<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-88116) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 22
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 24
VANGUARD SPECIALIZED PORTFOLIOS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
POST OFFICE BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
On May 13, 1996 pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED JANUARY 31, 1996 ON MARCH 14, 1996.
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<PAGE> 2
VANGUARD SPECIALIZED PORTFOLIOS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights: Fund Expenses
Item 4. General Description of Registrant............. Investment Objectives; Investment
Policies; Investment Limitations;
General Information
Item 5. Management of the Fund........................ Management of the Fund; Investment
Advisers
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies;
General Information
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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[VANGUARD SPECIALIZED PORTFOLIOS LOGO]
A Member of The Vanguard Group
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PROSPECTUS -- MAY 13, 1996
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Specialized Portfolios, Inc. (the "Fund") is an
open-end diversified investment company. The Fund consists
of five Portfolios that invest primarily in common stocks
and other equity securities concentrated in a particular
industry or group of related industries. Three Portfolios
of the Fund (Energy, Gold & Precious Metals and Health
Care) seek to provide long-term capital appreciation. Two
Portfolios (Utilities Income and REIT Index) seek to
provide current income and moderate growth of capital and
income. This Prospectus relates to the Energy, Gold &
Precious Metals and Health Care Portfolios. The REIT Index
and Utilities Income Portfolios are described in separate
Prospectuses. Given their specialized focus, the
Portfolios should not be considered a complete investment
program. There is no assurance that the Portfolios will
achieve their stated objectives. Shares of the Fund are
neither insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call our
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. (Eastern time), and Saturday, from 9:00 a.m. to
4:00 p.m. (Eastern time). The minimum initial investment
is $3,000 per Portfolio or $1,000 for Uniform
Gifts/Transfers to Minors Act accounts. The Fund is
offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, the Fund incurs
expenses for investment advisory, management,
administrative, and distribution services.
IMPORTANT NOTE:
1% REDEMPTION FEE If shares of the Energy, Gold & Precious Metals, Health
Care and REIT Index Portfolios are redeemed or exchanged
prior to being held for one year, they will be subject to
a 1% redemption fee. See "Fund Expenses."
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. Such Statement is
dated May 13, 1996, and has been incorporated by reference
into this Prospectus. A copy may be obtained without
charge by writing to the Fund or by calling the Investor
Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Who Should Invest ................. 14 SHAREHOLDER GUIDE
Fund Expenses .................... 4 Implementation of Policies......... 15 Opening an Account and
Financial Highlights ...............5 Investment Limitations ............ 17 Purchasing Shares ................ 25
Yield and Total Return .............7 Management of the Fund ............ 17 When Your Account Will
FUND INFORMATION Investment Advisers ............... 18 Be Credited ...................... 28
Investment Objectives ............ 8 Dividends, Capital Gains Selling Your Shares .............. 28
Investment Policies ............... 8 and Taxes ......................... 21 Exchanging Your Shares ........... 31
Investment Risks ................. 10 The Share Price of Each Portfolio.. 22 Important Information About
General Information ............... 23 Telephone Transactions ........... 32
Transferring Registration ......... 33
Other Vanguard Services .......... 33
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
HIGHLIGHTS
OBJECTIVE AND
POLICIES The Fund is an open-end diversified investment company.
The Fund consists of five Portfolios that invest primarily
in common stocks and other equity securities concentrated
in a particular industry or group of related industries.
This Prospectus relates only to the Energy, Gold &
Precious Metals, Health Care and Utilities Income
Portfolios. Three Portfolios of the Fund (Energy, Gold &
Precious Metals and Health Care) seek to provide long-term
capital appreciation. The Utilities Income Portfolio seeks
to provide current income and moderate growth of capital
and income. There is no assurance that any Portfolio will
achieve its stated objective. PAGE 8
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RISK
CHARACTERISTICS Each Portfolio of the Fund is subject to market risk and
industry risk. Market risk is the possibility that stock
prices will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline. Each Portfolio is expected to be
strongly influenced by these broad fluctuations in stock
prices.
In addition, unlike more widely-diversified mutual funds,
the Portfolios are subject to industry risk, the
possibility that a particular group of related stocks will
decline in price due to industry-specific developments.
Securities held by the Energy Portfolio will be influenced
by cyclical fluctuations in the supply and demand for oil,
as well as tax and regulatory policies, conservation
trends, and international oil politics. The Gold &
Precious Metals Portfolio will be subject to the highly
volatile and often erratic markets for gold and precious
metals and for the common stocks of mining companies.
Investments relating to gold and precious metals or
minerals are considered speculative, and are affected by a
host of world-wide economic, financial and political
factors. Stocks held by the Health Care Portfolio will be
affected by government policies on health care
reimbursements, regulatory approval for new drugs and
medical instruments, and similar matters.
Industry risks in the Utilities Income Portfolio include:
changing utility regulation, new competitive pressures,
and rising operating costs, on top of unique risks for
telephone, electric, gas and water utilities. The
Utilities Income Portfolio is also exposed to interest
rate risk -- price fluctuations due to changing interest
rates. More so than other stock market sectors, utility
stocks may sometimes behave like fixed-income investments,
rising and falling as interest rates change. PAGE 10
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THE VANGUARD
GROUP The Fund is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
funds, provides on an at-cost basis all corporate
management, administrative, distribution, marketing and
shareholder accounting services to the funds in the
Group. PAGE 17
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INVESTMENT
ADVISERS Wellington Management Company serves as investment adviser
to the Energy, Health Care, and Utilities Income
Portfolios. M&G Investment Management Limited serves as
investment adviser to the Gold & Precious Metals
Portfolio. PAGE 18
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2
<PAGE> 5
DIVIDENDS, CAPITAL
GAINS AND TAXES Distributions of net investment income are expected to be
made quarterly for the Utilities Income Portfolio, and
annually for the Energy, Gold & Precious Metals and Health
Care Portfolios. Capital gains, if any, will be
distributed annually. Dividend and capital gains
distributions are generally subject to federal, state and
local income taxes. Also, a sale of shares -- whether by
outright redemption or exchange -- is a taxable event and
may result in a capital gain or loss. PAGE 21
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PURCHASING
SHARES You may purchase shares by mail, wire, or exchange from
another Vanguard Fund. The minimum initial investment is
$3,000 per Portfolio; the minimum for subsequent
investments is $100. There are no sales commissions or
12b-1 fees.
PAGE 25
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SELLING SHARES You may redeem shares of each Portfolio by mail or by
telephone. The Energy, Gold & Precious Metals, Health Care
and REIT Index Portfolios assess a 1% redemption fee on
shares held less than 12 months. (The Utilities Income
Portfolio does not assess a 1% redemption fee.) Each
Portfolio's share price is expected to fluctuate, and at
the time of redemption may be more or less than at the
time of initial purchase, resulting in a gain or
loss. PAGE 28
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EXCHANGING
SHARES You may exchange a Portfolio's shares for those of another
Portfolio of the Fund or other available Vanguard Funds.
An exchange from the Energy, Gold & Precious Metals,
Health Care and REIT Index Portfolios will be subject to a
1% redemption fee on shares held for less than 12 months.
(The Utilities Income Portfolio does not assess a 1%
redemption fee.) PAGE 31
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SPECIAL
CONSIDERATIONS (1) Under normal circumstances, at least 80% of the assets
of each Portfolio (75% in the case of the Utilities Income
Portfolio) will be invested in equity securities
concentrated in a particular industry or group of
industries. As a result, a Portfolio of the Fund may be
subject to greater fluctuations in market value than a
mutual fund which invests in a more widely-diversified
group of stocks. Due to the specialized focus of the
individual Portfolios, an investment in a Portfolio should
not be considered a complete investment program.
(2) The Gold & Precious Metals Portfolio may invest all of
its assets in foreign securities, and each of the other
Portfolios of the Fund may invest a portion of its assets
in foreign securities. Each Portfolio may enter into
forward foreign exchange contracts in order to protect
against uncertainty in the level of future foreign
exchange rates, but not for speculative purposes. PAGE 15
(3) Each Portfolio may lend its securities. PAGE 16
- --------------------------------------------------------------------------------
3
<PAGE> 6
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the fiscal year
ended January 31, 1996.
<TABLE>
<CAPTION>
GOLD &
PRECIOUS HEALTH UTILITIES
ENERGY METALS CARE INCOME
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Sales Load Imposed on Purchases............. None None None None
Sales Load Imposed on Reinvested
Dividends................................. None None None None
Redemption Fees*............................ 1% 1% 1% None
Exchange Fees**............................. None None None None
*The 1% fee withheld from redemption proceeds of shares held for less than one year is
paid to the Portfolio.
** Exchanges will be treated as redemptions for purposes of imposing the redemption fees.
</TABLE>
<TABLE>
<CAPTION>
GOLD &
PRECIOUS HEALTH UTILITIES
ENERGY METALS CARE INCOME
ANNUAL OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Management & Administrative Fees............ 0.32%* 0.35%* 0.29%* 0.28%
Investment Advisory Fees.................... 0.12 0.18 0.12 0.11
12b-1 Fees.................................. None None None None
Other Expenses
Distribution Costs........................ 0.02* 0.02* 0.02* 0.02
Miscellaneous Expenses.................... 0.05 0.05 0.03 0.03
-------- -------- -------- --------
Total Other Expenses........................ 0.07% 0.07% 0.05% 0.05%
-------- -------- -------- --------
TOTAL OPERATING
EXPENSES.............................. 0.51% 0.60% 0.46% 0.44%
======== ======== ======== ========
*Excludes the effects of reductions associated with redemption fees.
</TABLE>
1% REDEMPTION FEE The Energy, Gold & Precious Metals, and Health Care
Portfolios are intended for long-term investors who can
withstand substantial price fluctuation. For this reason,
the Portfolios assess a 1% redemption fee on shares that
are redeemed or exchanged before they have been held for
one year. Solely for purposes of calculating the one-year
holding period, the Portfolio uses the "first-in,
first-out" (FIFO) method. That is, the date of any
redemption or exchange will be compared to the earliest
purchase date. If this holding period is less than one
year, the fee will be assessed. The fee will be prorated
if a portion of the shares being redeemed or exchanged has
been held for more than one year. This fee will not apply
to dividend or capital gain reinvestments and it is paid
directly to the Portfolio. The Utilities Income Portfolio
does not assess the 1% fee.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. This example takes into account
the 1% fee that applies to redemptions from the Energy,
Gold & Precious Metals, Health Care and REIT Index
Portfolios or exchanges from these Portfolios to another
Vanguard Fund or Portfolio (including the Utilities Income
Portfolio).
4
<PAGE> 7
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Energy Portfolio................... $ 5 $ 16 $ 29 $64
Gold & Precious Metals Portfolio... $ 6 $ 19 $ 33 $75
Health Care Portfolio.............. $ 5 $ 15 $ 26 $58
Utilities Income Portfolio......... $ 5 $ 14 $ 25 $55
REIT Index Portfolio............... $ 4 $ 11 -- --
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read
in conjunction with the Fund's financial statements and
notes thereto, which together with the remaining portions
of the Fund's 1996 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
ENERGY PORTFOLIO
---------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR............ $13.82 $15.77 $13.82 $12.73 $13.39 $14.94 $12.29 $10.22
----- ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income........................ .27 .23 .31 .34 .42 .45 .38 .36
Net Realized and Unrealized Gain (Loss) on
Investments................................ 3.68 (1.65) 3.31 1.29 (.24) (.66) 3.20 2.08
----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS........... 3.95 (1.42) 3.62 1.63 .18 (.21) 3.58 2.44
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.......................... (.28) (.24) (.29) (.36) (.42) (.46) (.36) (.37)
Distributions from Realized
Capital Gains.............................. (.30) (.29) (1.38) (.18) (.42) (.88) (.57) --
----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS........................ (.58) (.53) (1.67) (.54) (.84) (1.34) (.93) (.37)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $17.19 $13.82 $15.77 $13.82 $12.73 $13.39 $14.94 $12.29
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*................................. 28.68% (9.15)% 27.31% 13.02% 1.27% (1.64)% 28.98% 24.16%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)............ $505 $433 $339 $164 $124 $114 $80 $43
Ratio of Expenses to Average Net Assets....... .51%+ .30% .17% .21% .30% .35% .38% .40%
Ratio of Net Investment Income to Average Net
Assets....................................... 1.55% 1.66% 1.87% 2.47% 2.78% 3.24% 3.05% 3.07%
Portfolio Turnover Rate....................... 21% 13% 41% 37% 42% 40% 44% 46%
*Returns exclude 1% fee applied to shares redeemed or exchanged within one year of purchase.
+Effective in fiscal 1996, does not include reductions from directed brokerage arrangements. The 1996 Ratio of Expenses to
Average Net Assets is .48% after including these reductions.
<CAPTION>
1988 1987
<S> <C> <C>
- -----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR............ $12.42 $9.93
------ ------
INVESTMENT OPERATIONS
Net Investment Income........................ .61 .18
Net Realized and Unrealized Gain (Loss) on
Investments................................ (.64) 2.80
----- -----
TOTAL FROM INVESTMENT OPERATIONS........... (.03) 2.98
- -----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.......................... (.76) (.44)
Distributions from Realized
Capital Gains.............................. (1.41) (.05)
----- -----
TOTAL DISTRIBUTIONS........................ (2.17) (.49)
- ------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $10.22 $12.42
- ------------------------------------------------------------------
- ------------------------------------------------------------------
TOTAL RETURN*................................. 0.76% 31.88%
- ------------------------------------------------------------------
- ------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)............ $36 $29
Ratio of Expenses to Average Net Assets....... .38% .65%
Ratio of Net Investment Income to Average Net
Assets....................................... 3.70% 3.43%
Portfolio Turnover Rate....................... 84% 34
*Returns exclude 1% fee applied to shares redeemed or exchanged within one
year of purchase.
+Effective in fiscal 1996, does not include reductions from directed
brokerage arrangements. The 1996 Ratio of Expenses to Average Net Assets
is .48% after including these reductions.
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR..... $10.71 $13.58 $7.29 $9.41 $8.29 $12.49 $9.65 $9.35
--------- ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income................. .17 .27 .20 .19 .24 .29 .27 .27
Net Realized and Unrealized Gain
(Loss) on Investments............... 3.36 (2.83) 6.30 (2.13) 1.13 (4.17) 2.91 .29
--------- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS.... 3.53 (2.56) 6.50 (1.94) 1.37 (3.88) 3.18 .56
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income................... (.17) (.31) (.21) (.18) (.25) (.32) (.34) (.26)
Distributions from Realized
Capital Gains....................... -- -- -- -- -- -- -- --
--------- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS................. (.17) (.31) (.21) (.18) (.25) (.32) (.34) (.26)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........... $14.07 $10.71 $13.58 $7.29 $9.41 $8.29 $12.49 $9.65
====================================================================================================================================
TOTAL RETURN*.......................... 33.24% (19.20)% 89.24% (20.58)% 16.67% (31.21)% 33.38% 6.14%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)..... $648 $531 $613 $175 $178 $144 $223 $126
Ratio of Expenses to Average Net
Assets................................ .60% .25% .26% .36% .35% .42% .45% .48%
Ratio of Net Investment Income to
Average Net Assets.................... 1.38% 2.04% 2.04% 2.50% 2.54% 2.78% 3.01% 2.67%
Portfolio Turnover Rate................ 5% 4% 14% 2% 3% 10% 17% 18%
*Returns exclude 1% fee applied to shares redeemed or exchanged within one year of purchase.
<CAPTION>
1988 1987
<S> <C> <C>
- ----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR..... $10.50 $7.60
------ ------
INVESTMENT OPERATIONS
Net Investment Income................. .35 .20
Net Realized and Unrealized Gain
(Loss) on Investments............... .12 2.91
----- -----
TOTAL FROM INVESTMENT OPERATIONS.... .47 3.11
- ----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income................... (.48) (.21)
Distributions from Realized
Capital Gains....................... (1.14) --
----- -----
TOTAL DISTRIBUTIONS................. (1.62) (.21)
- ----------------------------------------------------------
NET ASSET VALUE, END OF YEAR........... $9.35 $10.50
==========================================================
TOTAL RETURN*.......................... 2.52% 42.17%
==========================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)..... $128 $70
Ratio of Expenses to Average Net
Assets................................ .47% .59%
Ratio of Net Investment Income to
Average Net Assets.................... 2.71% 3.36%
Portfolio Turnover Rate................ 44% 32%
*Returns exclude 1% fee applied to shares redeemed or exchanged
within one year of purchase.
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
HEALTH CARE PORTFOLIO
---------------------------==----------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------==--------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR........... $37.01 $36.51 $32.66 $35.54 $27.32 $22.16 $19.46 $17.53
----- ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income....................... .61 .55 .79 .70 .53 .52 .48 .36
Net Realized and Unrealized Gain (Loss) on
Investments............................... 16.06 2.83 5.79 (1.68) 8.75 6.03 3.43 3.20
----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS.......... 16.67 3.38 6.58 (.98) 9.28 6.55 3.91 3.56
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income......................... (.57) (.57) (.76) (.70) (.53) (.55) (.49) (.34)
Distributions from Realized
Capital Gains............................. (1.02) (2.31) (1.97) (1.20) (.53) (.84) (.72) (1.29)
----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS....................... (1.59) (2.88) (2.73) (1.90) (1.06) (1.39) (1.21) (1.63)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................. $52.09 $37.01 $36.51 $32.66 $35.54 $27.32 $22.16 $19.46
==================================================================================================================================
TOTAL RETURN*................................ 45.47% 9.79% 21.21% (2.92)% 33.97% 30.09% 20.22% 21.43%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)........... $1,654 $771 $638 $562 $553 $189 $76 $58
Ratio of Expenses to Average Net Assets...... .46%+ .40% .19% .22% .30% .36% .39% .62%
Ratio of Net Investment Income to Average Net
Assets...................................... 1.57% 1.58% 2.37% 2.06% 1.98% 2.54% 2.34% 1.85%
Portfolio Turnover Rate...................... 13% 25% 19% 15% 7% 17% 28% 19%
<CAPTION>
1988 1987
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR........... $19.53 $15.61
------ ------
INVESTMENT OPERATIONS
Net Investment Income....................... .35 .25
Net Realized and Unrealized Gain (Loss) on
Investments............................... (.39) 4.60
----- -----
TOTAL FROM INVESTMENT OPERATIONS.......... (.04) 4.85
- ----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income......................... (.57) (.13)
Distributions from Realized
Capital Gains............................. (1.39) (.80)
----- -----
TOTAL DISTRIBUTIONS....................... (1.96) (.93)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................. $17.53 $19.53
================================================================
TOTAL RETURN*................................ 0.35% 31.85%
================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)........... $54 $49
Ratio of Expenses to Average Net Assets...... .51% .61%
Ratio of Net Investment Income to Average Net
Assets...................................... 1.65% 1.47%
Portfolio Turnover Rate...................... 41% 27%
*Returns exclude 1% fee applied to shares redeemed
or exchanged within one year of purchase.
+Effective in fiscal 1996, does not include reductions
from directed brokerage arrangements. The 1996 Ratio
of Expenses to Average Net Assets is .45% after
including these reductions.
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
------------------------------------------------------
UTILITIES INCOME PORTFOLIO
------------------------------------------------------
YEAR ENDED JANUARY 31, MAY 15, 1992+,
--------------------------------- TO
1996 1995 1994 JANUARY 31, 1993
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.................... $10.42 $11.67 $11.18 $10.00
------ ------ ------ -----------
INVESTMENT OPERATIONS
Net Investment Income.................................. .56 .56 .57 .41
Net Realized and Unrealized Gain (Loss)
on Investments....................................... 2.42 (1.10) .88 1.03
----- ----- ----- ----------
TOTAL FROM INVESTMENT OPERATIONS..................... 2.98 (.54) 1.45 1.44
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.................................... (.56) (.59) (.56) (.24)
Distributions from Realized
Capital Gains........................................ -- (.12) (.40) (.02)
----- ----- ----- ----------
TOTAL DISTRIBUTIONS.................................. (.56) (.71) (.96) (.26)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......................... $12.84 $10.42 $11.67 $11.18
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................................ 29.47% (4.47)% 13.08% 14.51%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................... $781 $593 $ 738 $361
Ratio of Expenses to Average Net Assets................. .44%** .50% .42% .45%*
Ratio of Net Investment Income to Average
Net Assets............................................. 4.88% 5.43% 4.82% 4.70%*
Portfolio Turnover Rate................................. 35% 35% 46% 20%
* Anualized.
** Effective in fiscal 1996, does not include reductions from directed brokerage arrangements. The 1996 Ratio of Expenses to
Average Net Assets is .41% after including these reductions.
+ Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time a Portfolio may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on a Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by a Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account or the yield reported in a Portfolio's
financial statements.
Also, the Portfolios may compare their performance to that
of various stock market indices, including the Standard &
Poor's 500 Index.
- --------------------------------------------------------------------------------
7
<PAGE> 10
INVESTMENT
OBJECTIVES
THREE PORTFOLIOS SEEK
TO PROVIDE LONG-TERM
GROWTH; A FOURTH
PORTFOLIO SEEKS
CURRENT INCOME The Fund is an open-end diversified investment company.
The Portfolios invest primarily in common stocks and other
equity securities concentrated in a particular industry or
group of related industries.
The Energy, Gold & Precious Metals, and Health Care
Portfolios seek to provide long-term capital appreciation.
Although these three Portfolios may generate dividend
income to a limited extent, current income will be
secondary to these Portfolios' primary objective of
achieving capital appreciation.
The Utilities Income Portfolio, in contrast, seeks to
provide current income as its primary objective. Its
secondary objective is to provide moderate growth of
capital and income over time.
