<PAGE> 1
[VANGUARD
SPECIALIZED
PORTFOLIOS
LOGO]
ANNUAL REPORT 1996
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, assumed my responsibilities as Chief
Executive Officer of Vanguard Specialized Portfolios and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of all
the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have been
working closely together since he joined Vanguard in 1982. He is a graduate of
Dartmouth College and Harvard Business School. He started as Assistant to the
Chairman and, rising like a rocket, became President in 1989. While, at age 41,
he may seem young, he is in fact older than I was when I became Chief Executive
Officer of Vanguard's predecessor organization in 1967, at the age of 38. Most
important of all, Jack is completely dedicated to the Vanguard character, and
believes in our basic mission: serving solely the shareholder, free of any
conflict of interest. He believes in holding our costs of operation to a
minimum, and in retaining our position as the lowest-cost provider of financial
services in the world. He is a true competitor, who shares Vanguard's
dedication to providing highly competitive returns to our investors relative to
the returns provided by other mutual funds with comparable objectives. He also
believes in reporting our results to shareholders with complete candor. He has
the full support of the Board of Directors and our crew, and is committed to
staying the course we have set for Vanguard. You need have no doubt that the
essential elements that drew you to Vanguard in the first place will remain
intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as Chairman
of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me in
the past and, in advance, for your continued confidence in Vanguard under Jack
Brennan's leadership.
/s/ JOHN C. BOGLE
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:
The year ended January 31, 1996, was a remarkable period indeed for financial
markets. Buoyed by falling long-term interest rates and strong corporate
profits, U.S. stock prices rose dramatically, providing a total return of
+38.7%, as measured by the Standard & Poor's 500 Composite Stock Price Index.
Long-term bonds also had one of their best years on record, with the long-term
U.S. Treasury bond posting a return of +28.9%. In this salubrious environment,
each of our Vanguard Specialized Portfolios provided handsome returns to
shareholders.
This table shows the total return (capital change plus reinvested
dividends) achieved by our four Portfolios during fiscal 1996 compared with
their respective competitive fund standards and an unmanaged performance
benchmark: for our three "regular" equity Portfolios, the Standard & Poor's 500
Index; and for our Gold & Precious Metals Portfolio, the Salomon World Gold
Index.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURN
-------------------
FISCAL YEAR ENDED
JANUARY 31, 1996
- --------------------------------------------------------------------
<S> <C>
UTILITIES INCOME PORTFOLIO +29.5%
AVERAGE UTILITY FUND +25.1
- --------------------------------------------------------------------
HEALTH CARE PORTFOLIO +45.5%
AVERAGE HEALTH CARE FUND +48.7
- --------------------------------------------------------------------
ENERGY PORTFOLIO +28.7%
AVERAGE NATURAL RESOURCES FUND +26.6
- --------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX +38.7%
- --------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO +33.2%
AVERAGE GOLD FUND +38.3
- --------------------------------------------------------------------
SALOMON WORLD GOLD INDEX +34.7%
- --------------------------------------------------------------------
</TABLE>
Detailed per share figures for each Portfolio, including net asset values,
income dividends, and any capital gains distributions are presented in the
table that follows this letter.
THE FISCAL YEAR IN REVIEW
The great bull market in stocks we enjoyed during fiscal 1996 was continuous
and virtually uninterrupted. The dimension of the increase was close to record
breaking, delighting the bulls even as it astonished the bears. The stock
market rose in eleven of the past twelve months and, after all was said and
done, the Standard & Poor's 500 Index had generated one of its best years on
record.
There were, as always, many opinions as to the source of the
surprising strength in the stock market. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) a growing
speculative fever in the marketplace, especially during the final weeks of the
year; and (3) a sharp decline in long-term interest rates. The rise in
corporate profits during the year was particularly striking. For instance, it
is estimated that operating earnings for the companies in the Standard & Poor's
500 Index increased about +15% in 1995, after already rising +16% in 1994.
(Since 1926, earnings growth has averaged less than +7% per year.)
If there is a cautionary signal in this boom in profits, it is that
the two-year cumulative earnings growth of +33% has been accompanied by
dividend growth of only +11%. This subdued dividend growth in the face of
sharply higher stock prices resulted in a decline in the yield on the Index to
2.2%, the lowest level on record. Nonetheless, the Wall Street chorus sings
"this time it's different." Dividend yield and earnings growth--the two
fundamentals of stock returns--are clearly taking a back seat to the market's
high valuation of the long-term fundamentals. This is called "speculation," and
it is hardly an inconsequential component of the recent high returns on stocks.
So, as we enter a new fiscal year, we face an environment that is surely
sobering.
The huge decline in interest rates not only provided a major stimulus
to the stock market, but also set bond prices afire. Over the past twelve
months, the yield on the Lehman Long-Term Corporate Bond Index fell from 8.7%
to 6.9%. The decline drove long-term bond prices upward by fully +17%,
resulting in a total return (including the interest coupon) of +25% for the
long-term
1
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[FIGURE 2]
sector of the corporate bond market--remarkably competitive with the return on
stocks. Short-term rates also declined, as the Federal Reserve reduced the
Federal funds rate (the rate at which banks borrow from one another) in July,
December, and again in January 1996. On balance during the year, the yield on
the U.S. Treasury bill eased from 5.9% to 5.0%.
This improvement in the actual (and expected) interest rate
environment was caused largely by a measurable softening in the growth of the
U.S. economy, perhaps with further weakness to come. A sluggish economy, in
turn, engendered continued optimism about the benign outlook for inflation.
(Indeed, the Consumer Price Index was quite well-behaved in calendar 1995,
rising by but +2.6%, its smallest increase since 1986.) Investors should
carefully ponder the extent to which today's high growth rate of corporate
earnings is likely to be sustained in a slowing economy.
THE PORTFOLIOS IN FISCAL 1996
On balance during fiscal 1996, as shown in the chart to the left, growth stocks
(return of +39.9%) and value stocks (+37.4%) were relatively equal participants
in the great bull market. (In fact, thus far during the 1990s, there has been
little overall difference between the two investment styles, despite some
sizable year-to-year variations.) However, there was considerable variation in
the return of discrete sectors of the stock market during 1996, with
health-care stocks leading the market advance and utility and energy stocks
lagging behind. (Gold stocks were about "market neutral.") In this environment,
the Vanguard Specialized Portfolios provided returns that were commensurate
with the sectors in which they invest.
UTILITIES INCOME PORTFOLIO
Sharply falling interest rates, which enhance the performance of
interest-rate-sensitive utility stocks, provided a positive setting for the
Utilities Income Portfolio, resulting in a total return of +29.5%. This result
compares to returns of +30.2% for the Composite Utilities Index (80% Standard &
Poor's Utility Index and 20% Lehman Utility Bond Index) and +25.1% for the
average utility fund.
Our modest shortfall relative to the Composite Utilities Index
(-0.7%) was largely the result of our sector weightings in our equity holdings.
An underweighted position in telephone stocks hurt our relative performance, as
regional phone companies--in anticipation of telecommunications deregulation by
Congress--earned above-average returns during this past year. On the other
hand, we were slightly overweighted in electric utility stocks, which lagged
the overall utilities market. Of course, as I have often noted, the Composite
Utilities Index represents tough competition both for the Utilities Income
Portfolio and for its peer group of mutual funds. Like all indexes, it is a
theoretical construct, incurring none of the advisory fees, operating expenses,
and portfolio transaction costs that must be borne--to one extent or
another--in the real world in which mutual funds operate.
The large advantage we held over our peers (+4.4%) can be accounted
for by a number of
2
<PAGE> 5
factors. Our average competitor held a major position in international
utilities (14% of assets for our peers versus 8% for our Portfolio), which
substantially lagged the returns of their domestic counterparts. In addition,
our typically low cash position (2% of net assets), which hurt our relative
performance in last year's bear market for bonds, allowed the Portfolio to
participate fully in the bull market of the past year. The average utility
fund, on the other hand, held a cash position that was more than twice as large
as ours.
As the chart below shows, our average annual return since our
inception on May 15, 1992, has steadily outpaced the average utility fund.
Although our limited history does not allow for any substantive "long-term"
analysis, the early results would suggest that the Portfolio has acquitted
itself quite well.
[FIGURE 3]
Average Annual Total Returns--Periods Ended January 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1 Year Since Inception*
- -------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES INCOME PORTFOLIO +29.47% +13.52%
AVERAGE UTILITY FUND +25.08 +10.13
COMPOSITE INDEX** +30.24 +13.81
</TABLE>
* Inception, May 15, 1992.
** Composite Index is 80% S&P Utility Index and 20% Lehman
Utility Bond Index.
Note: Past performance is not predictive of future performance.
HEALTH CARE PORTFOLIO
The Health Care Portfolio enjoyed the benefits of investing in the
best-performing sector of the ebullient bull market in stocks. Given the
favorable performance of health-care stocks, the Portfolio provided a return of
+45.5% for the year, compared to a return of +48.7% for the average health-care
mutual fund.
Our shortfall relative to our peers was the result of two primary factors.
First, in the volatile health-care industry, our Portfolio has focused largely
on the high-quality, fundamentally sound companies that generally exhibit
relatively less interim volatility. The downside of this stability is that we
tend to underperform our peers in a "frothy" stock market. Nonetheless, we
believe that this tradeoff will benefit our shareholders in the long term.
Second, the diversification we achieved by investing more than 23% of our net
assets internationally impeded our performance relative to our competitors,
which held a smaller exposure to the weaker foreign markets.
Despite our modest shortfall over the past year, the chart on page 4 shows
that we still hold a nice long-term margin over our typical competitor. Our
ability to hold such a long-term advantage while maintaining a lower risk
profile sets the Health Care Portfolio apart from the field.
As you can also see in the chart, our outperformance in fiscal 1996 has
extended our long-term margin over the Standard & Poor's 500 Index. I should
caution, however, that narrowly defined sectors of the market can quickly turn
from leader to laggard during the ebb and flow of the financial market tides.
The superiority exhibited by health-care stocks over the past three years is
unlikely to persist without interruption.
