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VANGUARD
SPECIALIZED
PORTFOLIOS
Annual Report
January 31, 1997
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 (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); 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.
[PHOTO]
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[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
6
Report From
The Advisers
8
Portfolio
Profiles
12
Performance
Summaries
20
Financial
Statements
25
Report Of
Independent
Accountants
46
Directors And
Officers
INSIDE BACK COVER
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[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
Financial markets diverged during the twelve months ended January 31, 1997, the
fiscal year for Vanguard Specialized Portfolios. Unlike fiscal 1996, when a
strong rising tide in the financial markets lifted nearly all boats, fiscal
1997 featured a robust overall stock market, a lackluster bond market, and a
distinctly hostile market for gold. The standard barometer for the overall
stock market, the Standard & Poor's 500 Composite Stock Price Index, provided a
truly remarkable total return of +26.3% for the twelve months ended January 31.
By contrast, the Lehman Brothers Aggregate Bond Index, a good proxy for the
overall bond market, had a total return of only +3.3%.
In this environment, each of our Vanguard Specialized Portfolios
provided a return that reflected its narrowly defined investment focus. The
table at right presents the total return (capital change plus reinvested
dividends) for each Portfolio compared with its respective competitive fund
standard and its unmanaged performance benchmark: for our three "regular"
equity Portfolios, the S&P 500 Index; for our Gold & Precious Metals Portfolio,
the Salomon Brothers World Gold & Precious Metals Index; and for our new REIT
Index Portfolio, the Morgan Stanley Real Estate Investment Trust Index.
<TABLE>
<CAPTION>
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TOTAL RETURNS
FISCAL YEAR ENDED
JANUARY 31, 1997
- ----------------------------------------------------------------------
<S> <C>
Energy Portfolio +40.3%
Average Natural Resources Fund +30.9
- ----------------------------------------------------------------------
Health Care Portfolio +20.6%
Average Health Care Fund +12.5
- ----------------------------------------------------------------------
Utilities Income Portfolio + 5.5%
Average Utility Fund +10.0
- ----------------------------------------------------------------------
S&P 500 Index +26.3%
- ----------------------------------------------------------------------
Gold & Precious Metals Portfolio -20.5%
Average Gold Fund -14.0
Salomon World Gold Index -14.9
- ----------------------------------------------------------------------
REIT Index Portfolio* +30.3%
Average Real Estate Fund* +26.2
Morgan Stanley REIT Index* +30.7
- ----------------------------------------------------------------------
</TABLE>
*Since the REIT Index Portfolio's inception on
May 13, 1996.
Per-share figures for each Portfolio, including net asset values,
income dividends, and any capital gains distributions, are presented on page 5.
OVERVIEW OF THE PORTFOLIOS
Although the stock market as a whole provided generous returns in fiscal 1997,
the market's performance was decidedly mixed, varying with both the market
capitalization (the share price multiplied by the number of shares outstanding)
of stocks and the industry sectors measured.
As noted above, the S&P 500 Index, which is dominated by
large-capitalization stocks, provided a total return of +26.3%. With its gain
of +38.7% in our prior fiscal year, the Index has provided an incredible
cumulative return of +75% over the two years. Smaller stocks lagged again;
during fiscal 1997 the Wilshire 4500 Equity Index achieved a +19.7% return
(bringing its two-year return to just shy of +60%). Performance disparities
were even greater within sectors of the S&P 500 Index. Total returns ranged
from +2.1% for the utilities group to an astounding +54.1% for the technology
sector, which was led by such huge investor favorites as Intel, Microsoft, and
IBM.
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The Vanguard Specialized Portfolios also provided highly diverse
returns--Energy much better than the market averages, Health Care and Utilities
Income worse, and Gold & Precious Metals actually down rather sharply--that were
pretty much in keeping with those of the sectors in which they invest.
ENERGY PORTFOLIO
The Energy Portfolio's total return of +40.3% in fiscal 1997 was the best by
far in our history. Stocks of energy producers and oil-service firms rose even
more steeply than the prices of oil and natural gas, both of which registered
strong gains because of increased demand and concerns about tight supplies. A
number of companies that had been forced by low energy prices to become
markedly more efficient were able to take full advantage of the increased
prices.
Through excellent stock selection, our adviser, Wellington Management
Company, made the most of the sector's strong showing. Our return was 4
percentage points ahead of the S&P Energy Index and fully 14 percentage points
higher than the S&P 500 Index, which itself surpassed most equity mutual funds.
We also were 9.4 percentage points above the return on the average natural
resources fund--making fiscal 1997 the fifth consecutive year in which we have
outpaced our average competitor.
Our edge was due in part to the fact that our Portfolio is truly
concentrated (97%) in the energy sector, while the typical natural resources
fund invests about half its assets in energy stocks. Another factor in our
favor--especially over the long run--has been our low expense ratio. At 0.39% of
average net assets, our expense ratio in fiscal 1997 was more than 1.3
percentage points below the ratio of 1.77% for the average natural resources
fund. This difference contributed one-third to our annual advantage of 4.1
percentage points over the average natural resources fund during the past ten
years. Such an edge looms large over a full decade. A hypothetical $10,000
investment in our Portfolio grew over the ten years to $37,940 versus $26,361
for our average competitor. The difference of $11,579 is more than the amount
initially invested.
<TABLE>
<CAPTION>
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TOTAL RETURN
10 YEARS ENDED JANUARY 31, 1997
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------------
<S> <C> <C>
Energy Portfolio +14.3% $37,940
- --------------------------------------------------------------
Average Natural Resources Fund +10.2% $26,361
- --------------------------------------------------------------
S&P 500 Index +14.5% $38,850
- --------------------------------------------------------------
</TABLE>
Of course, these returns are merely history and should not be regarded
as emblematic of future returns, which may be lower or higher than those earned
during the past decade.
GOLD & PRECIOUS METALS PORTFOLIO
While optimism prevailed in the broad stock market during fiscal 1997, gloom
pervaded the niche where our Gold & Precious Metals Portfolio invests. Gold
prices fell by roughly -15% in fiscal 1997. Our Portfolio's return was even
worse, a dismal -20.5%, which lagged by a substantial margin the -14.0% loss on
the average gold fund and the -14.9% return on the Salomon World Gold Index.
Our diversification--which we regard as a long-term strength of the
Portfolio--worked against us in fiscal 1997. We held, on average, less than 40%
of our assets in U.S. and Canadian companies, the strongest performers. The
average competing fund held more than 60% of its assets in North American gold
stocks. On the other hand, we had about one-third of our assets in South
African stocks during the year, roughly twice the
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weighting of the average competing fund. South African share prices were hit by
a double whammy. The first blow was the decline in bullion prices, to which
South African companies are especially sensitive. The second was the fall in
the value of the rand versus the U.S. dollar, which reduced the dollar value of
securities denominated in the South African currency.
The losses of fiscal 1997 took a great deal of the glitter off the
long-term returns of our Portfolio and its comparative benchmarks. During the
ten years ended January 31, 1997, our average annual return was +4.1%. Though
quite disappointing on an absolute basis, this was better than the +2.7%
average annual return on the peer group of funds over the same period. Neither
our Portfolio nor the average gold fund kept pace with the Salomon World Gold
Index, whose average return over the decade was +5.1% annually. The future
returns of the Portfolio--both on an absolute basis and in relation to the Index
and to competing gold funds--cannot be predicted and may be higher or lower than
the long-term average returns shown in the table above.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED JANUARY 31, 1997
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------
<S> <C> <C>
Gold & Precious Metals
Portfolio +4.1% $14,984
- --------------------------------------------------------
Average Gold Fund +2.7% $13,045
- --------------------------------------------------------
Salomon World Gold Index* +5.1% $16,402
- --------------------------------------------------------
</TABLE>
*MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
HEALTH CARE PORTFOLIO
While health care has been one of the stock market's strongest sectors over the
past decade, it lagged the +26.3% return for the overall market in fiscal 1997.
Even so, the +20.6% return achieved by our Portfolio was quite satisfying on an
absolute basis and was especially strong in relation to the average competing
health-care fund, which earned +12.5% for the year.
The stock market's strong bias toward very large companies with strong
market positions accounts for part of both our shortfall versus the Index and
our advantage over the average competing fund in fiscal 1997. Our median market
capitalization--the midpoint of market capitalization for all the stocks in the
Portfolio--is $10.3 billion versus $27.5 billion for the S&P 500 Index. In turn,
our Portfolio has a larger commitment than the average health-care fund to the
big pharmaceutical companies that dominate the Index. Good stock selection by
Wellington Management Company, our adviser, also helped our performance versus
our competitors.
Over the longer term, our performance has been strong on both an
absolute basis--an average return of +19.2% per year over the past decade--and a
relative basis, as we outpaced both the average competitor and the S&P 500
Index. Our performance versus the Index owes a good deal, of course, to the
strength of the health-care sector. But our superiority over competing funds
testifies, we believe, to the soundness of our investment strategy and to our
low costs. Our expense ratio in fiscal 1997 of 0.38% of average assets gave us
a head start of nearly 1.3 percentage points over our peers, an advantage that
accounts for three-quarters of our winning margin over the past decade.
Over long periods, a modest annual margin over competitors turns into
a more-than-modest difference in earnings. A $10,000 investment made a decade
ago in our Portfolio would, with reinvested dividends and capital gains
distributions, have grown to $57,883, or $7,879 more than the comparable return
for our average competitor. The difference is a remarkable 79% of the original
investment.
