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VANGUARD
SPECIALIZED
PORTFOLIOS
Semiannual Report
July 31, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our course
toward the twenty-first century. Our Report cover reflects that blending of
tradition and innovation, of past, present, and future. The montage includes a
bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson; and several views of our recently completed
campus, which is steeped in nautical imagery--from our buildings named after
Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
5
Report From
The Advisers
7
Performance
Summaries
12
Financial
Statements
15
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
The stock market kept up its rollicking run during the six months ended
July 31, 1997, the first half of fiscal 1998 for Vanguard Specialized
Portfolios. The bond market rose, too, as interest rates declined. On an
absolute basis, returns were excellent from all segments of the financial
markets except for precious metals, whose prices slumped as investors shunned
hard assets in favor of financial assets.
In this salubrious investment climate, the return of each of our
Portfolios reflected its narrowly defined investment focus. Four of the five
posted gains during the period; the loss recorded by our Gold & Precious Metals
Portfolio was significantly smaller than that of its average competitor. The
table at right presents the total return (capital change plus reinvested
dividends) for each Portfolio, its average competitor, and an unmanaged
benchmark. For our three "regular" equity Portfolios, the benchmark is the
Standard & Poor's 500 Composite Stock Price Index; for our Gold & Precious
Metals Portfolio, it is the Salomon Brothers World Gold & Precious Metals Index;
and for our REIT Index Portfolio, it is the Morgan Stanley Real Estate
Investment Trust Index. Per-share figures for each Portfolio, including net
asset values, income dividends, and any capital gains distributions, are
presented in the table that follows this letter.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SIX MONTHS ENDED
JULY 31, 1997
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<S> <C>
ENERGY PORTFOLIO + 9.9%
Average Natural Resources Fund + 6.5
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HEALTH CARE PORTFOLIO +21.1%
Average Health Care Fund +11.1
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UTILITIES INCOME PORTFOLIO + 6.4%
Average Utility Fund + 8.4
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S&P 500 Index +22.5%
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GOLD & PRECIOUS METALS PORTFOLIO -11.3%
Average Gold Fund -17.9
Salomon World Gold Index - 7.3
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REIT INDEX PORTFOLIO + 7.9%
Average Real Estate Fund +10.0
Morgan Stanley REIT Index + 8.0
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</TABLE>
THE PERIOD IN REVIEW
Economic conditions were picture-perfect for stocks and bonds during the six
months ended July 31, 1997. The economy and corporate profits grew at robust
paces, yet inflation decelerated and long-term interest rates declined
moderately. The U.S. stock market shrugged off a decline of nearly -10% during
February and March to post big gains during the half-year. Returns were
especially strong for large-capitalization stocks: The large-cap-dominated S&P
500 Index chalked up a return of +22.5%, versus +14.5% on the rest of the market
as measured by the Wilshire 4500 Equity Index. Bonds also did well during the
period, though when compared with the stock market's returns, the +5.6% return
earned on the Lehman Brothers Aggregate Bond Index seemed anemic.
Although this Report necessarily focuses on the semiannual period, we
pause to remark on just how extraordinary the past few years have been for
investors. The S&P 500 Index has gained a total of +123.6% during the past 36
months. Put another way, in just the past three years, stocks have provided
returns equal to about eight years' worth of compounded "normal" returns (the
+10.7% average annual return on stocks from 1926 through 1996). To state the
obvious: It is virtually certain that returns on stocks during the next few
years will be less generous than those of the past few.
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ENERGY PORTFOLIO
The Energy Portfolio earned a total return of +9.9%, a result that was excellent
on an absolute basis and relative to other natural resources mutual funds, but
that was less than half the return on the S&P 500 Index. The stock prices of
energy producers and oil-service firms trailed the overall market in the
half-year largely because the prices of oil and natural gas declined. This was a
reversal from the last fiscal year, when higher energy prices gave a boost to
the performance of energy companies and our Portfolio. (We outpaced the S&P 500
Index by a full 14 percentage points in the fiscal year ended January 31, 1997.)
During the first half of the current fiscal year, we outpaced the average
natural-resources fund by 3.4 percentage points. It is not unusual for our
Portfolio's performance to diverge from that of its average competitor, because
energy stocks constitute more than 90% of our Portfolio's assets versus just
over 50% for the average natural resources fund. Many competing funds have
significant holdings in mining, chemical, and paper stocks as well as energy
stocks. The stronger performance of large-capitalization stocks during the
half-year also helped our Portfolio, which is tilted more heavily toward
large-cap stocks than our average competitor.
GOLD & PRECIOUS METALS PORTFOLIO
The prices of gold and other precious metals continued to slump during the
half-year and so did the prices of mining companies, which were the
worst-performing sector of the overall stock market. The -11.3% loss by our Gold
& Precious Metals Portfolio was disheartening, even though it was less severe
than the -17.9% loss on the average gold-oriented mutual fund. Our return lagged
the -7.3% loss on the Salomon Brothers World Gold & Precious Metals Index. The
prices of gold and silver bullion fell about -7% during the six months as
central banks continued to sell gold bullion to invest in interest-bearing debt
securities of other governments. Our Portfolio's heavier weighting in South
African stocks, which impeded our performance in fiscal 1997, was one reason we
outperformed the average competitor in the first half of fiscal 1998. South
African stocks were aided by a stabilization of the rand versus the U.S. dollar.
Our underperformance versus the Index was partly due to the fact that its
weighting in South African stocks is higher than our Portfolio's.
HEALTH CARE PORTFOLIO
Although it lagged the S&P 500 Index by 1.4 percentage points, our Health Care
Portfolio's powerful return of +21.1% was a full 10 percentage points higher
than that of the average competing health-care fund. Strong stock selection was
the key factor in our big margin over the average competitor. Another plus was
that we held a lower percentage of assets in biotechnology stocks than many of
our competitors; this subsector was one of the weakest in the market during the
half-year. Our small shortfall versus the Index can be attributed largely to the
fact that health-care stocks, as represented by the S&P Health Sector Index,
slightly underperformed the S&P 500 Index.
UTILITIES INCOME PORTFOLIO
Utility stocks continued to be generally out of favor with investors during the
six-month period ended July 31, a fact that is evident in the +6.4% return on
our Utilities Income Portfolio. Although such a return for just six months is
respectable on an absolute basis, we did trail the returns of our comparative
standards. We fell a mere 0.4 percentage point behind the +6.8% return on our
composite benchmark (made up of 40% S&P Utilities
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Index, 40% S&P Telephone Index, and 20% Lehman Utility Bond Index), but
trailed the average utility mutual fund's +8.4% return by 2 percentage points.
This shortfall had two primary causes. First, our Portfolio held a larger
percentage of assets in bonds than the typical utility fund (18% versus
approximately 7%). Second, we held a larger proportion of assets in electric
utilities--the weakest subsector of the utilities universe during the
period--than did our peers.
We call your attention to the Special Notice on the following page,
describing three changes, recently approved by the Board of Directors, in the
Portfolio's investment guidelines.
REIT INDEX PORTFOLIO
Shares of real estate investment trusts provided solid returns, and our REIT
Index Portfolio tracked its target, the Morgan Stanley REIT Index, with
admirable precision during the half-year. The Portfolio's return of +7.9% was
just a smidgen behind the +8.0% return on the Index, which has no real-world
operating costs. We trailed the average real estate fund by 2.1 percentage
points during the half-year, though we have outpaced our peers over the
Portfolio's brief lifetime of 14 1/2 months (+40.7% versus +39.7%). Our
Portfolio holds stakes in roughly twice as many REITs as the average competing
fund, and our broad diversification may hamper our performance relative to
competitors during some periods. But we believe our long-term results will be
quite competitive because of our extremely low cost--our annual expense ratio
is below 0.40% of assets, less than one-fourth the expense ratio of the average
real estate fund.
IN SUMMARY
The varying results of our five Portfolios during the first half of fiscal 1998
demonstrate both the rewards and the risks that are part of investing in
discrete sectors of the stock market. And while the extraordinary bull market
for U.S. stocks that began 15 years ago has demonstrated the rewards of
long-term investing, investors should keep in mind that risk is the inseparable
companion of reward.
Our narrowly focused Portfolios can play a useful role in diversifying
investment programs centered on mainstream stock funds, bond funds, and money
market funds in proportions appropriate to one's financial situation, tolerance
for risk, and investment objectives. Once such a program is in place, we urge
investors to "stay the course" toward their long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
August 14, 1997
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SPECIAL NOTICE TO SHAREHOLDERS OF THE UTILITIES INCOME PORTFOLIO
The Board of Directors recently approved several adjustments to the
investment guidelines under which our adviser, Wellington Management
Company, manages the Utilities Income Portfolio. The changes will provide
more flexibility to the adviser without fundamentally altering the character
or risk profile of the Portfolio.
They are:
- The Portfolio's commitment to fixed-income securities, previously
maintained at about 20% of assets, now may range from 10% to 20%. This
should make the Portfolio's returns more predictable in relation to
competing utility funds while allowing us to maintain the steady income
stream our shareholders expect.
- The maximum that may be invested in stocks of non-U.S. utility companies
has been raised to 20% of the Portfolio's equity position from 10%. This
is consistent with guidelines for most of our other actively managed
domestic equity funds. Because of the evolution of the utility industry,
including an increasing number of cross-border mergers between
companies, our adviser must maintain a thorough understanding of foreign
utilities. The adviser therefore is able to identify attractive
investments among non-U.S. utilities.
- So that the Portfolio's holdings may more closely reflect the universe
of utility bonds, the credit-quality guideline for the Portfolio's bond
segment, which previously required ratings of A or above, is being
changed to allow ratings of Baa or better for domestic bonds.
Dollar-denominated bonds of foreign issuers must have ratings of A or
better.
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
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SIX MONTHS ENDED JULY 31, 1997
NET ASSET VALUE PER SHARE -----------------------------------------------
-------------------------------- INCOME CAPITAL
PORTFOLIO JAN. 31, 1997 JUL. 31, 1997 DIVIDENDS GAINS* TOTAL RETURN**
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy $23.44 $25.49 $0.01 $0.22 + 9.9%
Gold & Precious Metals 10.94 9.70 0.01 0.00 -11.3
Health Care 60.65 72.63 0.04 0.66 +21.1
Utilities Income 12.93 13.43 0.31 0.00 + 6.4
REIT Index 12.64 13.37 0.26 0.00 + 7.9
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</TABLE>
*Includes both long-term and short-term capital gains distributions.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year in the Energy, Gold & Precious Metals,
Health Care, and REIT Index Portfolios.
