<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the six months ended July 31, 1996, the first half of the fiscal year
for Vanguard Specialized Portfolios, the stock and bond markets diverged, with
stocks advancing to record highs while bond prices retreated from their peaks
reached in January. In this environment, the return of each Vanguard
Specialized Portfolio varied according to its narrowly defined investment
focus.
The following table presents the total return (capital change plus
reinvested dividends) provided by each Portfolio compared to its respective
competitive fund standard and its unmanaged performance benchmark: for our
three "regular" equity Portfolios, the Standard & Poor's 500 Composite Stock
Price Index; for our Gold & Precious Metals Portfolio, the Salomon World Gold
Index; and for our new REIT Index Portfolio, the Morgan Stanley Capital
International (MSCI) REIT Index.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURN
- --------------------------------------------------------------------
SIX MONTHS ENDED
JULY 31, 1996
- --------------------------------------------------------------------
<S> <C>
UTILITIES INCOME PORTFOLIO - 3.5%
AVERAGE UTILITY FUND - 2.9
- --------------------------------------------------------------------
HEALTH CARE PORTFOLIO + 2.7%
AVERAGE HEALTH CARE FUND - 6.7
- --------------------------------------------------------------------
ENERGY PORTFOLIO + 9.9%
AVERAGE NATURAL RESOURCES FUND + 7.9
- --------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX + 1.8%
====================================================================
GOLD & PRECIOUS METALS PORTFOLIO -11.7%
AVERAGE GOLD FUND - 4.8
- --------------------------------------------------------------------
SALOMON WORLD GOLD INDEX -11.1%
====================================================================
REIT INDEX PORTFOLIO + 2.7%*
AVERAGE REIT FUND + 0.7*
- --------------------------------------------------------------------
MSCI REIT INDEX + 2.8%*
- --------------------------------------------------------------------
</TABLE>
* Performance figures since the Portfolio's inception, May 13, 1996.
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 SIX MONTHS IN REVIEW
The stock market continued to surge ahead during the early months of our Fund's
current fiscal half year--it was ahead by +6.5% for the fiscal year through
June--before falling sharply in July. The early advance was impressive,
occurring as it did in the face of a persistent rise in long-term interest
rates. For the full six months, the stock market, as measured by the Standard &
Poor's 500 Index, chalked up a +1.8% return.
While stocks were positive, the bond market slumped. The price of the
benchmark 30-year U.S. Treasury bond fell -12% during the half year, as its
yield rose from 6.0% at the beginning of the period to 7.0% at the end. The
Lehman Aggregate Bond Index, a good measure of the overall bond market,
provided a total return of -1.6% during the half year, earning income of 3.3%
combined with a price decline of -4.9%.
The primary reason for the divergence in the returns of stocks and
bonds appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy. Faster-than-expected economic growth
during the past six months led stock investors to anticipate accelerated growth
in corporate earnings, even as bond investors worried about higher inflation.
It remains to be seen whether the bull market in stocks can continue in the
face of higher interest rates, which may provide heightened competition for
investors' dollars at a time when common stocks offer historically low dividend
yields.
UTILITIES INCOME PORTFOLIO
Sharply falling interest rates, which provided the backdrop for last year's
+29.5% return on the Utilities Income Portfolio, reversed course and climbed
steadily higher during the first six months of the fiscal year. As a result,
interest-rate-sensitive securities, including utility stocks, experienced sharp
price declines.
During the six-month period, the performance of the Utilities Income
Portfolio moved into negative
1
<PAGE> 2
territory, as utility stocks were the worst-performing sector of the market.
Our Portfolio's return of -3.5% compared to returns of -6.6% for the Composite
Utilities Index (80% Standard & Poor's Utility Index and 20% Lehman Utility
Bond Index) and -2.9% for the average utility fund. On balance, our
overweighted position in natural gas stocks boosted our relative performance
during the period, but weakness in electric utility and telecommunications
stocks more than offset this advantage.
Since the inception of the Utilities Income Portfolio on May 15, 1992,
our returns have significantly outpaced that of the average utility fund.
During this period, our Portfolio provided an average annual return of +10.9%,
compared with an annual return of +8.2% for our peers.
HEALTH CARE PORTFOLIO
During the ebullient bull market that lifted the Health Care Portfolio to a
lofty +45.5% return for fiscal 1996, our performance lagged that of the average
health-care fund by -3.2 percentage points. In our Annual Report to
shareholders, we explained that the relative shortfall should not be a concern
because "we tend to underperform our peers in a 'frothy' stock market." That is
to say, since our Portfolio focuses on high-quality, fundamentally sound
companies, our performance "swings" generally are not as wide as those of our
typical competitor.
The risks associated with managing a more aggressive portfolio came
home to roost during the past six months. The average health-care fund lost
- -6.7%, while Vanguard Health Care Portfolio rose +2.7%, a healthy relative
performance differential of +9.4%. This outperformance adds to our excellent
long-term record. Over the past ten years, the Health Care Portfolio provided
an average annual return of +18.4% compared to +15.4% for the average
health-care fund and +14.0% for the Standard & Poor's 500 Index.
ENERGY PORTFOLIO
During the first half of the fiscal year, energy stocks were among the best
performing major market sectors, leading the market advance. The Energy
Portfolio enjoyed a solid absolute return of +9.9% during this six-month
period, outpacing the +7.9% return on the average natural resources fund. We
enjoyed large price gains in our substantial holdings of natural gas stocks, as
demand for both oil and natural gas continued to show strong growth.
The long-term return of the Energy Portfolio continues to show an
advantage over our peer group of competitive funds. For the past decade, the
Energy Portfolio's ten-year annualized return has been +15.1% compared with an
annual return of +10.7% for the average natural resources fund.
GOLD & PRECIOUS METALS PORTFOLIO
During the past six months, gold prices fell approximately -5.0% from their
highs established in early 1996. In this environment, the -11.7% total return
for the Gold & Precious Metals Portfolio was disappointing, as gold mining
companies fared even worse than gold bullion. Our performance was essentially
in line with our unmanaged benchmark, the Salomon World Gold Index (-11.1%),
but we lagged behind our peers (-4.8%) due largely to our lower representation
in the better-performing North American gold companies. Our heavy commitment to
the lagging South African gold companies also impeded our six-month return.
Despite our short-term underperformance, the long-term record of the
Gold & Precious Metals Portfolio compares favorably with that of the average
gold fund. For the past ten years, the Portfolio provided an annual return of
+10.5%, compared with +8.1% for our peer group.
REIT INDEX PORTFOLIO
This is our first opportunity to write to you since the initial offering of the
REIT Index Portfolio, which took place on May 13, 1996. The period since the
inception of the Portfolio was a positive one for real estate stocks. This
report to you on the operations of the REIT Index Portfolio covers the two and
one-half months since the inception of the Portfolio through July 31, 1996, the
midpoint of its fiscal year. During this period, the Portfolio provided a
return of +2.7%, essentially matching its unmanaged MSCI REIT Index, and
outpacing the return of the average REIT mutual fund. We stress, however, that
small differences in
2
<PAGE> 3
total return over such a short time period are hardly meaningful, and we
present them solely to meet our responsibility to report to shareholders.
As far as we can determine, our REIT Index Portfolio is the first, and
so far only, mutual fund of its type. We chose this strategy because of the
special advantages market indexing provides--extraordinarily broad
diversification, no advisory fees, low management expenses, and minimal
portfolio turnover. These advantages should result in consistent returns
relative to other real estate funds. During the brief period since May 13,
1996, the Portfolio has already attracted more than $120 million of assets. The
REIT Index Portfolio, then, is off to a good start.
IN SUMMARY
Six months ago in the Annual Report for Vanguard Specialized Portfolios,
following an extraordinarily bountiful year, we cautioned that the financial
markets are not a "one-way street," and that investors should prepare for the
occasional rough patch by maintaining a balanced portfolio of stock funds, bond
funds, and money market funds. The first half of the Fund's fiscal year proved
to be an excellent example of the benefits of a balanced investment strategy,
as the weakness in the bond market was largely offset by the positive
performance of the stock market. We believe that our earlier caution remains
valid today. So, too, does our comment about the major long-term risks of
investing: (1) failing to hold stocks at all because of their short-term risks;
and (2) following an erratic and ever-changing course.