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<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED JANUARY 31, 1997
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------
<S> <C> <C>
Health Care Portfolio +19.2% $57,883
- --------------------------------------------------------
Average Health Care Fund +17.5% $50,004
- --------------------------------------------------------
S&P 500 Index +14.5% $38,850
- --------------------------------------------------------
</TABLE>
We hasten to add that the past returns presented in the table at left
are of little or no use in predicting future returns. However, given that the
returns of the Portfolio and of the entire stock market during the past decade
were well above long-term averages for stocks, it is logical to assume that
future returns will not be as high. And we emphasize that stock prices are both
unpredictable and subject to wide swings--down as well as up.
UTILITIES INCOME PORTFOLIO
Rising interest rates, the bane of utility stocks and bonds, retarded our
Portfolio in fiscal 1997, resulting in a total return of +5.5%. Our performance
was quite disappointing in relation to our competitors, as we trailed the
+10.0% return on the average utility fund. However, we did succeed in outpacing
the +4.5% return of a composite index weighted to reflect our traditional
allocation of 80% to utility stocks and 20% to utility bonds. Utility stocks as
a group badly lagged the overall market because of both rising interest rates
and continuing concern about the effects of deregulation on the future earnings
and dividend-paying ability of electric utilities.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURN
MAY 15, 1992, TO JANUARY 31, 1997
- ---------------------------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ---------------------------------------------------------
<S> <C> <C>
Utilities Income Portfolio +11.8% $16,899
- ---------------------------------------------------------
Average Utility Fund +10.1% $15,737
- ---------------------------------------------------------
Composite Index* +11.8% $16,912
- ---------------------------------------------------------
</TABLE>
*80% utility stocks from S&P, 20% utility bonds from Lehman.
Our shortfall versus the average utility fund was primarily due to our
position in bonds, which is nearly three times greater than that of our average
peer. This allocation enables us to maintain a relatively high and durable
stream of income. But it hurts our performance when bond prices decline, as
inevitably occurs when interest rates rise. (In fiscal 1996, of course, rates
fell and bond prices rose.)
Its lifetime of nearly five years provides a more significant period
for evaluation of the Portfolio's strategy and management. During our history
the Utilities Income Portfolio has performed well on both an absolute basis and
relative to its comparative benchmarks. Although it is gratifying that we
surpassed our average competitor and matched the unmanaged index benchmark, we
concede that the period since our inception on May 15, 1992, is too brief to
constitute a long-term track record. Future returns are unpredictable and can
be expected to vary from those shown above; however, we believe that one factor
in our strong relative performance--our low cost relative to competitors--will
endure. Our expense ratio of 0.40% is nearly 1 percentage point lower than that
of the average utility fund.
REIT INDEX PORTFOLIO
Our REIT Index Portfolio is less than nine months old, having started
operations on May 13, 1996. This is, of course, too short a time to allow any
conclusions about the Portfolio's performance, other than to note that its
infancy fortunately coincided with a
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strong rally in real estate stocks. The Portfolio's total return of +30.3%
since inception is extraordinary, and we hasten to add that there is simply no
way that such strong returns can be expected to persist indefinitely. Indeed,
the REIT sector, like all narrowly defined segments of the stock market, can
quickly turn from leader to laggard.
IN SUMMARY
The fiscal 1997 results of our five Portfolios demonstrate both the rewards and
the risks inherent in investing in narrow segments of the stock market.
Although each Portfolio is widely diversified within its niche, each is devoted
to only a small segment of the entire market and is, therefore, subject to much
more volatility than the market as a whole. For this reason, we believe, the
Portfolios are best employed as part of a broadly diversified and balanced mix
of stock, bond, and money market mutual funds. Once such a program is in place,
we believe that the best approach is to "stay the course" through the
inevitable ups and downs of the financial markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
February 18, 1997
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NEW MANAGERS FOR GOLD & PRECIOUS METALS, UTILITIES INCOME PORTFOLIOS
In December 1996, Graham E. French of M&G Investment Management Ltd. succeeded
David J. Hutchins as Portfolio Manager of the Gold & Precious Metals Portfolio.
Effective March 31, 1997, Earl E. McEvoy, Senior Vice President of
Wellington Management Company, llp, will begin managing the bond component of
the Utilities Income Portfolio. Mr. McEvoy succeeds Paul D. Kaplan, also a
Senior Vice President of Wellington Management. Mark J. Beckwith will continue
to manage the Portfolio's equity component, which constitutes nearly 80% of the
Portfolio's assets.
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<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE 12 MONTHS
JANUARY 31, ---------------------------------------
------------------------- INCOME CAPITAL GAINS RETURN
PORTFOLIO 1996 1997 DIVIDENDS DISTRIBUTIONS* OF CAPITAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy $17.19 $23.44 $0.240 $0.400 --
Gold & Precious Metals 14.07 10.94 0.210 0.070 --
Health Care 52.09 60.65 0.740 1.290 --
Utilities Income 12.84 12.93 0.560 0.020 --
REIT Index** 10.00** 12.64 0.341 0.005 $0.014
- -------------------------------------------------------------------------------------------------
</TABLE>
*Includes both long-term and short-term capital gains distributions.
**Beginning net asset value on May 13, 1996.
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THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED JANUARY 31, 1997
[PHOTO]
U.S. EQUITY MARKETS
With investors' confidence backed by steady economic growth, low inflation, and
rising earnings, the stock market rose in fiscal 1997 by 26.3%, as measured by
the Standard & Poor's 500 Composite Stock Price Index. This advance, while less
than the spectacular 38.7% return of the previous fiscal year, reflects how
exceptional the recent environment has been for common stocks. When the two
years are considered cumulatively, the S&P 500 Index has risen an astonishing
75.2%--truly a roaring bull market.
The market's gains, however, were far from evenly distributed in the
12 months ended January 31. Investors strongly favored larger companies, such
as those that dominate the S&P 500 Index. In fact, even within the Index, it
was the largest companies that prevailed: The 50 biggest (which account for
roughly half the Index's market value) gained 32.8% over the last 12 months,
6.5 percentage points more than the overall Index. Looking at the S&P 500
Index's performance by sector, technology stocks were strongest, with a 54.1%
gain. Financial stocks were also notably strong, gaining 39.5%. Utilities,
plagued early in the year by higher interest rates and a rapidly changing
competitive landscape, eked out a meager 2.1% return, the lowest within the
Index.
Smaller companies generally posted solid absolute results but could
not keep pace with the largest companies, with the 19.0% return of the Russell
2000 Index of small stocks lagging the S&P 500 Index by 7.3 percentage points.
Even for the smaller companies, there was a significant range of performance
among sectors. Energy stocks led the Russell 2000 Index with a 63.1% gain for
the fiscal year. Here, rising prices, limited exposure to the cyclical refining
business, and a reduced number of competitors created a favorable environment
for the stocks. At the other end of the spectrum were the small-capitalization
health-care stocks, which showed a loss of -1.4%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED JANUARY 31, 1997
------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 26.3% 20.8% 17.1%
Russell 2000 Index 19.0 13.3 14.3
MSCI-EAFE Index 2.2 4.5 8.2
- ------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.3% 5.7% 7.4%
Lehman 10-Year Municipal
Bond Index 3.9 5.0 7.5
Salomon 90-Day U.S. Treasury Bills 5.2 5.1 4.4
- ------------------------------------------------------------------------
Other
Consumer Price Index 3.1% 2.9% 2.9%
- ------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
The fiscal year saw an overall rise in interest rates that reflected concern
about the prospects for increasing inflation, due to indications of greater
than expected strength in the economy. At January 31, 1997, the 30-year U.S.
Treasury yield was 6.79%, noticeably higher than its 6.03% level one year
earlier.
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<PAGE> 9
A year ago, the general expectation was that modest economic growth
and benign inflation would continue, giving the Federal Reserve no reason to
boost interest rates. This complacent view was shattered by an exceptionally
strong February jobs report, the first in a succession of economic reports
indicating that in fact the economy was growing at a much faster--and
potentially inflation-inducing--pace. The bond market reacted swiftly: The
30-year Treasury bond's yield jumped from 6.03% on January 31, 1996, to 6.74%
in mid-March. The next several months saw a consistent pattern in which bond
yields rose on the Friday of the jobs-report release only to fall back by the
middle of the month. As it turned out, most of the worry was wasted: Inflation,
as measured by the Consumer Price Index, remained near an annualized rate of
3.1%. But increasing signs of growth during the past three months reignited
inflation concerns and caused bonds to finish the fiscal year on a sour note.
Despite the numerous setbacks suffered by the bond market in 1996,
most indexes were able to finish the fiscal year with positive total returns.
Although the specter of the Federal Reserve Board loomed large during the past
year, the board never acted to either raise or lower interest rates.
Amid the concerns that clouded the bond market during the fiscal year
were three relatively bright spots: corporate bonds, mortgage-backed issues,
and municipals. The strength in earnings that benefited stock prices extended
to the corporate bond sector as well. These bonds, especially those of lower
credit quality, performed well relative to Treasuries, supported by general
confidence in companies' ability to meet payments. The stable-to-rising
interest-rate environment throughout most of the year benefited another large
segment of the bond market--mortgage-backed securities--as the threat of
refinancings receded. Finally, municipal bonds outpaced their U.S. Treasury
counterparts. The sector was shielded to a certain extent from the inflation
wars of the Treasury market as demand outstripped supply for much of the year.