ENERGY PORTFOLIO
Although the Energy Portfolio's absolute return of +28.7% for the fiscal year
was the third best in our history, our relative return lagged most other
sectors of the domestic stock market. The performance of the energy sector was
hampered by concerns that increased production capacity will result in an
abundance of natural resources in the years ahead. Although the demand for oil
remains strong,
3
<PAGE> 6
[FIGURE 4]
FISCAL YEARS
Average Annual Total Returns*--Periods Ended January 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE PORTFOLIO +45.47% +20.28% +20.26%
AVERAGE HEALTH CARE FUND +48.73 +19.29 +18.97
S&P 500 INDEX +38.66 +16.38 +15.20
</TABLE>
FISCAL YEARS
Average Annual Total Returns*--Periods Ended January 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY PORTFOLIO +28.68% +11.24% +13.56%
AVG. NATURAL RESOURCES FUND +26.62 + 9.25 + 9.77
S&P 500 INDEX +38.66 +16.38 +15.20
</TABLE>
*Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held for less than one year.
Note: Past performance is not predictive of future performance.
advances in drilling technology and the reentry of the Iraqi oil supply will
potentially exert downward pressure on the price of oil in the future. With
those long-range concerns hanging over the industry, the Energy Portfolio
trailed the overall market by -10.0%.
Compared to what is probably our more relevant performance benchmark, the
average natural resources fund, the news is much better, as we outpaced our
peers by +2.1 percentage points for the year (+28.7% versus +26.6%), the fourth
consecutive year in which we have outpaced this standard. This persistent
advantage can be partially attributed to our lower expense ratio (expenses as a
percentage of net assets), which totaled 0.5% for the Portfolio in fiscal 1996
versus 1.8% for our competitors. This expense ratio differential gives us a
natural "tailwind" of +1.3% per year. That said, some of the credit also goes
to our adviser, Wellington Management Company, which has provided sound and
steady guidance since the Portfolio's inception.
The chart above presents the Portfolio's record during this period
compared to our two traditional benchmarks, the unmanaged Standard & Poor's 500
Index and the average natural resources mutual fund. Over the past ten years,
the Portfolio's average annual rate of return of +13.6% was well above the
+9.8% return achieved by the average competitor in our peer group, but lagged
the +15.2% average annual return of the broadly diversified Standard & Poor's
500 Index.
GOLD & PRECIOUS METALS PORTFOLIO
Given the significant decline in gold prices during fiscal 1995, this past year
was a welcome reversal of fortune for shareholders of the Gold & Precious
Metals Portfolio. Despite lagging the stellar returns of the U.S. equity
market, our Portfolio provided a solid
4
<PAGE> 7
absolute return of +33.2%, slightly behind the +34.7% return of the Salomon
World Gold Index. You may recall from our Semi-Annual Report that this
unmanaged performance benchmark represents a change from our customary Index,
the Morgan Stanley Capital International Gold Mines Index, which dramatically
altered its composition in February 1995.
Our broad diversification into international gold stocks, which
historically has enhanced our returns and lowered our overall volatility,
impeded our performance relative to our peers during the fiscal year. The
typical gold fund provided a return of +38.3% and held almost double our
weighting in North American gold stocks (61% of net assets versus 32%), which
was the best performing geographic sector. Our higher weighting in the lagging
South African gold companies (37% of net assets versus 19% for our peers), not
to mention our 3% cash reserves position, constrained our returns relative to
our peers.
[FIGURE 5]
FISCAL YEARS
Average Annual Total Returns*--Periods Ended January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GOLD & PRECIOUS
METALS PORTFOLIO +33.24% +13.55% +10.36%
AVERAGE GOLD FUND +38.30 +11.63 + 7.12
SALOMON WORLD GOLD INDEX** +34.72 +14.90 + 8.04
</TABLE>
* Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held for less than one year.
** MSCI Gold Mines Index through 1994; Salomon World Gold Index thereafter.
Note: Past performance is not predictive of future performance.
The truly eye-opening element of this past year's bull market in gold
stocks is that the price of gold bullion increased by only +8.2%. The
divergence of gold bullion returns and gold company stock returns brings to
light an important characteristic of the Gold & Precious Metals Portfolio: less
than 20% of the net assets of the Portfolio (roughly 5% this past year) is
typically invested directly in actual "metals," with the balance of the
Portfolio held in common stocks of companies engaged in the mining, processing,
and marketing of precious metals. For this reason, the volatility in the net
asset value of the Portfolio often deviates--sometimes rather
substantially--from that of the price of gold.
The long-term chart to the left clearly shows the competitive advantage
the Portfolio has provided versus our peers and an unmanaged gold index,
resulting in a large financial advantage for our shareholders. Of course, it
should go without saying that the returns reflected in the chart are merely
history. Future returns of the Portfolio--both on an absolute basis and
relative to the average gold fund and to the index--are unpredictable, and may
be better or worse than those shown in the chart.
IN SUMMARY
This past year was an extraordinarily bountiful period for the shareholders of
Vanguard Specialized Portfolios. We should all take (only) a moment to bask in
the light of its generous rewards. But we should also recognize that the
financial markets are never a "one-way street," and the risks that exist today
in the stock market may well come home to roost and erode this past year's
bounty. Put even more bluntly, shareholders in our four Portfolios enjoyed
enhancements in value ranging from +29% to +46% during the year. With these
gains now behind us, even a significant market decline seems unlikely to take
shareholders back to where they were-- presumably with satisfaction--just one
year ago.
(continued)
5
<PAGE> 8
Under these circumstances, what course of action should shareholders in
Vanguard Specialized Portfolios follow? In our Annual Report one year ago,
under very different circumstances, I urged you to "stay the course." You
should recognize that, despite today's short-term risks of investing, the
biggest long-term risks are: (1) failing to invest in equities at all; and (2)
following an erratic and ever-changing course. That said, I would reemphasize
that our Portfolios, while broadly diversified in individual stocks, are
narrowly focused in their sector diversification. This characteristic, simply
put, increases their risk relative to the equity market as a whole. So, each
shareholder should consider the role that the Portfolios play in what I assume
is a broadly diversified and balanced blend of mutual funds.
For our part, we intend to manage the portfolios of Vanguard Specialized
Portfolios under the same time-tested strategies we have followed since our
inception. "Stay the course" proved wise counsel a year ago; I reiterate it
today.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
February 22, 1996
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, 1995 January 31, 1996 Dividends Gains* Total Return
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE $37.01 $52.09 $.57 $1.02 +45.5%**
ENERGY 13.82 17.19 .28 .30 +28.7**
GOLD & PRECIOUS METALS 10.71 14.07 .17 -- +33.2**
UTILITIES INCOME 10.42 12.84 .56 -- +29.5
- ------------------------------------------------------------------------------------------------------------------------
</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 for less than one year.
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED DECEMBER 31,
1995) 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 5/23/84 +45.17% +20.69% +19.96% +17.79% +2.17%
ENERGY 5/23/84 +25.32 +10.66 +13.05 + 9.61 +3.44
GOLD & PRECIOUS METALS 5/23/84 - 4.48 + 8.00 +10.60 + 7.65 +2.95
UTILITIES INCOME 5/15/92 +34.03 +13.47* +13.47* + 8.15* +5.32*
</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 HEALTH CARE, ENERGY, AND GOLD & PRECIOUS METALS PORTFOLIOS FOR LESS THAN
ONE YEAR.
*PERFORMANCE FIGURES SINCE INCEPTION.
7
<PAGE> 10
REPORT FROM M&G INVESTMENT MANAGEMENT LTD.
GOLD & PRECIOUS METALS PORTFOLIO
The good performance that we reported in the Semi-Annual Report continued in
the second half of the fiscal year, with the Portfolio showing a positive
return of +33.2% for the full year. This was below the performance of the F.T.
Global Gold Mines Index (+39.7%) over the same period primarily due to our
holdings in gold and platinum bullion (4.8% of net assets at year end) and cash
(3.4%).
For most of the fiscal year, gold bullion traded in a particularly narrow
range and with a notable lack of volatility. However, this all changed in the
final months of 1995 when the market sprang to life as the cost of borrowing
gold bullion surged to a 20-year high. This increase occurred against a
background of aggressive forward selling, particularly by the South African
companies, and an increasing reluctance from Central Banks to lend bullion to
the market place. The subsequent improvement in the gold price, while only
small, led a number of gold producers to close some of their hedge positions
and thereby reduce, or extinguish, their risk exposure to a rising gold price.
This renewed interest in gold bullion continued into the new calendar year, and
in mid-January 1996 the price traded above $400 for the first time since August
1993.
There was also greater recognition of the ever widening supply/demand
deficit we have spoken of in the past. Once again the Gold Fields Mineral
Services survey for 1995 highlighted the particularly robust demand side of
gold, with fabrication demand rising +8.5% to a record all-time high of 3550
tonnes. On the other hand, mine supply was only 2268 tonnes, with South African
output down 10% on the year and at its lowest level for 40 years.
Against this positive background, gold shares worldwide returned to favor,
and during the period under review, the best performances came from the North
American gold sector, followed by the Australian and then the South African.
The improvement in the gold price has led to a quick reversal of fortunes for
South African gold stocks, justifying our current holdings in that region.
Apart from the excitement of an improving bullion price, corporate activity has
been the highlight of the sector for most of the year. In addition to the deals
that we spoke of in the Semi-Annual Report, Burmine in Australia has been bid
for via a share exchange with a fellow gold producer, Sons of Gwalia. There has
been a change of control at Emperor Mines, which includes a new management
team, while Plutonic Resources has entered into an option agreement for over
19.9% of Great Central Mines. Finally, Normandy Mining and its subsidiary
Poseidon Gold have proposed merging via a scheme of arrangement.
The investment in Bakyrchik Gold has performed well recently, following an
injection of fresh capital and a new management team. Elsewhere in the former
Soviet Union, Nelson Gold has recently produced its first gold in Tajikistan.