We assure you that Vanguard Specialized Portfolios will continue to
steer a steady course, remaining fully invested in stocks representing those
segments of the financial markets whose returns we emulate. We look forward to
reporting to you on the full fiscal year in our Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/JOHN J. BRENNAN
John J. Brennan
President
August 15, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
3
<PAGE> 4
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
Six-Month
Net Asset Value Per Share ----------------------------
----------------------------------- Income Capital Six-Month
Portfolio January 31, 1996 July 31, 1996 Dividends Gains* Total Return
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE $52.09 $53.08 $.06 $.35 + 2.7%**
ENERGY 17.19 18.89 -- -- + 9.9**
GOLD & PRECIOUS METALS 14.07 12.31 .06 .07 -11.7**
UTILITIES INCOME 12.84 12.11 .29 -- - 3.5
REIT INDEX 10.00+ 10.24 .03+ -- + 2.7** +
- ----------------------------------------------------------------------------------------------------------------------------
</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.
+ Since Portfolio's inception, May 13, 1996.
4
<PAGE> 5
REPORT FROM WELLINGTON MANAGEMENT COMPANY
UTILITIES INCOME PORTFOLIO
After strong utility stock performance in the second half of last year, which
was aided by a favorable interest rate environment, utility stocks have
suffered in the first half of the Fund's current fiscal year from the head
winds of rising interest rates and increased competitive concerns, particularly
in the telecommunications stocks. The Portfolio realized a negative return of
- -3.5% in the first half ended July 31, 1996, lagging the S&P 500 return of
+1.8%, but performing better than the -6.6% return of our Composite Utilities
Index.
Rising natural gas prices, favorable weather comparisons, and
restructuring activity led the natural gas stocks to superior performance in
the most recent six-month period. We will continue to maintain an overweighted
position in the natural gas industry because storage levels remain relatively
low and companies with pipeline and exploration and production exposure should
continue to benefit.
The passage of the Telecom Act was a landmark event for Congress, but
all it has done for investors is increase the realization that full competition
in both local and long distance service will be implemented over the next two
years. Margin pressure caused by aggressive strategies to gain market share is
now seeping into results at the large long-distance carriers, and it is unclear
as to how aggressive the pricing for local service will become. In the short
term, telephone earnings are coming in very strong, but we remain concerned
about the earnings impact of the build-out of PCS services, cellular, and other
new products over the next several years. Current earnings and dividend growth
rates do not appear sustainable, and we remain underweighted in the
telecommunications sector.
The electric utilities continue to look oversold as a group, but stock
selection within the sector remains more important than ever before. Nuclear
operating risk and regulatory concerns toward uneconomic fixed costs in nuclear
generating plants have led to a flight to non-nuclear quality companies in the
most recent six-month period. We believe that this will continue and our
emphasis remains on low-cost, well-managed utilities with superior dividend
growth potential. The transition to retail competition will take three to seven
years in most state jurisdictions, and we will monitor developments closely for
new opportunities. The temptation to take on more risk in companies with
depressed valuations is compelling, but we generally will wait for proactive
management strategies (asset write-downs, strategic alliances, accelerated
nuclear depreciation) before stepping into the higher risk investments. We
remain overweighted in electric utilities versus our benchmark.
We continue to look for opportunities to enhance utility total returns
while maintaining the income goals of the Portfolio.
HEALTH CARE PORTFOLIO
The Health Care Portfolio achieved a return of +2.7% for the first half of the
fiscal year. Better performance early in the year was substantially reduced
toward the end of the period. Still, the Portfolio performed well versus other
health-care mutual funds and the S&P Health Care Indices, which suffered
declines.
We were helped by a low representation in the health services sector,
particularly the HMOs, which had a difficult period. We had strong performance
from some of our international stocks, most notably Ciba-Geigy and Sandoz,
which are merging to form the world's largest health-care company.
The health-care industry has an attractive long-term outlook, driven
by favorable demographics and exciting new developments in technology. Strong
performance in recent years has created a higher valuation base that will make
it harder to duplicate the recent strong results in the near future. We are
hopeful that the Portfolio is well positioned for the long-term investor.
ENERGY PORTFOLIO
The Energy Portfolio achieved a total return of +9.9% during the first half of
the fiscal year, as compared to +1.8% for the S&P 500 Index. Oil and gas prices
were quite firm during the period. In the case of oil, demand growth so far in
1996 has exceeded expectations. The oil market is currently taking the prospect
of Iraq's return to the world oil market in stride, even though oil production
in a
5
<PAGE> 6
number of areas outside the Middle East is growing at a rapid rate. In the next
few months, oil prices may weaken some, as a large amount of new production
enters the market. Longer term, the current rate of growth in demand worldwide,
on the order of 2.5% to 3.0% per year, bodes well for the oil price outlook.
Since the end of the winter, natural gas prices in the U.S. have also been
quite strong, some 50% or more above year ago levels. The industry is currently
struggling to refill gas storage for the 1996-1997 winter, and this effort is
running behind the normal seasonal rate of recent years.
Oil and gas markets will remain volatile as traders react to
short-term events. We are encouraged by the positive impact on profits of the
high rates of capacity utilization in the oil and gas production, and oil
service sectors since last year. The oil refining industry remains depressed,
although in this sector demand growth will likely make for better markets in
future years as well.
The Portfolio continues to emphasize companies which are well
positioned with respect to the positive long-term trends in the industry, as we
see them and which are not dependent on continued improvement in commodity
pricing in order to show earnings growth. Such companies include Chevron and
Kerr-McGee among the integrated oils, Alberta Energy, an oil and gas producing
company in Canada, and Schlumberger in the oil service sector. We recently
reduced our exposure to smaller oil-producing and oil-service companies
somewhat in view of their strong performance earlier this year.
Respectfully,
Mark J. Beckwith, 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
August 13, 1996
6
<PAGE> 7
REPORT FROM M&G IMVESTMENT MANAGEMENT LTD.
GOLD & PRECIOUS METALS PORTFOLIO
Following the good performance that we were able to report last year, the
Portfolio's current fiscal year has begun on a disappointing note, with the
total return declining by 11.7% during the six months under review. This is
against a background of a gold bullion price that has fallen from its recent
high of above $400 in January/February 1996 to once again reestablish itself
within its narrow trading range between $380 and $390. While the price of gold
has fallen 5.1% during the past six months, gold shares have fared slightly
worse, with the Salomon World Gold Index declining by 11.1% and the F.T. Global
Gold Mines Index falling by 16.8%.
Vanguard Gold & Precious Metals Portfolio has performed in line with
the Salomon World Gold Index, although it has outperformed the F.T. Global Gold
Mines Index. However, its performance has not matched some of the other gold
mutual funds in its peer group. This was a consequence of the divergent
performance of gold stocks worldwide, which could be described as a tale of two
markets, characterized by lackluster returns from the world's leading gold
producers and sparkling, often spectacular, performances from the junior
exploration sector, particularly in Canada. In general, the smaller, more
aggressively managed gold mutual funds have produced superior results by
actively participating in this exploration boom, although their risk profile
and turnover levels have increased significantly.
We have continued to maintain a conservative approach to the
management of Vanguard Gold & Precious Metals Portfolio, preferring, in
general, to concentrate investment in the productive, growth-oriented
companies, rather than in the speculative, high-risk shares of exploration
companies.
The geographical distribution of the Portfolio shows no dramatic or
substantial changes from the last Annual Report, although the North American
weightings have been increased slightly. Two new holdings in this area are:
Greenstone Resources, a Latin American based +200,000 ounce producer in the
coming year with a strong and growing reserve position; and Miramar Mining, a
low-cost, 125,000 ounce producer, with a strong balance sheet and control of a
quoted exploration company active in Argentina.
The Portfolio's weightings in South Africa have fallen slightly over
the past six months, primarily due to market movements. However, significant
positive changes have taken place at the operational level, with improving cost
controls and the introduction of new work practices at many mines. The industry
has also recently been helped by a near 20% depreciation in the Rand. This
combination of factors has been reflected in some excellent quarterly results
recently, and we therefore remain comfortable with our weightings in this area.
Finally, the Portfolio remains fully invested, with cash representing
around 2% of net assets and gold bullion holdings of just over 5%.
Respectfully,
David J. Hutchins
M&G Investment Management Ltd.
