812
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
New Jersey Bell Telephone Co.
8.00%, 6/1/22 $3,000 $ 2,915
New York Telephone &
Telegraph Co.
8.625%, 11/15/10 2,500 2,535
Ohio Bell Telephone Co.
7.85%, 12/15/22 2,000 1,915
Pacific Bell Telephone Co.
7.25%, 7/1/02 4,000 3,822
Southwestern Bell
6.625%, 4/1/05 3,000 2,661
United Telephone Florida
6.25%, 5/15/03 3,000 2,665
United Telephone Ohio
6.625%, 10/1/02 2,000 1,817
Wisconsin Bell
6.75%, 8/15/24 4,000 3,266
----------
GROUP TOTAL 46,342
----------
- --------------------------------------------------------------------------------
TOTAL BONDS
(Cost $123,014) 112,131
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.4%)
- --------------------------------------------------------------------------------
U.S. TREASURY NOTE
5.50%, 4/15/00
(Cost $8,807) 9,000 8,227
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.0%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.82%, 2/1/95
(Cost $11,851) 11,851 11,851
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.1%)
(Cost $614,735) 581,069
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.9%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F 33,432
Liabilities--Note F (21,893)
----------
11,539
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 56,878,825 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $592,608
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.42
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt
ADS--American Depository Share
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $641,566 $11.28
Undistributed Net
Investment Income 9,205 .16
Accumulated Net
Realized Losses--Note D (24,497) (.43)
Unrealized Depreciation
of Investments--Note D (33,666) (.59)
- --------------------------------------------------------------------------------
NET ASSETS $592,608 $10.42
- --------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HEALTH CARE ENERGY
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . $10,782 $ 7,177
Interest . . . . . . . . . . . . . . . . . . . . . . . 1,837 1,050
- -----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 12,619 8,227
- -----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . 861 575
The Vanguard Group--Note C . . . . . . . . . . . . . . 1,405 430
Taxes (other than income taxes) . . . . . . . . . . . 48 22
Custodians' Fees . . . . . . . . . . . . . . . . . . . 123 164
Auditing Fees . . . . . . . . . . . . . . . . . . . . 6 6
Shareholders' Reports . . . . . . . . . . . . . . . . 66 57
Annual Meeting and Proxy Costs . . . . . . . . . . . . 26 9
Directors' Fees and Expenses . . . . . . . . . . . . . 3 2
- -----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 2,538 1,265
- -----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 10,081 6,962
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . 34,818 7,354
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . 18,839 (59,289)
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations . . . . . $63,738 $(44,973)
- -----------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
GOLD & PRECIOUS UTILITIES INCOME
METALS PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . . . $ 13,047 $ 26,957
Interest . . . . . . . . . . . . . . . . . . . . . . . 1,524 9,578
- -----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 14,571 36,535
- -----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . 1,116 756
The Vanguard Group--Note C . . . . . . . . . . . . . . 132 2,038
Taxes (other than income taxes) . . . . . . . . . . . 50 73
Custodians' Fees . . . . . . . . . . . . . . . . . . . 173 50
Auditing Fees . . . . . . . . . . . . . . . . . . . . 6 6
Shareholders' Reports . . . . . . . . . . . . . . . . 75 105
Annual Meeting and Proxy Costs . . . . . . . . . . . . 9 27
Directors' Fees and Expenses . . . . . . . . . . . . . 3 3
- -----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 1,564 3,058
- -----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 13,007 33,477
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . 3,212 (24,471)
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . (149,036) (45,090)
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations . . . . . $(132,817) $(36,084)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $2,297,000.