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JULY 31, 1997
U.S. EQUITY MARKETS
The Standard & Poor's 500 Composite Stock Price Index finished the first
half of the fiscal year with an impressive 8.0% gain in July, which brought the
overall six-month return to 22.5%.
Stocks benefited from the continued strength of corporate earnings,
which have been remarkably consistent in positively surprising Wall Street
analysts. At the end of January, the consensus forecast for 1997 called for a
6.8% rise in earnings for the S&P 500 Index. Six months later, the consensus
estimate had risen to 8.8%. Investors' confidence is also reflected in increased
price/earnings ratios. For example, in July 1996 investors were willing to pay
roughly $15 for every dollar of the S&P's earnings. One year later, that "price"
is close to $20.
Within the S&P 500 Index, technology was the top-performing sector for
the half-year, gaining 29.6%. By contrast, numerous uncertainties for utilities
caused that sector to lag the broad market, although, on an absolute basis, its
8.1% return over six months is quite good.
For the six months, large-capitalization stocks once again outperformed
smaller issues. The latter, as measured by the Russell 2000 Index, rose 13.1%
and actually outperformed the S&P 500 Index in the final three months (21.3%
versus 19.7%). The momentum in small-cap companies is a result of better-than-
expected earnings reports. In fact, the second-quarter earnings increases for
small companies were even stronger than those of their large-cap counterparts.
It is noteworthy that the recent small-cap gains were led by small growth
stocks, the worst segment of the U.S. market during the past 12 months. This
group has surged 25% since the end of April, although at the end of the six
months it still lagged the S&P 500 Index return by a sizable margin (7.9% versus
22.5%).
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JULY 31, 1997
----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 52.1% 20.7%
Russell 2000 Index 13.1 33.4 18.1
MSCI EAFE Index 17.3 18.5 14.1
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FIXED-INCOME
Lehman Aggregate Bond Index 5.6% 10.8% 7.3%
Lehman 10-Year Municipal
Bond Index 5.8 10.3 7.3
Salomon Brothers Three-Month
U.S. Treasury Bill Index 1.8 5.3 4.5
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OTHER
Consumer Price Index 0.9% 2.2% 2.7%
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</TABLE>
*Average annual.
U.S. FIXED-INCOME MARKETS
The robust consumer spending that fueled the U.S. economy's remarkable 4.9%
growth in the first three months of 1997 slowed in the early summer. As a
result, the Gross Domestic Product expanded at a 2.2% annual rate in the second
quarter. Labor costs, which have been the flash point for inflation concerns,
grew at a modest rate over the
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period, despite an unemployment rate below 5% and strong growth in the number of
new jobs reported. In the past, strong economic growth and tight labor markets
have often led to rising inflation because of increased demand for goods and
services. With this in mind, in March the Federal Reserve raised its
federal-funds interest rate target by 0.25% in a "preemptive strike" against
inflationary pressures. Since that time, however, there has been scant evidence
that higher prices were a threat. Lower automobile prices and a sharp decrease
in the cost of imports (due to the strong dollar) were key factors.
As the market accepted the good news about inflation, yields on
longer-term issues fell during the six months. For example, the 10-year Treasury
yield dropped from 6.49% on January 31 to 6.01% at the end of July; the 30-year
bond's yield moved from 6.79% down to 6.30%. With the drop in rates, bond
investors fared reasonably well over the period, as illustrated by the 5.6%
return of the Lehman Brothers Aggregate Bond Index. Mortgage-backed securities,
which had outperformed other issues early in the period, gave back some of their
gains. Municipal issues tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors fared well over the six months. As measured by the broad
Morgan Stanley Capital International Europe, Australasia, Far East Index,
foreign markets gained 21.1% in local-currency terms. The strong dollar,
however, trimmed this return to 17.3% for U.S. investors. Regionally, the MSCI
Europe Index gained 19.2% while the MSCI Pacific Free Index rose 14.0%. The
latter gain masked significant turmoil in some of the smaller Asian markets,
most notably Thailand, Singapore, and the Philippines. Companies in Thailand, in
particular, face an environment of high real interest rates, a significant
number of nonperforming loans, and falling real estate prices. Over the
half-year, the Thai market dropped 26%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher, gaining 15.8% for the six months. For U.S. investors, a
revived yen brought this return up to 18.8%. Better tone to the economy, good
earnings from the export-oriented sector, and renewed buying on the part of
foreign investors all contributed to the increase.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain.
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
ENERGY PORTFOLIO
The Energy Portfolio provided a total return of 9.9% during the first
half of fiscal 1998, the six months ended July 31. This was considerably below
the 22.5% return on the Standard & Poor's 500 Composite Stock Price Index.
During the period, oil prices were in a rather steep downward trend. Gas prices
declined sharply in February, but recovered somewhat in the spring.
The winter of 1996-1997, which had gotten off to a very cold start,
turned quite mild in mid-January. As a result, inventories of oil products and
natural gas increased to more-than-adequate levels in early spring. As the
second half of 1997 begins, the supply of oil and gas appears to remain ample.
However, in our view the commodity markets are not going to decline much further
from their levels as of July 31, when the price of oil was near $20 per barrel
and that of gas was approximately $2 per thousand cubic feet. While short-term
surpluses may continue to exist, operating rates in the production of oil and
gas are quite high, so even modest interruptions in the supply of either can
lead to sharp increases in prices.
In the strong market environment of the last six months, most of the
gains from the energy sector were concentrated in the large international oil
companies and in the oil service industry. The price declines for oil and gas
were most punishing to independent producers as a group, since the profit
margins of these companies were squeezed between rising oil-service costs and
the falling commodity prices. Should current trends continue, oil companies will
find it more attractive to buy assets (other companies) than to explore for new
oil and gas supplies.
Your Portfolio continues to invest in a diversified list of companies
which we think will provide above-average returns because of the positive
long-term trends we see developing in this sector. Such companies include
Unocal, Total, Baker Hughes, Schlumberger, Anadarko Petroleum, and Alberta
Energy.
Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
August 12, 1997
INVESTMENT PHILOSOPHY
Each Portfolio reflects a belief that investors who seek to emphasize a given
economic sector as part of a long-term, balanced investment program are best
served by holding a portfolio of securities well-diversified across that
sector.
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REPORT FROM M&G INVESTMENT MANAGEMENT LTD.
GOLD & PRECIOUS METALS PORTFOLIO
The six months ended July 31, 1997, was another difficult period for
gold investing, with the Gold & Precious Metals Portfolio declining by 11.3%.
Although we lagged the Salomon World Gold & Precious Metals Index, which lost
7.3% during the period, we are pleased to note that we significantly outpaced
the average gold mutual fund, which suffered a 17.9% decline.
The period was dominated by the saga of Bre-X, a Canadian gold-mining
company whose stock market value collapsed from $3.55 billion to zero when a
thorough independent assessment of Bre-X's Indonesian gold deposit found only
insignificant quantities of gold. Fortunately, your Portfolio never owned shares
of Bre-X.
However, the fallout from Bre-X and a declining price for gold bullion
caused declines in gold mining stocks in most regions. Canada was hit hardest,
with an index of gold shares falling some 27%. Australia was also hit hard. The
weakest segment within the gold stock universe was small exploration companies,
to which your Portfolio had very little exposure. Mining stocks with U.S.
operations fared best, with strong performances from the Portfolio's holdings in
Euro-Nevada Mining Corp., Franco-Nevada Mining Corp., and Santa Fe Pacific Gold
Corp. (the subject of a takeover bid).
We made some adjustments to the Portfolio during the period. The
weighting in South African stocks was reduced to 17.8% from 25.4%, while we
gradually increased the weighting in U.S. and Australian stocks. In Australia,
notable changes included added positions in Rio Tinto and Plutonic Resources and
increases in our holdings of Mount Isa Mines and Aurora Gold. In the United
States, we added to our holdings of Newmont Mining Corp. and Freeport-McMoRan
Copper & Gold.
We saw mixed results from our small holdings in companies with
operations in the former states of the Soviet Union. Star Mining, after months
of corporate dispute that had resulted in a cessation of trading and a writedown
in its value to nil, was relisted for trading and saw a strong gain. However,
our holding in Bakyrchik Gold declined by more than 65% after a corporate
restructuring diluted the value of the stock. We had sold some of our holdings
at higher levels, but a lack of liquidity in the market resulted in our
maintaining a small stake.
In summary, the six-month period was a trying time for all gold funds,
although your Portfolio's return represented a good performance relative to
competitors.
Graham E. French, Portfolio Manager
August 15, 1997
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
HEALTH CARE PORTFOLIO
The Health Care Portfolio had a very strong performance during the
first half of fiscal 1998, recording a gain of 21.1% for the six months ended
July 31. This result was closely in line with the gains of 22.5% on the
Standard & Poor's 500 Composite Stock Price Index and 21.2% on the S&P Health
Sector Index. We substantially exceeded the 11.1% return on the average health
care mutual fund for the period, during which the stock market continued to be
dominated by the strong rise in prices of large-capitalization companies.
We had good results from all subsectors of health care, even
biotechnology, where our holdings of Immunex and DEKALB Genetics did very well
despite the general weakness of that category.
Among the major contributors to the Portfolio's performance were
Warner-Lambert and Guidant. We also benefited from three stocks whose
acquisitions by other companies were announced during the half-year: MDL
Information Systems, Nellcor Puritan Bennett, and Healthsource.
The health-care industry is one of the most dynamic in the economy, with
growth driven by favorable demographics and tremendous new product development
opportunities derived from biotechnology research. Exceptionally strong
performance by health-care stocks in recent years shows that the market has
already recognized, to a large extent, the potential in the sector. Investors in
the Portfolio should be prepared to take a long-term view, for it is unlikely
that recent performance can continue without a period of consolidation.
Edward P. Owens, Senior Vice President and Portfolio Manager
August 12, 1997
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
UTILITIES INCOME PORTFOLIO
Utility stocks again provided disappointing relative performance in the
six months ended July 31, the first half of fiscal 1998, though an improved bond
market outlook enhanced absolute performance in the final three months of the
period. The roaring bull market continues to leave utility equities behind: The
Portfolio realized a 6.4% return in the first half, lagging the 22.5% return on
the Standard & Poor's 500 Composite Stock Price Index but falling in line with
our composite benchmark's return of 6.8%.