(Regulated by IMRO)
London, England
August 6, 1996
7
<PAGE> 8
TOTAL INVESTMENT RETURN TABLES
The following tables illustrate the results of single-share investments in
three of the five Portfolios since inception through July 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
- ----------------------------------------------------------------------------------------------------------------------------------
1996 (7/31) 53.08 .35 .06 102.90 + 2.6 +0.1 + 2.7 + 1.8
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +929.0% +523.9%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +21.1% +16.2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<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
- ----------------------------------------------------------------------------------------------------------------------------------
1996 (7/31) 18.89 -- -- 39.76 + 9.9 0.0 + 9.9 + 1.8
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +297.6% +523.9%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.0% +16.2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
- ----------------------------------------------------------------------------------------------------------------------------------
1996 (7/31) 12.31 .07 .06 18.16 - 12.1 +0.4 - 11.7 - 11.1
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME + 81.6% + 30.8%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 5.0% + 2.2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
9
<PAGE> 10
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
July 31, 1996
<TABLE>
<CAPTION>
Market
Value
HEALTH CARE PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (89.0%)
- -------------------------------------------------------------------------------------------
UNITED STATES (70.8%)
- -------------------------------------------------------------------------------------------
BASIC MATERIALS (1.7%)
Mallinckrodt Group, Inc. 920,000 $ 34,385
*Scios, Inc. 491,750 2,674
------------
37,059
------------
CONSUMER STAPLES (2.8%)
Dekalb Genetics Corp. Class B 1,216,950 38,334
*(1)Paragon Trade Brands, Inc. 958,500 20,608
------------
58,942
------------
DRUGS (26.9%)
Alpharma Inc. Class A 1,004,040 18,198
*ALZA Corp. 730,000 18,068
American Home Products Corp. 650,000 36,888
Bristol-Myers Squibb Co. 1,080,000 93,555
Carter-Wallace, Inc. 266,000 3,126
Carter-Wallace, Inc. Class B 24,000 282
Eli Lilly & Co. 331,574 18,568
Merck & Co., Inc. 880,225 56,554
*(1)Oravax, Inc. 602,600 3,917
*Perrigo Co. 3,357,100 29,374
Pharmacia & Upjohn, Inc. 1,270,000 52,387
Pfizer, Inc. 1,295,000 90,488
Rhone-Poulenc Rorer, Inc. 795,000 52,470
Schering-Plough Corp. 100,000 5,512
*(1)Targeted Genetics Corp. 1,224,600 4,286
Warner-Lambert Co. 1,600,000 87,200
------------
570,873
------------
FINANCIAL (.7%)
(1)United Wisconsin Services Inc. 678,000 16,018
------------
MEDICAL SERVICES (4.9%)
*Beverly Enterprises Inc. 1,230,000 11,685
Columbia/HCA Healthcare Corp. 524,347 26,873
*Humana, Inc. 980,400 16,422
*Laboratory Corp. of America 2,492,116 17,133
*Laboratory Corp. of America
Warrants Exp. 4/28/00 128,200 56
*Physician Corp. of America 1,153,100 11,819
*Salick Healthcare Inc. 38,450 1,480
*(1)Syncor International Corp. 856,559 10,172
*Tenet Healthcare Corp. 471,100 9,128
------------
104,768
------------
MEDICAL SUPPLIES (24.0%)
Abbott Laboratories 2,080,000 91,520
*Advanced Technology
Laboratories, Inc. 683,300 22,036
Allergan, Inc. 746,000 30,399
C.R. Bard, Inc. 1,356,400 41,370
Beckman Instruments Inc. 1,102,200 39,679
*Biomet, Inc. 1,070,300 16,322
(1)Collagen Corp. 474,800 8,012
*Coventry Corp. 200,000 2,475
*Datascope Corp. 340,100 5,782
*(1)E-Z-EM Inc. Class A 219,258 2,357
*E-Z-EM Inc. Class B 274,291 2,828
Guidant Corp. 1,163,703 59,058
*Haemonetics Corp. 906,000 17,440
*Healthdyne Technologies, Inc. 193,065 1,689
*Healthsource, Inc. 1,200,000 13,200
Johnson & Johnson 1,500,000 71,625
Kinetic Concepts, Inc. 716,000 9,934
*Matria Healthcare Inc. 196,700 1,598
*Mid Atlantic Medical
Services, Inc. 500,000 6,250
*Nellcor Puritan Bennett, Inc. 260,000 6,110
Owens & Minor, Inc.
Holding Co. 1,106,700 12,727
*Perseptive Biosystems 250,500 1,941
*Protocol Systems Inc. 273,000 4,743
*Resound Corp. 300,000 2,737
*SpaceLabs Medical Inc. 280,000 5,670
United Healthcare Corp. 400,000 13,500
United States Surgical Corp. 300,000 10,275
*Value Health, Inc. 500,000 7,750
------------
509,027
------------
SPECIALTY PHARMACEUTICAL (5.5%)
*Alliance Pharmaceutical Corp. 967,388 13,785
*Amylin Pharmaceuticals, Inc. 650,000 5,688
*Cephalon Inc. 270,000 4,219
*Genentech Inc.-Special
Common Stock 876,900 46,147
*Genetics Institute Inc.
Depository Shares 316,960 20,999
*Genzyme Corp. 200,000 4,950
*Immunex Corp. 1,024,000 12,800
*Lynx Therapeutics Inc. 21,141 106
*Magainin Pharmaceuticals 694,400 5,642
*Matrix Pharmaceutical, Inc. 200,500 2,155
------------
116,491
------------
TECHNOLOGY (1.4%)
*Cerner Corp. 450,000 5,738
*(1)MDL Information Systems, Inc. 588,300 17,208
Perkin-Elmer Corp. 122,720 6,412
------------
29,358
------------
MISCELLANEOUS (2.9%)
*Human Genome Sciences, Inc. 177,500 5,414
McKesson Corp. 1,280,000 55,680
------------
61,094
------------
GROUP TOTAL 1,503,630
------------
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INTERNATIONAL (18.2%)
- -------------------------------------------------------------------------------------------
Amersham International PLC 1,630,900 $ 24,328
Banyu Pharmaceutical 300,000 4,357
Bayer AG ADR 400,000 13,500
Chugai Pharmaceutical Ltd. 700,000 6,487
Ciba Geigy (Registered) 40,760 48,390
Eisai Co., Ltd. 1,575,000 29,072
*Elan Corp. PLC ADR 58,824 3,456
Fujisawa Pharmaceutical 1,600,000 15,292
Hafslund ASA A 354,857 2,647
*Nycomed ASA A 354,857 5,182
Rhone-Poulenc SA ADR 1,155,932 30,199
Sandoz AG (Registered) 17,670 19,723
Sankyo Co., Ltd. 1,300,000 33,741
Schering AG 193,470 13,419
SmithKline Beecham PLC ADR 574,800 30,896
Sulzer AG (Ptg. Ctf.) 31,366 16,588
Synthelabo 118,270 9,561
Takeda Chemical Industries 1,000,000 17,522
Zeneca Group ADR 964,524 62,453
------------
GROUP TOTAL 386,813
------------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,381,022) 1,890,443
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (10.9%)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.62%, 8/1/96
(Cost $232,505) $232,505 232,505
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $1,613,527) 2,122,948
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- -------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.1%)
- -------------------------------------------------------------------------------------------
Other Assets--Notes C and G $ 29,776
Liabilities--Note G (27,985)
------------
1,791
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 40,030,327 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $2,124,739