However, the Canadian listed Princess Resources has been a disappointing
investment. The company has been in negotiations with the Kazakhstan government
concerning the potentially large Vasilkovskoye gold deposit. These negotiations
have proved particularly complex, difficult, and time consuming, but the rich
prize warrants continued perseverance. While the performance of Princess has
been disappointing we continue to monitor the situation very closely, in the
hope that the company can strike a favorable deal with the Kazakhstan
government.
The Portfolio shows few major changes during the year, although some gold
bullion has been sold. In addition to Burmine and Princess Resources, new
holdings during the year included Firstmiss Gold and Pioneer Group in America.
Pioneer is an interesting company, as it is a mutual fund group which also owns
a major low cost gold mine in Ghana, West Africa.
While it is pleasing to witness a revival of fortunes in the gold market,
it continues to be a particularly volatile sector, offering an above-average
risk/reward ratio.
Respectfully,
David J. Hutchins
M&G Investment Management Ltd.
(Regulated by IMRO)
London, England February 12, 1996
8
<PAGE> 11
REPORT FROM WELLINGTON MANAGEMENT COMPANY
UTILITIES INCOME PORTFOLIO
During the past twelve months, the Utilities Income Portfolio has been sailing
through extremely favorable weather, and the Portfolio's positive results have
been largely a function of the weather rather than the navigation. The
performance of the Portfolio for the twelve months ended January 31, 1996,
reads as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
TOTAL RETURN
-------------------
TWELVE MONTHS ENDED
JANUARY 31, 1996
- ------------------------------------------------------------------
<S> <C>
UTILITIES INCOME PORTFOLIO +29.5%
- ------------------------------------------------------------------
S&P UTILITY STOCK INDEX +32.7%
- ------------------------------------------------------------------
LEHMAN UTILITY BOND INDEX +20.6%
- ------------------------------------------------------------------
COMPOSITE INDEX* +30.2%
- ------------------------------------------------------------------
AVERAGE UTILITY FUND +25.1%
- ------------------------------------------------------------------
</TABLE>
*80% S&P Utilities/20% Lehman Utility Bond Index.
The stage for strong utility stock performance in 1995 was set by the
industry's desolate performance in 1994 when interest rates soared and concerns
over regulatory changes became more prevalent. During the 1996 fiscal year, the
environment for utility stocks improved sharply. Bond yields moved
significantly lower, utility business trends improved, and the regulatory
tigers retracted their claws. Given this improving backdrop, plus a relatively
attractive valuation level to start, utility stocks posted very strong
performance during the year with the S&P Utility Index up +32.7%. And within
the Utility Index, two of its sub-sectors, natural gas and telecommunications,
edged out the S&P 500's stellar +38.7% performance. With a total return of
about +25%, electric utility stocks were laggards in this red hot market.
Given this impressive performance in fiscal 1996, we feel that many
utility stocks probably are approaching full valuations, but it is unclear
where "the top" is in the current liquidity-driven market. By normal standards,
the stocks would be vulnerable to negative developments on either the
regulatory or interest rate fronts. The most visible area of overvaluation is
in the telecommunications sector where valuations have climbed to market
premium price/earnings multiples. Progress was made on rewriting the arcane
telecommunications laws during the fourth quarter, adding another layer of
enthusiasm for the stocks. We believe the passage of a telecommunications act
will accelerate the competitive challenge for the phone companies and will
lower competitive barriers in all facets of the industry. Capital inflows into
the industry are likely to lower the returns on capital earned in the industry
and make the consumer the only certain winner. Over the next several years,
costs could be reduced to an even greater extent than currently expected if the
regional phone companies seek to consolidate through mergers, such as the
recently hinted discussions between NYNEX and Bell Atlantic would suggest.
The natural gas market recovered from the woes created by last year's warm
winter. Not only did this year's winter return to normal, but it became colder
than normal at the perfect time, early in the season. The cold weather revealed
that the gas supply situation was tighter than previously assumed by the market
and pushed natural gas prices to all-time highs. Though the gas stocks have
started to reflect the improved supply/demand situation, there remains a great
deal of skepticism over the sustainability of currently favorable conditions.
Electric utilities prospered in 1995 as interest rates fell and the most
aggressive regulators retreated somewhat from the most disruptive "retail
wheeling" proposals. Regulators recognized that it will take time to create
full competition in an industry where cross-subsidies and previously legislated
actions need to be unwound. Electric utilities have continued to restructure or
renegotiate their high industrial rates and to offset this revenue attrition
through cost reductions. In an effort to secure greater cost reductions, nearly
a dozen utilities last year announced mergers that we believe benefit the
industry, and hopefully the shareholders will retain a portion of the merger
benefits. On the other hand, we have become concerned about the recent spate of
international acquisitions, particularly in the UK where the regulatory
framework could deteriorate under a Labour government.
9
<PAGE> 12
The Portfolio's return of +29.5% for the year was slightly behind the
benchmark return of +30.2%, as we were too heavily positioned in electric
utility stocks instead of the better performing regional phone stocks. As we
survey the utility landscape, it appears that utility valuations in general are
above historical average levels. Utility earnings growth is likely to be in the
mid-single-digit range, and dividend yields, though above the average stock,
are not likely to grow more than a couple of percent per year for the next
several years.
Over the next year or two, we should witness an acceleration in
competitive activity in telecommunications from the established players as well
as from new entrants in PCS (wireless), satellite, cable TV, the Internet, and
local loop alternative access providers. There clearly will be convergence of
heretofore discrete and regulated communications markets. Uncertainty should
build, and uncertainty is not conducive to higher price earnings multiples.
Investor sentiment in this segment could shift sharply.
In the electric utility arena, we are encouraged by managements'
progressive responses to the evolving challenges of competition. Despite a
long established integrated structure in the industry, the industry is
evaluating its distribution and transmission and generation businesses on
separate bases, and we believe that the industry will initiate appropriate
action to protect and enhance shareholder values. The long-term fundamentals in
the natural gas industry are emerging in favor of the suppliers after a long
period of deregulatory havoc and market oversupply. Since the valuations in the
electric and natural gas utility sectors are friendlier and the news could
break more positively, we believe the Fund's current overweighting in these two
sectors is appropriate.
HEALTH CARE PORTFOLIO
The Health Care Portfolio achieved a total return of +45.5% during the fiscal
year, exceeding the robust +38.7% gain of the Standard & Poor's 500 Index. The
Portfolio's results slightly trailed the S&P Health Sector Index return and the
average health-care mutual fund. This is in-line with our historical pattern of
lower volatility, which has been evidenced in lower returns during boom years
like the past one, and smaller declines in weak years.
Reviewing the five major categories of health-care stocks, Medical
Products, Major Pharmaceuticals and Specialty Pharmaceuticals all had very
strong years. Health Services and International stocks were solidly positive,
but below the average for health care this year.
The strongest contributors to the Portfolio performance in fiscal 1996
included Pfizer, Johnson & Johnson, Guidant, McKesson, and Zeneca. Our biotech
holdings were especially strong.
In two short years, investor sentiment has bounced back from pessimistic
to euphoric. This increases the risk for near-term performance as the next
change in sentiment is likely to be toward lesser expectations. However, we
believe our diversified approach toward the Portfolio positions it well to
participate in the long-term attractiveness of the health-care sector.
ENERGY PORTFOLIO
The Energy Portfolio gained +28.7% during the year, trailing the +38.7% gain of
the stock market. During 1995, the performance of energy stocks was negatively
impacted by weak natural gas prices in North America and concerns about the
rapid growth of oil production in the world, which could lead to lower oil
prices, especially if the embargo on Iraqi crude oil exports is lifted. We
mentioned in last year's Annual Report that the then prevailing gas prices
under $1.50 per Mcf were unsustainably low. Natural gas prices have risen some
50% since early 1995, a result of good demand growth, the absence of capacity
additions, and more favorable weather patterns than in 1994. The outlook for
1996 is for continued improvement in natural gas markets, as supplies again
will be constrained.
The price of oil increased modestly in 1995, averaging $18.50 per barrel.
Productive capacity growth in some areas of the world, especially the North
Sea, has exceeded expectations, while declines in production in mature
countries such as the United States have moderated. This is a result of the
application of more advanced seismic and drilling technologies, which have
reduced costs in new
10
<PAGE> 13
production and which enable the industry to make investments which provide
attractive returns in a low-price environment. The return of Iraq to the world
oil market is a distinct possibility in 1996 and will require an adjustment by
the other members of the OPEC cartel for oil prices not to decline. These
developments make the oil market look oversupplied, but the strong demand
growth we are now experiencing will give the market an upward bias in future
years.
The Portfolio provides exposure to companies which have demonstrated the
ability to show earnings and dividend growth in a low-price environment, such
as Exxon and Amoco. We have a number of investments in the North American
producer sector, both in the U.S. and Canada in companies such as Vastar and
Anderson Exploration, which have good growth prospects in gas production. We
also continue to emphasize the oil service sector, which has consolidated and
where a number of companies, such as Noble Drilling are benefitting from a
better pricing environment. We continue to invest in foreign companies like
Total, which have good growth prospects and attractive valuations.
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 15, 1996
UTILITIES INCOME PORTFOLIO ANNOUNCES NEW PORTFOLIO MANAGER
Mark J. Beckwith, the assistant portfolio manager of Vanguard Specialized
Utilities Income Portfolio, assumed full portfolio management responsibilities
on February 16, 1996. Jack Ryan had managed the Utilities Income Portfolio
since its inception on May 15, 1992. During this period, the Portfolio provided
a return of +13.5% versus +10.1% for its peer group of comparable funds. Paul
D. Kaplan will continue to manage the Portfolio's fixed-income assets, which
currently comprise approximately 20% of total net assets. The investment
objectives and strategies of the Portfolio remain unchanged from those that
have led to our strong performance record.