Dividend growth has also been difficult to achieve because utility
managements, instead of using excess cash flow to pay higher dividends to
shareholders, are increasingly investing in infrastructure and in nonregulated
business opportunities to prepare for a more competitive operating environment.
We believe that accepting a moderately lower current dividend for the Portfolio
will allow us to pursue more growth in total return, an approach we think is
consistent with current strategies employed by most large electric, telephone,
and gas utilities. Particularly given the Portfolio's expense-ratio advantage,
there is room for us to modestly reduce the Portfolio's current yield and yet
maintain a yield that is at or above that of key competing mutual funds.
The S&P Telephone Index comprises just nine companies, which are rapidly
diversifying their operations and have significantly reduced their commitments
to dividend growth. We therefore expect to increase the Portfolio's exposure to
non-U.S. utilities with good current yields, relatively stable operating and
regulatory environments, and better growth prospects. The Portfolio's maximum
exposure to non-U.S. utility stocks under its policy guidelines has been
increased to 20% of equity assets from 10%. We might expect to move the
weighting of non-U.S. utilities from the current level of about 7% to around
15%, remaining conscious of the desire for stable income. We also expect to
moderately reduce the Portfolio's bond weighting from the current 18% of assets
to roughly 15%. (The average utility fund has about 7% invested in fixed-income
securities.) We will maintain the Portfolio's primary focus on income and a low
risk profile, consistent with the expectation of our shareholders, and will
execute any change in strategy gradually to reduce the impact on income
dividends.
Relatively good earnings, benign proposals by the Federal Communications
Commission for reforming access charges, and ongoing merger speculation helped
the telephone utilities--particularly the regional Bell operating companies
(RBOCs)--to achieve the best performance among utility sectors in the first half
of our fiscal year. However, a noteworthy setback occurred for investors in MCI
Communications, which, incidentally, was not a holding in the Portfolio. After
agreeing to merge with British Telecom, MCI announced a dramatic shortfall in
estimated earnings through 1998. The shortfall stemmed from the company's
necessary investment to compete in the local telephone market, where revenue
growth has been delayed by RBOC stalling tactics and legal challenges. All of
the long-distance companies have reported slower revenue growth due to
competitive pressure in the past 12 months, and it seems to be only a question
of time before the same phenomenon appears in local revenue growth.
By all historical valuation measures, the electric utilities continue to
look attractive relative to other stocks. Even so, they will probably continue
to lag the general market as long as the bull market continues. Utility
investors remain frustrated by punitive regulatory policies, increased operating
risk, and downward pressure on prices. The negative
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news is generally reflected in the stocks' current prices, and we look for more
reasonable regulatory settlements in Illinois, Michigan, and Texas to stabilize
the stocks over the next 12 months or so. When the state regulatory policies are
clearer, investors should become more sanguine about the risk/reward balance in
a competitive market and should be willing to invest in those companies that can
generate growth in deregulated markets. We continue to expand our investments in
electric utilities that are focusing on growth in international markets and on
combining electric and gas operations.
The natural-gas distribution and pipeline utilities have performed
poorly in the past six months, particularly those companies with gas and oil
exploration and production operations. Speculation about takeovers of gas and
pipeline utilities by large electric utilities has decreased somewhat because of
poor regulatory policies in Texas, which have depressed the price of electric
companies' stocks--their takeover currency--and increased dilution for Texas
Utilities and Houston Industries, respectively, in their acquisitions of Enserch
and NorAm Energy. We are using this period of weakness to add to positions in
gas distribution utilities that have better growth prospects than comparable
electric companies.
Mark J. Beckwith, Vice President and Portfolio Manager
August 7, 1997
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PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolios. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolios could lose money.
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1997
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ENERGY PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -1.9% 0.0% -1.9% 21.1%
1986 2.0 1.4 3.4 22.9
1987 25.8 6.1 31.9 33.9
1988 -5.7 6.5 0.8 -3.3
1989 20.3 3.9 24.2 20.1
1990 26.1 2.9 29.0 14.5
1991 -4.7 3.1 -1.6 8.4
1992 -1.9 3.2 1.3 22.7
1993 10.0 3.0 13.0 10.6
1994 25.0 2.3 27.3 12.9
1995 -10.6 1.5 -9.1 0.5
1996 26.6 2.1 28.7 38.7
1997 38.8 1.5 40.3 26.3
1998* 9.8 0.1 9.9 22.5
- ------------------------------------------------------------------
</TABLE>
*Six months ended July 31, 1997.
See Financial Highlights table on page 30 for dividend and capital
information for the past five years.
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1997
- --------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO SALOMON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -34.0% 0.0% -34.0% -34.4%
1986 15.2 1.1 16.3 3.6
1987 38.2 4.0 42.2 12.4
1988 -1.6 4.1 2.5 4.5
1989 3.2 2.9 6.1 -9.3
1990 29.4 4.0 33.4 72.3
1991 -33.6 2.4 -31.2 -41.1
1992 13.5 3.2 16.7 10.9
1993 -22.5 1.9 -20.6 -23.3
1994 86.3 2.9 89.2 121.5
1995 -21.1 1.9 -19.2 -21.1
1996 31.4 1.8 33.2 34.7
1997 -21.9 1.4 -20.5 -14.9
1998** -11.3 0.0 -11.3 -7.3
- ------------------------------------------------------------------
</TABLE>
*MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
**Six months ended July 31, 1997.
See Financial Highlights table on page 31 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- -------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Portfolio** 5/23/84 24.24% 18.50% 9.42% 2.87% 12.29%
Gold & Precious Metals Portfolio** 5/23/84 -20.12 4.21 -1.81 2.40 0.59
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
12
<PAGE> 15
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolios could lose money.
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1997
- --------------------------------------------------------------------
HEALTH CARE PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 18.5% 0.0% 18.5% 21.1%
1986 32.9 0.8 33.7 22.9
1987 30.8 1.0 31.8 33.9
1988 -2.7 3.0 0.3 -3.3
1989 19.3 2.1 21.4 20.1
1990 17.7 2.5 20.2 14.5
1991 27.4 2.7 30.1 8.4
1992 32.0 2.0 34.0 22.7
1993 -4.8 1.9 -2.9 10.6
1994 18.7 2.5 21.2 12.9
1995 8.1 1.7 9.8 0.5
1996 43.8 1.7 45.5 38.7
1997 19.1 1.5 20.6 26.3
1998* 21.0 0.1 21.1 22.5
- --------------------------------------------------------------------
</TABLE>
*Six months ended July 31, 1997.
See Financial Highlights table on page 31 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
UTILITIES INCOME PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 15, 1992-JULY 31, 1997
- ---------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO UTILITIES
COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 12.0% 2.5% 14.5% 12.2%
1994 8.0 5.1 13.1 12.9
1995 -9.7 5.2 -4.5 -2.0
1996 23.2 6.3 29.5 30.2
1997 0.9 4.6 5.5 4.5
1998** 3.9 2.5 6.4 6.8
- ---------------------------------------------------------------------
</TABLE>
*80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996,
when the S&P Utilities component was separated into the S&P Utilities Index
and the S&P Telephone Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 32 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- ----------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care Portfolio** 5/23/84 32.87% 23.36% 17.31% 2.08% 19.39%
Utilities Income Portfolio 5/15/92 8.75 11.80 6.47+ 5.18+ 11.65+
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
+Since inception.
13
<PAGE> 16
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
REIT INDEX PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 13, 1996-JULY 31, 1997
- -----------------------------------------------------------------------
REIT INDEX PORTFOLIO MORGAN STANLEY
FISCAL CAPITAL INCOME TOTAL REIT INDEX
YEAR RETURN RETURN RETURN TOTAL RETURN
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 26.6% 3.7% 30.3% 30.7%
1998* 5.8 2.1 7.9 8.0
- -----------------------------------------------------------------------
</TABLE>
*Six months ended July 31, 1997.
See Financial Highlights table on page 32 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- ---------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REIT Index Portfolio** 5/13/96 33.44% 26.31% 5.64% 31.95%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
14
<PAGE> 17
[PHOTO]
FINANCIAL STATEMENTS
JULY 31, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
sector within the Portfolio's designated industry; international securities, if
significant, may be presented in a separate group. The REIT Index Portfolio
lists its security holdings alphabetically. Other assets are added to, and
liabilities are subtracted from, the value of Total Investments to calculate the
Portfolio's Net Assets. Finally, Net Assets are divided by the outstanding
shares of the Portfolio to arrive at its share price, or Net Asset Value (NAV)
Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Portfolio's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net income or net realized gains, will
appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the Portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the Portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MARKET
VALUE*
ENERGY PORTFOLIO SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.3%)
- -------------------------------------------------------------------------------------
UNITED STATES (64.9%)
- -------------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING (2.2%)
Fluor Corp. 400,000 $ 24,600
------------
ENERGY MISCELLANEOUS (5.0%)
McDermott International, Inc. 700,000 21,394
Tosco Corp. 500,000 15,656
- - TransTexas Gas Corp. 350,000 4,944
Ultramar Diamond
Shamrock Corp. 431,900 14,361
------------
56,355
------------
MACHINERY-OIL WELL EQUIPMENT & SERVICES (9.8%)
Baker Hughes, Inc. 500,000 22,031
Camco International, Inc. 130,000 8,401
- - Cooper Cameron Corp. 160,000 9,380
- - Noble Drilling Corp. 700,000 19,644
- - Rowan Cos., Inc. 200,000 6,575
Transocean Offshore, Inc. 300,000 24,506
- - Varco International, Inc. 180,000 6,964
- - Weatherford Enterra, Inc. 299,999 13,050
------------
110,551
------------
OFFSHORE DRILLING (4.8%)
- - J. Ray McDermott S.A. 100,000 3,206
- - Reading & Bates Corp. 700,000 23,275
Schlumberger Ltd. 360,000 27,495
------------
53,976
------------
OIL-CRUDE PRODUCERS (14.8%)
Anadarko Petroleum Corp. 230,000 16,071
Apache Corp. 100,000 3,525
- - Barrett Resources Corp. 200,000 5,800
Devon Energy Corp. 220,000 8,374
Enron Oil & Gas Co. 654,400 13,333
Monterey Resources, Inc. 513,939 7,837
Noble Affiliates, Inc. 130,000 5,395
Occidental Petroleum Corp. 750,000 18,797
- - Oryx Energy Co. 800,000 19,750
Pogo Producing Co. 380,000 15,533
- - Santa Fe Energy Resources, Inc. 1,165,200 10,050
Union Texas Petroleum
Holdings, Inc. 1,000,000 20,813
Vastar Resources, Inc. 590,300 21,251
------------
166,529
------------
OIL-INTEGRATED DOMESTIC (20.5%)
Amerada Hess Corp. 900,000 52,931
Amoco Corp. 190,000 17,860
Ashland, Inc. 600,000 31,875
Kerr-McGee Corp. 350,000 21,919
Murphy Oil Corp. 370,100 19,268
Phillips Petroleum Co. 600,000 27,637
- - Seagull Energy Corp. 500,000 10,250
Sun Co., Inc. 150,000 5,372
USX-Marathon Group 600,000 19,313
Unocal Corp. 596,000 23,840
------------
230,265
------------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
ENERGY PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
OIL-INTEGRATED INTERNATIONAL (6.3%)
Chevron Corp. 380,000 $ 30,067
Exxon Corp. 280,000 17,990
Texaco Inc. 200,000 23,213
-------------
71,270
-------------
SHIPPING (0.7%)
- - OMI Corp. 700,000 7,787
-------------
OTHER (0.8%)
Foster Wheeler Corp. 200,000 8,875
-------------
- --------------------------------------------------------------------------------------
TOTAL UNITED STATES 730,208
- --------------------------------------------------------------------------------------
INTERNATIONAL (26.4%)
- --------------------------------------------------------------------------------------
CANADA (13.0%)
Alberta Energy Co., Ltd. 627,870 14,423
- - Anderson Exploration Ltd. 1,012,401 12,892
- - Cabre Exploration Ltd. 290,000 5,728
Canadian Pacific Ltd. 800,000 24,150
- - Chauvco Resources Ltd.