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $53.08
===========================================================================================
</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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT JULY 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
<S> <C> <C>
PAID IN CAPITAL $1,558,616 $38.94
UNDISTRIBUTED NET
INVESTMENT INCOME--
NOTE F 16,529 .41
ACCUMULATED NET
REALIZED GAINS--NOTE F 40,164 1.00
UNREALIZED APPRECIATION--
NOTE E:
INVESTMENT SECURITIES 509,421 12.73
FOREIGN CURRENCIES 9 --
- -------------------------------------------------------------------------------------------
NET ASSETS $2,124,739 $53.08
- -------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
ENERGY PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.5%)
- -------------------------------------------------------------------------------------------
UNITED STATES (65.3%)
- -------------------------------------------------------------------------------------------
COAL, GAS, PIPE (3.5%)
Anadarko Petroleum Corp. 110,000 $ 5,624
*Santa Fe Energy Resources, Inc. 500,000 5,687
*Seagull Energy Corp. 500,000 9,125
------------
20,436
------------
EXPLORATION & DRILLING (10.1%)
*BJ Services Co. 270,000 8,944
*Diamond Offshore Drilling, Inc. 120,000 5,670
*ENSCO International, Inc. 110,000 2,970
McDermott International, Inc. 300,000 5,437
Noble Affiliates, Inc. 130,000 5,119
*Noble Drilling Corp. 922,600 12,686
Pogo Producing Co. 250,000 8,344
*Reading & Bates Corp. 150,000 3,056
*Varco International, Inc. 458,500 6,878
------------
59,104
------------
OIL--DOMESTIC (35.7%)
Amerada Hess Corp. 270,000 13,129
Amoco Corp. 200,000 13,375
Apache Corp. 130,000 3,689
Ashland Inc. 360,000 13,185
*Barrett Resources Corp. 200,000 5,750
Devon Energy Corp. 220,000 5,142
Diamond Shamrock, Inc. 200,000 5,550
Enron Oil & Gas Co. 154,400 3,860
*Falcon Drilling Co., Inc. 130,000 2,697
Kerr-McGee Corp. 350,000 19,950
Murphy Oil Corp. 170,100 7,250
*Oryx Energy Co. 850,000 13,388
Pennzoil Co. 200,000 9,825
Phillips Petroleum Co. 260,000 10,270
Sun Co., Inc. 200,000 5,175
*TransTexas Gas Corp. 350,000 3,063
USX-Marathon Group 1,000,000 20,500
Ultramar Corp. 227,900 6,011
Union Texas Petroleum
Holdings, Inc. 260,000 4,875
Unocal Corp. 646,000 21,076
Vastar Resources, Inc. 606,800 20,935
------------
208,695
------------
OIL--INTERNATIONAL (7.5%)
Chevron Corp. 110,000 6,366
Exxon Corp. 250,000 20,562
Texaco Inc. 200,000 17,000
------------
43,928
------------
OIL SERVICES (6.3%)
Baker Hughes, Inc. 310,000 9,106
Camco International, Inc. 197,400 6,391
*Numar Corp. 100,000 1,525
*Rowan Cos., Inc. 270,000 3,881
Schlumberger Ltd. 200,000 16,000
------------
36,903
------------
TRANSPORT & SERVICES (1.0%)
*OMI Corp. 700,000 5,863
------------
MISCELLANEOUS (1.2%)
Weatherford Enterra Inc. 269,999 6,649
------------
GROUP TOTAL 381,578
------------
- -------------------------------------------------------------------------------------------
INTERNATIONAL (27.2%)
- -------------------------------------------------------------------------------------------
CANADA (16.0%)
Alberta Energy Co. 627,870 11,581
*Anderson Exploration Ltd. 1,012,400 9,503
*Barrington Petroleum 200,000 626
*C S Resources Ltd. 500,000 3,638
*Cabre Exploration Ltd. 290,000 3,598
*Canadian Natural Resources Ltd. 390,000 7,293
*Chauvco Resources Ltd. Class A 250,000 1,865
*Elan Energy, Inc. 150,000 1,282
Imperial Oil Ltd. 260,300 10,862
*Jordan Petroleum Ltd. 500,000 2,947
*Morgan Hydrocarbons, Inc. 600,000 1,593
Morrison Petroleum 268,000 1,560
*Northstar Energy Corp. 300,000 2,914
Pancanadian Petroleum Ltd. 91,700 3,103
Paramount Resources Ltd. 360,300 4,457
*Penn West Petroleum Ltd. 352,143 2,306
Petro-Canada 272,300 3,387
Petro-Canada (U.S. Traded) 227,700 2,818
*Poco Petes Ltd. 570,000 4,127
*Rigel Energy Corp. 250,290 2,231
*Rio Alto Exploration Ltd. 652,500 3,371
*Talisman Energy, Inc. 255,000 6,123
*Tarragon Oil & Gas Ltd. 280,000 2,526
------------
93,711
------------
UNITED KINGDOM (2.6%)
Burmah Castrol PLC 299,955 4,638
Lasmo PLC 2,000,000 5,590
London & Overseas
Freighters Ltd. 638,300 934
London & Overseas
Freighters Ltd. ADR 290,000 3,915
------------
15,077
------------
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER (8.6%)
Norsk Hydro AS ADR 180,000 $ 7,807
Repsol SA ADR 192,500 6,425
Royal Dutch Petroleum Co. ADR 100,000 15,087
Saga Petroleum B (Free) 190,000 2,521
Total SA ADR 400,000 14,300
YPF Sociedad Anonima ADR 200,000 4,200
------------
50,340
------------
GROUP TOTAL 159,128
------------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $443,219) 540,706
- -------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (.4%)
- -------------------------------------------------------------------------------------------
Sun Co., Inc. $1.80 Series A
(Cost $2,750) 100,000 2,637
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (6.1%)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-----------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.62%, 8/1/96
(Cost $35,421) $35,421 35,421
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(Cost $481,390) 578,764
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- -------------------------------------------------------------------------------------------
Other Assets--Notes C and G 22,086
Liabilities--Note G (16,407)
------------
5,679
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 30,945,054 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $584,443
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $18.89
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT JULY 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------- ---------
<S> <C> <C>
PAID IN CAPITAL $469,420 $15.17
UNDISTRIBUTED NET
INVESTMENT INCOME--NOTE F 4,004 .13
ACCUMULATED NET
REALIZED GAINS--NOTE F 13,645 .44
UNREALIZED APPRECIATION--
NOTE E:
INVESTMENT SECURITIES 97,374 3.15
FOREIGN CURRENCIES -- --
- -------------------------------------------------------------------------------------------
NET ASSETS $584,443 $18.89
- -------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
GOLD & PRECIOUS Value
METALS PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.0%)
- -------------------------------------------------------------------------------------------
AUSTRALIA (19.0%)
*Aurora Gold Ltd. 2,000,000 $ 3,092
*Bougainville Copper Ltd. 2,000,000 835
CRA Ltd. 500,000 7,052
*Emperor Mines Ltd. 2,150,000 4,154
*Gold Mines of Australia Ltd. 6,000,000 1,090
*Golden Shamrock Mines Ltd. 9,000,000 7,373
*Great Central Mines NL 5,000,000 13,911
Highlands Gold Ltd. 15,000,000 6,028
*Lone Star Exploration NL 2,000,000 1,299
Normandy Mining Ltd. 4,500,000 6,608
*Normandy Mining Ltd.