INTERNATIONAL EQUITY MARKETS
The Morgan Stanley Capital International-Europe, Australasia, Far East Index
showed a 2.2% return for the year ended January 31--an overall result that
conceals a striking regional disparity between the European and Pacific
markets. Europe's markets provided U.S. investors with a gain of 20.8%, while
the Pacific markets declined -16.0%. Clearly, the outlook and environments that
characterized the European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing
concern about the health of the Japanese economy. Growth in Japan has remained
modest at best for several years despite government efforts to stimulate the
economy through public works programs and tax incentives. In Europe, the
picture was dramatically different, with the region benefiting from a variety
of factors. Among the most important were (1) ongoing efforts to lower
government deficits consistent with the Maastricht Treaty guidelines, (2)
improving economic growth, and (3) a greater commitment by corporate executives
to increasing "shareholder value."
7
<PAGE> 10
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
ENERGY PORTFOLIO
[PHOTO]
During the fiscal year ended January 31, 1997, the Energy Portfolio
achieved a total return of 40.3%, well ahead of the 35.9% return of the
capitalization-weighted Standard & Poor's Energy Index and far in front of the
26.3% return of the unmanaged Standard & Poor's 500 Composite Stock Price
Index.
The energy sector benefited from high levels of capacity utilization
in the production of oil and natural gas, which boosted prices of these
commodities to levels much higher than those prevailing in the previous year.
The price of oil averaged about $22 per barrel in the spot market in calendar
1996, about 20% above the average price in 1995. The price of natural gas on
the Gulf Coast averaged $2.30 per thousand cubic feet, 50% higher than in 1995.
Oil-producing and oil-service companies did quite well in this environment,
especially because many of the successful companies had earlier streamlined
their operations in order to be profitable when oil and gas prices were lower.
Looking forward, we expect the demand for oil to grow by 2% to 3% in
the coming year. This may lead to lower prices, since a large amount of new
productive capacity is being put onstream. Similarly, since higher prices for
natural gas prompted an increase in drilling last year, there could be some
weakness in these prices as well.
Over the longer run, we expect the upward bias in oil and gas pricing,
which became evident over the past two years, to continue because any spare
productive capacity will be absorbed quickly. It will require a sustained, high
level of investment by energy producers to meet long-term growth in demand for
energy and to offset the depletion of supplies being consumed.
We continue our efforts to provide you with a portfolio that is well
diversified in the more promising segments of the energy sector. Given the
overall strength in the equity market, we have been emphasizing relatively
conservative investments in our transactions. Among our new commitments are
such companies as Chevron Corporation, Transocean Offshore, Inc., and Canadian
Pacific.
Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
February 13, 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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<PAGE> 11
REPORT FROM M&G INVESTMENT MANAGEMENT LTD.
GOLD & PRECIOUS METALS PORTFOLIO
The spot price of gold fell from $405 per ounce to $344 during the
fiscal year ended January 31, 1997. Your Portfolio's share price fell, too,
producing a total return of -20.5%. Although we fared better than the FT Global
Gold Mines Index, which lost -26.6%, we lagged the -14.9% loss on the Salomon
World Gold Index.
Gold bullion prices and investor sentiment were dragged down by
producers' sales of future production and gold sales by central banks,
including 300 tons of bullion sold by the Dutch central bank. These factors
outweighed the fact that demand outstripped production of gold.
South African companies were our worst performers: The Salomon South
African Gold Index fell -27% in U.S. dollar terms. Because of high production
costs, South African companies are most sensitive to the falling price of
bullion, a problem compounded by the rand's fall in value versus the dollar.
Several of our South African holdings--including the American Depository
Receipts (ADRs) of Randfontein, Impala Platinum, Kloof, and Beatrix--fell by
more than -40% in dollar terms.
Canada was the strongest sector in fiscal 1997, with the Salomon
Canadian Gold Index losing -11.6%. Golden Star Resources registered a strong
gain and Barrick Gold again outperformed most gold stocks. Although Barrick
Gold represents a significant percentage of global gold indexes, we recently
reduced its weighting in our Portfolio because the company is engaged in a
risky international expansion.
Our U.S. holdings were relatively strong performers. A takeover bid is
under way for one holding, Sante Fe Pacific Gold, and we had gains from Crown
Resources and Getchell Gold. A notable disappointment was Newmont Mining. We
selectively increased our weighting in U.S. companies because of their low cost
profiles and international expansion opportunities.
Australian results were mixed, though the sector did better than the
Portfolio as a whole. We sold Highlands Gold at a price significantly above
that at which it was eventually acquired in a takeover. Great Central Mines,
CRA, and Climax Mining were all strong performers. We recently increased our
weighting in Australia with significant purchases of MIM and Newcrest (both
with exciting copper/gold projects in development) and expect to selectively
add more Australian shares.
Fiscal 1998 has started poorly, with the price of gold declining from
$344 to $339 per ounce as of this writing. Market sentiment is very negative,
and continued selling by central banks probably will depress prices in the
short term. However, lots of bad news is already factored into the price, and
the robust production/demand situation is little noticed. A market upturn could
take everyone by surprise.
Graham E. French, Portfolio Manager
February 12, 1997
9
<PAGE> 12
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
HEALTH CARE PORTFOLIO
The Health Care Portfolio provided a strong gain of 20.6% in fiscal
1997, which ended January 31. Although the Portfolio's total return trailed the
broader unmanaged Standard & Poor's 500 Composite Stock Price Index (26.3%
total return) and the capitalization-weighted S&P Health Sector Index (28.1%),
which is heavily dominated by major pharmaceutical companies, it exceeded the
return of the average competitive health-care fund (12.5%).
While smaller stocks began the year strongly, they never recovered
from the summer correction in the same robust fashion as larger-company stocks.
This produced one of the largest divergences in performance based on company
size that we have seen, and put most equity mutual funds at a disadvantage in
relation to the large-cap-dominated S&P 500 Index.
Not surprisingly in such an environment, our largest holdings did very
well during the year. The biggest contributors to the Portfolio in absolute
terms were DEKALB Genetics, Bristol-Myers Squibb, Warner-Lambert, and Pfizer.
The Portfolio also benefited when two holdings, MediSense and Genetics
Institute, were sold after takeover bids at premium prices.
The Health Care Portfolio's size grew tremendously during the year,
with our total net assets rising more than 70%. Historically, the Portfolio has
been diversified both by market subsectors and by company size, with 5% to 10%
of its assets in small-cap companies. It will be harder to maintain this
representation in the future. However, we believe that the resultant slight
upward shift in average company size will not impair the Portfolio's ability to
provide a sound, diversified exposure to the exciting and dynamic health- care
industry.
The long-term outlook for health care remains robust, based on
favorable demographic trends and tremendous innovation in the biological
sciences. That said, the very strong stock price performance of this sector
over the past few years is, unfortunately, unlikely to be duplicated.
Edward P. Owens, Senior Vice President and Portfolio Manager
February 13, 1997
10
<PAGE> 13
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
UTILITIES INCOME PORTFOLIO
The Utilities Income Portfolio earned 5.5% for fiscal 1997, which
ended January 31. Our total return was far below the 26.3% return of the
unmanaged Standard & Poor's 500 Composite Stock Price Index, but above the 4.5%
return of the composite benchmark that reflects our 80% utilities stocks/20%
utilities bonds asset allocation.
Approximately 80% of our equity assets are invested in the electric
and telephone industries, both of which significantly underperformed the broad
market in 1996 because of increasing competition, slowing growth in dividends,
and a lackluster bond market. The best-performing area within the utilities
sector during fiscal 1997 was the natural-gas pipeline and distribution
companies, and our overweighted position added to our performance. In an effort
to provide a high level of income, the Portfolio maintains an investment in
bonds. Bonds represented roughly 20% of assets over the course of the fiscal
year and were a drag on our performance.
Since our last report to you, we have modestly increased our weighting
in the natural-gas sector by initiating positions in Energen and KN Energy and
adding to positions in National Fuel Gas, MCN, and Coastal. We lessened our
weighting in electric utilities slightly by eliminating our holdings in Pacific
Gas & Electric, Allegheny Power, and FPL Group. We also took profits in
Carolina Power & Light and sold some Central & South West to buy Dominion
Resources, Duke Power, CMS Energy, New England Electric, and Edison
International. In the telephone sector, we reacquired a position in NYNEX and
added to our holdings in Frontier while taking profits in MCI Communications
and selling some of our BellSouth and SBC Communications.
The negative sentiment toward both the electric and telephone
utilities has caused these sectors to drop to valuations that seem low in
relation to the general market. We will continue to look for opportunities in
these sectors from companies well positioned to benefit from more competitive
markets. Stock selection will remain crucial to the Portfolio in fiscal 1998,
and we look forward to the challenge of providing strong total returns while
maintaining the Portfolio's income goals.