11
<PAGE> 14
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard Specialized
Portfolios has reached an agreement with Wellington Management Company (WMC),
the Fund's investment adviser for the Energy, Health Care, and Utilities Income
Portfolios, on a revised investment advisory agreement. The revised agreement
involves a reduction in the annual rate of advisory fees to be paid to WMC. At
the Portfolios' current aggregate asset level of $2.9 billion, the dollar
amount of the annual fee would decline from $3,539,000 to $3,079,000, a
reduction of $460,000. The new effective annual fee rate would equal 0.105% of
current assets and would decline further if the assets of the Portfolios were
to continue to grow.
Under the terms of the new agreement, the Fund will pay WMC a basic
advisory fee at the end of each fiscal quarter based on the Portfolios' average
month-end net assets during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
NET ASSETS ANNUAL BASIC FEE RATE
- ----------------------------------------------------------------
<S> <C>
FIRST $500 MILLION 0.150%
NEXT $500 MILLION 0.125
NEXT $1 BILLION 0.100
NEXT $1 BILLION 0.075
OVER $3 BILLION 0.050
- ----------------------------------------------------------------
</TABLE>
In addition, once the advisory fee to WMC is calculated for the three
Portfolios under this schedule, the total fee will be reduced in order that the
advisory fee paid by the Utilities Income Portfolio does not exceed 0.08%.
This revised investment advisory agreement replaces the Fund's current
agreement with the adviser dated May 31, 1993, and will go into effect on May
1, 1996. Until the effective date, the adviser has agreed to waive its advisory
fees to the extent necessary to abide by the new fee schedule. For the fiscal
year ended January 31, 1996, the Fund paid approximately $2,698,000 to WMC for
investment advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which globally provides investment
services to investment companies, institutions, and individuals. Among the
clients of WMC are 12 investment companies of The Vanguard Group. Under the
terms of its investment advisory agreement with the Fund, the adviser agrees to
manage the investment and reinvestment of the assets of the Portfolios and to
continuously review, supervise, and administer the Portfolios' investment
programs. The adviser discharges its responsibilities subject to the control of
the officers and directors of the Fund.
12
<PAGE> 15
TOTAL INVESTMENT RETURN TABLES
The following tables illustrate the results of single-share investments in
three of the four Portfolios since inception through January 31, 1996. The
percentage figures show results on a "total return" basis and assume the
reinvestment of both income dividends and any capital gains distributions.
During the period illustrated, stock prices fluctuated widely; these 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 S&P 500
VALUE WITH INCOME ----------------------------- ---------
January 31 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Total
Fiscal year 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 - 3.3
- ----------------------------------------------------------------------------------------------------------------------------------
1989 19.46 1.29 .34 25.45 +19.3 +2.1 +21.4 +20.1
- ----------------------------------------------------------------------------------------------------------------------------------
1990 22.16 .72 .49 30.60 +17.7 +2.5 +20.2 +14.5
- ----------------------------------------------------------------------------------------------------------------------------------
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 +22.7
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
1996 52.09 1.02 .57 100.22 +43.8 +1.7 +45.5 +38.7
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +902.2% +513.2%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +21.8% +16.8%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
TOTAL INVESTMENT RETURN TABLES (continued)
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- ----------------------------------------------------------------------------------------------------------------------------------
Energy Portfolio S&P 500
VALUE WITH INCOME ----------------------------- --------
January 31 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Total
Fiscal year 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 - 3.3
- ----------------------------------------------------------------------------------------------------------------------------------
1989 12.29 -- .37 16.74 +20.3 +3.9 +24.2 +20.1
- ----------------------------------------------------------------------------------------------------------------------------------
1990 14.94 .57 .36 21.59 +26.1 +2.9 +29.0 +14.5
- ----------------------------------------------------------------------------------------------------------------------------------
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 +22.7
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
1996 17.19 .30 .28 36.18 +26.6 +2.1 +28.7 +38.7
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +261.8% +513.2%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +11.6% +16.8%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- ----------------------------------------------------------------------------------------------------------------------------------
Salomon
Gold & Precious Metals Portfolio Gold Index*
VALUE WITH INCOME -------------------------------- -----------
JANUARY 31 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Total
FISCAL YEAR 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 -34.0% 0.0% -34.0% - 34.4%
- ----------------------------------------------------------------------------------------------------------------------------------
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 - 9.3
- ----------------------------------------------------------------------------------------------------------------------------------
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 - 21.1
- ----------------------------------------------------------------------------------------------------------------------------------
1996 14.07 -- .17 20.56 +31.4 +1.8 +33.2 + 34.7
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +105.6% +47.1%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +6.4% +3.4%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
15
<PAGE> 18
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
January 31, 1996
<TABLE>
<CAPTION>
Market
Value
HEALTH CARE PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.2%)
- -----------------------------------------------------------------------------
UNITED STATES (73.6%)
- -----------------------------------------------------------------------------
BASIC MATERIALS (2.3%)
Mallinckrodt Group, Inc. 900,000 $ 36,113
* Scios Nova, Inc. 491,750 2,612
-------------
38,725
-------------
CONSUMER STAPLES (2.0%)
Dekalb Genetics Corp. Class B 380,050 22,423
Paragon Trade Brands, Inc. 481,500 10,412
-------------
32,835
-------------
DRUGS (26.6%)
Alpharma Inc. Class A 949,040 25,624
* ALZA Corp. 600,000 16,950
American Home Products Corp. 180,000 18,360
Bristol-Myers Squibb Co. 720,000 63,720
Carter-Wallace, Inc. 266,000 3,824
Carter-Wallace, Inc. Class B 24,000 345
Eli Lilly & Co. 331,574 19,066
Merck & Co., Inc. 320,225 22,496
* Perrigo Co. 2,657,100 34,874
Pfizer, Inc. 1,040,000 71,500
Pharmacia & Upjohn, Inc. 882,000 36,934
Rhone-Poulenc Rorer, Inc. 733,000 47,462
Schering-Plough Corp. 100,000 5,412
Warner-Lambert Co. 790,000 74,062
-------------
440,629
-------------
FINANCIAL (.8%)
(1)United Wisconsin 678,000 13,729
-------------
MEDICAL SERVICES (6.4%)
* Beverly Enterprises Inc. 730,000 8,760
Columbia/HCA Healthcare Corp. 314,347 17,486
Healthdyne Inc. 296,700 2,670
* Humana, Inc. 730,400 20,177
* Laboratory Corp. of America 1,106,416 9,266
* Laboratory Corp. of America
Warrants Exp. 4/28/00 176,990 111
* Physician Corp. of America 802,100 14,438
Salick Healthcare Inc. 38,450 1,442
*(1)Syncor International Corp. 856,559 5,782
* Tenet Healthcare Corp. 380,000 8,122
U.S. Healthcare, Inc. 350,000 16,931
-------------
105,185
-------------
MEDICAL SUPPLIES (24.7%)
Abbott Laboratories, Inc. 1,825,000 77,106
*(1)Advanced Technology
Laboratories, Inc. 683,300 18,107
Allergan, Inc. 596,000 19,817
C.R. Bard, Inc. 1,269,400 44,429
Beckman Instruments 979,200 34,272
Collagen Corp. 383,100 7,662
* Datascope Corp. 340,100 8,417
(1)E-Z-EM Inc. Class A 219,258 2,330
E-Z-EM Inc. Class B 259,916 2,599
Guidant Corp. 1,163,703 53,385
* Haemonetics Corp. 806,000 14,004
Healthdyne Technologies, Inc. 193,065 2,172
Johnson & Johnson 690,000 66,240
Kinetic Concepts, Inc. 716,000 8,681
* Medisense, Inc. 663,000 17,404
* Nellcor Puritan Bennett Inc. 130,000 7,995
Owens & Minor Holdings Co., Inc. 202,500 2,379
* Protocol Systems Inc. 273,000 3,413
* Resound Corp. 300,000 2,663
* Spacelabs Medical 280,000 7,490
United States Surgical Corp. 300,000 7,088
-------------
407,653
-------------
SPECIALTY PHARMACEUTICAL (6.9%)
* Alliance Pharmaceutical Corp. 967,388 16,083
* Amylin Pharmaceuticals, Inc. 650,000 8,694
* Athena Neurosciences, Inc. 800,000 10,700
* Cephalon Inc. 270,000 6,649
* Genentech Inc. 340,700 18,355
* Genetics Institute Inc.
Depository Shares 316,960 20,127
* Immunex Corp. 1,000,000 16,250
Lynx Therapeutic 211,410 159
* Magainin Pharmaceuticals 694,400 10,069
* Matrix Pharmaceutical, Inc. 200,500 4,561
* Xoma Corp. 353,000 1,743
-------------
113,390
-------------
TECHNOLOGY (1.0%)
*(1)MDL Information Systems, Inc. 588,300 11,178
Perkin-Elmer Corp. 122,720 5,799
-------------
16,977
-------------
MISCELLANEOUS (2.9%)
* Human Genome Sciences, Inc. 177,500 7,632
McKesson Corp. 820,000 41,000
-------------
48,632
-------------
GROUP TOTAL 1,217,755
-------------
- -----------------------------------------------------------------------------
INTERNATIONAL (17.6%)
- -----------------------------------------------------------------------------
Amersham International PLC 762,174 9,588
Banyu Pharmaceutical 100,000 1,169
Bayer AG ADR 400,000 11,850
Chugai Pharmaceutical Ltd. 600,000 5,724
Ciba Geigy (Registered) 40,760 33,986
Eisai Co., Ltd. 1,400,000 25,272
Fujisawa Pharmaceutical 1,500,000 13,539
* Gedeon Richter 113,600 3,266
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Hafslund Nycomed AS A 354,857 $ 10,025
Rhone Poulenc SA ADR 1,130,200 27,125
Sandoz AG (Registered) 17,670 15,347
Sankyo Co., Ltd. 1,200,000 28,396
Schering AG 193,470 14,044
SmithKline Beecham Unit ADR 324,800 18,270
Sulzer AG (Ptg. Ctf.) 8,140 4,863
Synthelabo 78,270 5,333
Takeda Chemical Industries 1,000,000 15,807
Zeneca Group ADR 814,524 47,548
-------------
GROUP TOTAL 291,152
-------------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $980,438) 1,508,907
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (10.7%)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $176,776) $176,776 176,776
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (101.9%)
(Cost $1,157,214) 1,685,683
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.9%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and G 23,277
Liabilities--Note G (55,319)
------------
(32,042)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 31,747,482 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,653,641
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $52.09
=============================================================================
</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.