Warrants Exp. 4/30/01 1,800,000 737
Placer Pacific Ltd. 3,500,000 4,598
Plutonic Resources Ltd. 1,500,000 6,480
Poseidon Gold Ltd. 5,000,000 11,554
RGC Ltd. 1,750,000 8,318
Resolute Samantha Ltd. 6,000,000 13,865
Sons of Gwalia 875,000 5,545
*Star Mining Corp. 28,000,000 3,030
------------
105,569
------------
CANADA (13.5%)
Euro-Nevada Mining Corp. 950,000 19,285
Franco-Nevada Mining Corp. Ltd. 550,000 16,808
*Golden Star Resources Ltd. 350,000 4,711
*Greenstone Resources Ltd. 750,000 8,813
*Miramar Mining Corp. 1,000,000 4,948
Nelson Gold Corp. Ltd. 3,250,000 2,247
*Princess Resources 6,000,000 1,091
*South Pacific Resources Corp. 150,000 584
*TVX Gold, Inc. 2,000,000 15,280
*Texas Star Resources Corp. 800,000 349
*Vengold Inc. 1,250,000 1,201
------------
75,317
------------
GHANA (1.3%)
Ashanti Goldfields Co., Ltd. GDS 425,000 7,493
------------
SOUTH AFRICA (32.6%)
Anglo American Corp. ADR 175,000 9,647
Beatrix Gold Mines ADR 1,250,000 9,531
De Beers Centenary AG ADR 600,000 18,075
Driefontein Consolidated
Ltd. ADR 1,000,000 13,125
Elandsrand Gold Mining
Ltd. ADR 1,500,000 8,063
Free State Consolidated Gold
Mines Ltd. ADR 1,500,000 15,563
Gold Fields South Africa ADR 375,000 10,594
Hartebeestfontein Gold Mining
Co. Ltd. ADR 2,300,000 7,475
Impala Platinum Holdings
Ltd. ADR 750,000 10,447
Kinross ADR 425,000 4,622
Kloof Gold Mining Ltd. ADR 850,000 8,606
Minorco Sponsored ADR 325,000 6,947
Randfontein Estates Gold Mining
Co. Ltd. ADR 1,750,000 10,937
Rustenberg Platinum Holdings
Ltd. ADR 650,000 9,912
Southvaal Holdings ADR 330,000 11,220
Vaal Reefs Exploration & Mining
Co. Ltd. ADR 1,750,000 13,781
Western Deep Levels ADR 350,000 12,819
------------
181,364
------------
UNITED KINGDOM (3.1%)
*Bakyrchik Gold PLC 750,000 3,153
London Fiduciary Trust PLC 60,000,000 4,204
RTZ Corp. PLC 700,000 10,131
------------
17,488
------------
UNITED STATES (22.5%)
*Amax Gold, Inc. 1,500,000 8,625
*Atlas Corp. 1,000,000 813
Barrick Gold Corp. 625,000 17,422
*Campbell Resources Inc. 5,000,000 5,625
*Canyon Resources Corp. 325,000 792
*Crown Resource Corp. 600,000 3,075
Freeport-McMoRan Copper &
Gold Inc. Class A 400,000 11,100
Freeport-McMoRan Copper &
Gold Inc. Gold
Denomination Shares 150,000 5,081
Freeport-McMoRan Copper &
Gold Inc. 7.00% Cvt. Pfd. 150,000 4,275
*Getchell Gold Corp. 200,000 6,475
Homestake Mining Co. 500,000 8,188
Newmont Gold Co. 125,000 6,359
Newmont Mining Corp. 275,000 13,578
Pioneer Group Inc. 250,000 6,438
Placer Dome, Inc. 250,000 5,844
*Royal Oak Mines Inc. 2,000,000 7,875
Santa Fe Pacific Gold Corp. 600,000 8,024
*Stillwater Mining Co. 250,000 5,375
------------
124,964
------------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $457,863) 512,195
- -------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
PRECIOUS METALS (5.3%)
- -------------------------------------------------------------------------------------------
*Gold Bullion (74,873 Ounces) $ 28,849
*Platinum Bullion (2,009 Ounces) 808
- -------------------------------------------------------------------------------------------
TOTAL PRECIOUS METALS
(Cost $31,920) 29,657
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.1%)
- -------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.62%, 8/1/96
(Cost $11,616) $11,616 11,616
TOTAL INVESTMENTS (99.4%)
(Cost $501,399) 553,468
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.6%)
- -------------------------------------------------------------------------------------------
Other Assets--Notes C and G 31,440
Liabilities--Note G (28,117)
------------
3,323
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 45,244,837 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $556,791
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.31
===========================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt.
GDS--Global Depository Share.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT JULY 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
------- ------
<S> <C> <C>
PAID IN CAPITAL $506,712 $11.20
OVERDISTRIBUTED NET
INVESTMENT INCOME--NOTE F (332) (.01)
ACCUMULATED NET
REALIZED LOSSES (1,659) (.03)
UNREALIZED APPRECIATION--
NOTE E:
INVESTMENT SECURITIES 52,069 1.15
FOREIGN CURRENCIES 1 --
- -------------------------------------------------------------------------------------------
NET ASSETS $556,791 $12.31
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
UTILITIES INCOME PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (78.8%)
- -------------------------------------------------------------------------------------------
BASIC MATERIALS (.3%)
NOVA Corp. 220,800 $ 1,877
------------
ELECTRICAL POWER (43.2%)
Allegheny Power System, Inc. 50,000 1,463
Baltimore Gas & Electric Co. 354,600 9,131
CMS Energy Corp. 329,000 9,993
Carolina Power & Light Co. 426,600 15,358
Central & South West Corp. 336,100 8,991
Central Hudson Gas &
Electric Corp. 216,300 6,435
Cilcorp, Inc. 85,000 3,549
CINergy Corp. 313,321 9,282
DPL, Inc. 522,000 11,810
DQE Inc. 725,250 19,854
DTE Energy Co. 136,000 3,910
Duke Power Co. 157,000 7,516
FPL Group, Inc. 100,000 4,537
General Public Utilities Corp. 230,000 7,475
Illinova Corp. 655,000 16,866
NIPSCO Industries, Inc. 415,500 15,529
New England Electric System 277,300 8,770
Northern States Power Co. 130,900 5,858
Pacific Gas & Electric Co. 749,100 14,795
PacifiCorp 927,800 19,368
Pinnacle West Capital Corp. 919,300 25,970
PowerGen PLC ADR 189,000 5,812
Public Service Co. of Colorado 194,600 6,884
Public Service Co. of New Mexico 400,000 7,950
Sierra Pacific Resources 227,600 5,718
Southern Co. 100,000 2,262
Texas Utilities Co. 597,200 25,082
Wisconsin Energy Corp. 110,000 2,929
------------
283,097
------------
ENERGY (4.7%)
Coastal Corp. 125,000 4,656
Questar Corp. 287,300 9,050
Transcanada Pipelines 157,500 2,441
Westcoast Energy, Inc. 926,900 14,367
Westcoast Energy, Inc. Class B 30,000 465
------------
30,979
------------
NATURAL GAS (7.3%)
Equitable Resources, Inc. 318,400 8,079
MCN Corp. 142,000 3,337
National Fuel & Gas Co. 225,000 7,594
ONEOK, Inc. 145,400 3,835
Pacific Enterprises 232,000 6,815
Public Service Co. of North
Carolina, Inc. 39,300 653
</TABLE>
15
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
UTILITIES INCOME Value
PORTFOLIO (continued) Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Sonat, Inc. 225,000 $ 9,591
Southwestern Energy Co. 161,200 2,277
Williams Cos., Inc. 125,000 5,734
------------
47,915
------------
TECHNOLOGY (.4%)
Tele Danmark AS ADR 107,500 2,513
TELEPHONE (21.5%)
AT&T Corp. 357,200 18,619
ALLTEL Corp. 180,000 4,927
Ameritech Corp. 324,500 18,010
BCE, Inc. 182,600 7,281
BellSouth Corp. 327,600 13,432
Frontier Corp. 195,200 5,490
GTE Corp. 400,000 16,500
SBC Communications Inc. 200,000 9,775
Southern New England
Telecommunications Corp. 250,000 9,594
Sprint Corp. 450,000 16,481
Telecom Corp. of New Zealand
Ltd. ADR 112,900 8,312
Telus Corp. 173,100 2,380
U S WEST Communications Group 332,000 10,085
------------
140,886
------------
MISCELLANEOUS (1.4%)
Royal PTT Nederland NV ADR 153,947 5,407
Southern California Water Co. 175,700 3,404
------------
8,811
------------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $472,209) 516,078
- -------------------------------------------------------------------------------------------
BONDS (18.3%)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
ELECTRIC (9.1%)
Carolina Power & Light Co.
8.625%, 9/15/21 $3,000 3,312
Central Power and Light Co.
7.25%, 10/1/04 2,000 1,958
Dayton Power & Light Co.
8.15%, 1/15/26 3,000 3,043
Duke Power Co.
6.625%, 2/1/03 4,000 3,912
Florida Power & Light Co.
7.00%, 9/1/25 4,000 3,591
Houston Lighting & Power Co.
7.50%, 7/1/23 2,000 1,902
8.75%, 3/1/22 2,000 2,068
Kentucky Utilities Co.
7.92%, 5/15/07 2,000 2,068
Louisville Gas & Electric
Energy Corp.
6.00%, 8/15/03 2,000 1,881
Northern States Power Co.
5.75%, 10/1/03 4,000 3,680
Pacific Gas & Electric Co.
5.375%, 8/1/98 3,000 2,921
8.375%, 5/1/25 2,000 2,052
Southern California Edison
6.25%, 6/15/03 3,000 2,839
Southern California Gas Co.
8.75%, 10/1/21 3,000 3,167
Southern Indiana Gas & Electric Co.
8.875%, 6/1/16 3,400 3,793
Tampa Electric Co.
7.75%, 11/1/22 3,000 2,899
Union Electric Power Co.
8.75%, 12/1/21 2,000 2,118
Virginia Electric & Power Co.
6.00%, 8/1/01 5,000 4,787
West Texas Utilities Co.