23
<PAGE> 26
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO ENERGY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1995 January 31, 1994 JANUARY 31, 1995 January 31, 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 10,081 $ 12,884 $ 6,962 $ 4,621
Realized Net Gain (Loss) . . . . . . . . . . . 34,818 30,424 7,354 22,730
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . 18,839 63,279 (59,289) 23,473
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . 63,738 106,587 (44,973) 50,824
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (10,497) (12,384) (7,148) (4,161)
Realized Net Gain . . . . . . . . . . . . . . (42,079) (31,623) (8,318) (19,802)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (52,576) (44,007) (15,466) (23,963)
- ------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION
Credits (Charges)--Note A . . . . . . . . . . -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . 76,213 85,116 110,300 101,220
--In Lieu of Cash Distributions . . . 50,271 42,105 14,334 22,424
--Exchange . . . . . . . . . . . . . 114,500 150,660 166,536 222,492
Redeemed --Regular . . . . . . . . . . . . . . (40,896) (62,573) (48,268) (38,474)
--Exchange . . . . . . . . . . . . . (78,502) (201,763) (88,840) (158,967)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . 121,586 13,545 154,062 148,695
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 132,748 76,125 93,623 175,556
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . 637,966 561,841 339,269 163,713
- ------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . $770,714 $ 637,966 $432,892 $ 339,269
========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . $ .57 $ .76 $.24 $ .29
Realized Net Gain . . . . . . . . . . . . $2.31 $1.97 $.29 $1.38
- ------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . 5,337 7,171 17,811 19,803
Issued in Lieu of Cash Distributions . . . 1,430 1,277 992 1,553
Redeemed . . . . . . . . . . . . . . . . . (3,416) (8,180) (8,982) (11,687)
- ------------------------------------------------------------------------------------------------------------------------
3,351 268 9,821 9,669
- ------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income . . . . . . . . . $ 328 $ 744 $ 239 $ 425
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO UTILITIES INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1995 January 31, 1994 JANUARY 31, 1995 January 31, 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 13,007 $ 8,682 $ 33,477 $ 31,371
Realized Net Gain (Loss) . . . . . . . . . . . 3,212 6,931 (24,471) 31,762
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . (149,036) 200,021 (45,090) (5,047)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . (132,817) 215,634 (36,084) 58,086
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (15,231) (9,095) (34,340) (29,934)
Realized Net Gain . . . . . . . . . . . . . . -- -- (7,108) (25,584)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (15,231) (9,095) (41,448) (55,518)
- ------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION
Credits (Charges)--Note A . . . . . . . . . . -- -- (1,346) 4,629
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . 112,156 175,749 70,620 339,906
--In Lieu of Cash Distributions . . . 13,866 8,030 33,422 46,953
--Exchange . . . . . . . . . . . . . 267,733 584,688 94,577 254,384
Redeemed --Regular . . . . . . . . . . . . . . (85,473) (57,064) (79,265) (52,584)
--Exchange . . . . . . . . . . . . . (241,692) (480,684) (186,274) (218,225)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . 66,590 230,719 (66,920) 370,434
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . (81,458) 437,258 (145,798) 377,631
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . 612,545 175,287 738,406 360,775
- ------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . $ 531,087 $ 612,545 $ 592,608 $ 738,406
========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . $.31 $.21 $.59 $.56
Realized Net Gain . . . . . . . . . . . . -- -- $.12 $.40
- ------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . 28,806 67,267 16,045 49,884
Issued in Lieu of Cash Distributions . . . 1,096 608 3,226 4,010
Redeemed . . . . . . . . . . . . . . . . . (25,414) (46,829) (25,665) (22,891)
- ------------------------------------------------------------------------------------------------------------------------
4,488 21,046 (6,394) 31,003
- ------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note E . . . . $ (2,637) $ (413) $ 9,205 $ 11,414
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $36.51 $32.66 $35.54 $27.32 $22.16
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .55 .79 .70 .53 .52
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . 2.83 5.79 (1.68) 8.75 6.03
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . 3.38 6.58 (.98) 9.28 6.55
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.57) (.76) (.70) (.53) (.55)
Distributions from Realized Capital Gains . . . (2.31) (1.97) (1.20) (.53) (.84)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (2.88) (2.73) (1.90) (1.06) (1.39)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $37.01 $36.51 $32.66 $35.54 $27.32
==================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . +9.79% +21.21% -2.92% +33.97% +30.09%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $771 $638 $562 $553 $189
Ratio of Expenses to Average Net Assets--Note C . .40% .19% .22% .30% .36%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 1.58% 2.37% 2.06% 1.98% 2.54%
Portfolio Turnover Rate . . . . . . . . . . . . . 25% 19% 15% 7% 17%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $15.77 $13.82 $12.73 $13.39 $14.94
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .23 .31 .34 .42 .45
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . (1.65) 3.31 1.29 (.24) (.66)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . (1.42) 3.62 1.63 .18 (.21)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.24) (.29) (.36) (.42) (.46)
Distributions from Realized Capital Gains . . . (.29) (1.38) (.18) (.42) (.88)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.53) (1.67) (.54) (.84) (1.34)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $13.82 $15.77 $13.82 $12.73 $13.39
==================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . -9.15% +27.31% +13.02% +1.27% -1.64%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $433 $339 $164 $124 $114
Ratio of Expenses to Average Net Assets--Note C . .30% .17% .21% .30% .35%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 1.66% 1.87% 2.47% 2.78% 3.24%
Portfolio Turnover Rate . . . . . . . . . . . . . 13% 41% 37% 42% 40%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee that is assessed on
redemptions of shares that are held in the Portfolios for less than one
year.