(Ptg. Ctf.)--Participating Certificate.
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
----------- -------
<S> <C> <C>
Paid in Capital $1,111,276 $35.00
Undistributed Net
Investment Income--Note F 1,805 .06
Accumulated Net
Realized Gains--Note F 12,103 .38
Unrealized Appreciation
(Depreciation)--Note E: Investment Securities 528,469 16.65
Foreign Currencies and
Forward Currency
Contracts (12) --
- -----------------------------------------------------------------------------
NET ASSETS $1,653,641 $52.09
- -----------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
ENERGY PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.3%)
- -----------------------------------------------------------------------------
UNITED STATES (71.0%)
- -----------------------------------------------------------------------------
COAL, GAS, PIPE (5.3%)
Anadarko Petroleum Corp. 80,000 $ 4,040
Cabot Oil & Gas Corp. 138,100 2,296
ENSERCH Corp. 242,180 3,542
* Nabors Industries, Inc. 220,000 2,667
* Santa Fe Energy Resources, Inc. 500,000 4,813
* Seagull Energy Corp. 500,000 9,187
-------------
26,545
EXPLORATION & DRILLING (11.2%)
* BJ Services Co. 400,000 10,700
* Diamond Offshore Drilling, Inc. 160,000 6,100
* Ensco International, Inc. 127,850 3,052
McDermott International, Inc. 240,000 4,650
Noble Affiliates, Inc. 150,000 4,463
Noble Drilling Corp. 962,600 9,385
Pogo Producing Co. 350,000 10,106
* Reading & Bates Corp. 180,000 3,060
* Varco International, Inc. 503,700 5,037
-------------
56,553
-------------
OIL--DOMESTIC (36.5%)
Amerada Hess Corp. 270,000 14,884
Amoco Corp. 200,000 14,075
Apache Corp. 140,000 3,763
Ashland Inc. 380,000 13,965
* Barrett Resources Corp. 330,000 8,415
Devon Energy Corp. 220,000 5,417
Diamond Shamrock, Inc. 200,000 5,700
Enron Oil & Gas Co. 154,400 3,764
* Falcon Drilling Co., Inc. 179,700 2,606
Kerr-McGee Corp. 170,000 10,753
Murphy Oil Corp. 170,100 7,165
* Oryx Energy Co. 850,000 11,156
Pennzoil Co. 200,000 8,125
Phillips Petroleum Co. 270,000 8,809
* TransTexas Gas Corp. 350,000 4,113
USX-Marathon Group 850,000 15,937
Ultramar Corp. 227,900 6,438
Union Texas Petroleum
Holdings, Inc. 260,000 4,745
Unocal Corp. 646,000 19,299
Vastar Resources, Inc. 541,000 15,283
-------------
184,412
-------------
OIL--INTERNATIONAL (7.7%)
Chevron Corp. 110,000 5,706
Exxon Corp. 250,000 20,063
Texaco Inc. 160,000 12,940
-------------
38,709
-------------
OIL SERVICES (6.5%)
Baker Hughes, Inc. 350,000 9,056
Camco International, Inc. 199,000 5,323
* Numar Corp. 100,000 1,138
* Rowan Cos., Inc. 300,000 3,263
Schlumberger Ltd. 200,000 14,025
-------------
32,805
-------------
TRANSPORT & SERVICES (1.9%)
OMI Corp. 700,000 5,075
Overseas Shipholding Group Inc. 250,000 4,750
-------------
9,825
-------------
MISCELLANEOUS (1.9%)
Weatherford Enterra Inc. 321,438 9,563
-------------
GROUP TOTAL 358,412
-------------
- -----------------------------------------------------------------------------
INTERNATIONAL (24.3%)
- -----------------------------------------------------------------------------
CANADA (15.3%)
Alberta Energy Co. 327,870 5,421
* Anderson Exploration Ltd. 1,089,000 10,388
* Barrington Petroleum 200,000 480
* C S Resources Ltd. 500,000 3,861
* Cabre Exploration 310,000 3,661
* Canadian Natural Resources 407,000 6,101
* Chauvco Resources Ltd. 250,000 2,249
* Elan Energy Inc. 150,000 1,158
Imperial Oil Ltd. 110,300 3,998
* Jordan Petroleum Ltd. 500,000 2,816
* Morgan Hydrocarbons 600,000 1,875
Morrison Petroleum 268,000 1,607
* Northstar Energy Corp. 320,000 3,372
Nowsco Well Service, Ltd. 250,000 3,475
Paramount Resources Ltd. 360,300 3,830
* Penn West Petroleum 352,143 2,079
Petro-Canada 272,300 3,216
* Poco Petes Ltd. 600,000 4,633
* Rigel Energy Corp. 250,290 2,433
* Rio Alto Exploration Ltd. 700,000 2,518
* Talisman Energy, Inc. 255,000 5,351
-------------
* Tarragon Oil & Gas Ltd. 280,000 2,595
77,117
-------------
OTHER (9.0%)
Burmah Castrol PLC 299,955 4,464
Coflexip ADR 110,000 2,007
Lasmo PLC 2,000,000 4,986
London & Overseas
Freighter Ltd. ADR 290,000 3,625
Norsk Hydro AS ADR 180,000 7,357
Repsol SA ADR 160,000 5,580
Saga Petroleum B (Free) 190,000 2,086
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Total SA ADR 270,000 $ 9,315
YPF Sociedad Anonima ADR 270,000 6,109
45,529
-------------
GROUP TOTAL 122,646
-------------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $412,574) 481,058
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.7%)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-----------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $24,171) $24,171 24,171
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $436,745) 505,229
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
Other Assets--Notes C and G 5,250
Liabilities--Note G (5,432)
-------------
(182)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 29,371,862 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $505,047
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $17.19
=============================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
AT JANUARY 31, 1996, NET
ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
--------- ------------
<S> <C> <C>
Paid in Capital $437,040 $14.88
Overdistributed Net
Investment Income--Note F (39) --
Overdistributed Net
Realized Gains--Note F (436) (.02)
Unrealized Appreciation
(Depreciation)--Note E:
Investment Securities 68,484 2.33
Foreign Currencies and
Forward Currency
Contracts (2) --
- -----------------------------------------------------------------------------
NET ASSETS $505,047 $17.19
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
GOLD & PRECIOUS Value
METALS PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.7%)
- -----------------------------------------------------------------------------
AUSTRALIA (20.7%)
- -----------------------------------------------------------------------------
* Bougainville Copper Ltd. 2,000,000 $ 909
Burmine Ltd. 1,000,000 3,068
CRA Ltd. 605,000 8,597
* CRA Ltd. New 45,000 623
Dominion Mining Ltd. 2,400,000 1,394
* Emperor Mines Ltd. 2,150,000 4,964
* Gold Mines of Australia Ltd. 7,000,000 1,772
* Golden Shamrock Mines Ltd. 8,000,000 5,064
* Goldfields Ltd. 914,029 2,519
* Great Central Mines NL 4,000,000 9,980
Highlands Gold Ltd. 15,000,000 9,496
Kidston Gold Mines Ltd. 3,000,000 4,871
* Lone Star Exploration 1,500,000 916
Newcrest Mining Ltd. 1,750,000 7,898
Normandy Mining Ltd. 4,500,000 7,708
Placer Pacific Ltd. 3,500,000 7,690
Plutonic Resources Ltd. 2,500,000 13,964
Poseidon Gold Ltd. 4,500,000 11,562
Renison Goldfields
Consolidated Ltd. 3,250,000 15,854
Resolute Samatha Ltd. 4,000,000 10,099
Resolute Samantha Private
Placement 500,000 1,229
* Star Mining Corp. 28,000,000 3,962
-------------
GROUP TOTAL 134,139
-------------
- -----------------------------------------------------------------------------
CANADA (13.9%)
- -----------------------------------------------------------------------------
Euro-Nevada Mining Corp. 500,000 19,169
Franco-Nevada Mining Corp., Ltd. 275,000 17,288
Golden Star Resources Ltd. 350,000 2,385
* Guyanor Ressources SA 70,000 181
Nelson Gold Corp. Ltd. 2,250,000 4,742
Placer Dome, Inc. 375,000 10,546
(1) Princess Resources A
Warrants Exp. 3/31/96 571,200 166
(1) Princess Resources B
Warrants Exp. 3/31/96 1,714,400 448
(1) Princess Resources C
Warrants Exp. 3/31/96 1,714,400 448
* Rayrock Yellowknife
Resources, Inc. 750,000 5,996
* Royal Oak Mines Inc. 2,000,000 8,750
* TVX Gold, Inc. 2,000,000 18,896
* Texas Star Resources Corp. 800,000 204
* Vengold Inc. 750,000 872
-------------
GROUP TOTAL 90,091
-------------
- -----------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
GOLD & PRECIOUS Value
METALS PORTFOLIO (continued) Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
SOUTH AFRICA (36.6%)
- -----------------------------------------------------------------------------
Anglo American Corp. ADR 200,000 $ 14,500
Ashanti Goldfields Co., Ltd. GDS 425,000 9,775
Beatrix Gold Mines ADR 1,285,900 12,216
De Beers Centenary Units ADR 700,000 23,800
Driefontein Consolidated
Ltd. ADR 1,000,000 14,625
Elandsrand Gold
Mining Ltd. ADR 1,500,000 9,937
Free State Consolidated
Gold Mines Ltd. ADR 1,600,000 16,600
Gold Fields South Africa ADR 375,000 13,641
Hartebeesfontein Gold
Mining Co. Ltd. ADR 2,300,000 7,935
Impala Platinum Holdings
Ltd. ADR 650,000 13,366
Kinross ADR 425,000 5,737
Kloof Gold Mining Ltd. ADR 850,000 10,519
Minorco Sponsored ADR 350,000 9,887
Randfontein Estates Gold
Mining Co. Ltd. ADR 1,750,000 14,963
Rustenberg Platinum
Holdings Ltd. ADR 650,000 12,919
Southvaal Holdings ADR 330,000 12,581
Vaal Reefs Exploration &
Mining Co. Ltd. ADR 1,750,000 17,719
Western Deep Levels ADR 350,000 16,581
-------------
GROUP TOTAL 237,301
-------------
- -----------------------------------------------------------------------------
UNITED KINGDOM (2.2%)
- -----------------------------------------------------------------------------
* Bakyrchik Gold PLC 650,000 4,272
RTZ Corp. 700,000 9,710
-------------
GROUP TOTAL 13,982
-------------
- -----------------------------------------------------------------------------
UNITED STATES (18.3%)
- -----------------------------------------------------------------------------
* Amax Gold, Inc. 1,500,000 13,312
* Atlas Corp. 1,000,000 1,625
Barrick Gold Corp. 625,000 18,359
* Campbell Resources 5,000,000 6,250
* Crown Resource Corp. 600,000 3,375
* Firstmiss Gold, Inc. 60,000 1,590
Freeport-McMoRan Copper &
Gold Inc. Class A 400,000 11,600
Freeport-McMoRan Copper &
Gold Inc. Gold
Denomination Shares 150,000 5,775
Freeport-McMoRan Copper &
Gold Inc. 7.00% Convertible Pfd. 150,000 4,519
Homestake Mining Co. 500,000 9,437
Newmont Gold Co. 125,000 6,906
Newmont Mining Corp. 275,000 15,400
PIONEER Group Inc. 250,000 7,375
Santa Fe Pacific Gold Corp. 500,000 8,188
* Stillwater Mining Co. 250,000 5,094
-------------
GROUP TOTAL 118,805
-------------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $462,048) 594,318
- -----------------------------------------------------------------------------
CONVERTIBLE BOND (.2%)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-------------
<S> <C> <C>
Canyon Resources Corp.