7.75%, 6/1/07 1,500 1,500
Wisconsin Electric Power Co.
7.75%, 1/15/23 2,000 1,962
Wisconsin Public Service Corp.
6.80%, 2/1/03 4,500 4,435
------------
59,888
------------
GAS (.7%)
Atlanta Gas Light Co. MTN
5.90%, 10/6/03 5,000 4,591
------------
TELEPHONE (8.5%)
AT&T Corp.
7.50%, 6/1/06 5,000 5,086
Bell Telephone Co. of Pennsylvania
6.625%, 9/15/02 3,500 3,418
BellSouth Telecommunications
6.75%, 10/15/33 5,000 4,402
Carolina Telephone & Telegraph
5.75%, 8/15/00 5,000 4,799
GTE Northwest Inc.
6.125%, 2/15/99 5,000 4,927
Illinois Bell Telephone Co.
7.25%, 3/15/24 2,000 1,897
Michigan Bell Telephone Co.
6.375%, 9/15/02 4,000 3,864
New Jersey Bell Telephone Co.
8.00%, 6/1/22 3,000 3,148
New York Telephone & Telegraph Co.
8.625%, 11/15/10 2,500 2,736
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Ohio Bell Telephone Co.
7.85%, 12/15/22 $2,000 $ 2,047
Pacific Bell Telephone Co.
7.25%, 7/1/02 4,000 4,023
Southwestern Bell
6.625%, 4/1/05 3,000 2,890
U S WEST Communications Group
6.125%, 11/15/05 4,000 3,697
United Telephone Florida
6.25%, 5/15/03 3,000 2,866
United Telephone Ohio
6.625%, 10/1/02 2,000 1,951
Wisconsin Bell
6.75%, 8/15/24 4,000 3,569
------------
55,320
------------
- -------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost $122,590) 119,799
- -------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (.6%)
- -------------------------------------------------------------------------------------------
U.S.TREASURY NOTE
5.50%, 4/15/00
(Cost $3,842) 4,000 3,872
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- -------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.62%, 8/1/96
(Cost $8,139) 8,139 8,139
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $606,780) 647,888
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- -------------------------------------------------------------------------------------------
Other Assets--Notes C and G 11,046
Liabilities--Note G (3,697)
------------
7,349
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 54,093,027 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $655,237
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.11
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT JULY 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------- ---------
<S> <C> <C>
PAID IN CAPITAL $607,391 $11.23
UNDISTRIBUTED NET
INVESTMENT INCOME 8,703 .16
ACCUMULATED NET
REALIZED LOSSES (1,965) (.04)
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE E 41,108 .76
- -------------------------------------------------------------------------------------------
NET ASSETS $655,237 $12.11
- -------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
REIT Index Portfolio Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (98.1%)
- -------------------------------------------------------------------------------------------
Ambassador Apartments Inc. REIT 23,900 $ 406
Amli Residential Properties
Trust REIT 31,400 632
Apartment Investment &
Management Co. Class A REIT 31,200 620
Associated Estates Realty Corp. REIT 37,300 755
Avalon Properties, Inc. REIT 84,200 1,895
BRE Properties Inc. Class A REIT 87,500 1,859
Bay Apartment Communities,
Inc. REIT 30,700 779
Beacon Properties Corp. REIT 74,600 1,958
Berkshire Realty Co., Inc. REIT 68,800 740
Bradley Real Estate Inc. REIT 49,600 719
Burnham Pacific Properties,
Inc. REIT 45,100 524
CBL & Associates Properties,
Inc. REIT 55,700 1,205
Cali Realty Corp. REIT 41,700 964
Camden Property Trust REIT 39,500 958
CarrAmerica Realty Corp. REIT 36,300 871
CenterPoint Properties Corp. REIT 26,900 726
Chelsea GCA Realty, Inc. REIT 31,200 901
Colonial Properties Trust REIT 47,200 1,168
Columbus Realty Trust REIT 31,400 604
Commercial Net Lease Realty,
Inc. REIT 42,100 574
Cousins Properties, Inc. REIT 74,200 1,540
Crescent Real Estate Equities,
Inc. REIT 64,100 2,388
Crown American Realty Trust REIT 74,000 611
Debartolo Realty Corp. REIT 149,800 2,416
Developers Diversified Realty
Corp. REIT 58,100 1,823
Duke Realty Investments Inc. REIT 76,300 2,270
Equity Inns Inc. REIT 36,100 420
Equity Residential Properties
Trust REIT 107,600 3,632
Evans Withycombe Residential,
Inc. REIT 43,200 880
Excel Realty Trust, Inc. REIT 32,900 674
FAC Realty Inc. REIT 30,200 268
Federal Realty Investment
Trust REIT 87,500 1,958
Felcor Suite Hotels, Inc. REIT 63,200 1,770
First Industrial Realty Trust,
Inc. REIT 65,900 1,549
Franchise Finance Corp. of
America REIT 109,400 2,626
Gables Residential Trust REIT 44,100 1,036
General Growth Properties,
Inc. REIT 72,600 1,788
Glimcher Realty Trust REIT 60,000 998
Alexander Haagen Properties,
Inc. REIT 32,000 420
Highwood Properties, Inc. REIT 54,000 1,492
Horizon Group Inc. REIT 48,800 1,013
IRT Property Co. REIT 68,400 641
Innkeepers USA Trust REIT 22,500 236
Irvine Apartment Communities,
Inc. REIT 45,900 964
JDN Realty Corp. REIT 29,300 641
JP Realty Inc. REIT 42,200 891
Kimco Realty Corp. REIT 96,700 2,696
*Koger Equity Inc. REIT 48,300 670
Kranzco Realty Trust REIT 27,200 428
Lexington Corporate Properties,
Inc. REIT 24,500 291
Liberty Property Trust REIT 75,600 1,503
MGI Properties, Inc. REIT 30,000 521
The Macerich Co. REIT 53,600 1,119
Manufactured Home Communities,
Inc. REIT 67,200 1,226
Mark Centers Trust REIT 22,700 230
Merry Land & Investment Co.,
Inc. REIT 91,100 1,913
Mid-America Apartment
Communities, Inc. REIT 29,100 738
The Mills Corp. REIT 45,900 849
National Golf Properties, Inc. REIT 29,100 753
New Plan Realty Trust REIT 156,400 3,324
Oasis Residential, Inc. REIT 43,200 934
Paragon Group Inc. REIT 39,700 640
Patriot American Hospitality,
Inc. REIT 40,200 1,141
Pennsylvania Real Estate
Investment Trust 22,500 442
Post Properties, Inc. REIT 59,100 2,046
Public Storage, Inc. REIT 115,000 2,458
RFS Hotel Investors, Inc. REIT 62,900 1,006
ROC Communities Inc. REIT 33,700 779
Saul Centers, Inc. REIT 31,800 413
Security Capital Industrial
Trust REIT 218,083 3,898
Security Capital Pacific Trust REIT 193,927 4,024
Shurgard Storage Centers, Inc.