There is no assurance that any Portfolio will achieve its
stated objective.
The investment objective of each Portfolio is fundamental
and so cannot be changed without the approval of a
majority of a Portfolio's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH PORTFOLIO
CONCENTRATES ITS
INVESTMENTS IN A
PARTICULAR INDUSTRY Under normal circumstances, the Energy, Gold & Precious
Metals, and Health Care Portfolios will each invest at
least 80% of their net assets in the equity securities
(common stocks and securities convertible into common
stocks) of companies in a particular industry or group of
related industries. The Gold & Precious Metals Portfolio
may also invest up to 20% of its assets in gold or other
precious metal bullion and coins. A security will
generally be considered appropriate for a given Portfolio
if, as determined by the investment adviser, at least 50%
of the company's assets, revenues or net income are
related to or derived from the industry or industries
designated for the Portfolio. The Fund is managed without
regard to tax ramifications.
Under normal circumstances, the Utilities Income Portfolio
will invest at least 75% of its assets in equity
securities of companies in the utilities industry. The
remainder of the Portfolio's assets will be invested in
utility bonds rated A or better by Standard & Poor's
Corporation or Moody's Investors Service. Because of its
emphasis on higher-yielding utility stocks and its
holdings of utility bonds, the Portfolio is expected to
offer a dividend yield well above the stock market
average.
The Energy, Health Care, and Utilities Income Portfolios
of the Fund will invest primarily in securities that trade
in U.S. markets. However, each of these Portfolios may
invest up to 30% of its assets in foreign securities.
(Note, however, that the Utilities Income Portfolio has no
present intention of investing more than 10% of its assets
in foreign securities). The Gold & Precious Metals
Portfolio may invest up to 100% of its assets in foreign
securities, in order to protect against fluctuations in
foreign exchange rates, each Portfolio may invest in
forward foreign currency exchange contracts.
Besides investing primarily in equity securities, each
Portfolio may hold certain short-term fixed income
securities as cash reserves. Each Portfolio may also
invest in stock futures contracts and options to a limited
extent. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
8
<PAGE> 11
The specific investment policies of the four Portfolios
are listed below:
The ENERGY PORTFOLIO invests in the equity securities of
companies engaged in the following energy-related
activities: the production, transmission, marketing,
control or measurement of energy or energy fuels; the
making of component products for such activities; energy
research or experimentation; and activities related to
energy conservation and pollution control. Such activities
may involve newer sources of energy, such as geothermal,
nuclear and solar power, as well as more traditional
sources of energy, such as oil, natural gas and coal. As
new sources of energy are developed and current methods of
exploiting and developing energy are advanced, then
companies in these new areas will also be considered for
the Energy Portfolio. The Portfolio, however, will not
purchase the securities of electric utility companies,
although it may invest in natural gas distributors and
natural gas pipeline concerns.
The GOLD & PRECIOUS METALS PORTFOLIO invests in the equity
securities of foreign and domestic companies engaged in
the exploration, mining, fabrication, processing, or
marketing and distribution of gold, silver, platinum,
diamonds or other precious and rare metals and minerals.
The Portfolio may also invest up to 20% of its assets
directly in gold, silver or other precious metal bullion
and coins.
Bullion and coins for the Gold & Precious Metals Portfolio
will only be bought from and sold to banks (both U.S. and
foreign), and dealers who are members of, or affiliated
with members of, a regulated U.S. commodities exchange, in
accordance with applicable investment laws. Gold, silver
or other precious metal bullion will not be purchased in
any form that is not readily marketable. Coins will not be
purchased for their numismatic value and will not be
considered for the Portfolio if they cannot be bought or
sold in an active market. Any bullion or coins purchased
by the Portfolio will be delivered to and stored with a
qualified custodian bank in the U.S.
Investors should be aware that bullion and coins do not
generate income, offering only the potential for capital
appreciation or depreciation, and may subject the
Portfolio to higher custody and transactions costs than
those normally associated with the ownership of
securities. Investments relating to gold and other
precious metals or minerals are considered speculative.
See "Investment Risks."
The HEALTH CARE PORTFOLIO invests in securities of
companies engaged in the development, production or
distribution of products and services related to the
treatment or prevention of diseases and other medical
infirmities. Companies in these fields include, but are
not limited to, pharmaceutical firms; companies that
design, manufacture or sell medical supplies, equipment
and support services; and companies that operate hospitals
and other health care facilities. The Portfolio will also
consider companies engaged in medical, diagnostic,
biochemical, and biotechnological research and
development.
The UTILITIES INCOME PORTFOLIO invests in equity and debt
securities of companies engaged in the generation,
transmission, or distribution of electricity,
telecommunications, gas, or water. Such investments will
be selected on the basis of fundamen-
9
<PAGE> 12
tal analysis to identify those securities that the adviser
believes will provide both current income and the
potential for growth in income and capital over time.
The utilities sector of the stock market, from which the
UTILITIES INCOME PORTFOLIO'S primary investments will be
drawn, is dominated by telephone and electric utility
common stocks, with gas and water companies playing an
appreciably smaller role. For example, as of January 31,
1996, the Standard & Poor's Utility Index was heavily
weighted towards telephone and electric stocks, as the
following chart illustrates:
<TABLE>
<CAPTION>
% OF
UTILITY SECTOR INDEX
---------------------------------- -----
<S> <C>
Telephone/Telecommunications 52%
Electric 38
Gas 10
-----
TOTAL 100%
-----
-----
</TABLE>
Similarly, the market for utility bonds is dominated by
telephone and electric utility issuers. For example, as of
January 31, 1996, telephone company bonds represented 36%
of the outstanding utility bonds rated A or better
(measured in terms of market value by the Lehman Brothers
Investment Grade Utility Bond Index). Electric utility
issues accounted for 52% of A-or-better utility bonds,
while gas, water and other utilities represented the
remaining 12%.
Historically, utilities have been subject to strict
regulatory oversight. However, in recent years, changes in
the regulatory climate have allowed utilities to provide
products and services outside their traditional geographic
areas, leading to increased competition and expanded
prospects for growth. The Portfolio seeks to take
advantage of favorable opportunities that are expected to
arise from these structural changes in regulation.
* * *
The Fund is responsible for voting the shares of all
securities it holds.
The investment policies of the Fund are not fundamental
and so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified prior to a material change in either.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET AND
INDUSTRY RISK As mutual funds specializing in specific industries or
groups of industries, the Portfolios of the Fund are
subject primarily to two types of risk: market risk and
industry risk. Since the Portfolios may invest in foreign
securities, investors are also exposed to currency risk
and other risks of international investing.
MARKET RISK is the possibility that stock prices in
general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline. Stocks have provided annual total
returns (capital appreciation plus dividend income)
averaging +10.7% for all 10-year periods from 1926 to
1995, as measured by the Standard & Poor's 500 Composite
Stock Price Index. In contrast, the return on
10
<PAGE> 13
stocks in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices.
These fluctuations in stock market prices are expected to
have a substantial influence on the value of each
Portfolio. Moreover, the Energy, Gold & Precious Metals,
and Health Care Portfolios are likely to exhibit greater
volatility than the broad stock market, largely as a
result of their industry-specific holdings and, in several
of the Portfolios, an emphasis on the stocks of smaller
companies.
By contrast, the Utilities Income Portfolio is expected to
exhibit less volatility than the stock market as a whole
and the other Portfolios of the Fund. Historically,
utility stocks have been one of the least volatile sectors
of the stock market (when measured by such statistics as
standard deviation of returns or industry "beta").
Moreover, the Portfolio's investment in utility bonds is
expected to further dampen the stock market's influence on
the Portfolio. Of course, the Portfolio's bond holdings
will fluctuate in value, sometimes substantially, as
interest rates change.
In addition to stock market risk, each Portfolio is
subject to INDUSTRY RISK -- i.e., the possibility that a
particular group of related stocks will decline in price
due to industry-specific developments. The special
industry risks of the Energy Portfolio are that earnings
and dividends of companies in the energy industry are
greatly affected by changes in the prices and supplies of
oil and other energy fuels. Prices and supplies can
fluctuate significantly over a short period due to changes
in international politics, policies of the Organization of
Petroleum Exporting Countries (OPEC), relationships among
OPEC members and between OPEC and oil-importing nations,
energy conservation, the regulatory environment,
governmental tax policies, and the economic growth and
stability of the main energy-consuming countries.
The industry risks of the Gold & Precious Metals Portfolio
include the sharp price volatility of gold and other
precious metals and of mining company shares. Investments
related to gold or other precious metals or minerals are
considered speculative and are affected by a host of
worldwide economic, financial and political factors.
Prices of gold and other precious metals may fluctuate
sharply over short periods due to several factors: changes
in inflation or expectations regarding inflation in
various countries; currency fluctuations; metal sales by
governments, central banks or international agencies;
investment speculation; changes in industrial and
commercial demand; and governmental prohibitions or
restrictions on the private ownership of certain precious
metals or minerals.
Political and economic conditions in gold-producing
countries may also have a direct effect on the mining and
distribution of gold and, consequently, its price. At
present, there are only four major producers of gold
bullion. In order of magnitude, they are: South Africa,
the United States, Australia, Canada, and Russia.
Events in South Africa are of particular importance since
the Portfolio intends to invest a substantial portion of
its assets in securities of South African mining companies
(22% of the Portfolio's net assets as of January 31,
1996). In South Africa, the activities of gold-mining
companies are subject to policies promulgated
11
<PAGE> 14
by the Ministry of Mines. The Reserve Bank of South
Africa, as the sole authorized agent for South African
gold, influences the price and timing of sales of South
African gold. The South African government has also from
time to time imposed restrictions on the flow of
international capital.
Political and social problems in South Africa may also
pose certain risks to the Portfolio's investments in South
African issuers. These include the effect of social and
political unrest on mining production and gold prices, as
well as the threat of nationalization or expropriation by
the government of South Africa.
The special industry risks of the Health Care Portfolio
are that the economic prospects of health care companies
can fluctuate dramatically due to changes in the
regulatory and competitive environment. A substantial
portion of health care services are funded or subsidized
by the government, and so changes in governmental policies
at the federal or state level may affect the demand for
health care products and services. Regulatory approvals,
which often entail lengthy application and testing
procedures, are generally required before new drugs and
certain medical instrumentation may be introduced. Health
care companies may face lawsuits related to product
liability issues. Also, many products and services
provided by health care companies are subject to rapid
obsolescence.
For the Utilities Income Portfolio, changing regulation
constitutes one of the key industry-specific risks.
Regulators (largely at the state level) monitor and
control utility revenues and costs, and therefore may
limit utility profits and dividends paid to investors.
Regulatory authorities may also restrict a company's
access to new markets, thereby diminishing the firm's
long-term prospects. Individual sectors of the utility
market are subject to the following additional risks:
- Electric utilities may be burdened by unexpected
increases in fuel and other operating costs. They are
also adversely affected when long-term interest rates
rise. Long-term borrowings are used to finance most
utility investment, and rising interest rates lead to
higher financing costs and reduced earnings. There are
also the considerable costs associated with
environmental compliance, nuclear waste clean-up, and
safety regulation. Increasingly, electric utilities are
being called upon by regulators to bear these added
costs, and there is a risk that these costs will not be
fully recovered through an increase in revenues.
- Telephone utilities have been affected by technological
development leading to increased competition, as well as
changing regulation of long-distance telephone service
and other telecommunications businesses. While certain
companies have benefitted from the new competitive
climate, others have not, and increased competition in
the future may hinder the growth of more
traditionally-oriented telephone companies.
- Among gas transmission and distribution companies, there
has been a move to diversify into oil and gas
exploration and development, making investment returns
more sensitive to energy prices. In the case of the
water utility sector, the industry is highly fragmented,
and most water supply companies find themselves in
mature markets, with little potential for growth.
12
<PAGE> 15
The Utilities Income Portfolio is also subject to INTEREST
RATE RISK -- price fluctuations due to changing interest
rates. In general, fixed-income investments, such as
bonds, vary inversely with interest rates, falling in
price when interest rates rise, and rising in price when
interest rates fall. Utility stocks, more so than other
stock market sectors, are often influenced by these trends
in interest rates, rather than price movements in the
broad stock market. At the same time, the Portfolio's bond
holdings are subject to interest rate risk. This
combination of interest-rate-sensitive stocks and bonds
means that the Portfolio may at times move in tandem with
the bond market, rising and falling as interest rates
change, independent of the broad stock market.
Investors in the Utilities Income Portfolio should be
aware that while utility stocks have historically provided
above-average dividend yields, there is no guarantee that
they will continue to do so in the future. As of January
31, 1996, the Standard & Poor's Utility Index provided a
current yield of 3.8%, which was nearly twice as high as
the yield of 2.2% provided by the broad stock market (as
measured by the Standard & Poor's 500 Index). Many of the
risks enumerated above have made it increasingly difficult
for utility companies to sustain such generous dividend
pay-outs, and future dividend yields of the utility sector
could decline.
Similarly, while utility stocks during recent years have
provided total investment returns (dividend yield plus
capital change) close to stock market averages, there is
again no guarantee that such returns will continue. For
example, during the ten-year period ended January 31,
1996, the Standard & Poor's Utility Index gained 14.7% per
year on average, while the Standard & Poor's 500 Index, a
measure of the broad stock market, returned 15.2% per
year. Investors should not anticipate that utility stocks
will outperform the broad stock market over the long haul,
given the generally limited growth prospects of the
utilities industry.
THE PORTFOLIOS
ARE SUBJECT TO
MANAGER RISK The investment advisers for the Portfolios manage each
Portfolio according to the traditional methods of "active"
investment management, which involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. MANAGER RISK
refers to the possibility that each Portfolio's investment
adviser may fail to execute the Portfolio's investment
strategy effectively. As a result, each of the Portfolios
may fail to achieve its stated objective.
FOREIGN SECURITIES
ENTAIL CURRENCY AND
OTHER RISKS Since each Portfolio may invest in foreign securities,
investors in the Fund are also exposed to the unique risks
of international investing. For U.S. investors, the
returns of foreign securities are influenced by not only
the returns on foreign common stocks themselves, but also
by CURRENCY RISK -- i.e., changes in the value of the
currencies in which the stocks are denominated. In a
period when the U.S. dollar rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor are diminished. By contrast, in a period when the
U.S. dollar declines, the returns on foreign stocks are
enhanced.
Other risks and considerations of international investing
include the following: differences in accounting, auditing
and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the
smaller trading
13
<PAGE> 16
volumes and generally lower liquidity of foreign stock
markets, which may result in greater price volatility;
foreign withholding taxes payable on a Portfolio's foreign
securities, which may reduce dividend income payable to
shareholders; the possibility of expropriation or
confiscatory taxation; adverse changes in investment or
exchange control regulations; political instability which
could affect U.S. investment in foreign countries;
difficulty in obtaining and enforcing foreign court
judgements; and potential restrictions on the flow of
international capital.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Fund is designed for investors who are seeking the
potential rewards, and who are willing to accept the risks
associated with equity investments concentrated in
specific industries. Because of the risks associated with
common stock and bond investments, the Fund is intended to
be a long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term stock and bond market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all of the Fund's shareholders.
In order to minimize such costs the Fund has adopted the
following policies. The Fund reserves the right to reject
any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
The Energy, Gold & Precious Metals, and Health Care
Portfolios are intended for investors with substantial
financial resources who have the perspective and patience
to assume above-average interim investment risks in
pursuit of long-term capital growth. Since many of the
securities owned by these three Portfolios may be
considered speculative in nature or unseasoned by
traditional investment standards, substantially
greater-than-average investment risk is involved. The
share prices of these three Portfolios are expected to be
volatile.
In contrast, the Utilities Income Portfolio is designed
for investors who are seeking a more conservative,
income-oriented stock market investment. The Portfolio is
likely to offer higher dividend yields than the stock
market average, with substantially lower volatility in
share price. The Portfolio may also offer modest growth in
income and capital over time. Nonetheless, because the
Portfolio security price will fluctuate, sometimes
substantially, investors in the Utilities Income Portfolio
should be willing to accept moderate to high fluctuations
in principal value.
There can be no assurance that a Portfolio will achieve
its stated objective, or that shareholders will be
protected from the substantial risks inherent in equity
investing. Investors may wish to reduce the potential risk
of investing in a Portfolio by purchasing shares on a
periodic basis (dollar-cost averaging) rather than
investing in one lump sum.
Since each Portfolio concentrates its holdings in a
particular industry or group of industries, the Fund
should not be considered a complete investment program.
Most
14
<PAGE> 17
investors should maintain diversified holdings of
securities with different risk
characteristics -- including common stocks, bonds and
money market instruments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES
EACH PORTFOLIO MAY
HOLD FOREIGN SECURITIES
Each Portfolio follows a number of investment practices in
an effort to achieve its objective of long-term capital
growth.
Each Portfolio may invest up to 30% of its assets, and the
Gold & Precious Metals Portfolio may invest up to 100% of
its assets, in foreign securities. (At present, the
Utilities Income Portfolio is not expected to invest more
than 10% of its net assets in foreign securities.) Such a
policy expands the investment opportunities available to
the Portfolios and may result in improved diversification
and performance.
All or a portion of the foreign securities purchased by a
Portfolio may be in the form of American Depository
Receipts (ADRs) or European Depository Receipts (EDRs).
ADRs are receipts typically issued by a U.S. bank or trust
company that evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued
in Europe that evidence a similar ownership arrangement.
Generally, ADRs are designed for trading in the United
States securities markets and EDRs are designed for
trading in European securities markets.
EACH PORTFOLIO MAY
ENTER INTO FORWARD
CURRENCY CONTRACTS Each Portfolio of the Fund may enter into forward foreign
currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates
in the purchase and sale of investment securities. A
Portfolio may not enter into such contracts for
speculative purposes.
A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts may
be bought or sold to protect a Portfolio to a limited
extent against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Such contracts,
which protect the value of a Portfolio's investment
securities against a decline in the value of a currency,
do not eliminate fluctuations in the underlying prices of
the securities. They simply establish an exchange rate at
a future date. Also, although such contracts tend to
minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit
any potential gain that might be realized should the value
of such currency increase.
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED-INCOME
SECURITIES Although they normally seek to remain substantially fully
invested in equity securities (except the Utilities Income
Portfolio, which may invest up to 25% of its assets in
fixed-income securities), the Portfolios of the Fund may
invest temporarily in certain short-term fixed income
securities. Such securities may be used to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to take a temporary defensive
position against potential stock market declines. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
The use of repurchase agreements involves certain risks,
including the risk of losses caused by the default or
insolvency of the other party to the agreement. However,
15
<PAGE> 18
each Portfolio expects that it can control this risk
through careful evaluation of the creditworthiness of the
other party to any repurchase agreement and careful
monitoring procedures.
DERIVATIVE INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security. The most common and
conventional types of derivative securities are futures
and options.
THE FUND MAY INVEST
IN DERIVATIVE
SECURITIES The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, a Portfolio of the
Fund may enter into futures contracts provided that not
more than 5% of its assets are required as a futures
contract deposit; in addition, a Portfolio may enter into
futures contracts and options transactions only to the
extent that obligations under such contracts or
transactions represent not more than 20% of the
Portfolio's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
The Portfolios may use futures contracts for bona fide
"hedging" purposes. In executing a hedge, a manager sells,
for example, stock index futures to protect against a
decline in the stock market. As such, if the market drops,
the value of the futures position will rise, thereby
offsetting the decline in value of the Portfolio's stock
holdings.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by a
Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in
those contracts whose price fluctuations are expected to
resemble those of the Portfolio's underlying securities.
The risk that a Portfolio will be unable to close out a
futures position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial due both to the low margin
deposits required and the extremely high degree of
leveraging involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss or gain. However,
a Portfolio will not use futures contracts or options for
speculative purposes.
EACH PORTFOLIO MAY
LEND ITS SECURITIES Each Portfolio may lend its securities on a short-term or
long-term basis to qualified institutional investors for
the purpose of realizing additional income. With any loan
of portfolio securities, there is a risk that the
borrowing institution will fail to redeliver the
securities when due. However, loans of securities by a
Portfolio will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S.
16
<PAGE> 19
Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities.
EACH PORTFOLIO MAY
BORROW MONEY Each Portfolio may borrow money, subject to the limits set
forth below, for temporary or emergency purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO EXCEED
100% Although they generally seek to invest for the long term,
the Portfolios of the Fund retain the right to sell
securities irrespective of how long they have been held.
It is anticipated that the annual portfolio turnover of
each Portfolio will not exceed 100%. A turnover rate of
100% would occur, for example, if all the securities of a
Portfolio were replaced within one year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted certain limitations designed to
reduce its exposure to specific situations. Some of these
limitations are that a Portfolio will not:
(a) with respect to 75% of the value of its total assets,
invest more than 5% of its assets in the securities of
any single company;
(b) with respect to 75% of the value of its total assets,
purchase more than 10% of the voting securities of any
issuer;
(c) borrow money, except from banks (or through reverse
repurchase agreements) for temporary or emergency (not
leveraging) purposes, and then not in an amount
exceeding 15% of the value of the Fund's net assets at
the time the borrowing is made. Whenever borrowing
exceeds 5% of the value of the Fund's net assets, the
Fund will not make any additional investments;
(d) purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be
invested in securities that are illiquid; and
(e) make loans except (i) by purchasing bonds, debentures
or similar obligations (including repurchase
agreements, subject to the limitation described in (c)
above) which are either publicly distributed or
customarily purchased by institutional investors, and
(ii) by lending its securities to banks, brokers,
dealers and other financial institutions so long as
such loans are not inconsistent with the Investment
Company Act or the Rules and Regulations or
interpretations of the Commission thereunder and the
aggregate value of all securities loaned does not
exceed 33 1/3% of the market value of the Portfolio's
total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and so may be changed only
with the approval of a majority of the Fund's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services
17
<PAGE> 20
on an at-cost basis to certain Vanguard funds. As a result
of Vanguard's unique corporate structure, the Vanguard
funds have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
.31% compared to an average of 1.11% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS The Portfolios employ two external investment advisers.