Class A 250,000 3,907
Imperial Oil Ltd. 440,300 22,777
- - Jordan Petroleum Ltd. 500,000 2,948
PanCanadian Petroleum Ltd. 183,400 3,596
Paramount Resources Ltd. 1,080,900 9,189
- - Penn West Petroleum Ltd. 352,143 4,357
Petro-Canada 1,000,000 17,979
- - Poco Petroleums Ltd. 400,000 3,907
- - Renaissance Energy Ltd. 250,000 6,177
- - Rio Alto Exploration Ltd. 652,500 5,972
- - Talisman Energy, Inc. 255,000 7,933
-------------
145,935
-------------
UNITED KINGDOM (2.6%)
Burmah Castrol PLC 299,955 5,175
Lasmo PLC 2,000,000 9,137
- - London & Overseas
Freighters Ltd. 638,300 909
- - London & Overseas
Freighters Ltd. ADR 290,000 4,133
Shell Transport &
Trading Co. ADR 230,000 10,264
-------------
29,618
-------------
OTHER (10.8%)
ENI SPA ADR 400,500 23,554
Norsk Hydro ASA ADR 480,000 25,080
Repsol SA ADR 392,500 15,798
Royal Dutch Petroleum Co.
NY Shares 320,000 17,900
Saga Petroleum ASA
B Shares 190,000 3,440
Total SA ADR 508,989 25,672
YPF SA ADR 300,000 9,713
-------------
121,157
-------------
- --------------------------------------------------------------------------------------
TOTAL INTERNATIONAL 296,710
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $727,532) 1,026,918
- --------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.6%)
Sun Co., Inc. $1.80 Cvt. Pfd. Series A
(COST $5,046) 200,000 6,475
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (8.1%)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 8/1/97
(COST $90,687) $90,687 $ 90,687
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $823,265) 1,124,080
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------
Other Assets--Notes C and G 5,009
Liabilities--Note G (4,779)
-------------
230
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 44,114,090 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $1,124,310
======================================================================================
NET ASSET VALUE PER SHARE $25.49
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $765,054 $17.34
Undistributed Net Investment
Income--Note F 7,328 .17
Accumulated Net Realized
Gains--Note F 51,113 1.16
Unrealized Appreciation--Note E
Investment Securities 300,815 6.82
Foreign Currencies -- --
- --------------------------------------------------------------------------------------
NET ASSETS $1,124,310 $25.49
======================================================================================
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
GOLD & PRECIOUS VALUE*
METALS PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (90.7%)
- --------------------------------------------------------------------------------------
AUSTRALIA (25.2%)
Ashton Mining Ltd. 6,500,000 $ 9,492
- - Aurora Gold Ltd. 5,500,000 7,130
- - Bougainville Copper Ltd. 2,000,000 834
- - Climax Mining Ltd. 850,000 488
- - Emperor Mines Ltd. 2,150,000 1,730
Great Central Mines Ltd. 2,400,000 4,917
- - Lone Star Exploration NL 2,000,000 358
Mount Isa Mines Holdings Ltd. 13,500,000 18,708
Newcrest Mining Ltd. 6,000,000 12,293
Normandy Mining Ltd. 12,350,000 14,262
- - Normandy Mining Ltd.
Warrants Exp. 4/30/01 1,800,000 335
Plutonic Resources Ltd. 3,010,000 8,926
Rio Tinto Ltd. 1,100,000 17,110
Sons of Gwalia Ltd. 1,000,000 3,651
- - Star Mining Corp. NL 28,000,000 1,982
- - Tanami Gold NL 1,600,000 238
------------
102,454
------------
CANADA (19.6%)
- - Aber Resources Ltd. 150,000 2,198
Barrick Gold Corp. 125,000 2,849
- - Eldorado Gold Corp. Ltd. 900,000 3,060
Euro-Nevada Mining Corp. 692,000 21,629
Franco-Nevada Mining Corp., Ltd. 430,000 20,191
- - Golden Star Resources Ltd. 350,000 2,254
- - Greenstone Resources Ltd. 750,000 7,054
- - IAMGOLD (International African
Mining Gold Corp.) 527,600 1,966
- - Miramar Mining Corp. 1,250,000 4,838
- - Nelson Gold Corp. Ltd. 3,050,000 1,214
- - Philex Gold, Inc. 215,000 933
- - Princess Resources Ltd. 6,000,000 868
- - South Pacific Resources Corp. 150,000 67
- - TVX Gold, Inc. 2,000,000 9,189
- - Vengold, Inc. 1,250,000 1,465
------------
79,775
------------
GHANA (2.0%)
Ashanti Goldfields Co., Ltd. 399,998 4,388
Ashanti Goldfields Co., Ltd. GDR 350,000 3,938
------------
8,326
------------
SOUTH AFRICA (17.8%)
- - Avgold Ltd. ADR 204,067 1,816
Beatrix Gold Mines ADR 1,250,000 7,050
Driefontein Consolidated
Ltd. ADR 200,000 1,400
Elandsrand Gold Mining
Ltd. ADR 1,500,000 5,370
Evander Gold Mines Ltd. ADR 385,800 1,339
Free State Consolidated
Gold Mines Ltd. ADR 1,200,000 5,925
Gold Fields of South Africa
Ltd. ADR 290,000 5,583
Impala Platinum Holdings
Ltd. ADR 750,000 8,205
- - Randfontein Estates
Gold Mining Co. Ltd. ADR 1,475,400 2,936
- - Rustenberg Platinum Holdings
Ltd. ADR 703,020 12,190
Southvaal Holdings Ltd. ADR 230,000 5,159
Vaal Reefs Exploration &
Mining Co. Ltd. ADR 1,600,000 8,200
Western Deep Levels Ltd. ADR 325,000 7,191
------------
72,364
------------
UNITED KINGDOM (1.6%)
- - Bakyrchik Gold PLC 310,000 218
- - Philippine Gold PLC 1,525,000 874
Rio Tinto PLC 325,000 5,285
------------
6,377
------------
UNITED STATES (24.5%)
- - Atlas Corp. 1,000,000 438
Barrick Gold Corp. 575,000 13,117
- - Campbell Resources, Inc. 5,000,000 3,125
- - Crown Resources Corp. 600,000 3,300
Freeport-McMoRan, Inc. 46,877 1,444
Freeport-McMoRan Copper &
Gold, Inc. Class A 600,000 16,350
Freeport-McMoRan Copper &
Gold, Inc. Gold Denomination
Shares Pfd. 150,000 4,397
- - Getchell Gold Corp. 200,000 6,675
Newmont Gold Co. 125,000 5,281
Newmont Mining Corp. 733,000 30,236
Pioneer Group, Inc. 50,000 1,288
Placer Dome, Inc. 250,000 4,250
- - Royal Oak Mines Inc. 2,000,000 3,250
- - Stillwater Mining Co. 300,000 6,225
------------
99,376
------------
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $406,374) 368,672
- --------------------------------------------------------------------------------------
PRECIOUS METALS (6.2%)
- --------------------------------------------------------------------------------------
- - Gold Bullion (74,868 Ounces) 24,299
- - Platinum Bullion (2,009 Ounces) 857
- --------------------------------------------------------------------------------------
TOTAL PRECIOUS METALS
(COST $31,918) 25,156
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (3.7%)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 8/1/97
(COST $15,168) $15,168 15,168
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(COST $453,460) 408,996
- --------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MARKET
GOLD & PRECIOUS VALUE*
METALS PORTFOLIO (000)
- ----------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-0.6%)
- ----------------------------------------------------------------------------------------
Other Assets--Notes C and G $ 20,464
Liabilities--Note G (23,105)
------------
(2,641)
- ----------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------
Applicable to 41,889,680 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $406,355
========================================================================================
NET ASSET VALUE PER SHARE $9.70
========================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income Producing Security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------
Paid in Capital $468,371 $11.18
Overdistributed Net Investment
Income--Note F (981) (.02)
Accumulated Net Realized
Losses--Note F (16,566) (.40)
Unrealized Depreciation--Note E
Investment Securities (44,464) (1.06)
Foreign Currencies (5) --
- ----------------------------------------------------------------------------------------
NET ASSETS $406,355 $ 9.70
========================================================================================
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
COMMON STOCKS (87.5%)
- --------------------------------------------------------------------------------------
UNITED STATES (68.8%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY (0.5%)
- -(1)Paragon Trade Brands, Inc. 1,139,100 $ 19,934
---------------
BIOTECH RESEARCH & PRODUCTION (1.8%)
- - Genentech, Inc. Special
Common Stock 956,900 55,261
- - IDEXX Laboratories Corp. 1,100,000 17,531
---------------
72,792
---------------
DRUGS & PHARMACEUTICALS (44.4%)
Abbott Laboratories 2,290,000 149,852
Allergan, Inc. 2,893,900 92,424
- - Alliance Pharmaceutical Corp. 1,002,388 9,961
Alpharma, Inc. Class A 1,156,040 20,736
- - ALZA Corp. 1,030,000 33,282
American Home Products Corp. 830,000 68,423
- - Amgen, Inc. 300,000 17,625
- - Amylin Pharmaceuticals, Inc. 750,000 9,844
- - Anergen Inc. 520,000 1,397
Bergen Brunswig Corp. Class A 190,125 5,656
- - BioCryst Pharmaceuticals, Inc. 340,100 3,826
Bristol-Myers Squibb Co. 2,260,000 177,269
- - Cephalon, Inc. 270,000 2,632
- - Genzyme Corp. 1,000,000 27,250
- - Genzyme Corp. (Tissue Repair) 30,000 323
- - Human Genome Sciences, Inc. 600,000 19,425
- - Immunex Corp. 1,174,000 44,759