26
<PAGE> 29
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
--------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $13.58 $ 7.29 $9.41 $8.29 $12.49
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .27 .20 .19 .24 .29
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . (2.83) 6.30 (2.13) 1.13 (4.17)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . (2.56) 6.50 (1.94) 1.37 (3.88)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.31) (.21) (.18) (.25) (.32)
Distributions from Realized Capital Gains . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.31) (.21) (.18) (.25) (.32)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $10.71 $13.58 $7.29 $9.41 $ 8.29
==================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . -19.20% +89.24% -20.58% +16.67% -31.21%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $531 $613 $175 $178 $144
Ratio of Expenses to Average Net Assets--Note C . .25% .26% .36% .35% .42%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 2.04% 2.04% 2.50% 2.54% 2.78%
Portfolio Turnover Rate . . . . . . . . . . . . . 4% 14% 2% 3% 10%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee that is assessed on
redemptions of shares that are held in the Portfolios for less than one
year.
<TABLE>
<CAPTION>
UTILITIES INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
--------------------------------- May 15, 1992, to
For a Share Outstanding Throughout Each Period 1995 1994 January 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $11.67 $11.18 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .56 .57 .41
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (1.10) .88 1.03
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . (.54) 1.45 1.44
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.59) (.56) (.24)
Distributions from Realized Capital Gains . . . . . (.12) (.40) (.02)
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.71) (.96) (.26)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $10.42 $11.67 $11.18
==================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . -4.47% +13.08% +14.51%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $593 $738 $361
Ratio of Expenses to Average Net Assets . . . . . . . .50% .42% .45%*
Ratio of Net Investment Income to Average Net Assets 5.43% 4.82% 4.70%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 35% 46% 20%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
27
<PAGE> 30
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, 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 not
listed and precious metals 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 London 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. 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.
The Fund does not isolate that portion of the results of operations
resulting from
28
<PAGE> 31
changes in foreign exchange rates on investments from the portion arising
from changes in market prices of securities. Such fluctuations are included
in net realized gain (loss) and unrealized appreciation (depreciation) on
investments.
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,
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,
1995, the investment advisory fees of the Health Care and Energy Portfolios
represent an effective annual rate of .14 of 1% of average net assets. The
investment advisory fee of the Utilities Income Portfolio represents an
effective annual rate of .12 of 1% of average net assets.
Under the terms of a contract which expires January 31, 1996, M&G Investment
Management Ltd. 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, 1995, the investment
advisory fee of the Gold & Precious Metals Portfolio represents an effective
annual rate of .17 of 1% of average net assets after giving effect to a fee
waiver of $415,000 (.07 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. Prior to June 3, 1994, fees charged to shareholders of the Health
Care, Energy, and Gold & Precious Metals Portfolios in the redemption of
capital shares were credited by Vanguard to the respective Portfolio and were
utilized to offset administrative expenses. Under a new fee policy effective
June 3, 1994, redemption fees are instead credited to paid in capital.
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended January 31, 1995, directed
brokerage arrangements reduced the expenses of the Health Care, Energy, and
Utilities Income Portfolios by $37,000, $91,000, and $170,000, respectively
(annual rates of .01, .02, and .03 of 1% of average nets assets, respectively).