Class A REIT 63,200 1,493
Simon Property Group, Inc. REIT 150,600 3,539
Charles E. Smith Residential Realty,
Inc. REIT 25,700 591
South West Property Trust,
Inc. REIT 52,800 673
Spieker Properties, Inc. REIT 86,300 2,460
Starwood Lodging Trust REIT 36,700 1,248
Storage Trust Realty REIT 23,300 472
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Storage USA, Inc. REIT 53,200 $ 1,782
Summit Properties, Inc. REIT 44,000 803
Sun Communities, Inc. REIT 26,400 739
Taubman Co. REIT 119,200 1,252
The Town & Country Trust REIT 42,100 563
Trinet Corporate Realty Trust,
Inc. REIT 37,900 1,137
United Dominion Realty Trust,
Inc. REIT 152,100 2,072
Urban Shopping Centers REIT 35,900 826
Vornado Realty Trust REIT 65,500 2,759
Walden Residential Properties,
Inc. REIT 37,900 801
Washington Real Estate
Investment Trust 86,400 1,393
Weeks Corp. REIT 29,600 781
Weingarten Realty Investors REIT 71,500 2,878
Wellsford Residential Property
Trust REIT 46,100 1,003
Western Investment Real Estate
Trust REIT 44,900 561
Winston Hotels, Inc. REIT 22,800 258
- -------------------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $117,187) 117,929
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT ( 3.6%)
- -------------------------------------------------------------------------------------------
Face
Amount
(000)
----------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.62%, 8/1/96
(Cost $4,387) $4,387 4,387
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.7%)
(Cost $121,574) 122,316
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.7%)
- -------------------------------------------------------------------------------------------
Other Assets--Note C 925
Liabilities (2,981)
------------
(2,056)
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 11,747,418 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $120,260
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.24
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT JULY 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------- ---------
<S> <C> <C>
PAID IN CAPITAL $118,761 $10.11
UNDISTRIBUTED NET
INVESTMENT INCOME 757 .07
ACCUMULATED NET
REALIZED GAINS -- --
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE E 742 .06
- -------------------------------------------------------------------------------------------
NET ASSETS $120,260 $10.24
- -------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
HEALTH CARE ENERGY
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
July 31, 1996 July 31, 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . $ 14,082 $ 4,530
Interest . . . . . . . . . . . . . . . . . . . . . 6,545 654
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . 20,627 5,184
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . 1,014 287
The Vanguard Group--Note C
Management and Administrative . . . . . . . . $2,392 $678
Marketing and Distribution . . . . . . . . . . 184 2,576 62 740
------ ------
Taxes (other than income taxes) . . . . . . . . . 74 21
Custodian Fees . . . . . . . . . . . . . . . . . 128 59
Auditing Fees . . . . . . . . . . . . . . . . . 3 3
Shareholders' Reports . . . . . . . . . . . . . . 56 24
Annual Meeting and Proxy Costs . . . . . . . . . . 16 5
Directors' Fees and Expenses . . . . . . . . . . . 3 1
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 3,870 1,140
Expenses Paid Indirectly--Note C . . . . . (101) --
- --------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . 3,769 1,140
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 16,858 4,044
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . 40,342 14,080
Foreign Currencies and Forward Currency Contracts -- --
Realized Net Gain (Loss) . . . . . . . 40,342 14,080
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . (19,048) 28,890
Foreign Currencies and Forward Currency Contracts 21 2
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . (19,027) 28,892
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . $ 38,173 $47,016
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
GOLD & PRECIOUS UTILITIES INCOME
METALS PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
July 31, 1996 July 31, 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1). . . . . . . . . . . . . . . . . . . . $ 5,782 $ 13,118
Interest. . . . . . . . . . . . . . . . . . . . . . 644 4,785
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . 6,426 17,903
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . 552 280
The Vanguard Group--Note C
Management and Administrative . . . . . . . . $847 $958
Marketing and Distribution . . . . . . . . . . 66 913 75 1,033
---- ----
Taxes (other than income taxes) . . . . . . . . . 24 28
Custodian Fees . . . . . . . . . . . . . . . . . 65 23
Auditing Fees . . . . . . . . . . . . . . . . . 3 3
Shareholders' Reports . . . . . . . . . . . . . . 30 32
Annual Meeting and Proxy Costs . . . . . . . . . . 6 7
Directors' Fees and Expenses . . . . . . . . . . . 1 1
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 1,594 1,407
Expenses Paid Indirectly--Note C . . . . . -- (94)
- ---------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . 1,594 1,313
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 4,832 16,590
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . (1,666) 19,097
Foreign Currencies and Forward Currency Contracts 9 --
- --------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . (1,657) 19,097
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . (79,457) (62,173)
Foreign Currencies and Forward Currency Contracts 1 --
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . (79,456) (62,173)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . $(76,281) $(26,486)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $214,000.
21
<PAGE> 22
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
REIT INDEX PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
May 13, 1996, to
July 31, 1996
(000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . $ 970
Interest . . . . . . . . . . . . . . . . . . . . . 57
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . 1,027
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . --
The Vanguard Group--Note C
Management and Administrative . . . . . . . . $49
Marketing and Distribution . . . . . . . . . . -- 49
------
Taxes (other than income taxes) . . . . . . . . . --
Custodian Fees . . . . . . . . . . . . . . . . . --
Auditing Fees . . . . . . . . . . . . . . . . . 1
Shareholders' Reports . . . . . . . . . . . . . . --
Annual Meeting and Proxy Costs . . . . . . . . . . --
Directors' Fees and Expenses . . . . . . . . . . . --
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 50
Expenses Paid Indirectly--Note C . . . . . --
- --------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . 50
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 977
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . --
Foreign Currencies and Forward Currency Contracts --
- --------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . --
- --------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . 742
Foreign Currencies and Forward Currency Contracts --
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) 742
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . $1,719
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO ENERGY PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended SIX MONTHS ENDED Year Ended
JULY 31, 1996 January 31, 1996 JULY 31, 1996 January 31, 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income . . . . . . . . . . . . . . . . $ 16,858 $ 17,501 $ 4,044 $ 7,656
Realized Net Gain (Loss) . . . . . . . . . . . . . . . 40,342 39,020 14,080 7,591
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . (19,027) 378,961 28,892 104,905
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . 38,173 435,482 47,016 120,152
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . (2,110) (15,999) -- (7,929)
Realized Net Gain . . . . . . . . . . . . . . . . . (12,305) (28,431) -- (8,594)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (14,415) (44,430) -- (16,523)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A . . . . . . . . -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . 602,240 592,520 122,678 163,046
Issued in Lieu of Cash Distributions . . . . . . . . . 13,801 42,849 -- 15,560
Redeemed . . . . . . . . . . . . . . . . . (168,701) (143,494) (90,298) (210,080)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions . . . . . . . . . . . . 447,340 491,875 32,380 (31,474)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . 471,098 882,927 79,396 72,155
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 1,653,641 770,714 505,047 432,892
- ---------------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . $2,124,739 $1,653,641 $584,443 $ 505,047
=================================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 11,185 13,423 6,377 10,166
Issued in Lieu of Cash Distributions . . . . . . . 258 901 -- 926
Redeemed . . . . . . . . . . . . . . . . . (3,160) (3,400) (4,804) (13,053)
- ---------------------------------------------------------------------------------------------------------------------------------
8,283 10,924 1,573 (1,961)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO UTILITIES INCOME PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended SIX MONTHS ENDED Year Ended
JULY 31, 1996 January 31, 1996 JULY 31, 1996 January 31, 1996
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 4,832 $ 8,046 $ 16,590 $ 32,367
Realized Net Gain (Loss) . . . . . . . . . . . . . (1,657) 24,290 19,097 3,435
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . (79,456) 134,802 (62,173) 136,947
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . (76,281) 167,138 (26,486) 172,749
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . (2,795) (7,813) (16,407) (32,388)
Realized Net Gain . . . . . . . . . . . . . . . (3,260) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (6,055) (7,813) (16,407) (32,388)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A . . . . . . -- -- (1,159) 495
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . 119,280 169,754 54,483 192,752
Issued in Lieu of Cash Distributions . . . . . . . 5,669 7,233 13,184 25,709
Redeemed . . . . . . . . . . . . . . . (134,122) (219,099) (149,119) (171,184)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions . . . . . . . . . . (9,173) (42,112) (81,452) 47,277
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . (91,509) 117,213 (125,504) 188,133
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . 648,300 531,087 780,741 592,608
- ---------------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . $ 556,791 $ 648,300 $ 655,237 $ 780,741
=================================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . 8,549 13,989 4,409 16,949
Issued in Lieu of Cash Distributions . . . . . 406 604 1,074 2,296
Redeemed . . . . . . . . . . . . . . . (9,781) (18,112) (12,181) (15,333)
- ---------------------------------------------------------------------------------------------------------------------------------
(826) (3,519) (6,698) 3,912
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
REIT INDEX PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
MAY 13, 1996, TO
JULY 31, 1996
(000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 977
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . . . . . . . . . 742
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . . . . 1,719
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220)
- ---------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A . . . . . . . . . . . . . . . . . . . . . . . --
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,231
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . . 201
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (671)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . . . . . . . . 118,761
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . . . . . . . 120,260
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,260
=====================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,794
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . . . . 20
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67)
- ---------------------------------------------------------------------------------------------------------------------
11,747
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended January 31,
For a Share Outstanding Throughout Each Period JULY 31, 1996 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $52.09 $37.01 $36.51 $32.66 $35.54 $27.32
------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .41 .61 .55 .79 .70 .53
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . .99 16.06 2.83 5.79 (1.68) 8.75
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . 1.40 16.67 3.38 6.58 (.98) 9.28
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.06) (.57) (.57) (.76) (.70) (.53)
Distributions from Realized Capital Gains . . . (.35) (1.02) (2.31) (1.97) (1.20) (.53)
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.41) (1.59) (2.88) (2.73) (1.90) (1.06)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $53.08 $52.09 $37.01 $36.51 $32.66 $35.54
=================================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . +2.68% +45.47% +9.79% +21.21% -2.92% +33.97%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $2,125 $1,654 $771 $638 $562 $553
Ratio of Total Expenses to Average Net Assets . . . . .39%** .46% .40% .19% .22% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 1.70%** 1.57% 1.58% 2.37% 2.06% 1.98%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 9%** 13% 25% 19% 15% 7%
Average Commission Rate Paid . . . . . . . . . . . . $.0489+ N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</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.
** Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
26
<PAGE> 27
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
SIX MONTHS ENDED -------------------------------------------------------
For a Share Outstanding Throughout Each Period JULY 31, 1996 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $17.19 $13.82 $15.77 $13.82 $12.73 $13.39
------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .13 .27 .23 .31 .34 .42
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . 1.57 3.68 (1.65) 3.31 1.29 (.24)
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . 1.70 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 PERIOD . . . . . . . . . . . $18.89 $17.19 $13.82 $15.77 $13.82 $12.73
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* . . . . . . . . . . . . . . . . . . +9.89% +28.68% -9.15% +27.31% +13.02% +1.27%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $584 $505 $433 $339 $164 $124
Ratio of Total Expenses to Average Net Assets . . . . .41%** .51% .30% .17% .21% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 1.43%** 1.55% 1.66% 1.87% 2.47% 2.78%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 20%** 21% 13% 41% 37% 42%
Average Commission Rate Paid . . . . . . . . . . . . $.0427+ N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</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.
** Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
27
<PAGE> 28
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
SIX MONTHS ENDED ---------------------------------------------------
For a Share Outstanding Throughout Each Period JULY 31, 1996 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $14.07 $10.71 $13.58 $ 7.29 $9.41 $8.29
------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .10 .17 .27 .20 .19 .24
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . (1.73) 3.36 (2.83) 6.30 (2.13) 1.13
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . (1.63) 3.53 (2.56) 6.50 (1.94) 1.37
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.06) (.17) (.31) (.21) (.18) (.25)
Distributions from Realized Capital Gains . . . (.07) -- -- -- -- --
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.13) (.17) (.31) (.21) (.18) (.25)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $12.31 $14.07 $10.71 $13.58 $7.29 $9.41
==================================================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . -11.69% +33.24% -19.20% +89.24% -20.58% +16.67%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $557 $648 $531 $613 $175 $178
Ratio of Total Expenses to Average Net Assets . . . . .51%** .60% .25% .26% .36% .35%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 1.53%** 1.38% 2.04% 2.04% 2.50% 2.54%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 14%** 5% 4% 14% 2% 3%
Average Commission Rate Paid . . . . . . . . . . . . $.0075+ N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
** Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
28
<PAGE> 29
<TABLE>
<CAPTION>
UTILITIES INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
SIX MONTHS ENDED ------------------------------------ May 15, 1992, to
For a Share Outstanding Throughout Each Period JULY 31, 1996 1996 1995 1994 January 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . $12.84 $10.42 $11.67 $11.18 $10.00
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .29 .56 .56 .57 .41
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . (.73) 2.42 (1.10) .88 1.03
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . (.44) 2.98 (.54) 1.45 1.44
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.29) (.56) (.59) (.56) (.24)
Distributions from Realized Capital Gains . . -- -- (.12) (.40) (.02)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . (.29) (.56) (.71) (.96) (.26)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . $12.11 $12.84 $10.42 $11.67 $11.18
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . -3.46% +29.47% -4.47% +13.08% +14.51%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . $655 $781 $593 $738 $361
Ratio of Total Expenses to Average Net Assets . . . .40%* .44% .50% .42% .45%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 4.67%* 4.88% 5.43% 4.82% 4.70%*
Portfolio Turnover Rate . . . . . . . . . . . . . . 42%* 35% 35% 46% 20%
Average Commission Rate Paid . . . . . . . . . . . $.0560+ N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
29
<PAGE> 30
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
REIT INDEX PORTFOLIO
- ----------------------------------------------------------------------------------------------------
MAY 13, 1996++, TO
For a Share Outstanding Throughout the Period JULY 31, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . $10.00
--------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . .10
Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . .17
--------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . . . . .27
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . (.03)
Distributions from Realized Capital Gains . . . . . . . . . . . . . . . --
--------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . (.03)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $10.24
=====================================================================================================
TOTAL RETURN* . . . . . . . . . . . . . . . . . . . . . . . . . . +2.70%
- -----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . . . . . . . $120
Ratio of Total Expenses to Average Net Assets . . . . . . . . . . . . . . . . .35%**
Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . 6.64%**
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 0%
Average Commission Rate Paid . . . . . . . . . . . . . . . . . . . . . . . . $.0271+
- -----------------------------------------------------------------------------------------------------
</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.
** Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
++ Commencement of Operations.
30
<PAGE> 31
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, Utilities Income, and REIT Index
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 Portfolios may enter 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, transfers uninvested cash balances into a Pooled Cash Account, the
daily aggregate of which is invested in repurchase agreements secured by
31
<PAGE> 32
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, 1997, 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 six months ended July 31,
1996, the investment advisory fees of the Health Care, Energy, and Utilities
Income Portfolios represent effective annual rates of .10 of 1%, .10 of 1%, and
.08 of 1% of average net assets, respectively, after giving effect to fee
waivers of $86,000 (an annual rate of .02 of 1%), $25,000 (.02 of 1%), and
$70,000 (.04 of 1%), respectively for the period February 1, 1996, to April 30,
1996.
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 six months ended July 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 $201,000 (an annual rate of .06 of 1%).
The Vanguard Group furnishes investment advisory services to the REIT Index
Portfolio on an at-cost basis.
C. The Vanguard Group 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 six months ended July 31, 1996,
directed brokerage arrangements reduced the expenses of the Health Care and
Utilities Income Portfolios by $101,000 and $94,000, respectively (annual rates
of .01 and .03 of 1% of average net assets, respectively).
At July 31, 1996, the Fund had contributed capital of $421,000 to Vanguard
(included in Other Assets), representing 2.1% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
D. During the period ended July 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 $442,333 $ 82,115
ENERGY 74,562 55,087
GOLD & PRECIOUS METALS 43,662 47,181
UTILITIES INCOME 145,970 222,974
REIT INDEX 117,187 --
- ----------------------------------------------------------
</TABLE>
32
<PAGE> 33
E. At July 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 $565,895 $(56,474) $509,421
ENERGY 109,790 (12,416) 97,374
GOLD & PRECIOUS METALS* 111,964 (64,907) 47,057
UTILITIES INCOME 57,176 (16,068) 41,108
REIT INDEX 2,048 (1,306) 742
- ------------------------------------------------------------------------------
</TABLE>
*See Note F.
At July 31, 1996, the Health Care and Gold & Precious Metals Portfolios had net
unrealized foreign currency gains of $9,000 and $1,000, 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 six months ended July 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 $(24)
ENERGY (1)
GOLD & PRECIOUS METALS 9
- -------------------------------------------------------------
</TABLE>
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. Distributions to shareholders from passive foreign investment
company income during the six months ended July 31, 1996, were $2,097,000; the
cumulative total of these distributions related to passive foreign investment
company holdings at July 31, 1996, was $5,012,000, and is reflected in the
balance of overdistributed net income.
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 July 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 $21,802 $22,492
ENERGY 11,690 11,772
GOLD & PRECIOUS METALS 23,324 26,527
UTILITIES INCOME 1,845 1,920
- --------------------------------------------------------------------
</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.
33
<PAGE> 34
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 Emeritus 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 Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel
Corporation.
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.
34
<PAGE> 35
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
35
<PAGE> 36
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
This Report has been prepared for shareholders
and may be distributed to others only if
preceded or accompanied by a current prospectus.
All Funds in the Vanguard Family are offered by prospectus only.
Q512-7/96
VANGUARD
SPECIALIZED
PORTFOLIOS
SEMI-ANNUAL REPORT
JULY 31, 1996