Wellington Management Company serves as investment adviser
to the Energy, Health Care, and Utilities Income
Portfolios of the Fund. M&G Investment Management Limited
serves as investment adviser to the Gold & Precious Metals
Portfolio.
WELLINGTON
MANAGEMENT COMPANY
MANAGES INVESTMENTS
FOR THREE PORTFOLIOS Under an investment advisory agreement with the Fund,
Wellington Management Company ("WMC"), 75 State Street,
Boston, MA 02109, manages the investment and reinvestment
of the assets of the Fund's Energy, Health Care, and
Utilities Income Portfolios and continuously reviews,
supervises and administers each Portfolio's investment
program. WMC discharges its responsibilities subject to
the control of the Officers and Directors of the Fund.
WMC is a professional investment advisory firm which
globally provides services to investment companies,
institutions and individuals. Among the clients of WMC are
more than 10 of the investment companies of The Vanguard
Group. As of December 31, 1995, WMC held discretionary
management authority with respect to more than $108
billion of assets. WMC and its predecessor organizations
have provided investment advisory services to investment
companies since 1933 and to investment counseling clients
since 1960.
Ernst H. von Metzsch, Senior Vice President of WMC, serves
as the portfolio manager of the Energy Portfolio. Mr. von
Metzsch has been an investment professional with WMC since
1973. Edward P. Owens, Senior Vice President of WMC,
serves as portfolio manager of the Health Care Portfolio.
Mr. Owens has been an investment professional with WMC
since 1974. Mark J. Beckwith, Vice President
18
<PAGE> 21
of WMC, serves as the portfolio manager of the Utilities
Income Portfolio. Mr. Beckwith, who has served on the
Portfolio investment team since 1995, replaces John R.
Ryan, who managed the Portfolio from its inception in
1992. Mr. Beckwith has more than ten years investment
experience. Mr. Beckwith is assisted by Paul D. Kaplan,
Senior Vice President of WMC, who manages the Portfolio's
fixed-income investments. Mr. Kaplan has been an
investment professional with WMC since 1978. Messrs. von
Metzsch and Owens have served as portfolio managers of the
Energy and Health Care Portfolios, respectively, since the
Fund's inception in May 1984; Mr. Kaplan has served as
portfolio manager of the Utilities Income Portfolio since
its inception in May 1992. WMC's portfolio managers are
supported by research and other investment services
provided by the professional staff of WMC.
Under the investment advisory agreement, the three
Portfolios are required to pay WMC an aggregate fee at the
end of the fiscal quarter, calculated by applying the
following annual percentage rates to the average month-end
net assets for the quarter of the three Portfolios for
which WMC serves as investment adviser:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------- -------
<S> <C>
First $500 million 0.150%
Next $500 million 0.125%
Next $1 billion 0.100%
Next $1 billion 0.075%
Over $3 billion 0.050%
</TABLE>
In addition, once the advisory fee to WMC is calculated
for the three Portfolios under this schedule, the total
fee will be reduced in order that the advisory fee paid by
the Utilities Income Portfolio does not exceed 0.08%.
The advisory fee is based on the total assets for the
three Portfolios and is allocated, except as noted above,
to each Portfolio based on the net assets of each. For the
fiscal year ended January 31, 1996, the investment
advisory fee represented an effective annual rate of .12
of 1% of average net assets for the Energy and Health Care
Portfolios. The investment advisory fee for the Utilities
Income Portfolio represented an effective annual rate of
.11 of 1% of average net assets. These fees were paid
pursuant to the terms of a previous investment advisory
agreement, which called for a higher rate of fees.
M&G INVESTMENT
MANAGEMENT LTD.
MANAGES THE GOLD &
PRECIOUS METALS
PORTFOLIO The Fund has also entered into an investment advisory
agreement with M&G Investment Management Limited ("M&G"),
3 Minster Court, Great Tower Street, London, England EC3R
7XH. Under that investment advisory agreement, M&G manages
the investment and reinvestment of the assets of the
Fund's Gold & Precious Metals Portfolio and continuously
reviews, supervises and administers the Portfolio's
investment program. M&G discharges its responsibilities
subject to the control of the Officers and Directors of
the Fund.
M&G is a wholly-owned subsidiary of the M&G Group Plc and
is authorized to carry on investment business under
English law by the Investment Management Regulatory
Organisation Limited. The M&G Group, an independent group
of companies, began providing investment advisory services
to the public over 50 years ago, when
19
<PAGE> 22
they launched Great Britain's first unit trust (mutual
fund). Today, the principal operating subsidiaries of the
M&G Group manage funds for some 144 accounts, including
individual investors, company pension plans and charitable
foundations. In total, the M&G Group manages or advises
approximately $25.9 billion in assets. Among these assets
are two unit trusts that invest in the securities of gold
and precious metals-related companies. David J. Hutchins,
an Investment Manager of M&G, serves as portfolio manager
of the Gold & Precious Metals Portfolio, a position he has
held since January, 1987.
Under the investment advisory agreement, the Gold &
Precious Metals Portfolio pays M&G a fee at the end of
each fiscal quarter, calculated by applying the following
annual percentage rates to the average month-end net
assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------- -----
<S> <C>
First $100 million .30%
Next $300 million .25%
Over $400 million .20%
</TABLE>
For the fiscal year ended January 31, 1996, the investment
advisory fee paid by the Gold & Precious Metals Portfolio
represented an effective annual rate of .18 of 1% of
average net assets after giving effect to a fee waiver of
$364,000 (.06 of 1%).
The investment advisory agreements with WMC and M&G
authorize the advisers to select brokers or dealers to
execute purchases and sales of the Fund's portfolio
securities, and direct the advisers to use their best
efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are
considered in making these determinations.
The Fund has authorized WMC and M&G to pay higher
commissions in recognition of brokerage services felt
necessary for the achievement of better execution,
provided the advisers believe this to be in the best
interest of the Fund. Although the Fund does not market
its shares through intermediary brokers or dealers, the
Fund may place orders with qualified broker-dealers who
recommend the Fund to clients if the Officers of the Fund
believe that the quality of the transaction and the
commission are comparable to what they would be with other
qualified brokerage firms.
In placing portfolio transactions, each adviser of the
Fund uses its best judgment to choose the broker most
capable of providing the brokerage services necessary to
obtain the best available price and most favorable
execution at the lowest commission rate. The full range
and quality of brokerage services available are considered
in making these determinations. In those instances where
it is reasonably determined that more than one broker can
offer the services needed to obtain the best available
price and most favorable execution, consideration may be
given to those brokers which supply statistical
information and provide other services in addition to
execution services to the Portfolios.
20
<PAGE> 23
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund which shall include substantially
the information concerning the adviser that would have
normally been included in a proxy statement.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE UTILITIES INCOME
PORTFOLIO PAYS
DIVIDENDS QUARTERLY;
THE OTHER PORTFOLIOS,
ANNUALLY The Utilities Income Portfolio pays dividends consisting
of ordinary income on a quarterly basis; the Energy, Gold
& Precious Metals, and Health Care Portfolios pay
dividends annually. Capital gains distributions for all
Portfolios, if any, are also made annually.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these distribution methods.
In order to satisfy certain distribution requirements of
the Tax Reform Act of 1986, each Portfolio may declare
year-end dividend and capital gains distributions during
December. Such distributions, if received by shareholders
by January 31, are deemed to have been paid by the
Portfolio and received by shareholders on December 31 of
the prior year.
Each Portfolio of the Fund intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that each Portfolio will not be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by a Portfolio
from net investment income, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income will generally
qualify in part for the intercorporate dividends-received
deduction. However, the portion of the dividends so
qualified depends on the aggregate taxable qualifying
dividend income received by the Portfolio from domestic
(U.S.) sources.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Portfolio. Capital gains distributions are made when a
Portfolio realizes net capital gains on sales of portfolio
securities during the year. A Portfolio does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when a Portfolio realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
a
21
<PAGE> 24
Portfolio. Also, keep in mind that if you purchase shares
in a Portfolio shortly before the record date for a
dividend or capital gains distribution, a portion of your
investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by a
Portfolio.
THE GOLD & PRECIOUS
METALS PORTFOLIO MAY
"PASS THROUGH"
FOREIGN TAXES The Gold & Precious Metals Portfolio may elect to "pass
through" to the Portfolio's shareholders the amount of
foreign income taxes paid by the Portfolio. The
Portfolio will make such an election only if it deems it
to be in the best interests of its shareholders.
If this election is made, shareholders of the Gold &
Precious Metals Portfolio will be required to include in
their gross income their pro rata share of foreign taxes
paid by the Portfolio. However, shareholders will be able
to treat their pro rata share of foreign taxes as either
an itemized deduction or a foreign tax credit against U.S.
income taxes on their tax return.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio of the Fund is a taxable
event and may result in a capital gain or loss. A capital
gain or loss may be realized from an ordinary redemption
of shares or an exchange of shares between two mutual
funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Employer
Identification number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined as of the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Exchange is open for trading. Net asset value
per share is determined by dividing the total market value
of a Portfolio's investments and other assets, less any
liabilities, by the total number of outstanding shares of
such Portfolio.
22
<PAGE> 25
Securities listed on a U.S. exchange are valued at the
latest quoted sales prices on the day the valuation is
made. Securities listed on a U.S. exchange that are not
traded on the valuation date are valued at the mean of the
bid and ask prices. The values of foreign securities held
by each Portfolio are typically determined as of the close
of trading of foreign securities in their respective
markets. If events which materially affect the value of a
Portfolio's investments occur after the close of the
securities markets on which such securities are primarily
traded, those investments will be priced at "fair value".
All prices of listed securities are taken from the
exchange where the security is primarily traded. Unlisted
securities for which market quotations are readily
available are valued at the latest quoted bid price.
Securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to
reflect the fair market value of such securities. The
prices provided by a pricing service may be determined
without regard to bid or last prices of each security but
take into account institutional size transactions in
similar groups of securities as well as any developments
related to specific securities. Other assets and
securities for which no market quotations are readily
available are valued at fair value using methods
determined by the Board of Directors of the Fund.
In determining each Portfolio's net asset value per share,
all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars using the
officially quoted daily exchange rates as determined by
Morgan Stanley Capital International (MSCI) in the
calculation of their various benchmarking indices. This
officially quoted exchange rate may be determined by MSCI
prior to or after the close of a particular foreign
securities market. If such quotations are not available,
the rate of exchange will be determined in accordance with
policies established in good faith by the Board of
Directors.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 6,000,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
classes ("Portfolios") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such classes. Currently the Fund is offering five classes
of shares.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50%
of the shares voting for the election of Directors can
elect 100% of the Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
23
<PAGE> 26
All securities and cash for the Energy, Health Care, and
Utilities Income Portfolios are held by State Street Bank
and Trust Company, Boston, MA. All securities and cash for
the Gold & Precious Metals Portfolio are held by Morgan
Guaranty Trust Company, New York, NY. CoreStates Bank,
N.A. Philadelphia, PA, holds daily cash balances that are
used by the Fund's Portfolios to invest in repurchase
agreements or securities acquired in these transactions.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the
Fund and will audit its financial statements annually. The
Fund is not involved in any material litigation.
- --------------------------------------------------------------------------------
24
<PAGE> 27
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentations
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement for each Portfolio ($1,000
for Uniform Gifts/Transfers to Minors Act accounts). You
must open a new Individual Retirement Account by mail
(IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or
greater than the $1,000 minimum initial investment
requirement, but no more than $2,000 if you are making a
regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past
60 days from an IRA or other qualified Retirement Plan. If
you need assistance with the forms or have any questions
about the Fund, please call our Investor Information
Department (1-800-662-7447). NOTE: For other types of
account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney), please
call us to determine which additional forms you may need.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The
Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
stock market movements. Consequently, the Fund reserves
the right to reject any specific purchase (and exchange
purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to the Vanguard Group.
IMPORTANT NOTE:
1% REDEMPTION FEE Potential investors should note that a 1% redemption fee
is charged for the Energy, Gold & Precious Metals, Health
Care and REIT Index Portfolios. This fee, which is paid to
the Portfolios, applies to redemptions or exchanges from
these Portfolios of shares held for less than 12 months.
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
25
<PAGE> 28
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment and the include the Invest-by-Mail
Complete and sign the name of the Portfolio you have remittance form attached to your
enclosed Account selected on the registration Fund confirmation statements.
Registration Form form, make your check payable to Please make your check payable
The Vanguard Group-(Portfolio to The Vanguard Group-(Portfolio
Number) (see below), and mail Number) (see below), write your
to: account number on your check
and, using the return envelope
VANGUARD FINANCIAL CENTER provided, mail to the address
P.O. BOX 2600 indicated on the Invest-by-Mail
VALLEY FORGE, PA 19482 Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
Vanguard Specialized Portfolio
Numbers:
Energy Portfolio-51
Health Care Portfolio-52
Gold & Precious Metals
Portfolio-53
Utilities Income Portfolio-57
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD SPECIALIZED PORTFOLIOS
BEFORE WIRING PORTFOLIO NAME
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739)
</TABLE>
To assure proper receipt, please be sure your bank
includes the Portfolio name, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are opening a new account, please complete the
Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement.
Note: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open a new account or purchase additional shares
by making an exchange from an existing Vanguard account.
However, the Fund reserves the right to refuse any
exchange purchase request. Call our Client Services
Department (1-800-662-2739). The new account will have the
same registration as the existing account.
- --------------------------------------------------------------------------------
26
<PAGE> 29
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express service; please wait three weeks
before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION
You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
Investors should ask
about the timing of
capital gains and
dividend distributions
before investing
Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total
value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual dividend and capital gains distribution normally
occurs in December for the Energy, Gold & Precious Metals,
and Health Care Portfolios. The Utilities Income and REIT
Index Portfolios annual capital gains distribution
normally occur in December, and these Portfolios also
generally pay quarterly dividends in
27
<PAGE> 30
March, June, September and December. For additional
information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES
The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES
Share certificates will be issued upon request (with the
exception of the Utilities Income Portfolio, for which
certificates are not available). If a certificate is lost,
you may incur an expense to replace it.
BROKER-DEALER
PURCHASES
If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC
PROSPECTUS
DELIVERY
If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL BE
CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the day of receipt. If your purchase is
received after the close of the Exchange, your trade date
is the next business day. Your shares are purchased at the
net asset value determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
28
<PAGE> 31
IMPORTANT NOTE: For investors in the Energy, Gold &
Precious Metals, Health Care and REIT Index Portfolios, a
redemption fee amounting to 1% of the value of the shares
redeemed will be deducted from the redemption proceeds of
any shares held for less than one year. This fee is paid
directly to the Portfolio.
- --------------------------------------------------------------------------------
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD SPECIALIZED PORTFOLIOS, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center, Vanguard
Specialized Portfolios, 455 Devon Park Drive, Wayne, PA
19087).
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT AT 1-800-662-2739.
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange into another
Vanguard Fund account. Please see "Exchanging Your Shares"
for details.
- --------------------------------------------------------------------------------
29
<PAGE> 32
IMPORTANT REDEMPTION
INFORMATION
Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS
Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW BALANCE FEE
AND MINIMUM
ACCOUNT BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from non-retirement accounts with balances falling
below $2,500 ($500 for Uniform Gifts/Transfers to Minors
Act accounts). This fee deduction will occur mid-year,
beginning in 1996. The fee generally will be waived for
investors whose aggregate Vanguard Assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you
may be notified that your account is below the Fund's
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly paid
to the registered shareholder.
30
<PAGE> 33
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Portfolio's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Vanguard Specialized Portfolios for those of
other available Vanguard Funds.
IMPORTANT NOTE: For investors in the Energy, Gold &
Precious Metals, Health Care and REIT Index Portfolios, a
redemption fee amounting to 1% of the value of the shares
exchanged will be deducted from the exchange proceeds if
shares held for less than one year are exchanged. This fee
is paid directly to the Portfolio.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Portfolio name, account number, Social Security Number or
Employer Identification number listed on the account and
exact name and address in which the account is registered.
Only the registered shareholder or his or her
pre-authorized representative may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM
VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard, provided the request is received in
Good Order.
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount you
wish to exchange, and the signatures of all registered
account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD SPECIALIZED PORTFOLIOS, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard
Specialized Portfolios, 455 Devon Park Drive, Wayne, PA
19087).
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
31
<PAGE> 34
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received the required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The Fund's exchange privilege is only available in states
in which the shares of the Fund are registered for sale.
The Fund's shares are currently registered for sale in all
50 states and the Fund intends to maintain such
registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to THREE SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from a Portfolio of the Fund during
any twelve-month period. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard Portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security
32
<PAGE> 35
procedures, it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on your
account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT.
The request must be in Good Order. TO REQUEST A TRANSFER
FORM AND FULL INSTRUCTIONS PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1- 800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Portfolio Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS
Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
33
<PAGE> 36
VANGUARD DIVIDEND
EXPRESS
Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
34
<PAGE> 37
[This page intentionally left blank.]
<PAGE> 38
[VANGUARD SPECIALIZED PORTFOLIOS LOGO]
-----------------------------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[FLAG LOGO]
[VANGUARD SPECIALIZED PORTFOLIOS LOGO]
P R O S P E C T U S
MAY 13, 1996
[VANGUARD GROUP LOGO]
P051
- --------------------------------------------------------------------------------
<PAGE> 39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VANGUARD SPECIALIZED PORTFOLIOS LOGO]
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- MAY 13, 1996
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Specialized Portfolios, Inc. (the "Fund") is an
open-end diversified investment company which consists of
five Portfolios. This prospectus relates only to the
Utilities Income Portfolio (the "Portfolio"). The
objective of the Portfolio is to provide current income
and growth of capital and income. The Portfolio invests
primarily in common stocks and bonds of utilities
companies. Given its specialized focus, the Portfolio
should not be considered a complete investment program.
There is no assurance that the Portfolio will achieve its
stated objective. Shares of the Fund are neither insured
nor guaranteed by any agency of the U.S. Government,
including the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call our
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement, to obtain a copy of this form, call
1-800-662-7447 Monday through Friday, from 8:00 a.m. to
9:00 p.m. (Eastern time), and Saturday, from 9:00 a.m. to
4:00 p.m. (Eastern time). The minimum initial investment
is $3,000 or $1,000 for Uniform Gifts/Transfers to Minors
Act accounts. The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, the Portfolio incurs expenses for investment
advisory, management, administrative and distribution
services.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Portfolio has been filed
with the Securities and Exchange Commission. Such
Statement is dated May 13, 1996, and has been incorporated
by reference into this Prospectus. A copy may be obtained
without charge by writing to the Portfolio or by calling
the Investor Information Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Portfolio Expenses ................ 2 Who Should Invest ................. 7 SHAREHOLDER GUIDE
Financial Highlights ............... 2 Implementation of Policies......... 7 Opening an Account and
Yield and Total Return ............. 3 Investment Limitations ............ 10 Purchasing Shares ................. 17
FUND INFORMATION Management of the When Your Account Will
Investment Objective .............. 4 Portfolio ......................... 11 Be Credited ....................... 20
Investment Policies ................ 4 Investment Adviser ................ 12 Selling Your Shares ............... 20
Investment Risks .................. 4 Dividends, Capital Gains Exchanging Your Shares ............ 22
and Taxes ......................... 13 Important Information About
The Share Price of the Telephone Transactions ............ 24
Portfolio ......................... 14 Transferring
General Information ............... 15 Registration ...................... 24
Other Vanguard Services ........... 25
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 40
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Portfolio. The
expenses and fees set forth below are for the fiscal year
ended January 31, 1996.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Fees.............................. 0.28%
Investment Advisory Fees...................................... 0.11
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02
Miscellaneous Expenses...................................... 0.03
----
Total Other Expenses.......................................... 0.05%
------
TOTAL OPERATING EXPENSES............................. 0.44%
------
------
The purpose of this table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an
investor in the Portfolio.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C>
$ 5 $14 $25 $ 55
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read
in conjunction with the Fund's financial statements and
notes thereto, which, together with the remaining portions
of the Fund's 1996 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
2
<PAGE> 41
<TABLE>
<CAPTION>
----------------------------------------------------
UTILITIES INCOME PORTFOLIO
----------------------------------------------------
MAY 15, 1992+,
YEAR ENDED JANUARY 31, TO
1996 1995 1994 JAN. 31, 1993
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD................. $10.42 $11.67 $11.18 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.............................. .56 .56 .57 .41
Net Realized and Unrealized Gain (Loss) on
Investments...................................... 2.42 (1.10) .88 1.03
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS................. 2.98 (.54) 1.45 1.44
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............... (.56) (.59) (.56) (.24)
Distributions from Realized Capital Gains.......... -- (.12) (.40) (.02)
------ ------ ------ ------
TOTAL DISTRIBUTIONS.............................. (.56) (.71) (.96) (.26)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....................... $12.84 $10.42 $11.67 $11.18
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN......................................... 29.47% (4.47)% 13.08% 14.51%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................. $781 $593 $738 $361
Ratio of Expenses to Average Net Assets.............. .44%** .50% .42% .45%*
Ratio of Net Investment Income to Average Net
Assets............................................. 4.88% 5.43% 4.82% 4.70%*
Portfolio Turnover Rate.............................. 35% 35% 46% 20%
</TABLE>
* Annualized
+ Commencement of operations.