Johnson & Johnson 1,520,000 94,715
Eli Lilly & Co. 351,574 39,728
- - Magainin Pharmaceuticals, Inc. 694,400 5,555
- - Matrix Pharmaceutical, Inc. 200,500 1,153
McKesson Corp. 1,280,000 110,960
Merck & Co., Inc. 950,225 98,764
- -(1)OraVax, Inc. 602,600 1,356
- - Perrigo Co. 3,357,100 43,642
- - PerSeptive Biosystems, Inc. 250,500 2,505
Pharmacia & Upjohn, Inc. 5,261,400 198,618
Pfizer, Inc. 2,890,000 172,316
Rhone-Poulenc Rorer, Inc. 980,000 92,549
Schering-Plough Corp. 260,000 14,186
- - Scios, Inc. 491,750 3,934
- -(1)Targeted Genetics Corp. 1,224,600 4,592
Warner-Lambert Co. 1,620,000 226,294
---------------
1,795,551
---------------
ELECTRONICS-MEDICAL SYSTEMS (1.4%)
- - ATL Ultrasound, Inc. 683,300 27,503
- - Datascope Corp. 340,100 7,440
- - Haemonetics Corp. 906,000 16,365
- - Spacelabs Medical, Inc. 280,000 6,160
---------------
57,468
---------------
HEALTH & PERSONAL CARE (0.3%)
- - Matria Healthcare, Inc. 196,700 836
- -(1)Syncor International Corp. 856,559 11,778
---------------
12,614
---------------
HEALTH CARE FACILITIES (3.9%)
- - Beverly Enterprises, Inc. 1,230,000 18,911
Columbia/HCA Healthcare Corp. 2,810,620 90,643
- - Laboratory Corp. of America 3,992,116 9,980
- - Quest Diagnostics, Inc. 1,143,100 19,861
- - Tenet Healthcare Corp. 611,100 18,295
---------------
157,690
---------------
HEALTH CARE MANAGEMENT SERVICES (3.5%)
- - Cerner Corp. 706,600 21,198
- - Humana, Inc. 1,680,400 40,960
- - Mid Atlantic Medical
Services, Inc. 500,000 7,438
- - Physician Corp. of America 1,721,700 11,083
United Healthcare Corp. 400,000 22,800
United Wisconsin Services, Inc. 678,000 23,603
- - Value Health, Inc. 700,000 14,000
---------------
141,082
---------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (8.5%)
Allegiance Corp. 1,235,600 38,612
C.R. Bard, Inc. 2,496,400 93,927
Beckman Instruments, Inc. 1,102,200 53,525
Biomet, Inc. 1,070,300 21,339
Collagen Corp. 481,800 8,130
- - DePuy, Inc. 366,600 8,959
- -(1)E-Z-EM, Inc. Class A 219,258 1,644
- -(1)E-Z-EM, Inc. Class B 289,096 1,988
Guidant Corp. 720,000 65,700
Kinetic Concepts, Inc. 716,000 13,425
Owens & Minor, Inc. Holding Co. 1,429,100 21,258
- - Protocol Systems, Inc. 273,000 2,389
- - ReSound Corp. 300,000 1,425
U.S. Surgical Corp. 300,000 11,138
---------------
343,459
---------------
MEDICAL SERVICES (0.8%)
- - Covance, Inc. 1,200,000 24,525
- - Coventry Corp. 500,000 8,844
---------------
33,369
---------------
MATERIALS & PROCESSING (2.2%)
DEKALB Genetics Corp. Class B 1,038,050 79,346
Pioneer Hi-Bred
International, Inc. 120,000 8,880
---------------
88,226
---------------
PRODUCER DURABLES (0.3%)
Perkin-Elmer Corp. 122,720 10,017
---------------
OTHER (1.2%)
Carter-Wallace, Inc. 266,000 4,805
Carter-Wallace, Inc. Class B 24,000 434
Mallinckrodt, Inc. 1,198,000 41,930
---------------
47,169
---------------
- --------------------------------------------------------------------------------------
TOTAL UNITED STATES 2,779,371
- --------------------------------------------------------------------------------------
INTERNATIONAL (18.7%)
- --------------------------------------------------------------------------------------
Amersham International PLC 1,995,400 62,090
Banyu Pharmaceutical Co. 905,000 16,510
Bayer AG ADR 1,214,000 50,260
Chugai Pharmaceutical Co., Ltd. 1,410,000 12,504
- - CIBA Specialty Chemicals AG
(Registered) 51,747 4,774
Eisai Co., Ltd. 2,785,000 57,864
Elan Corp., PLC ADR 67,648 3,213
Fujisawa Pharmaceutical
Co., Ltd. 2,710,000 27,695
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Hoechst AG 200,000 $ 9,402
- - Instrumentation Laboratory
SPA ADR 300,000 750
Novartis AG (Registered) 51,747 83,057
Nycomed ASA A Shares 354,857 7,078
Rhone-Poulenc SA ADR 1,255,931 54,162
Roche Holdings AG
(Dividend-Right Certificates) 3,000 29,016
Sankyo Co., Ltd. 1,800,000 64,307
Schering AG 193,470 21,330
SmithKline Beecham PLC ADR 604,800 58,817
Sulzer AG (Registered) 31,366 23,689
- - Sulzer Medica AG (Registered) 15,336 4,366
Synthelabo 118,270 14,611
Takeda Chemical Industries Ltd. 1,500,000 45,481
Tanabe Seiyaku Co., Ltd. 200,000 1,672
Zeneca Group PLC ADR 1,054,524 105,321
- --------------------------------------------------------------------------------------
TOTAL INTERNATIONAL 757,969
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $2,082,776) 3,537,340
- --------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.5%)
- --------------------------------------------------------------------------------------
Laboratory Corp. of America
8.50% CVT. PRD.
(COST $22,981) 347,721 19,646
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (12.4%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 8/1/97
(COST $499,639) $499,639 499,639
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $2,605,396) 4,056,625
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- --------------------------------------------------------------------------------------
Other Assets--Notes C and G 75,484
Liabilities--Note G (91,089)
-----------
(15,605)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 55,638,484 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $4,041,020
======================================================================================
NET ASSET VALUE PER SHARE $72.63
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income Producing Security.
(1)Considered an affiliated company as the Portfolio owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $41,292,000.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C>
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------
Paid in Capital $2,523,341 $45.35
Undistributed Net Investment
Income--Note F 22,484 .41
Accumulated Net Realized
Gains--Note F 44,027 .79
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 1,451,229 26.08
Foreign Currencies (61) --
- -----------------------------------------------------------------------------------
NET ASSETS $4,041,020 $72.63
===================================================================================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
UTILITIES INCOME PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (80.7%)
- --------------------------------------------------------------------------------------
ELECTRICAL (40.8%)
Baltimore Gas & Electric Co. 154,600 $ 4,300
Boston Edison Co. 100,000 2,812
CMS Energy Corp. 354,000 13,098
Central Hudson Gas &
Electric Corp. 216,300 7,178
Cilcorp, Inc. 85,000 3,565
CINergy Corp. 463,321 15,579
Consolidated Edison Co. of
New York, Inc. 175,000 5,534
DPL, Inc. 447,000 11,007
DQE Inc. 625,250 19,734
DTE Energy Co. 100,000 2,994
Edison International 150,000 3,787
GPU Inc. 330,000 11,447
Houston Industries, Inc. 50,000 1,047
Illinova Corp. 445,400 10,495
NIPSCO Industries, Inc. 340,500 14,344
National Power PLC ADR 100,000 3,500
New England Electric System 572,100 21,346
Northern States Power Co. 155,900 8,009
Pinnacle West Capital Corp. 769,300 24,281
PowerGen PLC ADR 264,000 12,837
Public Service Co. of Colorado 219,600 9,141
Public Service Co. of New Mexico 300,000 5,550
Sierra Pacific Resources 227,600 7,269
Southern Co. 400,000 8,775
TECO Energy, Inc. 74,000 1,878
Texas Utilities Co. 422,200 14,962
----------
244,469
----------
GAS DISTRIBUTION (8.3%)
Columbia Gas Systems, Inc. 50,000 3,437
Energen Corp. 100,000 3,625
KN Energy, Inc. 125,000 5,250
MCN Energy Group, Inc. 287,000 9,094
National Fuel Gas Co. 225,000 9,563
Pacific Enterprises 282,000 9,429
Public Service Co. of
North Carolina, Inc. 39,300 776
Questar Corp. 155,300 6,358
Southwestern Energy Co. 161,200 2,217
----------
49,749
----------
INTEGRATED OILS (3.4%)
Coastal Corp. 175,000 9,516
Equitable Resources, Inc. 200,000 5,962
ONEOK, Inc. 145,400 5,089
----------
20,567
----------
OTHER ENERGY (1.0%)
El Paso Natural Gas Co. 50,000 2,891
Westcoast Energy Inc. 150,000 3,000
----------
5,891
----------
TELECOMMUNICATIONS (23.3%)
Alltel Corp. 80,000 2,630
BCE, Inc. 100,000 3,044
BellSouth Corp. 377,600 17,889
Deutsche Telekom AG ADR 101,500 2,373
Frontier Corp. 495,200 10,213
GTE Corp. 300,000 13,950
NYNEX Corp. 275,000 15,245
SBC Communications Inc. 275,000 16,277
Southern New England
Telecommunications Corp. 250,000 9,938
Sprint Corp. 382,100 18,914
Telecom Corp. of New Zealand
Ltd. ADR 325,800 13,175
U S WEST Communications
Group 432,000 15,795
----------
139,443
----------
WATER (0.8%)
Southern California Water Co. 200,700 4,578
----------
OTHER (3.1%)
Duke Energy Corp. 302,220 15,319
- - TELUS Corp. 173,100 3,350
----------
18,66
----------
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $388,976) 483,366
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (17.5%)
- -------------------------------------------------------------------------------------
ELECTRIC (10.4%)
Baltimore Gas & Electric Co.