6.00%, 6/1/98 (Cost $1,000) $ 1,000 970
- -----------------------------------------------------------------------------
PRECIOUS METALS (4.8%)
- -----------------------------------------------------------------------------
* Gold Bullion (74,873 ounces) 30,365
* Platinum Bullion (2,009 ounces) 841
- -----------------------------------------------------------------------------
TOTAL PRECIOUS METALS
(Cost $31,920) 31,206
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.4%)
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in a
Pooled
Cash Account 5.87%, 2/1/96
(Cost $22,351) 22,351 22,351
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $517,319) 648,845
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.1%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and G 18,769
Liabilities--Note G (19,314)
-------------
(545)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 46,071,171 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $648,300
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.07
=============================================================================
</TABLE>
See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Restricted securities represent .2 of 1% of net assets.
ADR--American Depository Receipt.
GDS--Global Depository Share.
20
<PAGE> 23
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $515,885 $11.20
Overdistributed Net Investment
Income--Note F (2,378) (.05)
Accumulated Net Realized
Gains--Note F 3,267 .07
Unrealized Appreciation of
Investments--Note E 131,526 2.85
- -----------------------------------------------------------------------------
NET ASSETS $648,300 $14.07
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
UTILITIES INCOME PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (78.9%)
- -----------------------------------------------------------------------------
BASIC MATERIALS (.4%)
NOVA Corp. 345,800 $ 3,069
-------------
- -----------------------------------------------------------------------------
ELECTRICAL POWER (34.8%)
American Electric Power Co., Inc. 50,000 2,213
Baltimore Gas & Electric Co. 404,600 11,632
CMS Energy Corp. 329,000 10,240
Carolina Power & Light Co. 451,600 16,709
Central Hudson Gas &
Electric Corp. 216,300 6,732
CILCORP, Inc. 85,000 3,740
CINergy Corp. 313,321 9,752
DPL, Inc. 422,000 10,497
DQE Inc. 619,750 19,135
DTE Energy Co. 286,000 10,260
FPL Group, Inc. 248,800 11,538
General Public Utilities Corp. 230,000 7,820
Illinova Corp. 505,000 15,087
Kansas City Power & Light Co. 250,000 6,625
Nipsco Industries Inc. 100,000 3,813
New England Electric System 252,300 10,029
PECO Energy Corp. 245,400 7,546
Pacific Gas & Electric Co. 641,200 17,793
PacifiCorp 570,000 12,113
Pinnacle West Capital Corp. 680,200 20,066
Portland General Electric Co. 100,000 2,975
Public Service Co. of Colorado 194,600 7,006
Sierra Pacific Resources 199,900 4,723
TNP Enterprises, Inc. 30,900 637
Texas Utilities Co. 559,100 22,853
Union Electric Co. 206,500 8,802
Wisconsin Energy Corp. 355,000 11,183
-------------
GROUP TOTAL 271,519
-------------
- -----------------------------------------------------------------------------
ENERGY (5.2%)
Coastal Corp. 115,000 4,356
Metrogas ADS 210,000 2,258
Panhandle Eastern Corp. 130,000 3,754
Questar Corp. 287,300 9,373
TransCanada Pipelines Ltd. 407,500 5,849
Westcoast Energy, Inc. 951,900 14,701
Westcoast Energy, Inc. Class B 30,000 463
-------------
GROUP TOTAL 40,754
-------------
- -----------------------------------------------------------------------------
NATURAL GAS (7.1%)
Equitable Resources, Inc. 300,000 8,513
MCN Corp. 142,000 3,497
National Fuel & Gas Co. 250,000 8,344
ONEOK, Inc. 145,400 3,035
Pacific Enterprises 167,200 4,640
Public Service Co. of
North Carolina, Inc. 65,200 1,092
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
UTILITIES INCOME Value
PORTFOLIO (continued) Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Sonat, Inc. 300,000 $ 10,350
Southwestern Energy Co. 220,100 2,531
Washington Energy Co. 243,500 4,961
Williams Cos., Inc. 179,500 8,459
-------------
GROUP TOTAL 55,422
-------------
- -----------------------------------------------------------------------------
TECHNOLOGY (2.7%)
Comsat Corp. 646,800 12,128
Tele Danmark AS ADR 332,500 9,268
-------------
GROUP TOTAL 21,396
-------------
- -----------------------------------------------------------------------------
TELEPHONE (27.5%)
AT&T Corp. 228,900 15,308
ALLTEL Corp. 208,000 6,526
Ameritech Corp. 210,000 12,626
BCE, Inc. 207,600 7,500
Bell Atlantic Corp. 342,000 23,555
BellSouth Corp. 350,000 15,006
Frontier Corp. 170,200 5,063
GTE Corp. 663,200 30,507
NYNEX Corp. 482,200 25,858
Pacific Telesis Group 412,300 12,163
SBC Communications Inc. 205,700 11,648
Southern New England
Telecommunications Corp. 336,700 13,468
Sprint Corp. 400,000 17,250
Telus Corp. 173,100 2,107
U S West Communications Group 457,900 16,084
-------------
GROUP TOTAL 214,669
-------------
- -----------------------------------------------------------------------------
MISCELLANEOUS (1.2%)
Royal Ptt Nederland NV ADR 150,000 5,756
Southern California Water Co. 175,700 3,668
-------------
GROUP TOTAL 9,424
-------------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $519,831) 616,253
- -----------------------------------------------------------------------------
BONDS (17.2%)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
----------
<S> <C> <C>
ELECTRIC (9.0%)
Carolina Power & Light Co.
8.625%, 9/15/21 $ 3,000 3,687
Central Power and Light Co.
7.25%, 10/1/04 2,000 2,113
Dayton Power & Light Co.
8.15%, 1/15/26 3,000 3,287
Duke Power Co.
6.625%, 2/1/03 4,000 4,139
Florida Power & Light Co.
7.00%, 9/1/25 6,000 6,065
Houston Lighting & Power Co.
7.50%, 7/1/23 2,000 2,078
8.75%, 3/1/22 2,000 2,392
Kansas Gas & Electric Co.
7.60%, 12/15/03 4,000 4,324
Kentucky Utilities Co.
7.92%, 5/15/07 2,000 2,268
Louisville Gas & Electric
Energy Corp.
6.00%, 8/15/03 2,000 2,010
Northern States Power Co.
5.75%, 10/1/03 6,000 5,913
Pacific Gas & Electric Co.
5.375%, 8/1/98 3,000 2,992
8.375%, 5/1/25 2,000 2,155
Southern California Gas Co.
8.75%, 10/1/21 3,000 3,444
Southern Indiana Gas
& Electric Co.
8.875%, 6/1/16 3,400 4,198
Tampa Electric Co.
7.75%, 11/1/22 3,000 3,243
Union Electric Power Co.
8.75%, 12/1/21 2,000 2,219
Virginia Electric & Power Co.
6.00%, 8/1/01 5,000 5,058
West Texas Utilities Co.
7.75%, 6/1/07 1,500 1,644
Wisconsin Electric Power Co.
7.75%, 1/15/23 2,000 2,112
Wisconsin Public Service Corp.
6.80%, 2/1/03 4,500 4,680
-------------
GROUP TOTAL 70,021
-------------
- -----------------------------------------------------------------------------
GAS (.6%)
Atlanta Gas Light Co. MTN
5.90%, 10/6/03 5,000 4,909
-------------
- -----------------------------------------------------------------------------
TELEPHONE (7.6%)
AT&T Corp.
7.50%, 6/1/06 5,000 5,513
Bell Telephone Co. of Pennsylvania
6.625%, 9/15/02 3,500 3,639
BellSouth Telecommunications
6.75%, 10/15/33 5,000 4,897
Carolina Telephone & Telegraph
5.75%, 8/15/00 5,000 4,984
GTE Northwest Inc.
6.125%, 2/15/99 5,000 5,088
Illinois Bell Telephone Co.
7.25%, 3/15/24 2,000 2,080
Michigan Bell Telephone Co.
6.375%, 9/15/02 4,000 4,118
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
New Jersey Bell Telephone Co.