** Effective in fiscal 1996, does not include reductions from directed
brokerage arrangements. The 1996 Ratio of Expenses to Average Net Assets
is .41% after including these reductions.
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time to time the Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Portfolio is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account or the yield reported in the
Portfolio's financial statements.
3
<PAGE> 42
Also, the Portfolio may compare its performance to that of
various stock market indices, including the Standard &
Poor's 500 Index and the Standard & Poor's Utility Index.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
THE PORTFOLIO SEEKS
CURRENT INCOME The primary objective of the Portfolio is to provide
current income. Its secondary objective is to provide
moderate growth of capital and income. There can be no
assurance that the Portfolio will achieve its stated
objective. The Portfolio is one of five Portfolios of
Vanguard Specialized Portfolios, Inc. (the "Fund").
The investment objective of the Portfolio is fundamental
and so cannot be changed without the approval of a
majority of the Portfolio's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE PORTFOLIO INVESTS
IN UTILITY STOCKS AND
BONDS Under normal circumstances, the Portfolio will invest at
least 75% of its assets in equity securities of companies
in the utilities industry. The remainder of the
Portfolio's assets will be invested in utility bonds rated
A or better by Standard & Poor's Corporation or Moody's
Investors Service. Because of its emphasis on higher-
yielding utility stocks and its holdings of utility bonds,
the Portfolio is expected to offer a dividend yield well
above the stock market average. The Portfolio is managed
without regard to tax ramifications.
FOREIGN SECURITIES The Portfolio will invest primarily in securities that
trade in U.S. markets. The Portfolio may invest up to 30%
of its assets in foreign securities, but has no present
intention of investing more than 10% of its assets in such
securities. In order to protect against fluctuations in
foreign exchange rates, the Portfolio may invest in
forward foreign currency exchange contracts.
Besides investing primarily in equity securities, the
Portfolio may hold certain short-term fixed income
securities as cash reserves. The Portfolio may also invest
in stock futures contracts and options to a limited
extent. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
The Portfolio is responsible for voting the shares of all
securities it holds.
The investment policies of the Portfolio are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
- --------------------------------------------------------------------------------
INVESTMENT RISKS As a mutual fund specializing in utility stocks and bonds,
the Portfolio is subject primarily to four types of risk:
stock market risk, interest rate risk, industry risk, and
manager risk. Since the Portfolio may invest in foreign
securities, investors are also exposed to currency risk
and other risks of international investing.
MARKET RISK MAY BE
SUBSTANTIAL MARKET RISK is the possibility that stock prices in
general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline. Stocks have provided annual total
returns (capital appreciation plus dividend income)
averaging +10.7% for all 10-year periods from 1926 to
1995, as measured by the Standard & Poor's 500 Composite
Stock Price Index. In contrast, the return on
4
<PAGE> 43
stocks in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices.
However, the Portfolio is expected to exhibit somewhat
less volatility than the stock market as a whole.
Historically, utility stocks have been one of the least
volatile sectors of the stock market (when measured by
such statistics as standard deviation of returns or
industry "beta"). Moreover, the Portfolio's investment in
utility bonds is expected to further dampen the stock
market's influence on the Portfolio.
INTEREST RATE RISK MAY
BE SUBSTANTIAL In addition to stock market risk, utility stocks and bonds
are also subject to INTEREST RATE RISK -- price
fluctuations due to changing market interest rates. In
general, fixed-income investments, such as bonds, vary
inversely with interest rates, falling in price when
interest rates rise, and rising in price when interest
rates fall. Utility stocks, more so than other stock
market sectors, are often influenced by these trends in
interest rates, rather than price movements in the stock
market. At the same time, the Portfolio's bond holdings
are subject to interest rate risk. This combination of
interest rate-sensitive stocks and bonds means that the
Portfolio may at times move in tandem with the bond
market, rising and falling as interest rates change,
independent of the stock market.
INVESTORS ARE EXPOSED
TO INDUSTRY RISK In addition to stock market and interest rate risk, the
Portfolio is subject to INDUSTRY RISK -- i.e., the
possibility that a particular group of related stocks will
decline in price due to industry-specific developments.
Changing regulation constitutes one of the key industry
specific risks for the Portfolio. Regulators (largely at
the state level) monitor and control utility revenues and
costs, and therefore may limit utility profits and
dividends paid to investors. Regulatory authorities may
also restrict a company's access to new markets, thereby
diminishing the firm's long-term prospects. Individual
sectors of the utility market are subject to the following
additional risks:
- Electric utilities may be burdened by unexpected
increases in fuel and other operating costs. They are
also adversely affected when long-term interest rates
rise. Long-term borrowings are used to finance most
utility investment, and rising interest rates lead to
higher financing costs and reduced earnings. There are
also the considerable costs associated with
environmental compliance, nuclear waste clean-up, and
safety regulation. Increasingly, electric utilities are
being called upon by regulators to bear these added
costs, and there is a risk that these costs will not be
fully recovered through an increase in revenues.
- Telephone utilities have been affected by technological
development leading to increased competition, as well as
changing regulation of long-distance telephone service
and other telecommunications businesses. While certain
companies have benefitted from the new competitive
climate, others have not, and increased competition in
the future may hinder the growth of more
traditionally-oriented telephone companies.
- Among gas transmission and distribution companies, there
has been a move to diversify into oil and gas
exploration and development, making investment returns
more sensitive to energy prices. In the case of the
water utility sector, the
5
<PAGE> 44
industry is highly fragmented, and most water supply
companies find themselves in mature markets, with little
potential for growth.
THE PORTFOLIO IS
SUBJECT TO MANAGER
RISK In addition to the risks described above, the Portfolio is
subject to MANAGER RISK. The investment adviser manages
the Portfolio according to the traditional methods of
"active" investment management, which involve the buying
and selling of securities based upon economic, financial
and market analysis and investment judgment. Manager risk
refers to the possibility that the Portfolio's investment
adviser may fail to execute the Portfolio's investment
strategy effectively. As a result, the Portfolio may fail
to achieve its stated objective.
FOREIGN SECURITIES
ENTAIL CURRENCY AND
OTHER RISKS Since the Portfolio may invest in foreign securities,
investors are also exposed to the unique risks of
international investing. For U.S. investors, the returns
of foreign securities are influenced by not only the
returns on foreign common stocks themselves, but also by
CURRENCY RISK -- i.e., changes in the value of the
currencies in which the stocks are denominated. In a
period when the U.S. dollar rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor are diminished. By contrast, in a period when the
U.S. dollar declines, the returns on foreign stocks are
enhanced.
Other risks and considerations of international investing
include the following: differences in accounting, auditing
and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the
smaller trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on a
Portfolio's foreign securities, which may reduce dividend
income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations; political
instability which could affect U.S. investment in foreign
countries; difficulty in obtaining and enforcing foreign
court judgments; and potential restrictions on the flow of
international capital.
HIGHER YIELDS AND
RETURNS MAY NOT
PERSIST Investors in the Portfolio should be aware that while
utility stocks have historically provided above-average
dividend yields, there is no guarantee that they will
continue to do so in the future. For example, as of
January 31, 1996, the Standard & Poor's Utility Index
provided a current yield of 3.8%, which was nearly twice
as high as the yield of 2.2% provided by the broad stock
market (as measured by the Standard & Poor's 500 Index).
Many of the risks enumerated above have made it
increasingly difficult for utility companies to sustain
such generous dividend pay-outs, and future dividend
yields of the utility sector could decline.
Similarly, while utility stocks during recent years have
provided total investment returns (dividend yield plus
capital change) close to stock market averages, there is
again no guarantee that such returns will continue. For
example, during the ten-year period ended January 31,
1996, the Standard & Poor's Utility Index gained 14.7% per
year on average, while the Standard & Poor's 500 Index, a
measure of the broad stock market, returned 15.2% per
year. Investors should not anticipate that utility stocks
will outperform the broad stock market over the long haul,
given the generally limited growth prospects of the
utilities industry.
- --------------------------------------------------------------------------------
6
<PAGE> 45
WHO SHOULD
INVEST
INVESTORS SEEKING AN
INCOME-ORIENTED STOCK
INVESTMENT The Utilities Income Portfolio is designed for investors
who are seeking a more conservative, income-oriented stock
market investment. The Portfolio is likely to offer higher
dividend yields than the stock market average, with
substantially lower volatility in share price. The
Portfolio may also offer modest growth in income and
capital over time. Nonetheless, because utility stock and
bond prices will fluctuate, sometimes substantially,
investors should be willing to accept moderate to high
fluctuations in principal value. Because of the risks
associated with common stock and bond investments, the
Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term common stock and bond market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Portfolio shareholders. In order to minimize such
costs the Portfolio has adopted the following policies.
The Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Portfolio has adopted
exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Portfolio
reserves the right to suspend the offering of its shares.
There can be no assurance that the Portfolio will achieve
its stated objective, or that shareholders will be
protected from the substantial risks inherent in equity
investing. Investors may wish to reduce the potential risk
of investing in the Portfolio by purchasing shares on a
periodic basis (dollar-cost averaging) rather than
investing in one lump sum.
Since the Portfolio concentrates its holdings in equity
securities of companies in
the utilities industry, the Portfolio should not be
considered a complete investment program. Most investors
should maintain diversified holdings of securities with
different risk characteristics -- including common stocks,
bonds and money
market instruments.
- --------------------------------------------------------------------------------
IMPLEMENTATION OF
POLICIES The Portfolio follows a number of investment practices in
an effort to achieve its objective of long-term capital
growth.
THE PORTFOLIO INVESTS
IN A RANGE OF UTILITY
STOCKS AND BONDS The Portfolio invests in equity and debt securities of
companies engaged in the generation, transmission, or
distribution of electricity, telecommunications, gas, or
water. Such investments will be selected on the basis of
fundamental analysis to identify those securities that the
adviser believes will provide both current income and the
potential for growth in income and capital over time.
The utilities sector of the stock market, from which the
Portfolio's primary investments will be drawn, is
dominated by telephone and electric utility common stocks,
with gas and water companies playing an appreciably
smaller role. For
7
<PAGE> 46
example, as of January 31, 1996, the Standard & Poor's
Utility Index was heavily weighted towards telephone and
electric stocks, as the following chart illustrates:
<TABLE>
<CAPTION>
% OF
UTILITY SECTOR INDEX
<S> <C>
------------------------------- ---------
Telephone/Telecommunications 52%
Electric 38
Gas 10
----------
TOTAL 100%
=========
</TABLE>
Similarly, the market for utility bonds is dominated by
telephone and electric utility issuers. For example, as of
January 31, 1996, telephone company bonds represented 36%
of the outstanding utility bonds rated A or better
(measured in terms of market value by the Lehman Brothers
Investment Grade Utility Bond Index). Electric utility
issues accounted for 52% of A-or-better utility bonds,
while gas, water and other utilities represented the
remaining 12%.
Historically, utilities have been subject to strict
regulatory oversight. However, in recent years, changes in
the regulatory climate have allowed utilities to provide
products and services outside their traditional geographic
areas, leading to increased competition and expanded
prospects for growth. The Portfolio seeks to take
advantage of favorable opportunities that are expected to
arise from these structural changes in regulation.
THE PORTFOLIO MAY
HOLD FOREIGN
SECURITIES The Portfolio may invest up to 30% of its assets in
foreign securities, but at present is not expected to
invest more than 10% of its net assets in foreign
securities. Such a policy expands the investment
opportunities available to the Portfolio and may result in
improved diversification and performance.
All or a portion of the foreign securities purchased by
the Portfolio may be in the form of American Depository
Receipts (ADRs) or European Depository Receipts (EDRs).
ADRs are receipts typically issued by a U.S. bank or trust
company that evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued
in Europe that evidence a similar ownership arrangement.
Generally, ADRs are designed for trading in the United
States securities markets and EDRs are designed for
trading in European securities markets.
THE PORTFOLIO MAY
ENTER INTO FORWARD
CURRENCY CONTRACTS The Portfolio may enter into forward foreign currency
exchange contracts in order to protect against uncertainty
in the level of future foreign exchange rates in the
purchase and sale of investment securities. The Portfolio
may not enter into such contracts for speculative
purposes.
A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts may
be bought or sold to protect the Portfolio to a limited
extent against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Such contracts,
which protect the value of the Portfolio's investment
securities against a decline in the value of a currency,
do not eliminate fluctuations
8
<PAGE> 47
in the underlying prices of the securities. They simply
establish an exchange rate at a future date. Also,
although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at
the same time they tend to limit any potential gain that
might be realized should the value of such currency
increase.
THE PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES The Portfolio may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to take a temporary
defensive position against potential stock market
declines. These securities include: obligations of the
United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of
deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
The use of repurchase agreements involves certain risks,
including the risk of losses caused by the default or
insolvency of the other party to the agreement. However,
the Portfolio expects that it can control this risk
through careful evaluation of the creditworthiness of the
other party to any repurchase agreement and careful
monitoring procedures.
DERIVATIVE INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security. The most common and
conventional types of derivative securities are futures
and options.
THE FUND MAY INVEST
IN DERIVATIVE
SECURITIES The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, a Portfolio of the
Fund may enter into futures contracts provided that not
more than 5% of its assets are required as a futures
contract deposit; in addition, a Portfolio may enter into
futures contracts and options transactions only to the
extent that obligations under such contracts or
transactions represent not more than 20% of the
Portfolio's assets.
Futures contracts and options may be used for several
common fund management strategies; to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
The Portfolio may use futures contracts for bona fide
"hedging" purposes. In executing a hedge, a manager sells,
for example, stock index futures to protect against a
decline in the stock market. As such, if the market drops,
the value of the futures position will rise, thereby
offsetting the decline in value of the Portfolio's stock
holdings.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by a
Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in
those contracts whose price fluctuations are expected to
resemble those of the Portfolio's underlying securities.
The risk that the Portfolio will
9
<PAGE> 48
be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial due both to the low margin
deposits required and the extremely high degree of
leveraging involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss or gain. However,
the Portfolio will not use futures contracts or options
for speculative purposes.
THE PORTFOLIO MAY
LEND ITS SECURITIES The Portfolio may lend its investment securities on a
short-term or long-term basis to qualified institutional
investors for the purpose of realizing additional income.
With any loan of portfolio securities, there is a risk
that the borrowing institution will fail to redeliver the
securities when due. However, loans of securities by the
Portfolio will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities.
THE PORTFOLIO MAY
BORROW MONEY The Portfolio may borrow money, subject to the limits set
forth below, for temporary or emergency purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Portfolio retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of the
Portfolio will not exceed 100%. A turnover rate of 100%
would occur, for example, if all of the securities held by
the Portfolio were replaced within one year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Portfolio has adopted certain limitations designed to
reduce its exposure to specific situations. Some of these
limitations are that the Portfolio will not:
(a) with respect to 75% of the value of its total assets,
invest more than 5% of its assets in the securities of
any single company;
(b) with respect to 75% of the value of its total assets,
purchase more than 10% of the voting securities of any
issuer;
(c) borrow money, except from banks (or through reverse
repurchase agreements) for temporary or emergency (not
leveraging) purposes, and then not in an amount
exceeding 15% of the value of the Fund's net assets at
the time the borrowing is made. Whenever borrowing
exceeds 5% of the value of the Fund's net assets, the
Fund will not make any additional investments;
(d) engage in the business of underwriting securities
issued by other persons, except to the extent that the
Portfolio may technically be deemed to be an
underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
(e) purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be
invested in securities that are illiquid; and
(f) make loans except (i) by purchasing bonds, debentures
or similar obligations (including repurchase
agreements, subject to the limitation described in
(c) above) which are either publicly distributed or
customarily purchased by
10
<PAGE> 49
institutional investors, and (ii) by lending its
securities to banks, brokers, dealers and other
financial institutions so long as such loans are not
inconsistent with the Investment Company Act or the
Rules and Regulations or interpretations of the
Commission thereunder and the aggregate value of all
securities loaned does not exceed 33 1/3% of the market
value of the Portfolio's total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and so may be changed only
with the approval of a majority of the Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE PORTFOLIO
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
PORTFOLIO The Portfolio is one of five Portfolio's of Vanguard
Specialized Portfolios, Inc. (the "Fund"), a member of The
Vanguard Group of Investment Companies, a family of more
than 30 investment companies with more than 90 distinct
investment portfolios and total assets in excess of $190
billion. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other
funds in the Group obtain at cost virtually all of their
corporate management, administrative and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds. As
a result of Vanguard's unique corporate structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1995, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Portfolio manage the day-to-day
operations of the Portfolio and are responsible to the
Portfolio's Board of Directors. The Directors set broad
policies for the Portfolio and choose its Officers. A list
of the Directors and Officers of the Portfolio and a
statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
11
<PAGE> 50
INVESTMENT
ADVISER
WELLINGTON
MANAGEMENT
COMPANY MANAGES
INVESTMENTS FOR THE
PORTFOLIO Under an investment advisory agreement with the Fund,
Wellington Management Company ("WMC"), 75 State Street,
Boston, MA 02109, manages the investment and reinvestment
of the assets of the Utilities Income Portfolio, and
continuously reviews, supervises and administers the
Portfolio's investment program. WMC discharges its
responsibilities subject to the control of the Officers
and Directors of the Fund.
WMC is a professional investment advisory firm which
globally provides services to investment companies,
institutions and individuals. Among the clients of WMC are
more than 10 of the investment companies of The Vanguard
Group. As of December 31, 1995, WMC held discretionary
management authority with respect to more than $108
billion of assets. WMC and its predecessor organizations
have provided advisory services to investment companies
since 1933 and to investment counseling clients since
1960.
As of February 16, 1996 Mark J. Beckwith, Vice President
of WMC, assumed the duties of portfolio manager of the
Utilities Income Portfolio. Mr. Beckwith, who has served
on the Portfolio's investment team since 1995, replaces
John R. Ryan, who managed the Portfolio from its inception
in 1992. Mr. Beckwith has more than ten years investment
experience. Mr. Beckwith is assisted by Paul D. Kaplan,
Senior Vice President of WMC, who manages the Portfolio's
fixed-income investments. Mr. Kaplan has served as
portfolio manager of the Utilities Income Portfolio since
its inception in May 1992, and has been an investment
professional with WMC since 1978. WMC's portfolio managers
are supported by research and other investment services
provided by the professional staff of WMC.
Under the Fund's investment advisory agreement, the fee
paid to WMC is based on the total assets of the Utilities
Income Portfolio and the total assets of two other
Portfolios of Vanguard Specialized Portfolios, Inc.
managed by WMC (the Energy and Health Care Portfolios).
The three Portfolios are required to pay WMC an aggregate
fee at the end of the fiscal quarter, calculated by
applying the following annual percentage rates to the
average month-end net assets for the quarter of the three
Portfolios:
<TABLE>
<CAPTION>
NET ASSETS RATE
<S> <C>
------------------- ------
First $500 million 0.150%
Next $500 million 0.125%
Next $1 billion 0.100%
Next $1 billion 0.075%
Over $3 billion 0.050%
</TABLE>
In addition, once the advisory fee to WMC is calculated
for the three Portfolios under this schedule, the total
fee will be reduced in order that the advisory fee paid by
the Utilities Income Portfolio does not exceed 0.08%.
The advisory fee is based on the total assets for the
three Portfolios and is allocated, except as noted above,
to each Portfolio based on the net assets of each. For
the fiscal year ended January 31, 1996, the investment
advisory fee
12
<PAGE> 51
represented an effective annual rate of .11 of 1% of
average net assets for the Utilities Income Portfolio.
This fee was paid pursuant to the terms of a previous
investment advisory agreement, which called for a higher
rate of fees.
The investment advisory agreement with WMC authorizes the
adviser to select brokers or dealers to execute purchases
and sales of the Portfolio's securities, and direct the
advisers to use their best efforts to obtain the best
available price and most favorable execution with respect
to all transactions. The full range and quality of
brokerage services are considered in making these
determinations.
The Portfolio has authorized WMC to pay higher commissions
in recognition of brokerage services felt necessary for
the achievement of better execution, provided the adviser
believes this to be in the best interest of the Portfolio.
Although the Portfolio does not market its shares through
intermediary brokers or dealers, the Portfolio may place
orders with qualified broker-dealers who recommend the
Portfolio to clients if the Officers of the Fund believe
that the quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
The Portfolio's Board of Directors may, without the
approval of shareholders, provide for: (a) the employment
of a new investment adviser pursuant to the terms of a new
advisory agreement, either as a replacement for an
existing adviser or as an additional adviser; (b) a change
in the terms of an advisory agreement; and (c) the
continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned
because of a change in control of the adviser. Any such
change will only be made upon not less than 30 days' prior
written notice to shareholders of the Portfolio which
shall include substantially the information concerning the
adviser that would have normally been included in a proxy
statement.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE UTILITIES INCOME
PORTFOLIO PAYS
QUARTERLY DIVIDENDS The Utilities Income Portfolio pays dividends consisting
of ordinary income on a quarterly basis. Capital gains
distributions, if any, are made annually.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these distribution methods.
In order to satisfy certain distribution requirements of
the Tax Reform Act of 1986, the Portfolio may declare
year-end dividend and capital gains distributions during
December. Such distributions, if received by shareholders
by January 31, are deemed to have been paid by the
Portfolio and received by shareholders on December 31 of
the prior year.
The Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that the Portfolio will not be subject to
federal income tax to the extent its income is distributed
to shareholders. Dividends paid by the Portfolio from net
investment income, whether received in cash or reinvested
in additional shares, will be taxable to shareholders as
ordinary income. For corporate investors, dividends from
net investment income will generally qualify in part for
the intercorporate dividends-received deduction.