7.50%, 1/15/07 $4,000 4,272
Carolina Power & Light Co.
8.625%, 9/15/21 3,000 3,571
Central Power & Light Co.
7.25%, 10/1/04 2,000 2,091
Dayton Power & Light Co.
8.15%, 1/15/26 3,000 3,258
Duke Energy Corp.
6.625%, 2/1/03 4,000 4,058
Florida Power & Light Co.
7.00%, 9/1/25 4,000 3,966
Kentucky Utilities Co.
7.92%, 5/15/07 2,000 2,201
Louisville Gas & Electric Energy Corp.
6.00%, 8/15/03 2,000 1,968
NRG Energy Inc.
7.50%, 6/15/07 2,000 2,078
Northern States Power Co.
5.75%, 10/1/03 4,000 3,872
Public Service Co. of Colorado
7.125%, 6/1/06 5,000 5,168
Southern California Edison Co.
6.25%, 6/15/03 3,000 2,988
Southern California Gas Co.
8.75%, 10/1/21 3,000 3,336
Southern Indiana Gas & Electric Co.
8.875%, 6/1/16 3,400 4,122
Tampa Electric Co.
7.75%, 11/1/22 3,000 3,151
Union Electric Co.
8.75%, 12/1/21 2,000 2,222
Virginia Electric & Power Co.
6.00%, 8/1/01 4,000 3,968
West Texas Utilities Co.
7.75%, 6/1/07 1,500 1,626
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
UTILITIES INCOME PORTFOLIO (000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Wisconsin Public Service Corp.
6.80%, 2/1/03 $4,500 $ 4,612
-----------
62,528
-----------
GAS (0.6%)
Atlanta Gas Light Co. MTN
5.90%, 10/6/03 4,000 3,902
-----------
TELEPHONE (6.5%)
Bell Atlantic Pennsylvania, Inc.
6.625%, 9/15/02 3,500 3,558
BellSouth Telecommunications
6.75%, 10/15/33 4,000 3,833
Illinois Bell Telephone Co.
7.25%, 3/15/24 2,000 2,026
Korea Telecom
7.625%, 4/15/07 2,000 2,096
Michigan Bell Telephone Co.
6.375%, 9/15/02 2,000 2,016
New Jersey Bell Telephone Co.
8.00%, 6/1/22 3,000 3,424
New York Telephone Co.
8.625%, 11/15/10 2,500 2,923
Pacific Bell
7.25%, 7/1/02 4,000 4,171
Southwestern Bell Telephone Co.
6.625%, 4/1/05 3,000 3,043
U S WEST Communications Group
6.875%, 9/15/33 4,000 3,784
United Telephone Co. of Florida
6.25%, 5/15/03 4,000 3,975
Wisconsin Bell
6.75%, 8/15/24 4,000 3,847
-----------
38,696
-----------
- --------------------------------------------------------------------------------------
TOTAL BONDS
(COST $101,476) 105,126
- --------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (0.2%)
- --------------------------------------------------------------------------------------
U.S.TREASURY NOTE
5.50%, 4/15/00
(COST $961) 1,000 993
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (0.8%)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 8/1/97
(COST $4,800) $4,800 $ 4,800
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(COST $496,213) 594,285
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.8%)
- --------------------------------------------------------------------------------------
Other Assets--Notes C and G 18,015
Liabilities--Note G (13,006)
-----------
5,009
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 44,613,499 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $599,294
======================================================================================
NET ASSET VALUE PER SHARE $13.43
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $488,584 $10.95
Undistributed Net
Investment Income 7,355 .16
Accumulated Net Realized Gains 5,283 .12
Unrealized Appreciation--Note E 98,072 2.20
- -------------------------------------------------------------------------------------
NET ASSETS $599,294 $13.43
=====================================================================================
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (97.8%)
- --------------------------------------------------------------------------------------
AMLI Residential Properties
Trust REIT 175,400 $ 4,121
Ambassador Apartments Inc.
REIT 108,300 2,565
American General Hospitality
Corp. REIT 173,000 4,671
Apartment Investment &
Management Co. Class A REIT 208,300 6,666
Arden Realty Group, Inc. REIT 185,000 5,030
Associated Estates Realty
Corp. REIT 180,800 4,158
Avalon Properties, Inc. REIT 417,200 11,525
BRE Properties Inc. Class A REIT 394,300 10,055
Bay Apartment Communities,
Inc. REIT 250,100 9,613
Beacon Properties Corp. REIT 605,800 22,187
Bedford Property Investors,
Inc. REIT 130,900 2,610
Berkshire Realty Co., Inc. REIT 299,100 3,346
Boykin Lodging Co. REIT 89,500 2,120
Bradley Real Estate Inc. REIT 256,500 4,809
Brandywine Realty Trust REIT 110,800 2,479
Burnham Pacific Properties,
Inc. REIT 203,600 2,901
CBL & Associates Properties,
Inc. REIT 284,100 7,245
Cali Realty Corp. REIT 435,400 15,919
Camden Property Trust REIT 310,656 9,397
CarrAmerica Realty Corp. REIT 623,600 18,708
CenterPoint Properties Corp. REIT 224,600 7,412
Chateau Communities, Inc. REIT 299,140 8,656
Chelsea GCA Realty, Inc. REIT 163,400 6,444
Colonial Properties Trust REIT 226,900 6,779
Columbus Realty Trust REIT 154,100 3,650
Commercial Net Lease Realty
REIT 277,000 4,311
Cousins Properties, Inc. REIT 344,600 9,864
- - Crescent Operating, Inc. REIT 13,070 216
Crescent Real Estate, Inc. REIT 1,054,600 32,956
Crown American Realty Trust
REIT 326,000 3,158
Developers Diversified Realty
Corp. REIT 296,700 11,720
Duke Realty Investments,
Inc. REIT 374,500 16,642
EastGroup Properties, Inc. REIT 149,150 2,974
Equity Inns, Inc. REIT 298,100 4,173
Equity Residential Properties
Trust REIT 742,687 37,459
Essex Property Trust, Inc. REIT 136,900 4,492
Evans Withycombe
Residential, Inc. REIT 218,300 4,625
Excel Realty Trust, Inc. REIT 217,100 6,459
Federal Realty Investment
Trust REIT 462,300 12,251
Felcor Suite Hotels, Inc. REIT 315,500 12,305
First Industrial Realty Trust REIT 357,200 11,051
Franchise Finance Corp. of
America REIT 481,700 12,735
Gables Residential Trust REIT 228,800 6,106
General Growth Properties
Inc. REIT 365,600 12,865
Glenborough Realty Trust,
Inc. REIT 155,000 3,691
Glimcher Realty Trust REIT 259,200 5,411
Alexander Haagen
Properties, Inc. REIT 141,900 2,324
Highwood Properties, Inc. REIT 425,400 14,198
Horizon Group, Inc. REIT 280,700 3,737
Hospitality Properties Trust REIT 319,100 10,191
IRT Property Co. REIT 377,300 4,834
Innkeepers USA Trust REIT 262,900 3,697
Irvine Apartment
Communities, Inc. REIT 233,800 7,014
JDN Realty Corp. REIT 183,200 5,714
JP Realty Inc. REIT 208,100 5,268
Jameson Inns, Inc. REIT 114,700 1,405
Kimco Realty Corp. REIT 431,600 14,674
Koger Equity, Inc. REIT 248,400 4,828
Kranzco Realty Trust REIT 121,000 2,080
Lexington Corporate
Properties, Inc. REIT 110,400 1,628
Liberty Property Trust REIT 466,300 12,299
MGI Properties, Inc. REIT 136,200 3,005
The Macerich Co. REIT 304,600 8,757
Manufactured Home
Communities, Inc. REIT 295,700 7,078
Mark Centers Trust REIT 99,700 935
Meridian Industrial Trust,
Inc. REIT 160,500 3,571
Merry Land & Investment Co.,
Inc. REIT 451,800 9,883
Mid-America Apartment
Communities, Inc. REIT 157,000 4,327
Mills Corp. REIT 210,400 5,589
National Golf Properties,
Inc. REIT 145,900 4,632
New Plan Realty Trust REIT 694,100 15,834
Oasis Residential, Inc. REIT 191,600 4,598
Pacific Gulf Properties, Inc. REIT 142,300 3,273
Patriot American Hospitality,
Inc. REIT 757,943 18,901
Pennsylvania REIT 102,400 2,560
Post Properties, Inc. REIT 260,100 10,388
Prentiss Properties Trust REIT 256,000 6,656
Price REIT, Inc. 125,900 4,768
Prime Retail, Inc. REIT 177,800 2,467
Public Storage, Inc. REIT 1,190,600 35,346
RFS Hotel Investors, Inc. REIT 289,100 5,276
Ramco-Gershenson Properties
REIT 59,000 1,121
Realty Income Corp. REIT 272,500 7,017
Reckson Associates Realty
Corp. REIT 406,300 10,107
Regency Realty Corp. REIT 145,100 3,890
Saul Centers, Inc. REIT 143,800 2,517
Security Capital Atlantic Inc. REIT 341,000 8,014
Security Capital Industrial
Trust REIT 1,163,106 26,243
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Security Capital Pacific Inc. REIT 902,827 $ 20,652
Shurgard Storage Centers, Inc.