Mark J. Beckwith, Vice President and Portfolio Manager
February 13, 1997
11
<PAGE> 14
PORTFOLIO PROFILE: ENERGY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
ENERGY S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 77 500
Median Market Cap $3.7B $27.5B
Price/Earnings Ratio 19.5x 19.6x
Price/Book Ratio 3.1x 3.6x
Yield 1.4% 1.9%
Return on Equity 6.8% 19.9%
Earnings Growth Rate -0.1% 14.1%
Foreign Holdings 27.0% 3.6%
Turnover Rate 15% --
Expense Ratio 0.39% --
Cash Reserves 6.3% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
ENERGY S&P 500
- -------------------------------------------
<S> <C> <C>
R-Squared 0.35 1.00
Beta 0.85 1.00
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Louisiana Land & Exploration Co. 2.8%
Unocal Corp. 2.8
Canadian Pacific Ltd. 2.7
USX-Marathon Group 2.7
Chevron Corp. 2.7
Exxon Corp. 2.6
Kerr-McGee Corp. 2.4
Ashland Inc. 2.4
Schlumberger Ltd. 2.2
Norsk Hydro ASA ADR 2.2
- --------------------------------------------
Top Ten 25.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------
JANUARY 31, 1996 JANUARY 31, 1997
---------------------------------------
ENERGY ENERGY
---------------------------------------
<S> <C> <C>
Construction .............................. 0.0% 2.3%
Coal, Gas, Pipe ........................... 5.5 4.0
Exploration & Drilling .................... 11.8 10.5
International ............................. 25.5 27.0
Oil-Domestic .............................. 38.3 35.7
Oil-International ......................... 8.1 8.0
Oil-Services .............................. 6.8 8.8
Transport & Services ...................... 2.0 3.7
Miscellaneous ............................. 2.0 0.0
- --------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the securities held by a portfolio.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its duration by the change in rates. If
interest rates rise by one percentage point, the share price of a portfolio
with an average duration of five years would decline by about 5%. If rates
decrease by a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity and are repaid. In general, the longer the average maturity, the
more a portfolio's share price will fluctuate in response to changes in market
interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies assign ratings after appraising an issuer's ability to
meet its obligations. Quality is graded on a scale, with Aaa indicating the
most creditworthy corporate bond issuers.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
COUNTRY DIVERSIFICATION. The percentage of a portfolio's non-cash holdings
invested in securities of various countries.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a portfolio, the weighted
average yield for stocks it holds.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a portfolio's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price
multiplied by the number of shares outstanding) of the stocks in a portfolio.
Half the stocks in the portfolio have higher market capitalizations and half
lower.
13
<PAGE> 16
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular issue.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PORTFOLIO ALLOCATION BY REIT TYPE. An indicator of diversification, this table
shows the percentage of the Portfolio's non-cash holdings invested in various
real estate investment trusts, classified according to the types of property
they emphasize.
PORTFOLIO ASSET ALLOCATION. This chart shows the distribution, by type of
asset, of a portfolio's holdings.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
SECTOR DIVERSIFICATION. The percentage of a portfolio's stocks from companies
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's common stock or total net
assets in its ten largest investments (the average for stock mutual funds is
about 25%). As this percentage rises, a portfolio's returns are likely to be
more volatile, since its return is more dependent on the fortunes of a few
companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to
investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on its income, net of its operating expenses, over the past 30 days and is
annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
14
<PAGE> 17
PORTFOLIO PROFILE: GOLD & PRECIOUS METALS PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
GOLD & PRECIOUS
METALS S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 66 500
Median Market Cap $1.9B $27.5B
Price/Earnings Ratio 28.6x 19.6x
Price/Book Ratio 2.2x 3.6x
Dividend Yield 1.7% 1.9%
Return on Equity 15.8% 19.9%
Earnings Growth Rate 3.7% 14.1%
Foreign Holdings 80.3% 3.6%
Turnover Rate 19% --
Expense Ratio 0.50% --
Cash Reserves 3.5% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
GOLD & PRECIOUS
METALS S&P 500
- -------------------------------------------
<S> <C> <C>
R-Squared 0.04 1.00
Beta 0.44 1.00
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION
- -------------------------------------------
<S> <C>
Australia 19.9%
Canada 24.1
Ghana 2.3
South Africa 26.4
United Kingdom 2.9
United States 18.5
- -------------------------------------------
Bullion 5.9%
- -------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Euro-Nevada Mining Corp. 4.9%
Franco-Nevada Mining Corp., Ltd. 4.4
Freeport-McMoRan Copper &
Gold Inc. 4.3
Normandy Mining Ltd. 3.4
Barrick Gold Corp. 3.1
Newcrest Mining Ltd. 2.9
Mount Isa Mines Holdings Ltd. 2.7
Great Central Mines Ltd. 2.6
TVX Gold, Inc. 2.5
Newmont Mining Corp. 2.4
- --------------------------------------------
Top Ten 33.2%
</TABLE>
15
<PAGE> 18
PORTFOLIO PROFILE: HEALTH CARE PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
HEALTH CARE S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 94 500
Median Market Cap $10.3B $27.5B
Price/Earnings Ratio 26.1x 19.6x
Price/Book Ratio 4.0x 3.6x
Yield 1.2% 1.9%
Return on Equity 23.6% 19.9%
Earnings Growth Rate 8.9% 14.1%
Foreign Holdings 20.6% 3.6%
Turnover Rate 7% --
Expense Ratio 0.38% --
Cash Reserves 9.1% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------
HEALTH CARE S&P 500
- --------------------------------------------
<S> <C> <C>
R-Squared 0.60 1.00
Beta 0.82 1.00
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Bristol-Myers Squibb Co. 5.0%
Warner-Lambert Co. 4.6
Pfizer, Inc. 4.3
Abbott Laboratories 4.0
Pharmacia & Upjohn, Inc. 3.2
Johnson & Johnson 3.1
Merck & Co., Inc. 3.0
Zeneca Group PLC ADR 2.9
McKesson Corp. 2.6
DEKALB Genetics Corp. Class B 2.5
- --------------------------------------------
Top Ten 35.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------
JANUARY 31, 1996 JANUARY 31, 1997
---------------------------------------
HEALTH CARE HEALTH CARE
---------------------------------------
<S> <C> <C>
Basic Materials ........................... 2.6% 1.6%
Consumer Staples .......................... 2.2 3.6
Drugs ..................................... 29.2 31.4
Financial ................................. 0.9 0.6
International ............................. 19.3 20.6
Medical Services .......................... 7.0 6.9
Medical Supplies .......................... 27.0 25.9
Specialty Pharmaceutical .................. 7.5 5.0
Technology ................................ 1.1 1.2
Miscellaneous ............................. 3.2 3.2
- --------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE: UTILITIES INCOME PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 13 and 14.
<TABLE>
TOTAL FUND CHARACTERISTICS
- -------------------------------------------
<S> <C>
Yield 4.6%
Turnover Rate 38%
Expense Ratio 0.40%
Cash Reserves 2.1%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- -------------------------------------------
UTILITIES
INCOME S&P 500
- -------------------------------------------
<S> <C> <C>
R-Squared 0.46 1.00
Beta 0.58 1.00
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------
EQUITY CHARACTERISTICS
UTILITIES
INCOME S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 57 500
Median Market Cap $4.1B $27.5B
Price/Earnings Ratio 13.8x 19.6x
Price/Book Ratio 2.0x 3.6x
Dividend Yield 4.3% 1.9%
Return on Equity 11.0% 19.9%
Earnings Growth Rate 1.0% 14.1%
Foreign Holdings 6.0% 3.6%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- -------------------------------------------
<S> <C>
STOCKS 78%
BONDS 28%
CASH RESERVES 2%
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF COMMON STOCK)
- -------------------------------------------
<S> <C>
Pinnacle West Capital Corp. 4.8%
Texas Utilities Co. 4.6
Sprint Corp. 4.0
DQE Inc. 4.0
New England Electric System 3.9
Illinova Corp. 3.2
NIPSCO Industries, Inc. 3.2
CINergy Corp. 3.2
PacifiCorp 3.0
BellSouth Corp. 2.9
- -------------------------------------------
Top Ten 36.8%
Top Ten as % of Total Net Assets 28.8
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------
JANUARY 31, 1996 JANUARY 31, 1997
---------------------------------------
UTILITIES INCOME UTILITIES INCOME
---------------------------------------
<S> <C> <C>
Basic Materials ........................... 0.5% 0.4%
Electrical Power .......................... 44.1 57.7
Energy .................................... 6.6 5.4
Natural Gas ............................... 9.0 11.3
Technology ................................ 3.5 0.9
Telephone ................................. 34.8 23.6
Miscellaneous ............................. 1.5 0.7
- --------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
PORTFOLIO PROFILE: UTILITIES INCOME PORTFOLIO (continued)
EQUITY INVESTMENT FOCUS
- -------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -------------------------------------------
<S> <C>
Number of Bonds 38
Yield to Maturity 7.0%
Average Coupon 6.9%
Average Maturity 12.8 years
Average Quality Aa3
Average Duration 6.1 years
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- -------------------------------------------
<S> <C>
Treasury/Agency 3.1%
Electric 47.7
Gas 3.7
Telephone 45.5
- -------------------------------------------
Total 100.0%
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- -------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------------
<S> <C>
Aaa 13.7%
Aa 44.6
A 41.7
Baa --
Ba --
B --
Not Rated --
- -------------------------------------------
Total 100.0%
</TABLE>
18
<PAGE> 21
PORTFOLIO PROFILE: REIT INDEX PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
REIT INDEX
PORTFOLIO S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 106 500
Median Market Cap $0.9B $27.5B
Price/Earnings Ratio 21.7x 19.6x
Price/Book Ratio 2.2x 3.6x
Dividend Yield 6.0% 1.9%
Return on Equity 8.1% 19.9%
Earnings Growth Rate 13.0% 14.1%
Foreign Holdings 0% 3.6%
Turnover Rate 0% --
Expense Ratio* 0.36% --
Cash Reserves 2.5% --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Simon DeBartolo Group, Inc. REIT 4.2%
Public Storage, Inc. REIT 3.8
Security Capital Industrial Trust REIT 3.1
Equity Residential Properties
Trust REIT 3.0
Crescent Real Estate Inc. REIT 2.8
Security Capital Pacific, Inc. REIT 2.5
Starwood Lodging Trust REIT 2.4
Beacon Properties Corp. REIT 2.3
New Plan Realty Trust REIT 2.1
United Dominion Realty Trust REIT 1.9
- --------------------------------------------
Top Ten 28.1%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REIT TYPE*
- ------------------------------------------
<S> <C>
Retail 29%
Apartments 27
Industrial 16
Office 13
Hotels 7
Diversified 7
Other 1
- ------------------------------------------
100%
</TABLE>
*Data as of December 31, 1996.