13
<PAGE> 52
However, the portion of the dividends so qualified depends
on the aggregate taxable qualifying dividend income
received by the Portfolio from domestic (U.S.) sources.
Distributions paid by the Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Portfolio. Capital gains distributions are made when
the Portfolio realizes net capital gains on sales of
portfolio securities during the year. The Portfolio does
not seek to realize any particular amount of capital gains
during a year; rather, realized gains are a by-product of
portfolio management activities. Consequently, capital
gains distributions may be expected to vary considerably
from year to year; there will be no capital gains
distributions in years when the Portfolio realizes net
capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Portfolio. Also, keep in mind that if you purchase
shares in a Portfolio shortly before the record date for a
dividend or capital gains distribution, a portion of your
investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Portfolio will notify you annually as to the tax
status of dividend and capital gains distributions paid by
the Portfolio.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Portfolio is a taxable event and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of shares
or an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Employer
Identification number and by certifying that you are not
subject to backup withholding.
The Portfolio has obtained a Certificate of Authority to
do business as a foreign corporation in Pennsylvania and
does business and maintains an office in that state. In
the opinion of counsel, the shares of the Portfolio are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE PORTFOLIO The share price or "net asset value" per share of the
Portfolio is determined as of the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Exchange is open for trading. Net asset value
per share is determined
14
<PAGE> 53
by dividing the total market value of the Portfolio's
investments and other assets, less any liabilities, by the
total number of outstanding shares of the Portfolio.
Securities listed on a U.S. exchange are valued at the
latest quoted sales prices on the day the valuation is
made. Securities listed on a U.S. exchange that are not
traded on the valuation date are valued at the mean of the
bid and ask prices. The values of foreign securities held
by each Portfolio are typically determined as of the close
of trading of foreign securities in their respective
markets. If events which materially affect the value of a
Portfolio's investments occur after the close of the
securities markets on which such securities are primarily
traded, those investments will be priced at "fair value".
All prices of listed securities are taken from the
exchange where the security is primarily traded. Unlisted
securities for which market quotations are readily
available are valued at the latest quoted bid price.
Securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to
reflect the fair market value of such securities. The
prices provided by a pricing service may be determined
without regard to bid or last prices of each security but
take into account institutional size transactions in
similar groups of securities as well as any developments
related to specific securities. Other assets and
securities for which no market quotations are readily
available are valued in good faith at fair value using
methods determined by the Board of Directors of the Fund.
In determining the Portfolio's net asset value per share,
all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars using the
officially quoted daily exchange rates as determined by
Morgan Stanley Capital International (MSCI) in the
calculation of their various benchmarking indices. This
officially quoted exchange rate may be determined by MSCI
prior to or after the close of a particular foreign
securities market. If such quotations are not available,
the rate of exchange will be determined in accordance with
policies established in good faith by the Board of
Directors.
The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Portfolio is one of five Portfolios of Vanguard
Specialized Portfolios, Inc. (the "Fund"). The Fund is a
Maryland corporation. The Articles of Incorporation permit
the Directors to issue 6,000,000,000 shares of common
stock, with a $.001 par value. The Board of Directors has
the power to designate one or more classes ("Portfolios")
of shares of common stock and to classify or reclassify
any unissued shares with respect to such classes.
Currently the Fund is offering five classes of shares.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50%
of the shares voting for the election of Directors can
elect 100% of the Directors if they so choose.
15
<PAGE> 54
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Utilities Income Portfolio
are held by State Street Bank and Trust Company, Boston,
MA. Core States Bank, N.A. Philadelphia, PA, holds daily
cash balances that are used by the Fund's Portfolios to
invest in repurchase agreements or securities acquired in
these transactions. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any material litigation.
- --------------------------------------------------------------------------------
16
<PAGE> 55
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement for the Portfolio ($1,000
for Uniform Gifts/Transfers to Minors Act accounts). You
must open a new Individual Retirement Account by mail
(IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or
greater than the $1,000 minimum initial investment
requirement, but no more than $2,000 if you are making a
regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past
60 days from an IRA or other qualified Retirement Plan. If
you need assistance with the forms or have any questions
about the Portfolio, please call our Investor Information
Department (1-800-662-7447). NOTE: For other types of
account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney), please
call us to determine which additional forms you may need.
The Portfolio's shares are purchased at the
next-determined net asset value after your investment has
been received. The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock and
bond investments, the Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term stock and bond market movements.
Consequently, the Portfolio reserves the right to
reject any specific purchase (and exchange purchase)
request. The Portfolio also reserves the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to the Vanguard Group.
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
17
<PAGE> 56
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group - 57, and mail to: Please make your check payable
to The Vanguard Group - 57,
VANGUARD FINANCIAL CENTER write your account number on
P.O. BOX 2600 your check and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the In-
vest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------------------
</TABLE>
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD SPECIALIZED PORTFOLIOS
UTILITIES INCOME PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the Portfolio name, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are opening a new account, please complete the
Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement.
NOTE: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open a new account or purchase additional shares
by making an exchange from an existing Vanguard account.
However, the Portfolio reserves the right to refuse any
exchange purchase request. Call our Client Services
Department (1-800-662-2739). The new account will have the
same registration as the existing account.
- --------------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
18
<PAGE> 57
options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express service; please wait three weeks
before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Portfolio shares for just a short period of time. (Taxes
are due on the distributions even if the dividend or gain
is reinvested in additional Portfolio shares.) While the
total value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfolio's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
quarterly in March, June, September and December. For
additional information on distributions and taxes, see the
section titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
19
<PAGE> 58
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates are not available for the Utilities
Income Portfolio.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL BE
CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the day of receipt. If your purchase is
received after the close of the Exchange, your trade date
is the next business day. Your shares are purchased at the
net asset value determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD SPECIALIZED PORTFOLIOS, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center, Vanguard
Specialized Portfolios, 455 Devon Park Drive, Wayne, PA
19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
20
<PAGE> 59
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts,
and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT AT 1-800-662-2739.
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
AUTOMATIC
WITHDRAWAL
& SPECIAL REDEMPTION If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares by making an exchange into another
Vanguard Fund account. Please see "Exchanging Your Shares"
for details.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
21
<PAGE> 60
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statement and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW-BALANCE FEE
AND MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from non-retirement accounts with balances falling
below $2,500 ($500 for Uniform Gifts/Transfers to Minors
Act accounts). This fee deduction will occur mid-year,
beginning in 1996. The fee generally will be waived for
investors whose aggregate Vanguard Assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you
may be notified that your account is below the Fund's
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly paid
to the registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Portfolio's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of the Utilities Income Portfolio of Vanguard
Specialized Portfolios for those of other available
Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Portfolio name, account number, Social Security Number or
Employer Identification number listed on the account, and
exact name and address in which the account is registered.
Only the registered shareholder or his or her
pre-authorized representative may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM
VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard, provided the request is received in
Good Order.
- --------------------------------------------------------------------------------
22
<PAGE> 61
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount you
wish to exchange, and the signatures of all registered
account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD SPECIALIZED PORTFOLIOS, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard
Specialized Portfolios, 455 Devon Park Drive, Wayne, PA
19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations of the
two accounts are identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received the required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The Fund's exchange privilege is only available in states
in which the shares of the Fund are registered for sale.
The Fund's shares are currently registered for sale in all
50 states and the Fund intends to maintain such
registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to THREE SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Portfolio during any
twelve-month period. Notwithstanding these limitations,
the Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
23
<PAGE> 62
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.
Neither the Portfolio nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT.
The request must be in Good Order. TO REQUEST A TRANSFER
FORM AND FULL INSTRUCTIONS PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The fourth
quarter statement will be a year-end statement, listing
all transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Portfolio Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
24
<PAGE> 63
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
25
<PAGE> 64
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<PAGE> 65
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<PAGE> 66
[VANGUARD SPECIALIZED PORTFOLIOS
UTILITIES INCOME PORTFOLIO LOGO]
-----------------------------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[FLAG LOGO]
[VANGUARD SPECIALIZED PORTFOLIOS
UTILITIES INCOME PORTFOLIO LOGO]
P R O S P E C T U S
MAY 13, 1996
[VANGUARD GROUP LOGO]
P057
- --------------------------------------------------------------------------------
<PAGE> 67
VANGUARD
REIT INDEX
PORTFOLIO
Prospectus
May 13, 1996
A Portfolio of
Vanguard
Specialized
Portfolios
[VANGUARD LOGO]
<PAGE> 68
VANGUARD REIT INDEX PORTFOLIO A Real Estate Stock Mutual Fund
CONTENTS
Portfolio Expenses 2
A Word About Risk 3
The Portfolio's
Objectives 3
Who Should Invest 3
Investment Strategies 4
Investment Policies 7
Investment Limitations 8
Investment
Performance 8
Share Price 8
Distributions and Taxes 9
The Portfolio
and Vanguard 10
Investment Adviser 11
General Information 11
Investing with
Vanguard 12
Services and
Account Features 13
Types of Accounts 13
Distribution Options 14
Buying Shares 15
Redeeming Shares 16
Fund and Account
Updates 18
Prospectus Postscript 20
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard REIT Index Portfolio (the "Portfolio") is a diversified mutual fund, a
part of Vanguard Specialized Portfolios, Inc. (the "Fund"), an open-end
investment management company.
The Portfolio seeks to provide a high level of income and moderate
long-term capital growth by investing at least 98% of its assets in stocks
issued by real estate investment trusts (known as "REITs"); these stocks make up
the Morgan Stanley REIT Index (the "Index"), a benchmark of U.S. property
trusts. The Portfolio's remaining assets are invested in cash reserves.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY
INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET
VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
The REIT Index Portfolio charges a 1% transaction fee if you redeem (that
is, sell or exchange) shares held less than one year.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information containing more information about the
Portfolio is, by reference, part of this prospectus and may be obtained without
charge by writing to Vanguard or by calling our Investor Information Department
at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of the REIT Index
Portfolio. To highlight terms and concepts important to mutual fund investors,
we have provided "Plain Talk" explanations along the way. Reading the prospectus
will help you to decide whether the Portfolio is the right investment for you.
We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 69
PORTFOLIO PROFILE Vanguard REIT Index Portfolio
WHO SHOULD INVEST (page 3)
- - Investors looking for a simple, low-cost way to diversify their stock,
bond, and cash investments with indirect exposure to real estate.
- - Investors seeking a stock fund that offers the potential for above-average
income (Historically, the securities that comprise the Index have provided
above-average income relative to the Standard & Poor's 500 Index).
- - Investors wanting modest growth of their capital over the long term--at
least five years.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors seeking a mutual fund that invests in a variety of industries.
RISKS OF THE PORTFOLIO (pages 3-7)
The Portfolio's total return will fluctuate, so an investor could lose money
over short or even extended periods. The REIT Index Portfolio is subject to,
among other risks:
- - Real estate industry risk (the chance that property values will fall due to
a variety of factors, such as a decline in rental rates).
- - Market risk (the chance that stock market prices will fall, sometimes
suddenly and sharply).
- - Interest rate risk (the chance that changes in interest rates will hurt
real estate values).
DISTRIBUTIONS* (page 9)
Distributions are paid in March, June, September and December. These
distributions may include dividends and capital gains (which are taxable) and a
return of capital (which is generally non-taxable).
INVESTMENT ADVISER (page 11)
Vanguard Core Management Group, Valley Forge, PA.
INCEPTION DATE: May 13, 1996
PORTFOLIO'S ESTIMATED EXPENSE RATIO: 0.35%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and accounts for minors
NEWSPAPER ABBREVIATION: SPREITs
VANGUARD FUND NUMBER: 123
ACCOUNT FEATURES (page 13)
- - Telephone Redemption (sales, not exchanges)
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
* IMPORTANT INFORMATION ABOUT DISTRIBUTIONS AND TAXES
Because REITs cannot provide complete information about the taxability of their
distributions until after the end of the calendar year, Vanguard plans to ask
the Internal Revenue Service each year for an extension on issuing Forms
1099-DIV ("1099s") for the REIT Index Portfolio. If this request is approved, we
expect to mail 1099s to Portfolio shareholders in non-retirement accounts during
February. See page 9 for details.
1
<PAGE> 70
PLAIN TALK ABOUT
VANGUARD'S
REDEMPTION FEES
Some Vanguard Portfolios charge a redemption fee on shares held less than one
year. Unlike a sales charge or load paid to a broker or fund management company,
the fee is paid directly to the Portfolio to offset the costs of buying and
selling securities. The fee, which is intended to discourage short-term trading,
ensures that short-term investors pay their share of the Portfolio's transaction
costs and that long-term investors do not subsidize the activities of short-term
traders.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of a
fund. Vanguard REIT Index Portfolio's expense ratio in its first year of
operations is expected to be 0.35%, or $3.50 per $1,000 of average net
assets. As of December 31, 1995, the average real estate mutual fund had
expenses of 1.37%, or $13.70 per $1,000 of average net assets, according to
Lipper Analytical Services, Inc., which reports on the mutual fund industry.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay a load or sales commission when you
buy, sell, or exchange shares of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Distributions: None
Redemption Fees*: None
Exchange Fees: None
</TABLE>
*The REIT Index Portfolio charges a 1% transaction fee on redemptions (sales and
exchanges) of shares that have been held less than one year. The fee is deducted
before your redemption proceeds are mailed to you or used to purchase shares of
another Vanguard Fund; you cannot pay the fee separately. If some of the shares
that you are redeeming have been held one year or more, the fee will apply to
only those shares held less than one year. The fee does not apply to reinvested
distributions.
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you, and include investment advisory expenses as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are estimates for the Portfolio's first full year since the Portfolio was
not in operation until May 13, 1996.
ESTIMATED ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.27%
Investment Advisory Expenses: 0.02%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.04%
----
Total Other Expenses: 0.06%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.35%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year (2) that you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
-------------------
1 YEAR 3 YEARS
-------------------
<S> <C>
$4 $11
-------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 71
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
REIT Index Portfolio. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. As you consider an investment in the REITIndex Portfolio, you
should also take into account your personal tolerance for the daily fluctu-
ations of the stock market.
Look for this "warning flag" [GRAPHIC FLAG] symbol throughout the
prospectus. It is used to mark detailed information about each type of risk
that you, as a shareholder of the Portfolio, will confront.
THE PORTFOLIO'S OBJECTIVES
Vanguard REIT Index Portfolio seeks to provide above-average income (relative to
the Standard & Poor's 500 Index) and long-term growth of capital. These
objectives are fundamental, which means that they cannot be changed unless a
majority of shareholders vote to do so.
BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE
[GRAPHIC FOLLOWING PAGES, YOUR INVESTMENT IN THE PORTFOLIO,
FLAG] AS WITH ANY INVESTMENT IN COMMON STOCKS, COULD
LOSE MONEY.
WHO SHOULD INVEST
The REIT Index Portfolio may be a suitable investment for you if:
- - You want to add real estate exposure to your existing mix of stock, bond,
and money market mutual funds.
- - You want a stock fund that seeks to provide a high level of income and
long-term capital growth.
- - You are looking for an investment that performs differently than a
diversified stock or bond fund.
- - You characterize your investment temperament as "somewhat conservative."
This Portfolio is not an appropriate investment if you are a
"market-timer." Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the Portfolio's shareholders.
To minimize such costs, which reduce the ultimate returns achieved by you and
other shareholders, the Portfolio has adopted the following policies:
- - The Portfolio charges a 1% redemption fee on shares held less than one
year.
PLAIN TALK ABOUT
REITs
Rather than owning properties directly--which can be costly and difficult to
convert into cash when needed--some investors buy shares in a company that owns
and manages real estate. This company is known as a real estate investment
trust, or REIT. Unlike corporations, REITs do not have to pay income taxes if
they meet certain Internal Revenue Code requirements. To qualify, a REIT must
distribute at least 95% of its taxable income to its shareholders and receive at
least 75% of that income from rents, mortgages, and sales of property. REITs
offer investors greater liquidity and diversification than direct ownership of a
handful of properties, as well as greater income potential than an investment in
common stocks. Like any investment in real estate, however, a REIT's performance
depends on several factors, such as its ability to find tenants for its
properties, to renew leases, and to finance property purchases and renovations.
3
<PAGE> 72
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Vanguard REIT Index Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of speculating on
short-term fluctuations in the stock or real estate markets.
PLAIN TALK ABOUT
TYPES OF REITs
An equity REIT, which owns properties, generates income (from rental and lease
payments) and offers the potential for growth (from property appreciation), as
well as occasional capital gains from the sale of property. A mortgage REIT
makes loans to commercial real estate developers. Mortgage REITs earn interest
income, and are subject to credit risks (that is, the chance that a developer
will fail to repay a loan). A hybrid REIT holds properties and mortgages.
- - The Portfolio reserves the right to reject any purchase request--including
exchanges from other Vanguard Funds--that it regards as disruptive to the
efficient management of the Portfolio. This could be because of the timing
of the investment or because of a history of excessive trading by the
investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Telephone exchanges are not accepted for non-retirement accounts.
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser tries to provide a
high level of income and long-term capital growth. It also explains three
important risks--real estate industry risk, market risk, and interest rate
risk--faced by investors in the Portfolio. Unlike the Portfolio's investment
objectives, the adviser's investment strategies are not fundamental and can be
changed by the Portfolio's Board of Directors without shareholder approval.
However, before making any important change in its strategies, the Portfolio
will give shareholders 30-days notice, in writing.
MARKET EXPOSURE
The Portfolio intends to remain at least 98% invested in the stocks of real
estate investment trusts; the remaining assets will be invested in cash reserves
to maintain liquidity for shareholder redemptions.
THE PORTFOLIO IS SUBJECT TO REAL ESTATE INDUSTRY RISK,
[GRAPHIC WHICH IS THE POSSIBILITY THAT A REIT's PROPERTIES
FLAG] COULD FALL IN VALUE.
Because of its emphasis on REIT stocks, the Portfolio's performance is
strongly linked to the ups and downs of the real estate market. In general, real
estate values are affected by a variety of factors, including supply and demand
for properties; the economic health of the country as well as different regions;
and the strength of specific industries renting properties. Ultimately, a REIT's
performance depends on the types and locations of the properties it owns and on
how well the REIT manages its properties. For instance, rental income could
decline because of extended vacancies, increased competition from nearby
properties, tenants' failure to pay rent, or incompetent management. Property
values could decrease because of overbuilding, environmental liabilities,
uninsured damages caused by natural disasters, loss of IRS status as a qualified
REIT, a general decline in the neighborhood, losses due to casualty or
condemnation, increases in property taxes, or changes in zoning laws.
THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE
[GRAPHIC POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER
FLAG] SHORT OR EVEN EXTENDED PERIODS. STOCK MARKETS TEND TO
MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES
AND PERIODS OF FALLING STOCK PRICES.
4
<PAGE> 73
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends to
narrow over the long term.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1995)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst (43.3) (12.5) (0.9) +3.1
Average +12.5 +10.3 +10.7 +10.7
- --------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1995. For example, while the average return on stocks for all of the
5-year periods was +10.3%, returns for the 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to +23.9% (from 1951 through 1955). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or the REIT Index Portfolio in particular.
REITs in the Morgan Stanley REIT Index tend to be medium-size and small
companies; their market capitalizations generally range from $75 million to
$1.3 billion. Like small-cap stocks in general, REIT stocks can be more
volatile than--and at times will perform differently from--the large-cap
stocks found in the S&P 500 Index.
In addition, because small-cap stocks are typically less liquid than
large-cap stocks, REIT stocks may sometimes experience greater share-price
fluctuations than the stocks of larger companies. Historically, however, the
significant amount of dividend income provided by REITs has tended to soften the
impact of this volatility.
THE PORTFOLIO IS SUBJECT TO INTEREST RATE RISK, WHICH IS
[GRAPHIC THE POSSIBILITY THAT CHANGES IN INTEREST RATES COULD
FLAG] HURT REIT PERFORMANCE.
In general, during periods of high interest rates, REITs may lose some of
their appeal for investors who may be able to obtain higher yields from other
income-producing investments, such as long-term bonds. Higher interest rates
also mean that financing for property purchases and improvements is more costly
and difficult to obtain.
SECURITY SELECTION AND PORTFOLIO DIVERSIFICATION
The REIT Index Portfolio employs a "passively" managed investment approach. The
Portfolio's adviser, Vanguard Core Management
PLAIN TALK ABOUT
INDEXES
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index can cover a very broad
range of securities, such as the entire U.S. stock market, or a specific market
segment, such as small-company stocks or real estate investment trusts.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with an average total market value exceeding $5 billion.
Mid-cap funds hold stocks of companies with an average market value between $750
million and $5 billion. Small-cap funds hold stocks of companies with an average
market value of less than $750 million.
5
<PAGE> 74
PLAIN TALK ABOUT
Active Versus
Passive Management
Index portfolios are not actively managed by investment advisers who buy and
sell securities based on research and analysis. Instead, passive
management--also known as indexing--tries to match, as closely as possible, the
performance of a target index by either holding all--or a representative
sample--of the securities in the index. Indexing appeals to many investors
because of its simplicity (indexing is a straightforward market-matching
strategy); diversification (indexes generally cover a wide variety of
companies); relative performance predictability (an index portfolio is expected
to move in the same direction--up or down--as its target index); and low cost
(index portfolios do not have many of the expenses of an actively managed
fund--such as research and company visits--and keep trading activity--and, thus,
brokerage commissions--to a minimum).