Class A REIT 328,300 9,295
Simon DeBartolo Group,
Inc. REIT 1,192,576 38,162
Charles E. Smith Residential
Realty, Inc. REIT 156,200 4,540
Sovran Self Storage, Inc. REIT 126,400 3,753
Spieker Properties, Inc. REIT 554,800 20,632
Starwood Lodging Trust REIT 510,300 23,793
Storage Trust Realty REIT 152,100 4,040
Storage USA, Inc. REIT 322,200 13,291
Summit Properties, Inc. REIT 273,500 5,402
Sun Communities, Inc. REIT 185,900 6,727
Sunstone Hotel Investors,
Inc. REIT 208,400 2,918
Taubman Co. REIT 600,500 7,844
Town & Country Trust REIT 185,000 3,168
Trinet Corporate Realty Trust,
Inc. REIT 239,800 8,528
United Dominion Realty Trust
REIT 1,028,376 14,654
Urban Shopping Centers,
Inc. REIT 201,100 6,222
Vornado Realty Trust REIT 316,800 21,245
Walden Residential
Properties, Inc. REIT 205,900 4,916
Washington REIT 377,200 6,365
Weeks Corp. REIT 169,000 5,345
Weingarten Realty Investors
REIT 317,000 13,829
- - Wellsford Real Properties
Inc. REIT 9,475 111
Western Investment Real Estate
Trust REIT 202,300 2,718
Winston Hotels, Inc. REIT 199,175 2,739
- --------------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(COST $856,101) 960,063
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (2.2%)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 8/1/97
(COST $21,398) $21,398 21,398
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $877,499) 981,461
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------
Other Assets--Note C $ 5,237
Liabilities (4,999)
------------
238
- ---------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------
Applicable to 73,441,693 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $981,699
=======================================================================================
NET ASSET VALUE PER SHARE $13.37
=======================================================================================
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $867,831 $11.82
Undistributed Net
Investment Income 8,215 .11
Accumulated Net Realized Gains 1,691 .02
Unrealized Appreciation--Note E 103,962 1.42
- ---------------------------------------------------------------------------------------
NET ASSETS $981,699 $13.37
=======================================================================================
</TABLE>
24
<PAGE> 27
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any Net
Gain (Loss) realized on the sale of investments, and the increase or decrease in
the Unrealized Appreciation (Depreciation) on investments during the
period--these amounts include the effect of foreign currency movements on the
value of a Portfolio's securities. Currency gains (losses) on the translation of
other assets and liabilities are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GOLD & PRECIOUS UTILITIES
ENERGY METALS HEALTH CARE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1997
---------------------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 7,467 $ 4,552 $ 21,082 $11,045
Interest 1,964 558 9,685 4,320
----------------------------------------------------------------------
Total Income 9,431 5,110 30,767 15,365
----------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 405 451 1,411 241
The Vanguard Group--Note C
Management and Administrative 1,455 792 5,598 1,181
Marketing and Distribution 98 49 329 63
Taxes (other than income taxes) 36 17 119 23
Custodian Fees 92 52 209 10
Auditing Fees 3 3 4 3
Shareholders' Reports 25 24 90 27
Annual Meeting and Proxy Costs 1 1 5 1
Directors' Fees and Expenses 1 1 4 1
---------------------------------------------------------------------
Total Expenses 2,116 1,390 7,769 1,550
Expenses Paid Indirectly--Note C (53) -- (76) (74)
---------------------------------------------------------------------
Net Expenses 2,063 1,390 7,693 1,476
- ----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 7,368 3,720 23,074 13,889
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 51,327 (10,947) 44,381 8,168
Foreign Currencies (6) (4) 51 --
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 51,321 (10,951) 44,432 8,168
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 40,569 (45,996) 591,469 14,611
Foreign Currencies -- (5) (29) --
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 40,569 (46,001) 591,440 14,611
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $99,258 $(53,232) $658,946 $36,668
============================================================================================================================
</TABLE>
*Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $284,000.
25
<PAGE> 28
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (continued)
- ------------------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
----------------
SIX MONTHS ENDED
JULY 31, 1997
----------------
(000)
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $26,366
Interest 480
----------------
Total Income 26,846
----------------
EXPENSES
Investment Advisory Fees--Note B 11
The Vanguard Group--Note C
Management and Administrative 941
Marketing and Distribution 78
Taxes (other than income taxes) 30
Custodian Fees 6
Auditing Fees 3
Shareholders' Reports 10
Annual Meeting and Proxy Costs --
Directors' Fees and Expenses 1
----------------
Total Expenses 1,080
Expenses Paid Indirectly--Note C --
----------------
Net Expenses 1,080
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 25,766
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 1,691
Foreign Currencies --
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 1,691
- ------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 40,666
Foreign Currencies --
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 40,666
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $68,123
==========================================================================================
</TABLE>
26
<PAGE> 29
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Portfolio's net income and capital gains
may not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the one
in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount shareholders
invested in the Portfolio, either by purchasing shares or by reinvesting
distributions, as well as the amounts redeemed. The corresponding numbers of
Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ENERGY GOLD & PRECIOUS
PORTFOLIO METALS PORTFOLIO
--------------------------------- -------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 7,368 $ 9,074 $ 3,720 $ 6,260
Realized Net Gain (Loss) 51,321 23,933 (10,951) (4,606)
Change in Unrealized Appreciation
(Depreciation) 40,569 191,764 (46,001) (129,994)
-----------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 99,258 224,771 (53,232) (128,340)
-----------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (422) (8,648) (428) (9,170)
Realized Capital Gain (9,297) (14,413) -- (3,261)
-----------------------------------------------------------------------------
Total Distributions (9,719) (23,061) (428) (12,431)
-----------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A -- -- -- --
-----------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 189,923 422,636 73,642 175,890
Issued in Lieu of Cash Distributions 9,276 21,861 396 11,571
Redeemed (153,877) (161,805) (76,532) (232,481)
-----------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 45,322 282,692 (2,494) (45,020)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 134,861 484,402 (56,154) (185,791)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 989,449 505,047 462,509 648,300
-----------------------------------------------------------------------------
End of Period $1,124,310 $989,449 $406,355 $462,509
====================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 8,366 19,911 6,826 13,263
Issued in Lieu of Cash Distributions 426 992 35 916
Redeemed (6,893) (8,060) (7,230) (17,991)
-----------------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 1,899 12,843 (369) (3,812)
====================================================================================================================================
</TABLE>
27
<PAGE> 30
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE UTILITIES INCOME
PORTFOLIO PORTFOLIO
------------------------------------ ----------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 23,074 $ 31,573 $ 13,889 $ 31,678
Realized Net Gain (Loss) 44,432 73,829 8,168 19,203
Change in Unrealized Appreciation
(Depreciation) 591,440 331,271 14,611 (19,820)
------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 658,946 436,673 36,668 31,061
------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (1,983) (31,986) (14,622) (30,454)
Realized Capital Gain (32,732) (53,604) -- (1,026)
------------------------------------------------------------------------------
Total Distributions (34,715) (85,590) (14,622) (31,480)
------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A -- -- (906) (1,909)
------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 709,923 1,109,685 31,855 108,977
Issued in Lieu of Cash Distributions 33,608 82,165 11,620 25,266
Redeemed (172,818) (350,498) (109,175) (268,802)
------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 570,713 841,352 (65,700) (134,559)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 1,194,944 1,192,435 (44,560) (136,887)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,846,076 1,653,641 643,854 780,741
------------------------------------------------------------------------------
End of Period $4,041,020 $2,846,076 $599,294 $643,854
==================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 10,871 20,050 2,510 8,741
Issued in Lieu of Cash Distributions 550 1,452 917 2,062
Redeemed (2,707) (6,324) (8,618) (21,789)
------------------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 8,714 15,178 (5,191) (10,986)
==================================================================================================================================
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
-----------------------------------------
SIX MONTHS
ENDED MAY 13, 1996,* TO
JUL. 31, 1997 JAN. 31, 1997
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 25,766 $ 9,062
Realized Net Gain (Loss) 1,691 145
Change in Unrealized Appreciation (Depreciation) 40,666 63,296
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 68,123 72,503
----------------------------------------
DISTRIBUTIONS
Net Investment Income (17,519) (9,094)
Realized Capital Gain -- (145)
Return of Capital -- (371)
----------------------------------------
Total Distributions (17,519) (9,610)
----------------------------------------
NET EQUALIZATION CHARGES--Note A -- --
----------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 324,136 592,437
Issued in Lieu of Cash Distributions 15,192 8,367
Redeemed (62,901) (9,029)
----------------------------------------
Net Increase (Decrease) from Capital Share Transactions 276,427 591,775
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 327,031 654,668
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 654,668 --
----------------------------------------
End of Period $981,699 $654,668
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 25,470 51,889
Issued in Lieu of Cash Distributions 1,190 695
Redeemed (5,022) (780)
----------------------------------------
Net Increase (Decrease) in Shares Outstanding 21,638 51,804
==========================================================================================================================
</TABLE>
*Commencement of operations.