19
<PAGE> 22
PERFORMANCE SUMMARY: ENERGY PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 5/23/84-1/31/97
- ---------------------------------------------
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
- ---------------------------------------------
</TABLE>
See Financial Highlights table on page 40 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ENERGY PORTFOLIO* 40.32% 18.74% 14.26% $37,940
AVERAGE NATURAL RESOURCES FUND 30.85 14.09 10.18 26,361
S&P 500 INDEX 26.34 17.06 14.54 38,850
- ----------------------------------------------------------------------------------
</TABLE>
* Total returns exclude the 1% redemption fee on shares held for less than one
year.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- -----------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Portfolio** 5/23/84 34.00% 17.27% 11.93% 3.09% 15.02%
- -----------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year-end.
** Total returns exclude the 1% redemption fee on shares held for less than one
year.
20
<PAGE> 23
PERFORMANCE SUMMARY: GOLD & PRECIOUS METALS PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 5/23/84-1/31/97
- -----------------------------------------------------
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
- -----------------------------------------------------
</TABLE>
* MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
See Financial Highlights table on page 41 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOLD & PRECIOUS METALS PORTFOLIO* -20.51% 5.17% 4.13% $14,984
AVERAGE GOLD FUND -13.97 6.40 2.69 13,045
SALOMON WORLD GOLD INDEX** -14.91 8.97 5.07 16,402
- ---------------------------------------------------------------------------------------
</TABLE>
* Total returns exclude the 1% redemption fee on shares held for less than one
year.
** MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- ---------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gold & Precious Metals
Portfolio** 5/23/84 -0.75% 6.92% 3.43% 2.71% 6.14%
- ---------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year-end.
** Total returns exclude the 1% redemption fee on shares held for less than one
year.
21
<PAGE> 24
PERFORMANCE SUMMARY: HEALTH CARE PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 5/23/84-1/31/97
- ----------------------------------------------
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
- ----------------------------------------------
</TABLE>
See Financial Highlights table on page 41 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Care Portfolio* 20.65% 17.79% 19.19% $57,883
Average Health Care Fund 12.49 11.26 17.46 50,004
S&P 500 Index 26.34 17.06 14.54 38,850
- ---------------------------------------------------------------------------------------
</TABLE>
* Total returns exclude the 1% redemption fee on shares held for less than one
year.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- -----------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care Portfolio** 5/23/84 21.36% 16.26% 17.73% 2.22% 19.95%
- -----------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year-end.
** Total returns exclude the 1% redemption fee on shares held for less than one
year.
22
<PAGE> 25
PERFORMANCE SUMMARY: UTILITIES INCOME PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 5/15/92-1/31/97
- ---------------------------------------------
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
- ---------------------------------------------
</TABLE>
*80% utility stocks from S&P, 20% utility bonds from Lehman.
See Financial Highlights table on page 42 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 5/15/92-1/31/97
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utilities Income Portfolio 5.51% 11.77% $16,899
Average Utility Fund 9.98 10.09 15,737
Utilities Composite Index* 4.54 11.79 16,912
S&P 500 26.34 17.86 21,696
- ---------------------------------------------------------------------------------------
</TABLE>
*80% utility stocks from S&P, 20% utility bonds from Lehman.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utilities Income Portfolio 5/15/92 5.28% 6.48% 5.17% 11.65%
- -----------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year-end.
23
<PAGE> 26
PERFORMANCE SUMMARY: REIT INDEX PORTFOLIO
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>
TOTAL INVESTMENT RETURN: 5/13/96-1/31/97
- -------------------------------------------------
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%
- -------------------------------------------------
</TABLE>
See Financial Highlights table on page 42 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 5/13/96-1/31/97
- --------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL RETURN FINAL VALUE OF A
SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------
<S> <C> <C>
REIT INDEX PORTFOLIO* 30.33% $13,033
AVERAGE REAL ESTATE FUND 26.18 12,618
MORGAN STANLEY REIT INDEX 30.66 13,066
- ------------------------------------------------------------------------
</TABLE>
* Total return excludes the 1% redemption fee on shares held for less than one
year.
<TABLE>
<CAPTION>
SINCE INCEPTION TOTAL RETURN: PERIOD ENDED 12/31/96*
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REIT Index Portfolio** 5/13/96 26.39% 3.73% 30.12%
- -----------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this total return information through the
latest calendar quarter as well as for the Portfolio's fiscal year-end.
** Total return excludes the 1% redemption fee on shares held for less than one
year.
24
<PAGE> 27
[PHOTO]
FINANCIAL STATEMENTS
JANUARY 31, 1997
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)
- --------------------------------------------------------------------------------
COMMON STOCKS (93.0%)
- --------------------------------------------------------------------------------
UNITED STATES (67.9%)
- --------------------------------------------------------------------------------
<S> <C> <C>
COAL, GAS, PIPE (3.7%)
Anadarko Petroleum Corp. 130,000 $ 8,418
- - Santa Fe Energy Resources, Inc. 1,165,200 17,332
- - Seagull Energy Corp. 500,000 10,687
---------
36,437
---------
CONSTRUCTION (2.2%)
Fluor Corp. 300,000 21,338
---------
EXPLORATION & DRILLING (9.7%)
- - BJ Services Co. 240,000 11,100
- - Diamond Offshore Drilling, Inc. 85,200 5,634
- - ENSCO International, Inc. 100,000 5,513
McDermott International, Inc. 700,000 12,775
Noble Affiliates, Inc. 130,000 5,671
- - Noble Drilling Corp. 800,000 17,500
Pogo Producing Co. 240,000 10,110
- - Reading & Bates Corp. 150,000 4,369
Transocean Offshore Inc. 200,000 13,100
- - Varco International, Inc. 400,000 10,650
---------
96,422
---------
OIL-DOMESTIC (33.2%)
Amerada Hess Corp. 270,000 15,930
Amoco Corp. 200,000 17,400
Apache Corp. 200,000 7,675
Ashland Inc. 557,800 24,055
- - Barrett Resources Corp. 200,000 7,725
Devon Energy Corp. 220,000 7,783
Enron Oil & Gas Co. 654,400 15,051
Kerr-McGee Corp. 350,000 24,063
Louisiana Land & Exploration Co. 500,000 28,125
Murphy Oil Corp. 220,100 11,088
- - Oryx Energy Co. 800,000 19,400
Pennzoil Co. 200,000 12,475
Phillips Petroleum Co. 400,000 17,650
Sun Co., Inc. 200,000 5,275
- - TransTexas Gas Corp. 350,000 5,687
USX-Marathon Group 1,000,000 26,625
Ultramar Diamond
Shamrock Corp. 431,900 12,687
Union Texas Petroleum
Holdings, Inc. 1,000,000 21,250
Unocal Corp. 646,000 27,213
Vastar Resources, Inc. 590,300 21,324
---------
328,481
---------
OIL-INTERNATIONAL (7.4%)
Chevron Corp. 400,000 26,550
Exxon Corp. 250,000 25,906
Texaco Inc. 200,000 21,175
---------
73,631
---------
OIL-SERVICES (8.2%)
Baker Hughes, Inc. 500,000 19,500
Camco International, Inc. 160,000 7,660
- - Cooper Cameron Corp. 150,000 10,931
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
ENERGY PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
- - Rowan Cos., Inc. 270,000 $ 6,818
Schlumberger Ltd. 200,000 22,225
- - Weatherford Enterra, Inc. 393,099 14,299
---------
81,433
---------
TRANSPORT & SERVICES (3.5%)
Canadian Pacific Ltd. 1,000,000 27,125
- - OMI Corp. 700,000 7,350
---------
34,475
---------
- --------------------------------------------------------------------------------
TOTAL UNITED STATES 672,217
- --------------------------------------------------------------------------------
INTERNATIONAL (25.1%)
- --------------------------------------------------------------------------------
CANADA (14.6%)
Alberta Energy Co., Ltd. 627,870 15,650
- - Anderson Exploration Ltd. 1,012,401 14,344
- - CS Resources Ltd. 500,000 4,636
- - Cabre Exploration Ltd. 290,000 4,948
- - Canadian Natural
Resources Ltd. 390,000 11,109
- - Chauvco Resources Ltd. Class A 250,000 2,791
Imperial Oil Ltd. 360,300 17,346
Imperial Oil Ltd. (U.S. Traded) 80,000 3,850
- - Jordan Petroleum Ltd. 500,000 2,874
- - Northstar Energy Corp. 300,000 3,449
Pancanadian Petroleum Ltd. 91,700 4,081
Paramount Resources Ltd. 360,300 7,885
- - Penn West Petroleum Ltd. 352,143 4,232
Petro-Canada 1,000,000 15,912
- - Poco Petroleums 570,000 6,300
- - Renaissance Energy Ltd. 250,000 8,698
- - Rigel Energy Corp. 250,290 2,785
- - Rio Alto Exploration Ltd. 652,500 4,937
- - Talisman Energy, Inc. 255,000 8,957
---------
144,784
---------
UNITED KINGDOM (2.8%)
Burmah Castrol PLC 299,955 4,951
Lasmo PLC 2,000,000 8,109
London & Overseas
Freighters Ltd. 638,300 788
- - London & Overseas
Freighters Ltd. ADR 290,000 3,480
Shell Transport & Trading
Co. ADR 100,000 10,350
---------
27,678
---------
OTHER (7.7%)
Norsk Hydro ASA ADR 380,000 21,375
Repsol SA ADR 192,500 7,628
Royal Dutch Petroleum Co. ADR 100,000 17,350
Saga Petroleum ASA B Shares 190,000 3,354
Total SA ADR 408,989 17,638
YPF SA ADR 300,000 8,362
---------
75,707
---------
- --------------------------------------------------------------------------------
TOTAL INTERNATIONAL 248,169
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $660,468) 920,386
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.7%)
- --------------------------------------------------------------------------------
Sun Co., Inc. $1.80 Series A
(COST $6,422) 250,000 6,750
- --------------------------------------------------------------------------------
<CAPTION>
MARKET
FACE VALUE*
AMOUNT (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (11.4%)
- --------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 2/3/97
(COST $112,723) $112,723 $112,723
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (105.1%)
(COST $779,613) 1,039,859
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.1%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and G 11,218
Payables for Investment Securities Purchased (53,366)
Other Liabilities--Note G (8,262)
---------
(50,410)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 42,214,778 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $989,449
================================================================================
NET ASSET VALUE PER SHARE $23.44
================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $719,732 $17.05
Undistributed Net Investment
Income--Note F 388 .01
Accumulated Net Realized
Gains--Note F 9,083 .22
Unrealized Appreciation--Note E
Investment Securities 260,246 6.16
Foreign Currencies -- --
- --------------------------------------------------------------------------------
NET ASSETS $989,449 $23.44
================================================================================
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
GOLD & PRECIOUS METALS VALUE*
METALS PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (90.8%)
- --------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (19.2%)
- - Acacia Resources Ltd. 1,500,000 $ 2,561
- - Aurora Gold Ltd. 3,000,000 4,871
- - Bougainville Copper Ltd. 2,000,000 694
- - Climax Mining Ltd. 850,000 777
CRA Ltd. 500,000 7,074
- - Emperor Mines Ltd. 2,150,000 3,622
Great Central Mines Ltd. 5,000,000 11,967
- - Lone Star Exploration NL 2,000,000 1,067
Mount Isa Mines Holdings Ltd. 9,500,000 12,672
Newcrest Mining Ltd. 3,500,000 13,393
Normandy Mining Ltd. 12,350,000 14,968
Normandy Mining Ltd.