Plain Talk About
Portfolio Diversification
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of assets represented by its
ten largest holdings. The average U.S. equity mutual fund has about 25% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
Group, invests at least 98% of the Portfolio's assets in an attempt to parallel
the performance of the Portfolio's target benchmark, the Morgan Stanley REIT
Index.
The REIT Index Portfolio holds each stock contained in the Morgan
Stanley REIT Index in roughly the same proportions as in the Index itself. For
example, if 5% of the Morgan Stanley REIT Index were made up of the stock of a
specific REIT, the Portfolio would invest the same percentage of its non-cash
assets in that stock.
AN INDEX FUND HAS OPERATING EXPENSES; AN UNMANAGED MARKET
INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED
TO PARALLEL ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL
[GRAPHIC NOT BE ABLE TO MATCH THE PERFORMANCE OF THE TARGET INDEX
FLAG] EXACTLY. THE CORRELATION BETWEEN THE PERFORMANCE OF
THE REIT INDEX PORTFOLIO AND ITS TARGET INDEX IS
EXPECTED TO BE AT LEAST 0.95.
The Morgan Stanley REIT Index is made up of the stocks of all publicly
traded equity REITs (except health care REITs) that meet certain criteria. For
example, to be included in the Index, a REIT must have a total market
capitalization of at least $75 million and have enough shares and trading volume
to be considered liquid. The REIT Index Portfolio invests in equity REITs only.
As of December 31, 1995, 93 equity REITs were included in the Index.
The Index is rebalanced every calendar quarter as well as each time that a REIT
is removed from the Index because of corporate activity such as a merger,
acquisition, leveraged buyout (LBO), bankruptcy, IRS removal of REIT status,
fundamental change in business, or change in shares outstanding.
Stocks in the Morgan Stanley REIT Index represent a broadly diversified
range of property types and regions. The Index's makeup, as of December 31,
1995, follows.
Retail Stores 33.1%
Residential 32.6
Office 14.8
Industrial 11.3
Hotels 3.8
Other 4.4
The Index's ten largest stocks are expected to make up about 30% of its
market value. The Index's largest stocks, as of December 31, 1995, follow.
1. Security Capital Pacific Trust
2. Security Capital Industrial Trust
3. Simon Property Group
4. New Plan Realty Trust
5. Equity Residential Properties Trust
6. Weingarten Realty
7. Kimco Realty Corporation
8. Franchise Financial Corporation
9. Vornado Realty Trust
10. United Dominion Realty
6
<PAGE> 75
Vanguard REIT Index Portfolio is not sponsored, sold, promoted, or
endorsed by Morgan Stanley. The Morgan Stanley REIT Index is the exclusive
property of Morgan Stanley and is a service market of Morgan Stanley Group Inc.
It has been licensed for use by The Vanguard Group, Inc.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held.
Generally, a passively managed portfolio sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the portfolio's target index. Because of this, the Portfolio's turnover rate
is expected to be less than 25%. (A rate of 100% would occur, for example, if
the Portfolio sold or replaced securities valued at 100% of its total net assets
within a one-year period.)
Investment Policies
Besides investing at least 98% of its assets in REIT stocks, the Portfolio may
follow other investment policies to achieve its objectives.
[GRAPHIC FLAG]
THE PORTFOLIO RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
STOCK FUTURES AND OPTIONS CONTRACTS, AND SWAP AGREEMENTS. STOCK FUTURES
AND OPTIONS CONTRACTS ARE TRADITIONAL TYPES OF DERIVATIVES THAT ARE
PUBLICLY TRADED ON EXCHANGES. SWAP AGREEMENTS ARE CUSTOMIZED CONTRACTS,
OFTEN ARRANGED THROUGH A BROKER, BETWEEN TWO INSTITUTIONS. SWAP
AGREEMENTS FUNCTION LIKE FUTURES, BUT ARE NOT PUBLICLY TRADED ON AN
EXCHANGE.
Losses (or gains) involving contracts can sometimes be substantial--in
part because a relatively small price movement in a contract may result in an
immediate and substantial loss (or gain) for a portfolio.
This Portfolio will not use futures, options, or swap agreements for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. Rather, the Portfolio will keep separate cash reserves
or short-term cash-equivalent securities in the amount of the obligation
underlying the contract. Only a limited percentage of the Portfolio's assets--up
to 5% if required for deposit and no more than 20% of total assets--may be
committed to such contracts. To the extent that such contracts are utilized, the
Portfolio will not have 98% of its assets invested in the REIT stock. However,
such contracts will only be utilized in order to mirror the performance of the
Index.
The reasons for which the Portfolio may use futures, options, and swap
agreements are:
- - To execute trades more easily.
- - To reduce costs--and to improve returns--by buying futures, options, or
swap agreements instead of actual stocks when they are cheaper.
- - To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
PLAIN TALK ABOUT
Portfolio Turnover
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed funds investing in common stocks is 75%.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
another security (such as a stock or a bond), an asset (such as a commodity like
gold), or a market index (such as the S&P 500 Index). Futures and options are
derivatives that have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new, exotic types of derivatives.
7
<PAGE> 76
PLAIN TALK ABOUT
Past Performance
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
Although up to 2% of its assets will be invested in cash reserves to
maintain liquidity, the Portfolio will not invest in cash reserves, futures,
options, or swap agreements to protect against a decline in the values of REITs.
Investment Limitations
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment practices. Specifically, the Portfolio will not:
- - Invest more than 25% of its assets in any one industry other than real
estate.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.
With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% of its assets in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of
Additional Information may be changed only by approval of a majority of the
Portfolio's shareholders.
Investment Performance
Vanguard REIT Index Portfolio invests primarily in stocks of real estate
investment trusts, so its performance may be correlated to the performance of
the overall stock market. Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term and by more stable
growth over the long term. There may be periods, however, when REITs perform
quite differently from the broader market.
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
Share Price
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------
NUMBER OF SHARES OUTSTANDING
8
<PAGE> 77
Daily net asset value, or NAV, is useful to you as a shareholder
because the NAV, multiplied by the number of Portfolio shares you own, gives you
the dollar amount you would have received had you sold all of your shares back
to the Portfolio that day.
The Portfolio's share price can be found daily in the mutual fund
listings of most major newspapers under the heading Vanguard Group. Different
newspapers use different abbreviations of the Portfolio's name, but the most
common is SPREITs.
Distributions and Taxes
Each March, June, September, and December, the REIT Index Portfolio will provide
shareholders with virtually all of the distributions it receives from its REIT
investments. Any capital gains realized from the sale of securities will be
distributed in December.
You may receive distributions in cash, or you may have them
automatically reinvested in more shares of the Portfolio.
If you own Portfolio shares in a non-retirement account, Vanguard will
notify you each year of the amount and taxability of the Portfolio's
distributions paid during the previous year (that is, the amount of dividends,
capital gains, and return of capital that you receive). You will also be
notified of the amount, if any, of Federal income taxes withheld from the
distribution.
REITs do not provide complete information about the taxability of their
distributions until after the calendar year end. As a result, Vanguard cannot
determine how much of the REIT Index Portfolio's annual distributions is taxable
for shareholders until after the traditional January 31 deadline for issuing
Forms 1099-DIV ("1099"). Therefore, we plan to request permission each year from
the Internal Revenue Service (IRS) for an extension. IF OUR REQUEST IS APPROVED,
WE WILL MAIL FORMS 1099-DIV TO REIT INDEX PORTFOLIO SHAREHOLDERS WITH
NON-RETIREMENT ACCOUNTS IN FEBRUARY.
TAXABILITY OF DISTRIBUTIONS
The portions of your distributions that are classified as dividends and
short-term capital gains are taxable to you as ordinary dividend income. Any
distributions of net long-term capital gains by the Portfolio are taxable to you
as long-term capital gains, no matter how long you've owned shares in the
Portfolio. Both dividends and capital gains are taxable to you whether received
in cash or reinvested in additional shares. In addition, distributions that are
declared in December--even if paid to you in January--are taxed as if they had
been paid to you in December.
Although the Portfolio does not seek to realize any particular amount
of capital gains during a year, such gains are realized from time to time as
byproducts of its ordinary investment activities and distributions paid by
REITs.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the Portfolio's earnings.
You receive such earnings from the REIT Index Portfolio as either a quarterly
distribution or as an annual capital gains distribution. The Portfolio's
quarterly payments come from distributions that the Portfolio receives from its
REIT holdings and interest it earns from any cash reserves. Capital gains are
realized when the Portfolio sells REIT stocks for higher prices than its
adjusted cost basis in the stocks. These gains may be short-term or long-term
depending on whether the Portfolio held the securities for less than or more
than one year.
9
<PAGE> 78
PLAIN TALK ABOUT
RETURN OF CAPITAL
The Internal Revenue Code requires a REIT to distribute at least 95% of its
taxable income to investors. In many cases, however, because of "non-cash"
expenses such as property depreciation, an equity REIT's cash flows will exceed
its taxable income. The REIT may distribute this excess cash to offer a more
competitive yield (in other words, provide investors with a higher
distribution). This portion of the distribution is classified as a return of
capital.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits as other mutual fund
companies do, Vanguard returns profits to fund shareholders in the form of lower
operating expenses.
If you sell or exchange shares of the Portfolio, any gain or loss you have is
generally a taxable event, which means that you may have a capital gain or a
capital loss to report when you complete your Federal income tax return.
Distributions--as well as capital gains or losses from your sale or exchange of
Portfolio shares--may be subject to state and local income taxes, too.
Note that any dividends distributed by REITs--and funds that invest in
REITs--are not eligible for the dividends-received deduction for corporations.
RETURN OF CAPITAL
The portion of your distributions that is classified as a return of capital is
generally not taxable to you. However, when you receive a return of capital,
your cost basis (that is, the adjusted cost of your investment, which is used to
determine a capital gain or loss for tax purposes) is decreased by the amount of
the return of capital. This, in turn, will affect the capital gain or loss you
realize when you sell or exchange any of your REIT Index Portfolio shares.
Two other important tax considerations about return of capital:
- - If you do not reinvest your distributions (that is, you receive your
distributions in cash), your original investment in the Portfolio will be
reduced by the amount of return of capital and capital gains included in the
distribution.
- - A return of capital is generally not taxable to you; however, any return of
capital distribution would be taxable as a capital gain once your cost basis
is reduced to zero (which could happen if you do not reinvest your
distributions and return of capital in those distributions is significant).
Keep in mind that the tax information in this prospectus is provided as
general information. You should consult your own tax adviser about the tax
consequences of an investment in the REIT Index Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $190 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
10
<PAGE> 79
INVESTMENT ADVISER
Vanguard Core Management Group provides investment advisory services on an
at-cost basis to the Portfolio.
The Group is authorized to choose brokers and dealers to handle the purchase
and sale of the Portfolio's securities, and is directed to get the best
available price and most favorable execution from these brokers with respect to
all transactions.
GENERAL INFORMATION
The REIT Index Portfolio is one of five Portfolios of Vanguard Specialized
Portfolios, Inc., a corporation organized under the laws of the State of
Maryland. The other Portfolios are the Energy, Gold & Precious Metals, Health
Care, and Utilities Income Portfolios. The Portfolios are all combined under one
corporation for administrative purposes, but operate as separate corporations in
virtually all respects.
Shareholders of the REIT Index Portfolio have rights and privileges similar
to those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors), each share outstanding at that point
would be entitled to one vote. Although the Portfolio does not usually hold an
annual meeting, shareholders may request one under certain circumstances, which
are described in the Statement of Additional Information.
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER
Vanguard Core Management Group provides investment advisory services to many
Vanguard Funds; as of December 31, 1995, the Group managed $33 billion in
assets. The individual who oversees the REIT Index Portfolio is:
GEORGE U. SAUTER, Principal of Vanguard, 11 years investment experience, 9
years primary responsibility for Vanguard Core Management Group; A.B. from
Dartmouth College, M.B.A. from the University of Chicago.
11
<PAGE> 80
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer you as a Vanguard REIT Index Portfolio shareholder. Booklets providing
detailed information are available on the services marked with a [GRAPHIC].
Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
We offer a variety of options designed to fit your financial planning needs,
including . . .
- - Automatic methods for depositing your paycheck or government check, and
moving money between Vanguard Fund accounts or between your Vanguard Fund
account and your bank account.
- - A cost-effective way to complement your Vanguard mutual fund shares with
individual stocks, bonds, and options.
TYPES OF ACCOUNTS
You can establish an account for yourself (or yourself and another party), a
minor child, a trust, or an organization, or as a third-party trustee retirement
investment. We also offer retirement accounts for individuals, self-employed
people, small businesses, partnerships, corporations, and tax-exempt
institutions.
DISTRIBUTION OPTIONS
You can receive your distributions in cash, or reinvest them in additional
Portfolio shares.
BUYING SHARES
It's easy to open an account or add money to an existing account.
REDEEMING SHARES
You can withdraw money you have invested in the Portfolio by selling or
exchanging shares.
FUND AND ACCOUNT UPDATES
- - Our clear, concise Portfolio Summaries and tax statements help you keep
track of your Vanguard investments throughout the year as well as when you
are preparing your income tax returns.
- - Twice each year, you will receive comprehensive fund reports about Vanguard
REIT Index Portfolio. These reports include an assessment of the
Portfolio's performance (and a comparison to its benchmark index) as well
as a complete listing of its holdings.
- - Vanguard Tele-Account(R) offers toll-free Fund and account information 24
hours a day from any TouchTone(TM) telephone. - You can use your personal
computer to obtain share price, yield, and total return--as well as general
investment information--through Vanguard Online(sm) and the World Wide Web.
12
<PAGE> 81
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to purchase, sell, or
exchange shares.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio unless you notify us
(SALES FOR NON-RETIREMENT otherwise.
ACCOUNTS ONLY; EXCHANGES
FOR RETIREMENT ACCOUNTS ONLY)
- ------------------------------------------------------------------------------------------------
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S.
SERVICE Government payment (including Social Security and Government
[GRAPHIC] pension checks) into your account.
- ------------------------------------------------------------------------------------------------
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of money from one
SERVICE Vanguard Fund account to another.*
[GRAPHIC]
- ------------------------------------------------------------------------------------------------
VANGUARD FUND EXPRESS Electronic method for purchasing or selling shares:
transferring money between your Vanguard Fund account and an
[GRAPHIC] account at your bank, savings and loan, or credit union on a
systematic schedule.*
- ------------------------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS Electronic method for transferring distributions directly
from your Vanguard Fund account to your bank, savings and
[GRAPHIC] loan, or credit union account or to another Vanguard Fund
account.
- ------------------------------------------------------------------------------------------------
VANGUARD BROKERAGE SERVICES A way to trade stocks, bonds, and options on major
(VBS) exchanges, Nasdaq, and other domestic over-the-counter
markets at reduced rates, and to buy and sell shares of
[GRAPHIC] non-Vanguard mutual funds. Call VBS (1-800-992-8327) for
additional information and the appropriate forms.
- ------------------------------------------------------------------------------------------------
</TABLE>
*Can be used to "dollar-cost average" [GRAPHIC] or to contribute to an IRA
or other retirement plan.
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
account types.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE To open an account in the name of one (individual) or more
(joint tenants) people. $3,000 minimum initial investment.
- ------------------------------------------------------------------------------------------------
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform Gifts/Transfers
to Minors Act). Age of majority and other transfer
[GRAPHIC] requirements are set by state law. $1,000 minimum initial
investment.
- ------------------------------------------------------------------------------------------------
FOR HOLDING TRUST ASSETS To register assets held in an existing trust. $3,000 minimum
[GRAPHIC] initial investment.
- ------------------------------------------------------------------------------------------------
</TABLE>
INVESTOR INFORMATION 1-800-662-7447 TELE-ACCOUNT 1-800-662-6273
CLIENT SERVICES 1-800-662-2739
13
<PAGE> 82
TYPES OF ACCOUNTS (continued)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan based on an
RETIREMENT INVESTMENTS existing corporate or institutional plan. These accounts are
(Vanguard is not the custodian established by the custodian or trustee of the existing
or trustee) plan.
- ------------------------------------------------------------------------------------------------
FOR AN ORGANIZATION To open an account as a corporation, partnership, or other
entity. These accounts may require a corporate resolution or
other documents to name the individuals authorized to act.
$3,000 minimum initial investment.
- ------------------------------------------------------------------------------------------------
</TABLE>
RETIREMENT
These accounts must be established with a Vanguard adoption agreement--not a
Vanguard account registration form--and may require additional documentation. To
request the appropriate adoption agreement and forms or to receive answers to
your questions about investing for retirement, call Investor Information.
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of an individual.
ACCOUNT (IRA) IRAs can also be established through a regular contribution,
(Vanguard Fiduciary Trust a direct rollover from an employer's plan such as a 401(k),
Company is the custodian) or through an asset transfer or rollover from another
financial institution such as a bank or mutual fund company.
$1,000 minimum initial investment.
- -------------------------------------------------------------------------------------------------
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of an employee.
PENSION PLAN ACCOUNT (SEP-IRA) SEPs allow employers to make deductible contributions
(Vanguard Fiduciary Trust directly to IRAs established by their employees. A SEP can
Company is the custodian) be established by self-employed individuals, small
businesses, partnerships, or corporations.
- -------------------------------------------------------------------------------------------------
FOR A QUALIFIED RETIREMENT To open a retirement account that allows small business
PROGRAM ACCOUNT owners or self-employed individuals to make tax-deductible
(Vanguard Fiduciary Trust retirement contributions for themselves and their employees
Company can be the custodian) into Profit-Sharing and Money Purchase Pension (Keogh)
plans.
- -------------------------------------------------------------------------------------------------
FOR A 403(B)(7) CUSTODIAL ACCOUNT To open a retirement account that allows employees of tax-
(Vanguard Fiduciary Trust exempt institutions (for example, schools or hospitals) to
Company is the custodian) make pre-tax retirement contributions.
- -------------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTION OPTIONS
You can receive Portfolio distributions in two ways:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
REINVESTMENT Distributions are reinvested in additional shares of the
. Portfolio
- -----------------------------------------------------------------------------------------
</TABLE>
INVESTOR INFORMATION 1-800-662-7447 TELE-ACCOUNT 1-800-662-6273
CLIENT SERVICES 1-800-662-2739
14
<PAGE> 83
DISTRIBUTION OPTIONS (continued)
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS IN CASH Distributions are paid by check and mailed to your account's
address of record. Note: If you do not reinvest your
distributions, your original investment will be reduced by
the amount of the return of capital in the distribution. See
"Distributions and Taxes."
- ---------------------------------------------------------------------------------------------
</TABLE>
To electronically transfer cash distributions to your bank, savings and loan, or
credit union account, or to another Vanguard Fund account, see Vanguard Dividend
Express under "Services and Account Features."
BUYING SHARES
The price you pay for your shares is the Portfolio's next-determined net asset
value after Vanguard receives your request, provided we receive your request
before 4:00 p.m. Eastern time (the close of trading on the New York Stock
Exchange). The Portfolio is offered on a no-load basis, meaning that you do not
pay sales commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
- ----------------------------------------------------------------------------------------------------------
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(IRAs and accounts for minors). by wire.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY MAIL Complete and sign the application Mail your check with an
[GRAPHIC ENVELOPE] form. Invest-By-Mail form detached from
FIRST-CLASS mail to: your confirmation statement to
The Vanguard Group the address listed on the form.
P.O. Box 2600
Valley Forge, PA 19482
EXPRESS or REGISTERED mail to: Make your check payable to: Make your check payable to:
The Vanguard Group The Vanguard Group-123. The Vanguard Group-123.
455 Devon Park Drive
Wayne, PA 19087 All purchases must be made in All purchases must be made in
U.S. dollars, and checks must be U.S. dollars, and checks must be
drawn on U.S. banks. drawn on U.S. banks.
</TABLE>
Important Note: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
<TABLE>
<S> <C> <C>
BY TELEPHONE FOR RETIREMENT ACCOUNTS ONLY: FOR RETIREMENT ACCOUNTS ONLY:
[GRAPHIC PHONE] Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
hours a day--or Client Services hours a day--or Client Services
1-800-662-6273 during business hours--to exchange during business hours--to exchange
Vanguard Tele-Account from another Vanguard Fund from another Vanguard Fund
1-800-662-2739 account with the same account with the same
registration (name, address, and registration (name, address, and
Client Services taxpayer I.D. number). taxpayer I.D. number).
*You must obtain a Personal Identification
Number through Tele-Account at least seven
days before you request your first
exchange.
</TABLE>
Important Note: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
INVESTOR INFORMATION 1-800-662-7447 TELE-ACCOUNT 1-800-662-6273
CLIENT SERVICES 1-800-662-2739
15
<PAGE> 84
BUYING SHARES (continued)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY WIRE Call Client Services to arrange Call Client Services to arrange
[ELECTRICITY GRAPHIC] your wire transaction. your wire transaction.
Wire to: Wire transactions are not available Wire transactions are not
CoreStates Bank, N.A. for retirement accounts. available for retirement accounts.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard REIT Index Portfolio
[Account Registration]
Attn Vanguard
- ---------------------------------------------------------------------------------------------------------
AUTOMATICALLY -- Vanguard offers a variety of ways
that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
Shares purchased by check or Vanguard Fund Express can be redeemed at any time.
However, while your redemption request will be processed as soon as it is
received, your redemption proceeds will not be available until payment for your
purchase is collected, which may take up to ten days.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. Vanguard must consider the interests of all Portfolio
shareholders and so reserves the right to delay or refuse any purchase that may
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
A 1% fee is charged for all redemptions (sales and exchanges) of Portfolio
shares held less than one year.
The ability to sell Portfolio shares by telephone is automatically established
for your non-retirement account unless you tell us in writing that you do not
want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
[GRAPHIC CHECKMARK] - Portfolio name.