29
<PAGE> 32
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total Return
and shows net investment income and expenses as percentages of average net
assets. These data will help you assess: the variability of the Portfolio's net
income and total returns from year to year; the relative contributions of net
income and capital gains to the Portfolio's total return; how much it costs to
operate the Portfolio; and the extent to which the Portfolio tends to distribute
capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities by
the total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $23.44 $17.19 $13.82 $15.77 $13.82 $12.73
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .25 .27 .23 .31 .34
Net Realized and Unrealized Gain (Loss)
on Investments 2.11 6.64 3.68 (1.65) 3.31 1.29
--------------------------------------------------------------------------
Total from Investment Operations 2.28 6.89 3.95 (1.42) 3.62 1.63
--------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.01) (.24) (.28) (.24) (.29) (.36)
Distributions from Realized Capital Gains (.22) (.40) (.30) (.29) (1.38) (.18)
--------------------------------------------------------------------------
Total Distributions (.23) (.64) (.58) (.53) (1.67) (.54)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $25.49 $23.44 $17.19 $13.82 $15.77 $13.82
=================================================================================================================================
TOTAL RETURN* 9.90% 40.32% 28.68% -9.15% 27.31% 13.02%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,124 $989 $505 $433 $339 $164
Ratio of Total Expenses to
Average Net Assets 0.43%** 0.39% 0.51% 0.30% 0.17% 0.21%
Ratio of Net Investment Income to
Average Net Assets 1.50%** 1.36% 1.55% 1.66% 1.87% 2.47%
Portfolio Turnover Rate 37%** 15% 21% 13% 41% 37%
Average Commission Rate Paid $.0549 $.0484 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
30
<PAGE> 33
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.94 $14.07 $10.71 $13.58 $ 7.29 $9.41
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .09 .13 .17 .27 .20 .19
Net Realized and Unrealized Gain (Loss)
on Investments (1.32) (2.98) 3.36 (2.83) 6.30 (2.13)
-------------------------------------------------------------------------
Total from Investment Operations (1.23) (2.85) 3.53 (2.56) 6.50 (1.94)
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.01) (.21) (.17) (.31) (.21) (.18)
Distributions from Realized Capital Gains -- (.07) -- -- -- --
-------------------------------------------------------------------------
Total Distributions (.01) (.28) (.17) (.31) (.21) (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.70 $10.94 $14.07 $10.71 $13.58 $7.29
====================================================================================================================================
TOTAL RETURN* -11.26% -20.51% 33.24% -19.20% 89.24% -20.58%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $406 $463 $648 $531 $613 $175
Ratio of Total Expenses to
Average Net Assets 0.61%** 0.50% 0.60% 0.25% 0.26% 0.36%
Ratio of Net Investment Income to
Average Net Assets 1.63%** 1.07% 1.38% 2.04% 2.04% 2.50%
Portfolio Turnover Rate 29%** 19% 5% 4% 14% 2%
Average Commission Rate Paid $.0146 $.0085 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $60.65 $52.09 $37.01 $36.51 $32.66 $35.54
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .42 .71 .61 .55 .79 .70
Net Realized and Unrealized Gain (Loss)
on Investments 12.26 9.88 16.06 2.83 5.79 (1.68)
-------------------------------------------------------------------------
Total from Investment Operations 12.68 10.59 16.67 3.38 6.58 (.98)
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.04) (.74) (.57) (.57) (.76) (.70)
Distributions from Realized Capital Gains (.66) (1.29) (1.02) (2.31) (1.97) (1.20)
-------------------------------------------------------------------------
Total Distributions (.70) (2.03) (1.59) (2.88) (2.73) (1.90)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $72.63 $60.65 $52.09 $37.01 $36.51 $32.66
==================================================================================================================================
TOTAL RETURN* 21.12% 20.65% 45.47% 9.79% 21.21% -2.92%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,041 $2,846 $1,654 $771 $638 $562
Ratio of Total Expenses to
Average Net Assets 0.47%** 0.38% 0.46% 0.40% 0.19% 0.22%
Ratio of Net Investment Income to
Average Net Assets 1.39%** 1.41% 1.57% 1.58% 2.37% 2.06%
Portfolio Turnover Rate 6%** 7% 13% 25% 19% 15%
Average Commission Rate Paid $.0532 $.0504 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
31
<PAGE> 34
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO
YEAR ENDED JANUARY 31,
------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED MAY 15, 1992,* TO
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 JAN. 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.93 $12.84 $10.42 $11.67 $11.18 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .29 .58 .56 .56 .57 .41
Net Realized and Unrealized Gain (Loss)
on Investments .52 .09 2.42 (1.10) .88 1.03
-------------------------------------------------------------------------
Total from Investment Operations .81 .67 2.98 (.54) 1.45 1.44
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.31) (.56) (.56) (.59) (.56) (.24)
Distributions from Realized Capital Gains -- (.02) -- (.12) (.40) (.02)
-------------------------------------------------------------------------
Total Distributions (.31) (.58) (.56) (.71) (.96) (.26)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.43 $12.93 $12.84 $10.42 $11.67 $11.18
====================================================================================================================================
TOTAL RETURN 6.40% 5.51% 29.47% -4.47% 13.08% 14.51%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $599 $644 $781 $593 $738 $361
Ratio of Total Expenses to
Average Net Assets 0.51%** 0.40% 0.44% 0.50% 0.42% 0.45%**
Ratio of Net Investment Income to
Average Net Assets 4.56%** 4.63% 4.88% 5.43% 4.82% 4.70%**
Portfolio Turnover Rate 39%** 38% 35% 35% 46% 20%
Average Commission Rate Paid $.0580 $.0568 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
REIT INDEX PORTFOLIO
SIX MONTHS ENDED MAY 13, 1996,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JULY 31, 1997 JAN. 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.64 $10.00
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .37 .341
Net Realized and Unrealized Gain on Investments .62 2.659
--------------------------------------
Total from Investment Operations .99 3.000
--------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.341)
Distributions from Realized Capital Gains -- (.005)
Return of Capital -- (.014)
--------------------------------------
Total Distributions (.26) (.360)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.37 $12.64
====================================================================================================================
TOTAL RETURN ** 7.94% 30.33%
====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $982 $655
Ratio of Total Expenses to Average Net Assets 0.26%+ 0.36%+
Ratio of Net Investment Income to Average Net Assets 6.31%+ 5.55%+
Portfolio Turnover Rate 4%+ 0%
Average Commission Rate Paid $.0249 $.0242
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
+Annualized.
32
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
Vanguard Specialized Portfolios is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and comprises the Energy,
Gold & Precious Metals, Health Care, Utilities Income, and REIT Index
Portfolios. The Energy, Gold & Precious Metals, Health Care, and Utilities
Income Portfolios may invest in securities of foreign issuers, which may subject
them to investment risks not normally associated with investing in securities of
United States corporations. Certain investments of the Utilities Income
Portfolio are in debt instruments for which the issuers' abilities to meet their
obligations may be affected by economic developments in the utilities industry.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on U.S. exchanges are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities listed on foreign exchanges are valued
at the latest quoted sales prices. Securities not listed on an exchange and
precious metals are valued at the latest quoted bid prices. Bonds are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Temporary cash investments
are valued at cost, which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the bid
prices of those currencies against U.S. dollars last quoted by major banks as of
5:00 p.m. Geneva time on the valuation date. Realized gains (losses) and
unrealized appreciation (depreciation) on investment securities include the
effects of changes in exchange rates since the securities were purchased,
combined with the effects of changes in security prices. Fluctuations in the
value of other assets and liabilities resulting from changes in exchange rates
are recorded as unrealized foreign currency gains (losses) until the asset or
liability is settled in cash, when they are recorded as realized foreign
currency gains (losses).
3. EQUALIZATION: The Utilities Income Portfolio follows the accounting
practice known as "equalization," under which a portion of the price of capital
shares issued and redeemed, equivalent to undistributed net investment income
per share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income per share is unaffected
by capital share transactions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Wellington Management Company, LLP, provides investment advisory
services to the Energy, Health Care, and Utilities Income Portfolios for fees
calculated at an annual percentage rate of
33
<PAGE> 36
average net assets. For the six months ended July 31, 1997, the investment
advisory fees of the Energy, Health Care, and Utilities Income Portfolios each
represented an effective annual rate of 0.08% of average net assets.
M&G Investment Management Ltd. provides investment advisory services to
the Gold & Precious Metals Portfolio for a fee calculated at an annual
percentage rate of average net assets. For the six months ended July 31, 1997,
the investment advisory fee represented an effective annual rate of 0.20% of the
Portfolio's average net assets.
The Vanguard Group furnishes investment advisory services to the REIT
Index Portfolio on an at-cost basis.
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such services
are allocated to each Portfolio under methods approved by the Board of
Directors.
Vanguard has asked the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
six months ended July 31, 1997, these arrangements reduced the expenses of the
Energy, Health Care, and Utilities Income Portfolios by $53,000 (an annual rate
of 0.01% of average net assets), $76,000 (0.01%), and $74,000 (0.02%),
respectively.
At July 31, 1997, the Fund had contributed capital aggregating $502,000
to Vanguard (included in Other Assets), representing 2.5% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
D. During the six months ended July 31, 1997, purchases and sales of
investment securities other than temporary cash investments were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
---------------------------- ---------------------------
PORTFOLIO PURCHASES SALES PURCHASES SALES
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Energy -- -- $183,267 $168,898
Gold & Precious Metals -- -- 68,635 64,157
Health Care -- -- 423,028 88,894
Utilities Income -- $2,926 114,584 175,295
REIT Index -- -- 294,642 15,141
--------------------------------------------------------------------------------------------------------
</TABLE>
E. At July 31, 1997, net unrealized appreciation (depreciation) of
investment securities for federal income tax purposes was:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(000)
--------------------------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
PORTFOLIO SECURITIES SECURITIES (DEPRECIATION)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy $ 305,521 $ (4,706) $ 300,815
Gold & Precious Metals* 60,295 (109,263) (48,968)
Health Care 1,504,139 (52,910) 1,451,229
Utilities Income 101,915 (3,843) 98,072
REIT Index 106,135 (2,173) 103,962
---------------------------------------------------------------------------------------------------------
</TABLE>
*See Note F.
34
<PAGE> 37
The Gold & Precious Metals Portfolio and the Health Care Portfolio had net
unrealized foreign currency losses of $5,000 and $61,000, respectively,
resulting from the translation of other assets and liabilities at July 31,
1997.
F. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
During the six months ended July 31, 1997, the Portfolios realized net
foreign currency gains (losses) which increased (decreased) distributable net
income for tax purposes; accordingly such gains (losses) have been reclassified
from accumulated net realized gains (losses) to undistributed net investment
income as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(000)
-----------------------------------
INCREASE (DECREASE)
PORTFOLIO UNDISTRIBUTED NET INVESTMENT INCOME
-----------------------------------------------------------------------------------------
<S> <C>
Energy $ (6)
Gold & Precious Metals (4)
Health Care 51
-----------------------------------------------------------------------------------------
</TABLE>
Gold & Precious Metals Portfolio: At January 31, 1997, the Gold &
Precious Metals Portfolio had available realized losses of $5,107,000 to offset
future net capital gains of $2,873,000 through January 31, 2005, and $2,234,000
through January 31, 2006. Certain of the Portfolio's investments are in
securities considered to be "passive foreign investment companies," for which
any unrealized appreciation and/or realized gains are required to be included in
distributable net income for tax purposes. The cumulative total of distributions
related to passive foreign investment company holdings at July 31, 1997, was
$4,504,000, and is reflected in the balance of overdistributed net investment
income. During the six months ended July 31, 1997, the Portfolio realized gains
on the sale of passive foreign investment companies of $1,007,000, which were
included in prior years' distributable net income for tax purposes; accordingly
such gains have been reclassified from accumulated net realized losses to
undistributed net investment income.
G. The market value of securities on loan to broker/dealers at July 31,
1997, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(000)
-------------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
-----------------------------------------------------------------------------------------
<S> <C> <C>
Energy $ 2,739 $ 2,814
Gold & Precious Metals 16,460 17,527
Health Care 41,787 60,132
Utilities Income 8,702 9,127
-----------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 38
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and
copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 39
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
IKON Office Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director
of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Co.; Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in
The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller
of each of the investment companies in The Vanguard Group. OTHER
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President, Individual Investor Group.
IAN A. MACKINNON, Senior Vice President, Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional Investor Group.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
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Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 40
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
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Vanguard/Windsor II
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GROWTH FUNDS
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INTERNATIONAL FUNDS
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INDEX FUNDS
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(CA, FL, NJ, NY, OH, PA)
Q512-7/97