Warrants Exp. 4/30/01 1,800,000 528
Resolute Ltd. 3,500,000 6,883
- - Sons of Gwalia Ltd. 1,000,000 5,107
- - Star Mining Corp. NL 28,000,000 2,134
- - Tanami Gold NL 1,600,000 317
---------
88,635
---------
CANADA (23.3%)
Barrick Gold Corp. 525,000 14,109
- - ElDorado Gold Corp., Ltd. 900,000 5,775
Euro-Nevada Mining Corp. 846,000 22,436
Franco-Nevada Mining
Corp., Ltd. 475,000 20,437
- - Golden Star Resources Ltd. 350,000 4,621
- - Greenstone Resources Ltd. 750,000 9,041
- - IAMGOLD (International
African Mining Gold Corp.) 527,600 2,446
- - Miramar Mining Corp. 1,250,000 5,193
- - Nelson Gold Corp., Ltd. 3,750,000 2,921
- - Philex Gold, Inc. 215,000 1,132
Placer Dome, Inc. 250,000 5,094
- - Princess Resources Ltd. 6,000,000 846
- - South Pacific Resources Corp. 150,000 356
- - TVX Gold, Inc. 1,500,000 11,628
- - Vengold, Inc. 1,250,000 1,576
---------
107,611
---------
GHANA (2.2%)
- - Ashanti Goldfields Co., Ltd. 399,998 4,985
- - Ashanti Goldfields Co., Ltd. GDR 425,000 5,206
---------
10,191
---------
SOUTH AFRICA (25.4%)
Anglo American Corp. of
South Africa Ltd. ADR 50,000 2,763
(1) Avgold Ltd. ADR 204,068 4,040
Beatrix Mines Ltd. ADR 1,250,000 7,263
De Beers Centenary AG ADR 100,000 3,113
Driefontein Consolidated
Ltd. ADR 1,000,000 9,000
Elandsrand Gold Mining
Ltd. ADR 1,500,000 7,155
Evander Gold Mines Ltd. ADR 425,000 2,236
Free State Consolidated
Gold Mines Ltd. ADR 1,500,000 10,875
Gold Fields of South Africa
Ltd. ADR 350,000 7,875
Impala Platinum Holdings
Ltd. ADR 750,000 7,440
Kloof Gold Mining Co., Ltd. ADR 650,000 4,631
Randfontein Estates Gold
Mining Co. Ltd. ADR 1,789,935 8,323
- -(1)Randgold & Exploration Co., Ltd. 500,000 4,073
Rustenberg Platinum Holdings
Ltd. ADR 670,000 8,998
Southvaal Holdings Ltd. ADR 330,000 9,405
Vaal Reefs Exploration &
Mining Co., Ltd. ADR 1,600,000 10,600
Western Deep Levels Ltd. ADR 325,000 9,750
---------
117,540
---------
UNITED KINGDOM (2.8%)
- - Bakyrchik Gold PLC 750,000 2,596
- - Philippine Gold PLC 1,525,000 2,810
RTZ Corp. PLC 525,000 7,673
---------
13,079
---------
UNITED STATES (17.9%)
- - Amax Gold, Inc. 800,000 5,000
- - Atlas Corp. 1,000,000 812
- - Campbell Resources, Inc. 5,000,000 4,063
- - Crown Resources Corp. 600,000 3,600
Freeport-McMoRan Copper &
Gold Inc. Class A 553,120 15,142
Freeport-McMoRan Copper &
Gold, Inc. Gold Denomination
Shares Pfd. 150,000 4,744
- - Getchell Gold Corp. 200,000 7,250
Newmont Gold Co. 125,000 4,984
Newmont Mining Corp. 275,000 10,966
Pioneer Group, Inc. 250,000 5,719
- - Royal Oak Mines, Inc. 2,000,000 6,000
Santa Fe Pacific Gold Corp. 600,000 9,225
- - Stillwater Mining Co. 300,000 5,250
---------
82,755
---------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $412,844) 419,811
- --------------------------------------------------------------------------------
PRECIOUS METALS (5.7%)
- --------------------------------------------------------------------------------
- - Gold Bullion (74,868 Ounces) 25,781
- - Platinum Bullion (2,009 Ounces) 702
- --------------------------------------------------------------------------------
TOTAL PRECIOUS METALS
(COST $31,918) 26,483
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.8%)
- --------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 2/3/97
(COST $17,451) $17,451 17,451
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(COST $462,213) 463,745
- --------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
GOLD & PRECIOUS METALS VALUE*
METALS PORTFOLIO (000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- --------------------------------------------------------------------------------
<S> <C>
Other Assets--Notes C and G $ 35,789
Liabilities--Note G (37,025)
------------
(1,236)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 42,258,972 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $462,509
================================================================================
NET ASSET VALUE PER SHARE $10.94
================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income Producing Security.
(1)Security purchased on a when-issued or delayed delivery
basis for which the Fund has not taken delivery as of
January 31, 1997.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $470,865 $11.14
Overdistributed Net Investment
Income--Note F (5,276) (.13)
Accumulated Net Realized
Losses--Note F (4,612) (.11)
Unrealized Appreciation--Note E
Investment Securities 1,532 .04
Foreign Currencies -- --
- --------------------------------------------------------------------------------
NET ASSETS $462,509 $10.94
================================================================================
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (90.9%)
- --------------------------------------------------------------------------------
UNITED STATES (72.2%)
- --------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS (1.5%)
Mallinckrodt, Inc. 940,000 $ 38,540
- - Scios, Inc. 491,750 2,920
---------
41,460
---------
CONSUMER STAPLES (3.3%)
DEKALB Genetics Corp. Class B 1,123,050 71,033
- -(1)Paragon Trade Brands, Inc. 958,500 22,525
---------
93,558
---------
DRUGS (28.5%)
Alpharma, Inc. Class A 1,156,040 15,173
- - ALZA Corp. 1,030,000 29,741
American Home Products Corp. 700,000 44,363
Bergen Brunswig Corp. Class A 152,100 4,525
Bristol-Myers Squibb Co. 1,130,000 143,510
Carter-Wallace, Inc. 266,000 3,990
Carter-Wallace, Inc. Class B 24,000 360
Eli Lilly & Co. 351,574 30,631
Merck & Co., Inc. 930,225 84,418
- -(1)Oravax, Inc. 602,600 2,561
- - Perrigo Co. 3,357,100 35,250
Pfizer, Inc. 1,315,000 122,131
Pharmacia & Upjohn, Inc. 2,420,000 90,145
Rhone-Poulenc Rorer, Inc. 795,000 59,824
Schering-Plough Corp. 130,000 9,831
- -(1)Targeted Genetics Corp. 1,224,600 5,817
Warner-Lambert Co. 1,610,000 129,605
---------
811,875
---------
FINANCIAL (0.6%)
(1) United Wisconsin Services, Inc. 678,000 16,102
---------
MEDICAL SERVICES (6.2%)
- - Beverly Enterprises, Inc. 1,230,000 17,835
Columbia/HCA Healthcare Corp. 1,789,020 70,666
- - Humana, Inc. 1,670,400 31,738
- - Laboratory Corp. of America 3,992,116 12,475
- - Physician Corp. of America 1,721,700 16,571
- - Salick Health Care, Inc. 38,450 1,528
- -(1)Syncor International Corp. 856,559 10,600
- - Tenet Healthcare Corp. 611,100 16,500
---------
177,913
---------
MEDICAL SUPPLIES (23.5%)
Abbott Laboratories 2,090,000 113,644
- - Advanced Technology
Laboratories, Inc. 683,300 22,549
Allegiance Corp. 1,235,600 31,662
Allergan, Inc. 1,856,000 65,656
C.R. Bard, Inc. 2,138,500 60,413
Beckman Instruments, Inc. 1,102,200 43,537
- - BioCryst Pharmaceuticals, Inc. 340,100 5,272
Biomet, Inc. 1,070,300 16,590
(1) Collagen Corp. 474,800 9,852
- - Coventry Corp. 500,000 4,000
- - Datascope Corp. 340,100 7,312
- - Depuy, Inc. 366,600 6,874
- -(1)E-Z-EM Inc. Class A 219,258 2,823
- - E-Z-EM Inc. Class B 274,290 3,394
Guidant Corp. 1,110,000 61,883
- - Haemonetics Corp. 906,000 14,949
- - Healthsource, Inc. 1,300,000 17,225
Johnson & Johnson 1,520,000 87,590
Kinetic Concepts, Inc. 716,000 8,771
- - Matria Healthcare, Inc. 196,700 984
- - Mid Atlantic Medical
Services, Inc. 500,000 6,375
- - Nellcor Puritan Bennett, Inc. 260,000 4,420
Owens & Minor, Inc.