[GRAPHIC CHECKMARK] - 10-digit account number.
[GRAPHIC CHECKMARK] - Name and address exactly as registered on
that account.
[GRAPHIC CHECKMARK] - Social Security or Employer Identification
number as registered on that account.
If you call to sell shares, the sale proceeds will be made payable to
you, as the registered shareholder, and mailed to your account's address of
record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if
Investor Information 1-800-662-7447 Tele-Account 1-800-662-6273
Client Services 1-800-662-2739
16
<PAGE> 85
REDEEMING SHARES (continued)
we do not follow these or other reasonable procedures, Vanguard may be liable
for any losses resulting from unauthorized or fraudulent transactions.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares;
however, the Portfolio reserves the right to close any non-retirement or
UGMA/UTMA account whose balance falls below the minimum initial investment. The
Portfolio will deduct a $10 annual fee if your non-retirement account balance
falls below $2,500 or if your UGMA/UTMA account balance falls below $500. The
fee is waived if your total Vanguard Fund account assets are $50,000 or more.
Sale proceeds are normally mailed within two business days after
Vanguard receives your request. The sale price of your shares will be the
Portfolio's next-determined net asset value after Vanguard receives all required
documents in good order.
Good order means that the request includes:
[GRAPHIC CHECKMARK] - Portfolio name and account number.
[GRAPHIC CHECKMARK] - Amount of the transaction (in dollars or shares).
[GRAPHIC CHECKMARK] - Signatures of all owners exactly as registered
on the account.
[GRAPHIC CHECKMARK] - Signature guarantees (if required).
[GRAPHIC CHECKMARK] - Any supporting legal documentation that may
be required.
[GRAPHIC CHECKMARK] - Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the
next business day's net asset value.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although every effort will be made to maintain the exchange privilege,
Vanguard reserves the right to revise or terminate the exchange privilege, limit
the amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of
the Portfolio and increase transaction costs, Vanguard has established a policy
of limiting exchange activity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least
30 days apart) from the Portfolio during any 12-month period. "Substantive"
means either a dollar amount large enough to have a negative impact on the
Portfolio or a series of movements between Vanguard Funds.
Before you exchange into a new Vanguard Fund, please read its
prospectus. For a copy and for answers to questions you might have, please call
Investor Information.
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
- --------------------------------------------------------------------------------
<S> <C>
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[GRAPHIC TELEPHONE]
Call Vanguard Tele-Account* 24 hours a day-or
Client Services during business hours-to request
1-800-662-6273 a sale of shares. You cannot exchange shares of
Vanguard Tele-Account this Portfolio by telephone.
1-800-662-2739 RETIREMENT:
Client Services
You can exchange-but not sell-shares by calling
Tele-Account or Client Services.
* You must obtain a Personal Identification
Number through Tele-Account at least seven days
before you request your first sale of shares.
</TABLE>
Investor Information 1-800-662-7447 Tele-Account 1-800-662-6273
Client Services 1-800-662-2739
17
<PAGE> 86
REDEEMING SHARES (CONTINUED)
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
- --------------------------------------------------------------------------------
<S> <C>
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE GRAPHIC]
FIRST-CLASS mail to: Send a letter of instruction signed by all
The Vanguard Group registered account holders. Include the
Vanguard REIT Index Portfolio Portfolio name and account number and (if you
P.O. Box 1120 are selling) a dollar amount or number of
Valley Forge, PA 19482 shares OR (if you are exchanging) the name of
the Fund you want to exchange into and a dollar
amount or number of shares.
EXPRESS or REGISTERED mail to: RETIREMENT:
The Vanguard Group Call Client Services (for IRAs) or Individual
Vanguard REIT Index Portfolio Retirement Services (for SEP-IRAs, 403(b)(7)
455 Devon Park Drive custodial accounts, and Profit-Sharing and
Wayne, PA 19087 Money Purchase Pension [Keogh] plans:
1-800-662-2003) for information on how to
request a distribution. Depending on your
account registration type, additional
documentation may be required.
- --------------------------------------------------------------------------------
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
</TABLE>
It is important that you call Vanguard before you redeem a large dollar
amount. In protecting the interests of all Portfolio shareholders, Vanguard may
not be able to deliver your redemption proceeds immediately if the amount is
considered to be disruptive to the Portfolio's operation or performance.
Vanguard reserves the right to take up to seven days to deliver your redemption
proceeds.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you a variety of statements to help you monitor your account
activity and to help you complete your tax returns. You will also receive annual
and semi-annual financial reports on the Portfolio's operation and performance.
CONFIRMATION STATEMENT Sent each time you purchase, exchange, or
redeem shares; confirms the date and the amount
of the transaction.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
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FUND AND ACCOUNT UPDATES (CONTINUED)
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PORTFOLIO SUMMARY Mailed quarterly; shows the market
value of your account as of the close of the
statement period, as well as distributions,
purchases, exchanges, and redemptions for the
current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS Mailed in March and September for this
Portfolio.
- --------------------------------------------------------------------------------
TAX STATEMENTS Generally mailed in January (see "Distributions
and Taxes"); report previous year's
distributions, proceeds from the sale of shares,
and distributions from IRAs or other retirement
accounts.
- --------------------------------------------------------------------------------
AVERAGE COST STATEMENT Issued annually for taxable accounts; shows the
[BOOK GRAPHIC] average cost of shares that you redeemed during
the previous year, using the average cost
single category method.
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AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to total return, share price,
1-800-662-6273 price change, and yield quotations through any
Any time, seven days a week, TouchTone telephone. Also provides your account
from anywhere in the balance (in dollars and shares), last
continental United States transaction, redemptions by check during the
and Canada. last three months, and the latest distribution.
[BOOK GRAPHIC] Permits exchanges and sales of Portfolio shares.
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COMPUTER ACCESS
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VANGUARD ONLINE Information via your personal computer on Fund
KEYWORD: vanguard share price, yield, and total return; offered
through America Online (AOL). To establish an
AOL account, call 1-800-238-6336.
- --------------------------------------------------------------------------------
VANGUARD ON THE An education-oriented website offering news and
WORLD WIDE WEB information about Vanguard Funds and services,
http://www.vanguard.com as well as interactive, easy-to-use investment
planning tools.
</TABLE>
Shares of the Portfolio may only be sold in those states in which they are
registered. The Portfolio's shares are currently registered for sale in all 50
states, and the Portfolio intends to maintain such registration.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
19
<PAGE> 88
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard REIT Index
Portfolio is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out: you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard REITIndex Portfolio, including its investment objectives, risks,
strategies, and estimated expenses, as well as services available to you as a
shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
/ / The Portfolio's objectives? (page 3)
/ / The definition of a REIT? (page 3)
/ / The Portfolio's investment strategies? (page 4)
/ / Who should invest in the Portfolio? (page 3)
/ / The risks associated with the Portfolio? (pages 3-7)
/ / Whether the Portfolio is Federally insured? (inside front cover)
/ / The Portfolio's estimated expenses? (page 2)
/ / How the REIT Index Portfolio's distributions are different from
those of other Vanguard mutual funds? (page 9)
/ / How return of capital could affect your income taxes? (page 10)
/ / How to open an account? (page 15)
/ / How to sell or exchange shares? (page 17)
/ / How often--and when--you'll receive statements and financial
reports? (page 18)
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<PAGE> 89
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit (minus any realized losses) or gains distributed by
the fund's holdings themselves.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which are paid out as
dividends.
COST BASIS
The adjusted cost of an investment used to determine a capital gain or loss for
tax purposes.
DISTRIBUTIONS
Payments to shareholders of dividend income, capital gains, and return of
capital generated by the fund's investment activities and distribution policies,
after expenses.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by the
fund's investments. For tax purposes, dividend income also includes short-term
capital gains.
EQUITY REIT
A type of real estate investment trust (REIT) that earns rental income by
investing in land and buildings.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INDUSTRY CONCENTRATION
Focusing on the securities of a specific industry (such as real estate,
technology, or utilities).
LIQUIDITY
The degree of a security's marketability (that is, how quickly the security can
be sold at a fair price and converted to cash).
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund tries to match--rather
than outperform--a particular market index. Also known as indexing.
PRINCIPAL
The amount of your own money you put into an investment.
REAL ESTATE INVESTMENT TRUST (REIT)
A company that owns and manages a portfolio of properties, mortgages, or both.
RETURN OF CAPITAL
A non-taxable portion of distributions. In general, the cost basis of an
investment is reduced when a return of capital is distributed, deferring taxes
until the investment is sold.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 90
[VANGUARD LOGO]
HMS Vanguard was the flagship
of Lord Nelson at the Battle
of the Nile in 1798. Vanguard
was chosen as the name of
The Vanguard Group because of
the significance of its traditional
meaning: "the advance guard"
or "leadership of a new trend."
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THE VANGUARD GROUP VANGUARD BROKERAGE ELECTRONIC ACCESS TO
Vanguard Financial Center SERVICES VANGUARD
P.O. Box 2600 1-800-992-8327 To Reach the Vanguard Mutual
Valley Forge, PA 19482 For Information on Trading Fund Education and Information
Stocks, Bonds, and Options Center
INVESTOR INFORMATION at Reduced Commissions On Vanguard Online (SM)
DEPARTMENT (on America Online (R))
1-800-662-7447 (SHIP) VANGUARD TELE-ACCOUNT (R) Keyword: vanguard
TEXT TELEPHONE: 1-800-662-6273 (ON-BOARD) To Send E-Mail to Vanguard
1-800-952-3335 For 24-Hour Automated Access [email protected]
For information on our Funds, to Price and Yield, Information On the World Wide Web
Fund Services, Retirement on Your Account, Certain http://www.vanguard.com
Accounts, Requests for Transactions
Literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For Information on Your
Account, Account Transactions,
Account Statements
</TABLE>
(C) 1996 Vanguard Marketing
Corporation, Distributor
P123N
<PAGE> 91
PART B
VANGUARD SPECIALIZED PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
MAY 13, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated May 13, 1996). To obtain the Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
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PAGE
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Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 2
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 8
Investment Advisory Services.............................................................. 10
Securities Transactions................................................................... 12
Purchase of Shares........................................................................ 13
Redemption of Shares...................................................................... 13
Share Price of Each Portfolio............................................................. 13
Comparative Indexes....................................................................... 14
Yield and Total Return.................................................................... 16
Financial Statements...................................................................... 16
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INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
FOREIGN INVESTMENTS As indicated in the Prospectus, each Portfolio may
include foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies. Since the stocks of
foreign companies are frequently denominated in foreign currencies, and since
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the Portfolio will be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and may incur
costs in connection with conversions between various currencies. The investment
policies of each Portfolio permit it to enter into forward foreign currency
exchange contracts in order to hedge the Portfolio's holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S investments in those countries.
Although each Portfolio will endeavor to achieve most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodial
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arrangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodial arrangements for handling U.S. securities of
equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Portfolio receives from its foreign investments. However, these
foreign withholding taxes are not expected to have a significant impact on the
Portfolios, since each Portfolio's investment objective is to seek long-term
capital appreciation and any income should be considered incidental.
PORTFOLIO TURNOVER While the rate of Portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that each
Portfolio's annual portfolio turnover rate will not normally exceed 100%. One
way a portfolio turnover rate of 100% can occur is if all of the Portfolio's
securities, exclusive of U.S. Government securities and other securities whose
maturities at the time of acquisition are one year or less, are replaced in the
period of one year. Turnover rates may vary greatly from year to year as well as
within a particular year and may also be affected by cash requirements for
redemptions of each Portfolio's shares and by requirements which enable the Fund
to receive certain favorable tax treatments. The portfolio turnover rates will,
of course, depend in large part on the level of purchases and redemptions of
shares of each Portfolio. Higher portfolio turnover can result in corresponding
increases in brokerage costs to the Portfolios of the Fund and their
shareholders.
INVESTMENT POLICIES
FUTURES CONTRACTS Each Portfolio may enter into futures contracts,
options, and options on futures contracts for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government Agency. Assets committed to futures contracts will be segregated at
the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. The Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
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Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. A Portfolio will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, a Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the
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event of bankruptcy of a broker with whom the Portfolio has an open position in
a futures contract or related option. Additionally, investments in futures
contracts and options involve the risk that the investment advisers will
incorrectly predict stock market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Each Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A Portfolio may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Portfolio.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities or currencies. In addition, gains
realized on the sale or other disposition of securities held for less than three
months must be limited to less than 30% of the Portfolio's annual gross income.
It is anticipated that any net gain realized from the closing out of futures
contracts will be considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order to avoid
realizing excessive gains on securities held less than three months, the
Portfolio may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Portfolio's fiscal year and which are
recognized for tax purposes, will not be considered gains on sales of securities
held less than three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a custodian bank until
repurchased. In addition, the Fund's Board of Directors will monitor each
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
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creditworthiness of any bank, broker or dealer party to a repurchase agreement
with any Portfolio of the Fund. No more than an aggregate of 15% of a
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale for which there are no readily
available market quotations. From time to time, the Fund's Board of Directors
may determine that certain restricted securities known as Rule 144A securities
are liquid and not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities on a
short-term basis or long-term basis to qualified institutional investors who
need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its securities, the Portfolio will be
attempting to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio. Each Portfolio may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time and (d) the
Portfolio receives reasonable interest on the loan which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments, any distribution on the loaned securities and any increase in their
market value. A Portfolio will not lend its portfolio securities, if as a
result, the aggregate value of such loans exceeds 33 1/3% of the value of the
Portfolio's total assets. Loan arrangements made by a Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonably negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment limitations set
forth in the Prospectus. It is a fundamental policy of each Portfolio not to
engage in any of the following activities or business practices. These
restrictions may not be changed with respect to a particular Portfolio without
the approval of a majority
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of the outstanding shares (as defined in the Investment Company Act of 1940 (the
"1940 Act")) of that Portfolio. A Portfolio may not:
1) Issue senior securities;
2) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not in
excess of 15% of the value of the net assets of the Portfolio
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the net assets of the Portfolio,
the Portfolio will not make any additional investments;
3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
5) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described on page 9);
6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
total assets;
7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;
8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or engage in short sales (unless by virtue of its ownership of other
securities it has a right to obtain at no added cost securities
equivalent in kind and amount to the securities sold) except as set
forth below in (12);
9) Purchase or sell puts or calls, or combinations thereof; provided
however, that a Portfolio may enter into forward foreign currency
exchange transactions except as set forth below in (12);
10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate or
interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein), except in the case of the
REIT Index Portfolio which may invest 100% of its assets in real estate
investment trusts;
11) The Fund will not invest in securities of other investment companies,
except as may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the Fund's shareholders or otherwise
to the extent permitted by Section 12 of the 1940 Act. The Fund will
invest only in investment companies which have investment objectives
and investment policies consistent with those of the Fund;
12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% of the portfolios
assets are required as
6
<PAGE> 97
deposit to secure obligations under futures contracts and not more than
20% of a portfolio's assets are invested in futures contracts and
options at any time, the Portfolio may also invest in bullion as
described in the prospectus;
13) Purchase or retain securities of an issuer if an officer or director of
such issuer is an officer or Director of the Fund or its investment
adviser and one or more of such officers or Directors of the Fund or
its investment adviser owns beneficially more than 1/2% of such shares
or securities of such issuer and all such directors and officers owning
more than 1/2% of such shares or securities together own more than 5%
of such shares or securities; and
14) Invest in companies for the purpose of exercising control of
management.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, make loans to, or contribute to the costs or other financial
requirements of, any company which will be wholly owned by the Fund and one or
more other investment companies and is primarily engaged in the business of
providing at cost services, such as management, administrative, distribution or
other related services to the Fund and other investment companies. (See
"Management of the Fund").
In addition, no Portfolio may engage in any of the following activities;
however, these restrictions may be changed by the Directors without shareholder
approval or prior notification:
1) Invest directly in oil, gas, or other mineral exploration or
development programs, including oil & gas or other mineral leases;
provided, however, that if consistent with the designated business
activities of a particular Portfolio, a Portfolio may purchase
securities of issuers whose principal business activities fall within
such areas;
2) Purchase warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Including within that amount,
but not to exceed 2% of the value of the Fund's net assets, may be
warrants which are not listed on the New York or American Stock
Exchange. Warrants acquired by a Portfolio at any time in units or
attached to securities are not subject to this restriction;
3) Invest more than 5% of its assets, at the time of investment, in the
securities of any issuers which have records of less than three years'
continuous operation, including the operation of any predecessor (other
than obligations issued or guaranteed as to interest and principal by
the U.S. Government or its agencies or instrumentalities).
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment by terminating sales of
its shares in the state(s) involved.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
7
<PAGE> 98
MANAGEMENT OF THE FUND
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director* JOHN C. SAWHILL, Director
Chairman and Director of The Vanguard Group, President and Chief Executive Officer, The
Inc. and of each of the investment companies Nature Conservancy; formerly, Director and
in The Vanguard Group; Director of The Mead Senior Partner, McKinsey & Co.; and
Corporation and General Accident Insurance. President, New York University; Director of
JOHN J. BRENNAN, President, Chief Executive Pacific Gas and Electric Company and NACCO
Officer and Director* Industries.
President, Chief Executive Officer and JAMES O. WELCH, JR., Director
Director of The Vanguard Group, Inc. and of Retired Chairman of Nabisco Brands, Inc.,
each of the investment companies in The retired Vice Chairman and Director of RJR
Vanguard Group. Nabisco; Director of TECO Energy, Inc.; and
ROBERT E. CAWTHORN, Director Director of Kmart Corporation.
Chairman of Rhone-Poulenc Rorer, Inc.; J. LAWRENCE WILSON, Director
Director of Sun Company, Inc. Chairman and Chief Executive Officer of Rohm &
BARBARA BARNES HAUPTFUHRER, Director Haas Company; Director of Cummins Energy
Director of The Great Atlantic and Pacific Company; and Trustee of Vanderbilt
Tea Company, Alco Standard Corp., Raytheon University.
Company, Knight-Ridder, Inc., and RAYMOND J. KLAPINSKY, Secretary*
Massachusetts Mutual Life Insurance Co. and Senior Vice President and Secretary of The
trustee Emerita of Wellesley College. Vanguard Group, Inc.; Secretary of each of the
BRUCE K. MACLAURY, Director investment companies in The Vanguard Group.
President, The Brookings Institution; RICHARD F. HYLAND, Treasurer*
Director of American Express Bank, Ltd., The Treasurer of The Vanguard Group, Inc. and of
St. Paul Companies, Inc. and Scott Paper each of the investment companies in The
Company. Vanguard Group.
BURTON G. MALKIEL, Director KAREN E. WEST, Controller*
Chemical Bank Chairman's Professor of Vice President of The Vanguard Group, Inc.;
Economics, Princeton University; Director of Controller of each of the investment companies
Prudential Insurance Co. of America, Amdahl in The Vanguard Group.
Corporation, Baker Fentress & Co., The ---------------
Jeffrey Co. and Southern New England *Officers of the Fund are "interested persons"
Communications Company. as defined in the Investment Company Act of
ALFRED M. RANKIN, JR., Director 1940.
Chairman, President and Chief Executive
Officer of NACCO Industries, Inc.; Director
of The BFGoodrich Company, and The Standard
Products Company.
</TABLE>
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Vanguard Funds obtain at cost virtually all of their corporate management,
administrative and distribution services.
Vanguard employs a supporting staff of management personnel needed to
provide the requisite services to the Funds and also furnishes the Funds with
necessary office space, furnishings and equipment. Each Fund pays its share of
Vanguard's net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or
8
<PAGE> 99
sale of securities by persons associated with Vanguard. Under Vanguard's Code of
Ethics certain officers and employees of Vanguard who are considered access
persons are permitted to engage in personal securities transactions. However,
such transactions are subject to procedures and guidelines substantially similar
to those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At the year ended January
31, 1996 the Fund had contributed capital of $378,000 to Vanguard representing
1.9% of its capitalization. The Fund's Service Agreement provides as follows:
(a) each Vanguard Fund may invest up to .40% of its current assets in Vanguard,
and (b) there is no other limitation on the amount that each Vanguard Fund may
contribute to Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard Funds by third parties.
During the fiscal year ended January 31, 1996, the Fund's share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $8,663,000.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors and Officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Fund, and whether to organize new investment companies. During the fiscal year
ended January 31, 1996, the Fund paid approximately $552,000 of the Group's
distribution and marketing expenses, which represented an effective annual rate
of .02 of 1% of the Fund's average net assets.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard Funds based
upon each Fund's sales for the preceding 24 months relative to the total sales
of the Funds as a Group. Provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES Vanguard provides Vanguard Money Market
Reserves, Vanguard Admiral Funds, Vanguard Municipal Bond Fund, the several
Portfolios of Vanguard Fixed Income Securities Fund, Vanguard Institutional
Index Fund, Vanguard Bond Index Fund, several Portfolios of Vanguard Variable
Insurance Fund, Vanguard California Tax-Free Fund, Vanguard Florida Insured
Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured
Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio of
Vanguard Horizon Fund, the REIT Index Portfolio of Vanguard Specialized
Portfolios, a portion of Vanguard/Windsor II, and a portion of Vanguard/Morgan
Growth Fund, as well as several indexed separate accounts with investment
advisory services. These services are provided on an at-cost basis from a money
management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended January 31, 1996, the Fund paid
approximately $12,000 in Director's fees. Directors who are also Officers
receive no remuneration for their services as Directors. The Fund's Officers and
employees are paid by Vanguard which, in turn, is reimbursed by the Fund, and
each other Fund in the Group, for its proportionate share of Officers' and
employees' salaries and retirement benefits. The Fund's proportionate share of
remuner-
9
<PAGE> 100
ation paid by Vanguard (and reimbursed by the Fund) during the fiscal year to
all Officers of the Fund, as a group, was approximately $106,098.