8.00%, 6/1/22 $ 3,000 $ 3,504
New York Telephone &
Telegraph Co.
8.625%, 11/15/10 2,500 3,019
Ohio Bell Telephone Co.
7.85%, 12/15/22 2,000 2,182
Pacific Bell Telephone Co.
7.25%, 7/1/02 4,000 4,307
Southwestern Bell
6.625%, 4/1/05 3,000 3,118
United Telephone Florida
6.25%, 5/15/03 3,000 3,024
United Telephone Ohio
6.625%, 10/1/02 2,000 2,080
U S West Communications Group
6.125%, 11/15/05 4,000 4,019
Wisconsin Bell
6.75%, 8/15/24 4,000 3,964
-------------
GROUP TOTAL 59,536
-------------
- -----------------------------------------------------------------------------
TOTAL BONDS
(Cost $127,890) 134,466
- -----------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.2%)
- -----------------------------------------------------------------------------
U.S. TREASURY NOTE
5.50%, 4/15/00
(Cost $8,839) 9,000 9,122
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.2%)
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $16,917) 16,917 16,917
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $673,477) 776,758
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and G 13,862
Liabilities--Note G (9,879)
-------------
3,983
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 60,790,591 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $780,741
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.84
=============================================================================
</TABLE>
+See Note A to Financial Statements.
ADR--American Depository Receipt.
ADS--American Depository Share.
MTN--Medium-Term Note.
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
------------ ------------
<S> <C> <C>
Paid in Capital $688,843 $11.33
Undistributed Net
Investment Income 9,679 .16
Accumulated Net
Realized Losses--Note F (21,062) (.35)
Unrealized Appreciation
of Investments--Note E 103,281 1.70
- -----------------------------------------------------------------------------
NET ASSETS $780,741 $12.84
- -----------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HEALTH CARE ENERGY
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1996 January 31, 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . $ 16,305 $ 8,893
Interest . . . . . . . . . . . . . . . . . . . . . 6,167 1,154
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 22,472 10,047
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . 1,365 605
The Vanguard Group--Note C . . . . . . . . . . . . .
Management and Administrative . . . . . . . . . . . $3,191 $1,600
Marketing and Distribution . . . . . . . . . . . . 173 3,364 109 1,709
------ ------
Taxes (other than income taxes) . . . . . . . . . . . 83 38
Custodian Fees . . . . . . . . . . . . . . . . . . . 134 111
Auditing Fees . . . . . . . . . . . . . . . . . . . . 6 6
Shareholders' Reports . . . . . . . . . . . . . . . . 97 49
Annual Meeting and Proxy Costs . . . . . . . . . . . 43 15
Directors' Fees and Expenses . . . . . . . . . . . . 4 2
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 5,096 2,535
Expenses Paid Indirectly--Note C . . . . . . . (125) (144)
- ---------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . 4,971 2,391
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . 17,501 7,656
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . 38,336 7,596
Foreign Currencies and Forward Currency Contracts . . 684 (5)
- ---------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . 39,020 7,591
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . 378,973 104,907
Foreign Currencies and Forward Currency Contracts . . (12) (2)
- ---------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) 378,961 104,905
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net . . . . . . . . . . . .
Assets Resulting from Operations . . . . . $435,482 $120,152
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
GOLD & PRECIOUS UTILITIES INCOME
METALS PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1996 January 31, 1996
(000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . . . $ 10,393 $ 24,695
Interest . . . . . . . . . . . . . . . . . . . . . 1,152 10,419
- ----------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 11,545 35,114
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . 1,058 728
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . $2,055 $1,817
Marketing and Distribution . . . . . . . . . . . . 129 2,184 141 1,958
------ ------
Taxes (other than income taxes) . . . . . . . . . . . 46 57
Custodian Fees . . . . . . . . . . . . . . . . . . . 124 37
Auditing Fees . . . . . . . . . . . . . . . . . . . . 6 6
Shareholders' Reports . . . . . . . . . . . . . . . . 63 70
Annual Meeting and Proxy Costs . . . . . . . . . . . 15 31
Directors' Fees and Expenses . . . . . . . . . . . . 3 3
- ----------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 3,499 2,890
Expenses Paid Indirectly--Note C . . . . . . . -- (143)
- ----------------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . 3,499 2,747
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . 8,046 32,367
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . 24,264 3,435
Foreign Currencies and Forward Currency Contracts . . 26 --
- ----------------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . 24,290 3,435
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . 134,802 136,947
Foreign Currencies and Forward Currency Contracts . . -- --
- ----------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) 134,802 136,947
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net
Assets Resulting from Operations . . . . . $167,138 $172,749
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $893,000.
25
<PAGE> 28
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO ENERGY PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1996 January 31, 1995 JANUARY 31, 1996 January 31, 1995
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . $ 17,501 $ 10,081 $ 7,656 $ 6,962
Realized Net Gain (Loss) . . . . . . . . . . . . 39,020 34,818 7,591 7,354
Change in Unrealized Appreciation . . . . . . .
(Depreciation) . . . . . . . . . . . . . . . 378,961 18,839 104,905 (59,289)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . 435,482 63,738 120,152 (44,973)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . (15,999) (10,497) (7,929) (7,148)
Realized Net Gain . . . . . . . . . . . . . . . (28,431) (42,079) (8,594) (8,318)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (44,430) (52,576) (16,523) (15,466)
- ------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS
(CHARGES)--Note A . . . . . . . . . . . . . . . -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . 290,798 76,213 77,992 110,300
--In Lieu of Cash Distributions . . . 42,849 50,271 15,560 14,334
--Exchange . . . . . . . . . . . . . 301,722 114,500 85,054 166,536
Redeemed --Regular . . . . . . . . . . . . . . (57,236) (40,896) (75,340) (48,268)
--Exchange . . . . . . . . . . . . . (86,258) (78,502) (134,740) (88,840)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from . . . . .
Capital Share Transactions . . . . . 491,875 121,586 (31,474) 154,062
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 882,927 132,748 72,155 93,623
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . 770,714 637,966 432,892 339,269
- -----------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . $1,653,641 $770,714 $ 505,047 $432,892
=============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . $ .57 $ .57 $.28 $.24
Realized Net Gain . . . . . . . . . . . . . $1.02 $2.31 $.30 $.29
- -----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 13,423 5,337 10,166 17,811
Issued in Lieu of Cash Distributions . . . . 901 1,430 926 992
Redeemed . . . . . . . . . . . . . . . . . (3,400) (3,416) (13,053) (8,982)
- ------------------------------------------------------------------------------------------------------------------------------
10,924 3,351 1,961 9,821
- ------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F . . . . . $ 1,805 $ 328 $ (39) $ 239
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO UTILITIES INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended Year Ended Year Ended
JANUARY 31, 1996 January 31, 1995 JANUARY 31, 1996 January 31, 1995
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . $ 8,046 $ 13,007 $ 32,367 $ 33,477
Realized Net Gain (Loss) . . . . . . . . . . . . 24,290 3,212 3,435 (24,471)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . 134,802 (149,036) 136,947 (45,090)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . 167,138 (132,817) 172,749 (36,084)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . (7,813) (15,231) (32,388) (34,340)
Realized Net Gain . . . . . . . . . . . . . . . -- -- -- (7,108)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (7,813) (15,231) (32,388) (41,448)
- ------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS
(CHARGES)--Note A . . . . . . . . . . . . . . . -- -- 495 (1,346)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . 56,168 112,156 94,627 70,620
--In Lieu of Cash Distributions . . . 7,233 13,866 25,709 33,422
--Exchange . . . . . . . . . . . . . 113,586 267,733 98,125 94,577
Redeemed --Regular . . . . . . . . . . . . . . (70,892) (85,473) (67,216) (79,265)
--Exchange . . . . . . . . . . . . . (148,207) (241,692) (103,968) (186,274)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . (42,112) 66,590 47,277 (66,920)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 117,213 (81,458) 188,133 (145,798)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . 531,087 612,545 592,608 738,406
- ------------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . $ 648,300 $ 531,087 $ 780,741 $ 592,608
==============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . $.17 $.31 $.56 $.59
Realized Net Gain . . . . . . . . . . . . . -- -- -- $.12
- ------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 13,989 28,806 16,949 16,045
Issued in Lieu of Cash Distributions . . . . 604 1,096 2,296 3,226
Redeemed . . . . . . . . . . . . . . . . . (18,112) (25,414) (15,333) (25,665)
- ------------------------------------------------------------------------------------------------------------------------------
(3,519) 4,488 3,912 (6,394)
- ------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F . . . . . $ (2,378) $ (2,637) $ 9,679 $ 9,205
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $37.01 $36.51 $32.66 $35.54 $27.32
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .61 .55 .79 .70 .53
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . 16.06 2.83 5.79 (1.68) 8.75
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 16.67 3.38 6.58 (.98) 9.28
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.57) (.57) (.76) (.70) (.53)
Distributions from Realized Capital Gains . . . . . (1.02) (2.31) (1.97) (1.20) (.53)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (1.59) (2.88) (2.73) (1.90) (1.06)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $52.09 $37.01 $36.51 $32.66 $35.54
==============================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . +45.47% +9.79% +21.21% -2.92% +33.97%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $1,654 $771 $638 $562 $553
Ratio of Expenses to Average Net Assets--Note C .46%+ .40% .19% .22% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 1.57% 1.58% 2.37% 2.06% 1.98%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 13% 25% 19% 15% 7%
- ------------------------------------------------------------------------------------------------------------------------------
</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.
+ Effective in fiscal 1996, does not include reductions from directed brokerage
arrangements. The 1996 Ratio of Expenses to Average Net Assets is .45% after
including these reductions. See Note C.