Holding Co. 1,429,100 14,648
- - PerSeptive Biosystems, Inc. 250,500 1,628
- - Protocol Systems, Inc. 273,000 2,696
- - ReSound Corp. 300,000 1,950
- - SpaceLabs Medical, Inc. 280,000 5,880
United Healthcare Corp. 400,000 19,500
United States Surgical Corp. 300,000 12,038
- - Value Health, Inc. 700,000 15,838
---------
669,953
---------
SPECIALTY PHARMACEUTICAL (4.6%)
- - Alliance Pharmaceutical Corp. 967,388 12,092
- - Amylin Pharmaceuticals, Inc. 750,000 10,406
- - Anergen, Inc. 520,000 1,690
- - Cephalon, Inc. 270,000 6,986
- - Genentech, Inc.-Special
Common Stock 931,900 51,138
- - Genzyme Corp. 600,000 16,725
- - Immunex Corp. 1,174,000 23,627
- - Magainin Pharmaceuticals, Inc. 694,400 5,555
- - Matrix Pharmaceutical, Inc. 200,500 1,278
---------
129,497
---------
TECHNOLOGY (1.1%)
- - Cerner Corp. 706,600 10,599
- -(1)MDL Information Systems, Inc. 588,300 12,943
Perkin-Elmer Corp. 122,720 8,575
---------
32,117
---------
MISCELLANEOUS (2.9%)
- - Human Genome Sciences, Inc. 177,500 8,165
McKesson Corp. 1,280,000 75,360
---------
83,525
---------
- --------------------------------------------------------------------------------
TOTAL UNITED STATES 2,056,000
- --------------------------------------------------------------------------------
INTERNATIONAL (18.7%)
- --------------------------------------------------------------------------------
Amersham International PLC 1,630,900 31,519
Banyu Pharmaceutical Co., Ltd. 905,000 11,778
Bayer AG ADR 400,000 15,092
Chugai Pharmaceutical Co., Ltd. 1,410,000 10,906
Eisai Co., Ltd. 2,785,000 53,681
- - Elan Corp. PLC ADR 67,648 2,604
Fujisawa Pharmaceutical
Co., Ltd. 2,710,000 21,050
- - Instrumentation Laboratory
SPA ADR 300,000 2,738
- - Novartis AG (Registered) 51,745 59,228
- - Nycomed ASA A 354,857 6,374
Rhone-Poulenc SA ADR 1,155,931 38,579
Roche Holding AG
(Dividend-Right Certificates) 3,000 26,339
Sankyo Co., Ltd. 1,800,000 46,853
Schering AG 193,470 16,498
SmithKline Beecham PLC ADR 574,800 41,529
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Sulzer AG (Ptg. Ctf.) 31,366 $ 20,761
Synthelabo SA 118,270 12,238
Takeda Chemical Industries Ltd. 1,500,000 29,530
Tanabe Seiyaku Co., Ltd. 200,000 1,395
Zeneca Group PLC ADR 964,524 83,190
---------
531,882
---------
TOTAL COMMON STOCKS
(COST $1,728,122) 2,587,882
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (10.4%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 2/3/97
(COST $295,575) $ 295,575 295,575
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.3%)
(COST $2,023,697) 2,883,457
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.3%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and G 29,106
Liabilities--Note G (66,487)
---------
(37,381)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 46,924,959 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $2,846,076
================================================================================
NET ASSET VALUE PER SHARE $60.65
================================================================================
</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.
ADR--American Depository Receipt.
(Ptg. Ctf.)--Participating Certificate.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,952,628 $41.61
Undistributed Net Investment
Income--Note F 1,342 .03
Accumulated Net Realized
Gains--Note F 32,378 .69
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 859,760 18.32
Foreign Currencies (32) --
- --------------------------------------------------------------------------------
NET ASSETS $2,846,076 $60.65
================================================================================
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
UTILITIES INCOME PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (78.3%)
- --------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS (0.3%)
NOVA Corp. 220,800 $ 2,070
---------
ELECTRICAL POWER (45.2%)
Baltimore Gas & Electric Co. 304,600 8,377
CMS Energy Corp. 354,000 11,859
Carolina Power & Light Co. 100,000 3,763
Centerior Energy Corp. 200,000 2,150
Central & South West Corp. 200,000 5,050
Central Hudson Gas &
Electric Corp. 216,300 6,786
Cilcorp, Inc. 85,000 3,273
CINergy Corp. 463,321 15,985
DPL, Inc. 522,000 12,789
DQE Inc. 700,250 20,045
Dominion Resources, Inc. 350,000 13,869
Duke Power Co. 150,000 7,031
Edison International 304,000 6,498
GPU Inc. 280,000 9,380
Illinova Corp. 620,400 16,363
NIPSCO Industries, Inc. 415,500 16,205
New England Electric System 572,100 19,594
Northern States Power Co. 130,900 6,038
PacifiCorp 702,800 14,935
Pinnacle West Capital Corp. 769,300 24,329
PowerGen PLC ADR 239,000 9,889
Public Service Co. of Colorado 219,600 8,564
Public Service Co. of New Mexico 400,000 8,000
Sierra Pacific Resources 227,600 6,458
Southern Co. 300,000 6,563
Southern California Water Co. 175,700 3,953
Texas Utilities Co. 572,200 23,174
---------
290,920
---------
ENERGY (4.2%)
Coastal Corp. 175,000 8,466
Questar Corp. 262,300 10,262
Westcoast Energy, Inc. 481,900 8,433
---------
27,161
---------
NATURAL GAS (8.8%)
Energen Corp. 62,000 1,907
Equitable Resources, Inc. 318,400 10,348
KN Energy, Inc. 50,000 1,944
MCN Corp. 162,000 5,245
National Fuel Gas Co. 225,000 9,506
ONEOK, Inc. 145,400 4,307
Pacific Enterprises 282,000 8,495
Public Service Co. of
North Carolina, Inc. 39,300 727
Sonat, Inc. 225,000 11,981
Southwestern Energy Co. 161,200 2,458
---------
56,918
---------
TECHNOLOGY (0.7%)
Lucent Technologies, Inc. 82,660 4,484
---------
TELEPHONE (18.5%)
AT&T Corp. 100,000 3,938
ALLTEL Corp. 80,000 2,570
BCE, Inc. 100,000 5,038
BellSouth Corp. 327,600 14,537
- - Deutsche Telekom AG ADR 101,500 1,890
Frontier Corp. 395,200 8,645
GTE Corp. 250,000 11,750
NYNEX Corp. 200,000 10,125
SBC Communications Inc. 225,000 12,347
Southern New England
Telecommunications Corp. 200,000 7,450
Sprint Corp. 500,000 20,375
Telecom Corp. of New Zealand
Ltd. ADR 87,900 7,109
Telus Corp. 173,100 2,485
U S WEST Communications
Group 332,000 10,915
---------
119,174
---------
MISCELLANEOUS (0.6%)
Royal PTT Nederland NV ADR 100,000 3,613
---------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $420,696) 504,340
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
BONDS (19.0%)
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC (9.3%)
Carolina Power & Light Co.
8.625%, 9/15/21 $ 3,000 3,351
Central Power & Light Co.
7.25%, 10/1/04 2,000 2,036
Dayton Power & Light Co.
8.15%, 1/15/26 3,000 3,092
Duke Power Co.
6.625%, 2/1/03 4,000 3,983
Florida Power & Light Co.
7.00%, 9/1/25 4,000 3,749
Houston Lighting & Power Co.
8.75%, 3/1/22 2,000 2,099
Kentucky Utilities Co.
7.92%, 5/15/07 2,000 2,119
Louisville Gas & Electric
Energy Corp.
6.00%, 8/15/03 2,000 1,920
Northern States Power Co.
5.75%, 10/1/03 4,000 3,785
Pacific Gas & Electric Co.
8.375%, 5/1/25 2,000 2,060
Southern California Edison
6.25%, 6/15/03 3,000 2,907
Southern California Gas Co.
8.75%, 10/1/21 3,000 3,206
Southern Indiana Gas &
Electric Co.
8.875%, 6/1/16 3,400 3,930
Tampa Electric Co.
7.75%, 11/1/22 3,000 2,975
Union Electric Power Co.