Under its Retirement Plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard are permitted to make pre-tax basic contributions in a maximum amount
equal to 4% of total compensation. Vanguard matches the basic contributions on a
100% basis. The Fund's proportionate share of benefits paid by Vanguard under
its Retirement and Thrift Plans to all Officers of the Fund, as a group, during
the fiscal year ended January 31, 1996 was approximately $2,850.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended January 31,
1996.
VANGUARD SPECIALIZED PORTFOLIOS
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR RETIREMENT FROM ALL
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL VANGUARD FUNDS
COMPENSATION AS PART OF BENEFITS PAID TO
NAMES OF DIRECTORS FROM FUND FUND EXPENSES UPON RETIREMENT DIRECTORS(3)
- ---------------------------- ------------ --------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)(2) -- -- -- --
John J. Brennan(2) -- -- -- --
Barbara Barnes Hauptfuhrer $1,295 $ 222 $ 15,000 $59,000
Robert E. Cawthorn $1,295 $ 185 $ 13,000 $59,000
Bruce K. MacLaury $1,428 $ 218 $ 12,000 $55,000
Burton G. Malkiel $1,317 $ 148 $ 15,000 $60,000
Alfred M. Rankin, Jr. $1,317 $ 117 $ 15,000 $60,000
John C. Sawhill $1,317 $ 138 $ 15,000 $60,000
James O. Welch, Jr. $1,295 $ 170 $ 15,000 $59,000
J. Lawrence Wilson $1,317 $ 123 $ 15,000 $60,000
</TABLE>
- ---------------
(1) For the period reported in this table, Mr. Bogle was the Fund's Chief
Executive Officer, and therefore an "Interested Director."
(2) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(3) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).
DIRECTORS' RETIREMENT FEES A Retirement Plan for Directors has been
implemented to provide a fee to retired Directors equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Director's retirement for a period of 10 years or until a
retired Director's death.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH WELLINGTON MANAGEMENT COMPANY The Fund
employs Wellington Management Company ("WMC") under an investment advisory
agreement dated as of May 1, 1996 to manage the investment and reinvestment of
the assets of the Fund's Energy, Health Care, and Utilities Income Portfolios
and to continuously review, supervise and administer each Portfolio's investment
program. WMC discharges its responsibilities subject to the control of the
officers and Directors of the Fund.
Under the investment advisory agreement, the three Portfolios are required
to pay the Adviser an aggregate fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the aggregate average month-end net assets of the
Portfolios for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------------------------------------------------------------------- ------
<S> <C>
First $500 million.............................................................. 0.150%
Next $500 million............................................................... 0.125%
Next $1 billion................................................................. 0.100%
Next $1 billion................................................................. 0.075%
Over $3 billion................................................................. 0.050%
</TABLE>
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<PAGE> 101
The advisory fee is based on the total assets of the Portfolios and is
allocated to each Portfolio based on the relative net assets of each. In
addition, once the advisory fee to WMC is calculated for the three Portfolios
under this schedule, the total fee will be reduced in order that the advisory
fee paid by the Utilities Income Portfolio does not exceed 0.125%. During the
years ended January 31, 1994, 1995 and 1996 the Fund paid to WMC advisory fees
totaling $2,079,000 $2,192,000 and $2,698,000, respectively, which represented
an effective annual rate of .14 of 1%, .14 of 1% and .12 of 1% respectively, of
the aggregate average net assets of the Energy, Health Care, and Utilities
Income Portfolios. These fees were paid pursuant to the terms of a previous
investment advisory agreement, which called for a higher rate of fees.
WMC's fees during the fiscal years ended January 31, 1994 were payable
under a prior investment advisory agreement. The assets on which advisory fees
for the 1994 fiscal year were based included the Service Economy and Technology
Portfolios, which are no longer in existence.
DESCRIPTION OF WMC WMC is a Massachusetts general partnership, of which
the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland, and John R. Ryan.
INVESTMENT ADVISORY AGREEMENT WITH M & G GROUP P.L.C. The Fund has also
entered into an investment advisory agreement with M & G Investment Management
Limited ("M & G"), effective February 1, 1987 to manage the assets of the Gold &
Precious Metals Portfolio. Under this agreement M & G manages the investment and
reinvestment of the assets of the Gold & Precious Metals Portfolio and
continuously renews, supervises and administers the Portfolio's investment
program. M & G will discharge its responsibilities subject to the control of the
officers and Directors of the Fund.
DESCRIPTION OF M & G M & G is a wholly-owned subsidiary of the M & G Group
P.L.C. M & G Group P.L.C. is a public company whose shares are quoted on the
London Stock Exchange. Kleinwort, Benson Limited, a merchant bank, and the Esmee
Fairbairn Charitable Trust own respectively 42% and 32% of
total shares outstanding. The remaining 26% of shares are held by individuals,
nominees, pension plans and
M & G employees.
The Gold & Precious Metals Portfolio will pay M & G a fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the aggregate average month-end net assets
of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------------------------------------------------------------------- ------
<S> <C>
First $100 million.............................................................. 0.30%
Next $300 million............................................................... 0.25%
Over $400 million............................................................... 0.20%
</TABLE>
During the years ended January 31, 1994, 1995 and 1996, the Gold & Precious
Metals Portfolio paid advisory fees of $924,000, $1,116,000 and $1,058,000
respectively, to M & G which represented an effective annual rate of .22 of 1%,
.17 of 1% after giving effect to a fee waiver of (.07 of 1%), and .18 of 1%
after giving effect to a fee waiver of $364,000 (.06 of 1%), respectively, of
average net assets.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Admiral Funds, Vanguard
Balanced Index Fund, several Portfolios of Vanguard Variable Insurance Fund,
Vanguard Bond Index Fund, Vanguard Index Trust, Vanguard Institutional Index
Fund, Vanguard Money Market Reserves, several Portfolios of Vanguard Fixed
Income Securities Fund, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, the REIT Index Portfolio of Vanguard
Specialized Portfolios, Vanguard California Tax-Free Fund, Florida Insured
Tax-Free Fund, New Jersey Tax-Free Fund, New York Insured Tax-Free Fund, Ohio
Tax-Free Fund, Pennsylvania Tax-Free Fund, a portion of the assets of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund and several
indexed separate accounts. These services are provided on an at-cost basis from
money management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the Funds utilizing these services.
The current agreements will continue until April 30, 1998, with respect to
WMC and January 31, 1997, with respect to M & G, and will be renewable
thereafter, for successive one-year periods, only if each renewal
11
<PAGE> 102
is specifically approved by a vote of the Fund's Board of Directors, including
the affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event,
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, WMC or M & G may continue to serve as
investment adviser to each Portfolio which approved the agreement, and to any
Portfolio which did not approve the agreement until new arrangements have been
made. The agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) either by vote of
the Board of Directors or by vote of the outstanding voting securities of the
Portfolio on sixty (60) days' written notice to WMC or M & G, or (2) by WMC or M
& G upon ninety (90) days' written notice to the Fund.
SECURITIES TRANSACTIONS
The investment advisory agreements with WMC and M & G authorize the
investment advisers (with the approval of the Fund's Board of Directors) to
select the brokers or dealers that will execute the purchases and sales of
securities for the Fund's Portfolio(s) and directs the investment adviser to use
its best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolio(s). Each investment adviser
has undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information, and provide other services in addition to execution services to the
Fund and/or the investment adviser. Each investment adviser considers the
investment services it receives useful in the performance of its obligations
under the agreement but is unable to determine the amount by which such services
may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, each investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Fund and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
12
<PAGE> 103
The total brokerage commissions paid by each of the Fund's Portfolios
during the fiscal years ended January 31, 1994, 1995 and 1996 totaled
$3,334,211, $2,225,321 and $3,080,278 respectively.
Some securities considered for investment by one Portfolio may also be
appropriate for the other Portfolios and the other Funds and/or clients served
by the investment advisers. If purchase or sale of securities consistent with
the investment policies of a Portfolio, the other Portfolios and/or one or more
of these other Funds or clients are considered at or about the same time,
transactions in such securities will be allocated among the Portfolios and the
several Funds and clients in a manner deemed equitable by the respective
investment adviser. Although there will be no specified formula for allocating
such transactions, the allocation methods used, and the results of such
allocations, will be subject to periodic review by the Fund's Board of
Directors.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund or any Portfolio,
and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments for certain fiduciary
accounts such as employee benefit plans or under circumstances where certain
economies can be achieved in sales of the Fund's shares.
STOCK CERTIFICATES Your purchase will be made in full and fractional
shares of a Portfolio calculated to three decimal places. Shares are normally
held on deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates, and saves the Fund the
cost of issuing certificates. Except in the case of the Utilities Income
Portfolio, share certificates are available at any time upon written request at
no additional cost to shareholders. No certificates will be issued for the
Utilities Income Portfolio or for any fractional shares of the Fund's other
Portfolios.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% or the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
SHARE PRICE OF EACH PORTFOLIO
The share price or "net asset value" per share of each Portfolio is
computed once each day at the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day the Exchange is open for
trading. Net asset value per share is computed by dividing the total value of
the investment and other assets of each Portfolio, less any liabilities, by the
total number of outstanding shares of such Portfolio.
13
<PAGE> 104
Securities listed on a U.S. exchange are valued at the latest quoted sales
prices on the day the valuation is made. Securities listed on a U.S. exchange
that are not traded on the valuation date are valued at the mean of the bid and
ask prices. Securities listed on a foreign exchange are valued at the latest
quoted sales price available before the time when assets are valued. All prices
of listed securities are taken from the exchange where the security is primarily
traded. For each Portfolio (with the exception of the REIT Index Portfolio),
unlisted securities for which market quotations are readily available are valued
at the latest quoted bid price. For the REIT Index Portfolio, unlisted
securities that are listed on the Nasdaq National List are valued at the latest
quoted sales price on the day the valuation is made. Unlisted securities that
are included on the Nasdaq National List, but do not trade on the valuation
date, and other unlisted securities are valued at the mean of the closing bid
and asked prices. Other assets and securities for which no market quotations are
readily available are valued in good faith at fair value using methods
determined by, or under the supervision of, the Board of Directors of the Fund.
Securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities.
In determining each Portfolio's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the bid price of such currencies against U.S. dollars last
quoted by a major bank or broker. If such quotations are not available as of the
close of the Exchange, the rate of exchange will be determined in accordance
with policies established in good faith by the Board of Directors.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard Specialized Portfolios, Inc., may, from time to time, use one or more
of the following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the
Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
LEHMAN GNMA INDEX -- includes pools of mortgages originated by private lenders
and guaranteed by the mortgage pools of the Government National Mortgage
Association.
MORGAN STANLEY REIT INDEX -- consist of approximately 90 stocks of equity Real
Estate Investment Trusts (REITs). REITs in the index meet size and liquidity
criteria specified by Morgan Stanley. The index had a market value of $35
billion as of May, 1995.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
14
<PAGE> 105
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar denominated,
SEC-registered corporate debt rated AA or AAA.
RUSSELL 2000 STOCK INDEX -- consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated Baa- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982,
15
<PAGE> 106
the results of the Lipper Small Company Growth category were estimated using the
returns of the Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of
U.S.-domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded Stocks in the U.S.
Advertisements which refer to the use of the fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield.
In addition there can be no assurance that the Fund will continue its
performance as compared to such
other averages.
YIELD AND TOTAL RETURN
The yield* of each Portfolio of the Fund for the 30-day period ended
January 31, 1996 was as follows:
<TABLE>
<S> <C>
Energy Portfolio..................................... 1.38%
Gold & Precious Metals Portfolio..................... N/A
Health Care Portfolio................................ 1.32%
Utilities Income Portfolio........................... 4.62%
</TABLE>
-------------------------------
*Yield is calculated daily.
The average annual total return of each Portfolio of the Fund for the one-
and five-year periods ended January 31, 1996 and since the inception of each
Portfolio was as follows.
<TABLE>
<CAPTION>
YEAR ENDED FIVE YEARS ENDED
JANUARY 31, 1996 JANUARY 31, 1996 SINCE INCEPTION**
---------------- ---------------- -----------------
<S> <C> <C> <C>
Energy Portfolio*....................... + 27.40% + 11.02% + 13.44%
Gold & Precious Metals Portfolio*....... + 31.91% + 13.33% + 10.25%
Health Care Portfolio*.................. + 44.02% + 20.04% + 20.14%
Utilities Income Portfolio.............. + 29.47% -- + 13.52%
</TABLE>
--------------------
*Includes 1% portfolio redemption fee.
**Inception for Utilities Income Portfolio, May 15, 1992; inception for all
other Portfolios, May 23, 1984.
Total return is computed by finding the average compounded rate of return
over the one-year period set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended January 31, 1996,
including the financial highlights for each of the periods presented ended
January 31, 1996, as applicable, appearing in the Vanguard Specialized
Portfolios Annual Report to Shareholders, and the report thereon of Price
Waterhouse LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Fund's 1996 Annual Report to Shareholders is enclosed with this Statement of
Additional Information.
16
<PAGE> 107
PART C
VANGUARD SPECIALIZED PORTFOLIOS, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Fund's financial statements for the year ended January 31, 1996,
including the financial highlights for each of the periods presented ended
January 31, 1996, as applicable, appearing in the Fund's 1996 Annual Report to
Shareholders, and Price Waterhouse LLP's report thereon, also appearing therein,
are incorporated by reference in the Statement of Additional Information. The
financial statements included in the Annual and Semi-Annual Reports are:
1. Statement of Net Assets as of January 31, 1996.
2. Statement of Operations for the year ended January 31, 1996.
3. Statement of Changes in Net Assets for the respective years ended
January 31, 1995 and 1996.
4. Financial Highlights for each of the five years in the period ended
January 31, 1996 for the Energy, Gold & Precious Metals, and the Health
Care Portfolios, and from May 15, 1992 to January 31, 1993 and for each
of the three years ended January 31, 1996 for the Utilities Income
Portfolio, as applicable.
5. Notes to Financial Statements.
6. Report of Independent Accountants.*
--------------------
* Appears in Annual Report only.
(B) EXHIBITS
1. Articles of Incorporation
2. By-Laws of Registrant
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement
9. Form of Vanguard Service Agreement
10. Opinion of Counsel
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
--------------------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
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<PAGE> 108
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of January 31, 1996 the number of shareholders of each of the Fund's
portfolios was:
<TABLE>
<S> <C>
Energy................................................................ 33,136
Health Care........................................................... 98,795
Gold & Precious Metals................................................ 40,449
Utilities............................................................. 48,728
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Advisers" in the prospectus
constituting Part A of this Registration Statement and "Investment Advisory
Services" in Part B of this Registration Statement.
Wellington Management Company, 75 State Street, Boston, MA 02109, is a
Massachusetts general partnership, of which the following persons are managing
partners: Robert W. Doran, Duncan M. McFarland, and John B. Neff.
Listed below are the names of, and office held by each of the Directors of
M & G Group P.L.C. The business address of each Director is Three Quays, Tower
Hill, London, England EC3R 6BQ.
<TABLE>
<S> <C>
DIRECTOR'S NAME BUSINESS AND OTHER CONNECTIONS OF ADVISER
J. R. Caldecott Director of the following companies:
Kleinwort, Benson Lonsdale P.L.C.
Chloride Group P.L.C.
Kleinwort, Benson Australia Limited
Kleinwort, Benson Australia (Holdings) Limited
M & G Securities Limited
M & G Limited
M & G Investment Management Limited
External Investment Trust, P.L.C.
</TABLE>
18
<PAGE> 109
<TABLE>
<S> <C>
M & G Second Dual Trust P.L.C.
Whitbread and Company P.L.C.
Electronic Rentals Group P.L.C.
Blue Circle Industries P.L.C.
D. H. L. Hopkinson Director of the following companies:
M & G Investment Management Limited
British Railways (Southern) Board
Central Board of Finance of the Church of England
Charities Investment Managers Limited
Chichester Diocesan Fund and Board of Finance
English Chamber Orchestra and Music Society Limited
English China Clays P.L.C.
English China Clays Trustees
E.C.C. (Operatives) Pension Fund Trustees Limited
E.C.C. (SMT) Pension Fund Trustees Limited
E.C.C. (Staff) Pension Fund Trustees Limited
Exit Finance Limited
External Investment Trust P.L.C.
First British Fixed Trust Company Limited
Gill and Duffus Group P.L.C.
Jetmain Limited
Lloyds Bank Limited (Southern Regional Board)
M & G Dual Trust P.L.C.
M & G Financial Services Limited
M & G Leasing Limited
M & G Life Assurance Company Limited
M & G Limited
M & G Pension and Annuity Company Limited
M & G Second Dual Trust P.L.C.
M & G Securities Limited
Mencap Unit Trust Managers Limited
Merchants Trust P.L.C.
Raeburn Investment Trust P.L.C.
Romney Trust P.L.C.
United States Debenture Corporation P.L.C.
J. S. Fairbairn Director of the following companies:
M & G Limited
M & G Securities Limited
M & G Assurance Group Limited
M & G Life Assurance Company Limited
M & G Pensions and Annuity Company Limited
Island Trust Limited
Pioneer Trust Limited
M & G Friendly Society (Management Committee)
M & G Leasing Limited
M & G Trust Assurance (Channel Islands) Limited
M & G Financial Services Limited
K. F. W. Allsop Director of the following companies:
M & G Financial Services Limited
M & G Assurance Group Limited
M & G Leasing Limited
M & G Limited
M & G Securities Limited
</TABLE>
19
<PAGE> 110
<TABLE>
<S> <C>
M & G Pensions and Annuity Company Limited
M & G Life Assurance Company Limited
R. A. Brooks Director of the following companies:
Kleinwort, Benson Limited
Robert Benson, Lonsdale and Company Limited
Sharps, Pixley Limited
Kleinwort, Benson Property Management and Services Limited
Kleinwort, Benson Investment Management Limited
Sharps, Pixley Holdings Limited
The Trans-European Company Limited
Stoxsals Limited
Kleinwort, Benson International Holdings Limited
Equinox Shipping Company Limited
Kleinwort, Benson Overseas B.V.
Kleinwort, Benson Development Capital Limited
Kleinwort, Benson Finance B.V.
Commercial Union Assistance, P.L.C.
Stanley P. Morrison Limited
Sutton Manor Methan Limited
The Cross Investment Trust Limited
Railcar Finance Limited
Highway Finance Limited
Kleinwort, Benson International Leasing Limited
Kleinwort, Benson Leasing Limited
Miles Roman Limited
Kleinwort, Benson Investment Trust Limited
Fenchurch Navigation Corporation
Cross Investment Trust Limited
Southampton Freeport Limited
M & G Limited
R. G. Down Director of the following companies:
Oil and Gas Production
Australian Farming Property Company Limited
Folkestone (Australia) Limited
Europa Petroleum Limited
L. E. Linaker Director of the following companies:
M & G Securities Limited
M & G Dual Trust P.L.C.
External Investment Trust P.L.C.
Exit Finance Limited
M & G Limited
M & G Second Dual Trust P.L.C.
M & G Friendly Society (Management Committee)
M & G Investment Management Limited
The Brunner Investment Trust Limited
Second Exit Finance Limited
Charities Investment Managers Limited
C. A. McLintock Director of the following companies:
Allchurches Trust Limited
Border and Southern Stockholders Trust P.L.C.
Bramley Educational Trust
Ecclesiastical Holdings P.L.C.
Ecclesiastical Insurance Office P.L.C.
</TABLE>
20
<PAGE> 111
<TABLE>
<S> <C>
EIO Trustees Limited
Beaufort House Trust Limited
Pendle Insurance Company Limited
Lake View Investment Trust P.L.C.
M & G Limited
Muir Investments Limited
National Westminster Bank P.L.C.
Pigott Properties Limited
Queen Street Nominees Limited
Reres Trust Limited
Sakers Finance and Investment Corporation Limited
Stockholders Investment Trust P.L.C.
Westonbirt School Limited
Woolwich Equitable Building Society
D. A. E. R. Peake Director of the following companies:
Kleinwort, Benson Limited
Fendrake Limited
Kleinwort, Benson (Middle East) E.C.
Kleinwort, Benson (Europe) S.A.
Nuclear Fuel Finance S.A.
Kleinwort, Benson Project Services Limited
Cross S.A.
Bolnore Estates Limited
Chevy Chase Property Company Limited
Clippwake Limited
Banque Nationale de Paris P.L.C.
Hargreaves Group P.L.C.
Societe Financiere Franco Britanique S.A.
Heythrop Hunt Kennels Limited
Daviford Investments Limited
Sezincote Trustees Limited
M & G Limited
Lord Michael Swann Director of the following company:
New Court Natural Resources P.L.C.s
D. L. Tucker Director of the following companies:
Barnard's University Bookshop Limited
External Investment Trust P.L.C.
Exit Finance Limited
M & G Investment Management Limited
M & G Securities Limited
Timepost Limited
M & G Limited
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
21
<PAGE> 112
Pennsylvania 19482; and the Registrant's Custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02105 for the Health Care,
Energy, and Utilities Income Portfolios; and Morgan Guaranty Trust Company of
New York, 23 Wall Street, New York, New York 10015 for the Gold & Precious
Metals Portfolio.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund;" the Registrant is not a party of
any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of Section 16(c)
of the 1940 Act in regard to shareholders' right to call a meeting of
shareholders for the purpose of voting on the removal of directors and to assist
in shareholder communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
22