At January 31, 1995, the Fund had contributed capital of $365,000 to Vanguard
(included in Other Assets), representing 1.8% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
D. During the year ended January 31, 1995, 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 $215,471 $150,569
- --------------------------------------------------------------------
ENERGY 212,979 52,406
- --------------------------------------------------------------------
GOLD & PRECIOUS METALS 101,880 25,225
- --------------------------------------------------------------------
UTILITIES INCOME 210,037 292,269
- --------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (continued)
At January 31, 1995, the Gold & Precious Metals and Utilities Income Portfolios
had available capital losses to offset future net capital gains through the
following fiscal year ends:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Expiration
Fiscal Year(s) Ending Amount
Portfolio January 31, (000)
- --------------------------------------------------------------------
<S> <C> <C>
GOLD & PRECIOUS METALS 1997-2001 $20,997
- --------------------------------------------------------------------
UTILITIES INCOME 2003-2004 24,471
- --------------------------------------------------------------------
</TABLE>
At January 31, 1995, unrealized appreciation (depreciation) for Federal income
tax purposes was:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(000)
------------------------------------------------
Net
Unrealized
Appreciated Depreciated Appreciation
Portfolio Securities Securities (Depreciation)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE $172,975 $(23,479) $149,496
- ----------------------------------------------------------------------
ENERGY 19,655 (56,078) (36,423)
- ----------------------------------------------------------------------
GOLD & PRECIOUS METALS 65,882 (69,158) (3,276)
- ----------------------------------------------------------------------
UTILITIES INCOME 10,236 (43,902) (33,666)
- ----------------------------------------------------------------------
</TABLE>
E. 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 "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 $2,167,000 during the
year ended January 31, 1995.
F. The market values of securities on loan to broker/dealers at January 31,
1995, 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 $ 2,325 $ 2,400
- ---------------------------------------------------------------------
GOLD & PRECIOUS METALS 3,197 3,694
- ---------------------------------------------------------------------
UTILITIES INCOME 10,874 11,110
- ---------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
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, Energy, Gold & Precious Metals, and Utilities Income
Portfolios of Vanguard Specialized Portfolios (the "Fund") at January 31, 1995,
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, 1995 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 3, 1995
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD SPECIALIZED PORTFOLIOS, INC.
Corporate shareholders should note that for the fiscal year ended January 31,
1995, 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:
<TABLE>
<S> <C>
Health Care Portfolio . . . . . . . . . . . . . . . . . . . . 58.4%
Energy Portfolio . . . . . . . . . . . . . . . . . . . . . . 73.1%
Gold & Precious Metals Portfolio . . . . . . . . . . . . . . 0.0%
Utilities Income Portfolio . . . . . . . . . . . . . . . . . 75.8%
</TABLE>
31
<PAGE> 34
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 of Rhone-Poulenc
Rorer, Inc.; Director of Sun Company, Inc.
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 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., The Jeffrey Co.,
and Southern New England Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich
Company, Reliance Electric 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 Chief Executive
Officer 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
ROBERT A. DISTEFANO VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Information Technology Operations
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
32
<PAGE> 35
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of risk)
to prospective investors, and in our description to shareholders of each
Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 36
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
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 Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
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<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q510-1/95
<PAGE> 37
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through six.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart comparing the indexed value of the Standard & Poor's
Growth Index and the Standard & Poor's Value Index for the fiscal years
1991 to 1995 appears at the upper-left of page two.
A cumulative performance line chart comparing the Utilities Income
Portfolio, the Average Utility Fund, and a Composite Index (80% S&P Utility
Index and 20% Lehman Utility Bond Index) for the fiscal periods May 31,
1992 to January 31, 1995, including average annual total returns, appears
on page three.
A cumulative performance line chart comparing the Health Care
Portfolio, the Average Health Care Fund, and the Standard & Poor's 500
Index for the fiscal years 1987 to 1995, including average annual total
returns, appears at the upper left of page four.
A cumulative performance line chart comparing the Energy Portfolio,
the Average Natural Resources Fund, and the Standard & Poor's 500 Index for
the fiscal years 1987 to 1995, including average annual total returns,
appears at the upper left of page four.
A cumulative performance line chart comparing the Gold & Precious
Metals Portfolio, the Average Gold Fund, and the MSCI Gold Mines Index for
the fiscal years 1987 to 1995, including average annual total returns,
appears at the upper left of page four.
A running head featuring a coiled rope appears on page seven.
A running head featuring a map and telescope appears on pages eight
through eleven.
A running head featuring a lantern appears on pages twelve and
thirteen.
A running head featuring a log book and pen appears on pages fourteen
through thirty-one.
A running head featuring a compass appears on page thirty-two.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover
of the report.