28
<PAGE> 31
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
----------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $13.82 $15.77 $13.82 $12.73 $13.39
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .27 .23 .31 .34 .42
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . 3.68 (1.65) 3.31 1.29 (.24)
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 3.95 (1.42) 3.62 1.63 .18
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.28) (.24) (.29) (.36) (.42)
Distributions from Realized Capital Gains . . . . . (.30) (.29) (1.38) (.18) (.42)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.58) (.53) (1.67) (.54) (.84)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $17.19 $13.82 $15.77 $13.82 $12.73
==============================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . +28.68% -9.15% +27.31% +13.02% +1.27%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $505 $433 $339 $164 $124
Ratio of Expenses to Average Net Assets--Note C . . . . .51%+ .30% .17% .21% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 1.55% 1.66% 1.87% 2.47% 2.78%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 21% 13% 41% 37% 42%
- ------------------------------------------------------------------------------------------------------------------------------
</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.
+ Effective in fiscal 1996, does not include reductions from directed brokerage
arrangements. The 1996 Ratio of Expenses to Average Net Assets is .48% after
including these reductions. See Note C.
29
<PAGE> 32
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $10.71 $13.58 $ 7.29 $ 9.41 $8.29
------- ------- ------- ------- ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .17 .27 .20 .19 .24
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 3.36 (2.83) 6.30 (2.13) 1.13
------- ------- ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . 3.53 (2.56) 6.50 (1.94) 1.37
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.17) (.31) (.21) (.18) (.25)
Distributions from Realized Capital Gains. . . . . -- -- -- -- --
------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.17) (.31) (.21) (.18) (.25)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $14.07 $10.71 $13.58 $ 7.29 $9.41
=============================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . +33.24% -19.20% +89.24% -20.58% +16.67%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $648 $531 $613 $175 $178
Ratio of Expenses to Average Net Assets--Note C .60% .25% .26% .36% .35%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 1.38% 2.04% 2.04% 2.50% 2.54%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 5% 4% 14% 2% 3%
- ----------------------------------------------------------------------------------------------------------------------------
</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.
30
<PAGE> 33
<TABLE>
<CAPTION>
UTILITIES INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
----------------------------------- May 15, 1992, to
For a Share Outstanding Throughout Each Period 1996 1995 1994 January 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $10.42 $11.67 $11.18 $10.00
------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .56 .56 .57 .41
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . 2.42 (1.10) .88 1.03
------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 2.98 (.54) 1.45 1.44
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.56) (.59) (.56) (.24)
Distributions from Realized Capital Gains . . . . . -- (.12) (.40) (.02)
------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.56) (.71) (.96) (.26)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $12.84 $10.42 $11.67 $11.18
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . +29.47% -4.47% +13.08% +14.51%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $781 $593 $738 $361
Ratio of Expenses to Average Net Assets . . . . . . . . .44%+ .50% .42% .45%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 4.88% 5.43% 4.82% 4.70%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 35% 35% 46% 20%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Effective in fiscal 1996, does not include reductions from directed brokerage
arrangements. The 1996 Ratio of Expenses to Average Net Assets is .41% after
including these reductions. See Note C.
31
<PAGE> 34
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: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 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.
2. FOREIGN CURRENCY: Securities and other assets and liabilities denominated
in foreign currencies are translated into U.S. dollars last quoted by
major banks as of 5:00 PM Geneva Time on the valuation date.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on securities from the
portion arising from changes in market prices of securities. Such
fluctuations are included in realized net gains (losses) and unrealized
appreciation (depreciation) on investment securities. Changes in the value
of other assets and liabilities resulting from changes in foreign exchange
rates are recorded as unrealized foreign currency gains (losses) until
settled in cash, at which time realized foreign currency gains (losses)
are recognized.
3. FORWARD CURRENCY CONTRACTS: The Health Care Portfolio enters into forward
foreign currency contracts to protect securities and related receivables
and payables against changes in future foreign exchange rates. Risks
associated with such contracts include movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the
counterparty to perform. Fluctuations in the value of such contracts are
recorded as unrealized appreciation (depreciation) until terminated, at
which time realized gains (losses) are recognized.
4. 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.
5. 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.
6. 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
32
<PAGE> 35
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until
maturity of each repurchase agreement. Provisions of each agreement
require 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.
7. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities
sold. Dividend income and distributions to shareholders are recorded on
the ex-dividend date. Discounts and premiums on debt securities purchased
are amortized to interest income over the lives of the respective
securities.
B. Under the terms of a contract which expires May 1, 1996, 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,
1996, the investment advisory fees of the Health Care, Energy, and Utilities
Income Portfolios represent effective annual rates of .12 of 1%, .12 of 1%, and
.11 of 1% of average net assets, respectively, after giving effect to fee
waivers of $71,000 (.01 of 1%), $23,000 (.01 of 1%), and $105,000 (.02 of 1%),
respectively.
Under the terms of a contract which expires January 31, 1997, 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, 1996, the investment
advisory fee of the Gold & Precious Metals Portfolio represents an effective
annual rate of .18 of 1% of average net assets after giving effect to a fee
waiver of $364,000 (.06 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, 1996, directed
brokerage arrangements reduced the expenses of the Health Care, Energy, and
Utilities Income Portfolios by $125,000, $144,000, and $143,000, respectively
(.01, .03, and .03 of 1% of average net assets, respectively).
At January 31, 1996, the Fund had contributed capital of $378,000 to Vanguard
(included in Other Assets), representing 1.9% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
D. During the year ended January 31, 1996, 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 $508,264 $137,233
ENERGY 98,447 156,001
GOLD & PRECIOUS METALS 26,151 78,095
UTILITIES INCOME 276,957 226,681
- ----------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (continued)
E. At January 31, 1996, net unrealized appreciation for Federal income tax
purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(000)
-----------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- -----------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE $543,437 $(14,968) $528,469
ENERGY 86,142 (17,658) 68,484
GOLD & PRECIOUS METALS* 171,634 (45,120) 126,514
UTILITIES INCOME 109,718 (6,437) 103,281
- -----------------------------------------------------------------
</TABLE>
*See Note F.
At January 31, 1996, the Health Care and Energy Portfolios had net unrealized
foreign currency losses of $12,000 and $2,000, respectively, resulting from the
translation of other assets and liabilities.
F. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
During the year ended January 31, 1996, the Portfolios realized net foreign
currency gains (losses) which increased (decreased) distributable net income
for tax purposes; accordingly such gains (losses) have been reclassified from
accumulated net realized gains (losses) to undistributed net income as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Increase (Decrease)
Undistributed
Net Income
Portfolio (000)
- ------------------------------------------------------------
<S> <C>
HEALTH CARE $(25)
ENERGY (5)
GOLD & PRECIOUS METALS 26
- ------------------------------------------------------------
</TABLE>
ENERGY PORTFOLIO: For Federal tax purposes, capital gains required to be
distributed in December 1995 included net gains realized through October 31,
1995. Subsequently, the Energy Portfolio realized capital losses of $439,000
which are available to offset future net capital gains.
GOLD & PRECIOUS METALS PORTFOLIO: Certain of the Gold & Precious Metals
Portfolio's investments are 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. The cumulative distributions to shareholders from passive foreign
investment company income totalled $2,915,000 through January 31, 1996, and are
reflected in the balance of overdistributed net income. An additional
$2,097,000 of unrealized appreciation attributed to passive foreign investment
companies is available for distribution at January 31, 1996. The Portfolio
utilized a capital loss carryforward of $20,997,000 to offset taxable capital
gains realized during the year ended January 31, 1996.
UTILITIES INCOME PORTFOLIO: At January 31, 1996, the Utilities Income Portfolio
had available a capital loss carryforward of $21,036,000 to offset future net
capital gains of $12,738,000 through January 31, 2003 and $8,298,000 through
January 31, 2004.
G. The market values of securities on loan to broker/dealers at January 31,
1996, 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 $ 8,759 $ 9,230
ENERGY 3,919 4,066
GOLD & PRECIOUS METALS 13,361 13,902
UTILITIES INCOME 7,158 7,298
- --------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; 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.
34
<PAGE> 37
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
Health Care, Energy, Gold & Precious Metals, and Utilities Income Portfolios of
Vanguard Specialized Portfolios (the "Fund") at January 31, 1996, and 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 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
February 29, 1996
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD SPECIALIZED PORTFOLIOS, INC.
Corporate shareholders should note that for the fiscal year ended January 31,
1996, 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 . . . . . . . . . 42.1%
Energy Portfolio . . . . . . . . . . . 85.2%
Gold & Precious Metals Portfolio . . . 11.3%
Utilities Income Portfolio . . . . . . 71.0%
</TABLE>
35
<PAGE> 38
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
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.; Director of Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
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 Co. 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. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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 F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
36
<PAGE> 39
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q510-1/96
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 40
VANGUARD SPECIALIZED PORTFOLIOS
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 cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through six.
A bar chart of the Growth Stocks versus Value Stocks (Standard & Poor's Growth
Index and Standard & Poor's Value Index), Annual Returns for the fiscal years
1991 through 1996 appears at the top of page two.
A line chart illustrating cumulative performance between the Utilities Income
Portfolio, Average Utility Fund and Composite Index, average Annual Total
Returns for the period May 15, 1992, to January 31, 1996 appears at the bottom
of page three.
A line chart illustrating cumulative performance between the Health Care
Portfolio, Average Health Care Fund, and Standard & Poor's 500 Index, average
Annual Total Returns for the period January 31, 1986, to January 31, 1996
appears at the top of page four.
A line chart illustrating cumulative performance between the Energy Portfolio,
Standard & Poor's 500 Index, and Average Natural Resources Fund, average Annual
Total Returns for the period January 31, 1986, to January 31, 1996 appears at
the top of page four.
A line chart illustrating cumulative performance between the Gold & Precious
Metals Portfolio, Average Gold Fund & Salomon World Gold Index, average Annual
Total Returns for the period January 31, 1986, to January 31, 1996 appears at
the bottom of page five.
A running head featuring an hourglass, compass, and telescope and battleships
in the background appears at the top of page seven.
A running head featuring a ships wheel and battleships in the background
appears at the top of pages eight through twelve.
A running head featuring a cannon and battleships in the background appears at
the top of pages thirteen through fifteen.
<PAGE> 41
A running head featuring open log book, pen and battleships in the background
appears at the top of pages sixteen through thirty five.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page thirty six.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