8.75%, 12/1/21 2,000 2,136
U S WEST Communications Group
6.125%, 11/15/05 4,000 3,778
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
UTILITIES INCOME PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Virginia Electric & Power Co.
6.00%, 8/1/01 5,000 $ 4,875
West Texas Utilities Co.
7.75%, 6/1/07 1,500 1,563
Wisconsin Electric Power Co.
7.75%, 1/15/23 2,000 1,990
Wisconsin Public Service Corp.
6.80%, 2/1/03 4,500 4,508
---------
60,062
---------
GAS (0.8%)
Atlanta Gas Light Co. MTN
5.90%, 10/6/03 5,000 4,703
---------
TELEPHONE (8.9%)
AT&T Corp.
7.50%, 6/1/06 5,000 5,171
Bell Telephone Co. of Pennsylvania
6.625%, 9/15/02 3,500 3,506
BellSouth Telecommunications
6.75%, 10/15/33 5,000 4,490
Carolina Telephone & Telegraph
5.75%, 8/15/00 5,000 4,878
GTE Northwest Inc.
6.125%, 2/15/99 5,000 4,984
Illinois Bell Telephone Co.
7.25%, 3/15/24 2,000 1,926
Michigan Bell Telephone Co.
6.375%, 9/15/02 4,000 3,960
New England Telephone &
Telegraph
6.875%, 10/1/23 2,000 1,819
New Jersey Bell Telephone Co.
8.00%, 6/1/22 3,000 3,241
New York Telephone &
Telegraph Co.
8.625%, 11/15/10 2,500 2,810
Ohio Bell Telephone Co.
7.85%, 12/15/22 2,000 2,037
Pacific Bell Telephone Co.
7.25%, 7/1/02 4,000 4,090
Southwestern Bell Telephone Co.
6.625%, 4/1/05 3,000 2,957
United Telephone Florida
6.25%, 5/15/03 6,000 5,839
United Telephone Ohio
6.625%, 10/1/02 2,000 1,989
Wisconsin Bell
6.75%, 8/15/24 4,000 3,624
---------
57,321
---------
- --------------------------------------------------------------------------------
TOTAL BONDS
(COST $122,337) 122,086
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (0.6%)
- --------------------------------------------------------------------------------
U.S. TREASURY NOTE
5.50%, 4/15/00
(COST $3,862) 4,000 3,930
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
FACE VALUE*
AMOUNT (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.3%)
- --------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 2/3/97
(COST $8,477) $8,477 $ 8,477
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(COST $555,372) 638,833
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.8%)
- --------------------------------------------------------------------------------
Other Assets--Note C 9,860
Liabilities (4,839)
---------
5,021
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 49,804,319 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $643,854
================================================================================
NET ASSET VALUE PER SHARE $12.93
================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $554,284 $11.13
Undistributed Net
Investment Income 8,994 .18
Accumulated Net Realized
Losses--Note F (2,885) (.06)
Unrealized Appreciation--Note E 83,461 1.68
- --------------------------------------------------------------------------------
NET ASSETS $643,854 $12.93
================================================================================
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (97.6%)
- --------------------------------------------------------------------------------
<S> <C> <C>
Ambassador Apartments
Inc. REIT 83,800 $ 2,011
Amli Residential Properties
Trust REIT 129,600 3,078
Apartment Investment &
Management Co. Class A REIT 123,800 3,327
Associated Estates Realty
Corp. REIT 132,400 3,128
Avalon Properties, Inc. REIT 300,100 8,290
BRE Properties Inc. Class A REIT 305,300 7,556
Bay Apartment
Communities, Inc. REIT 178,800 6,437
Beacon Properties Corp. REIT 417,200 14,915
Berkshire Realty Co., Inc. REIT 240,600 2,496
Bradley Real Estate Inc. REIT 202,000 3,737
Burnham Pacific
Properties, Inc. REIT 163,000 2,404
CBL & Associates
Properties, Inc. REIT 199,400 5,110
Cali Realty Corp. REIT 342,800 11,312
Camden Property Trust REIT 144,300 3,896
CarrAmerica Realty Corp. REIT 379,000 11,038
CenterPoint Properties Corp. REIT 156,900 5,099
Chelsea GCA Realty, Inc. REIT 111,800 3,843
Colonial Properties Trust REIT 157,400 4,584
Columbus Realty Trust REIT 120,800 2,658
Commercial Net Lease
Realty REIT 192,000 3,048
Cousins Properties, Inc. REIT 268,800 7,459
Crescent Real Estate Inc. REIT 338,600 18,157
Crown American Realty
Trust REIT 257,800 2,062
Developers Diversified Realty
Corp. REIT 225,500 8,062
Duke Realty Investments,
Inc. REIT 283,300 11,226
Eastgroup Properties REIT 57,400 1,586
Equity Inns, Inc. REIT 223,400 3,016
Equity Residential Properties
Trust REIT 462,100 19,870
Essex Property Trust, Inc. REIT 93,700 2,741
Evans Withycombe
Residential, Inc. REIT 173,600 3,646
Excel Realty Trust, Inc. REIT 152,700 3,703
FAC Realty, Inc. REIT 109,500 643
Federal Realty Investment
Trust REIT 330,000 9,322
Felcor Suite Hotels, Inc. REIT 221,200 7,853
First Industrial Realty Trust REIT 285,800 8,288
Franchise Finance Corp. of
America REIT 388,400 10,244
Gables Residential Trust REIT 183,700 4,891
General Growth
Properties, Inc. REIT 275,700 8,684
Glenborough Realty
Trust, Inc. REIT 74,300 1,439
Glimcher Realty Trust REIT 208,700 4,487
Alexander Haagen Properties,
Inc. REIT 112,000 1,736
Highwood Properties, Inc. REIT 328,200 11,487
- - Homestead Village, Inc. REIT 21,123 396
- - Homestead Village, Inc. REIT
Warrants Exp. 10/29/97 34,297 309
Horizon Group, Inc. REIT 210,500 3,578
Hospitality Properties Trust REIT 252,200 7,818
IRT Property Co. REIT 260,500 3,126
Innkeepers USA Trust REIT 208,800 2,767
Irvine Apartment
Communities, Inc. REIT 176,400 4,697
JDN Realty Corp. REIT 123,200 3,388
JP Realty, Inc. REIT 152,000 4,085
Kimco Realty Corp. REIT 351,400 11,508
Koger Equity, Inc. REIT 196,100 3,505
Kranzco Realty Trust REIT 96,100 1,562
Lexington Corporate
Properties, Inc. REIT 86,600 1,277
Liberty Property Trust REIT 285,300 7,346
The Macerich Co. REIT 243,800 6,704
Manufactured Home
Communities, Inc. REIT 230,000 5,434
Mark Centers Trust REIT 78,300 891
Meridian Industrial
Trust, Inc. REIT 111,500 2,453
Merry Land & Investment
Co., Inc. REIT 351,400 7,819
MGI Properties, Inc. REIT 107,800 2,345
Mid-America Apartment
Communities, Inc. REIT 102,800 2,994
Mills Corp. REIT 161,300 3,891
National Golf Properties,
Inc. REIT 114,000 3,477
New Plan Realty Trust REIT 570,500 13,621
Oasis Residential, Inc. REIT 154,900 3,679
Pacific Gulf Properties, Inc. REIT 90,400 2,023
Paragon Group, Inc. REIT 140,200 2,401
Patriot American
Hospitality, Inc. REIT 139,100 6,538
Pennsylvania Real Estate
Investment Trust 82,800 2,039
Post Properties, Inc. REIT 208,800 8,665
Price REIT, Inc. 94,700 3,480
Prime Retail, Inc. REIT 109,000 1,403
Public Storage, Inc. REIT 859,100 25,129
RFS Hotel Investors, Inc. REIT 231,800 4,346
Realty Income Corp. REIT 142,500 3,776
Reckson Associates
Realty Corp. REIT 111,100 4,944
ROC Communities, Inc. REIT 120,100 3,123
Saul Centers, Inc. REIT 112,200 1,851
Security Capital Industrial
Trust REIT 940,306 19,982
Security Capital Pacific,
Inc. REIT 702,127 16,676
Shurgard Storage Centers, Inc.
Class A REIT 242,700 6,765
Simon DeBartolo Group,
Inc. REIT 949,876 27,784
Charles E. Smith Residential
Realty, Inc. REIT 94,100 2,694
Sovran Self Storage, Inc. REIT 87,500 2,756
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Spieker Properties, Inc. REIT 323,500 11,323
Starwood Lodging Trust REIT 386,100 15,782
Storage Trust Realty REIT 121,800 3,182
Storage USA, Inc. REIT 238,800 9,045
Summit Properties, Inc. REIT 213,600 4,352
Sun Communities, Inc. REIT 141,900 4,594
Sunstone Hotel
Investors, Inc. REIT 116,800 1,562
Taubman Co. REIT 437,300 5,904
Town & Country Trust REIT 146,500 2,106
Trinet Corporate Realty
Trust, Inc. REIT 128,800 4,685
United Dominion Realty
Trust REIT 809,978 12,555
Urban Shopping Centers,
Inc. REIT 142,000 4,296
Vornado Realty Trust REIT 226,300 12,418
Walden Residential
Properties, Inc. REIT 151,600 4,036
Washington Real Estate
Investment Trust 296,300 5,482
Weeks Corp. REIT 110,100 3,977
Weingarten Realty
Investors REIT 255,200 10,974
Wellsford Residential Property
Trust REIT 162,600 4,573
Western Investment Real Estate
Trust REIT 159,900 2,079
Winston Hotels, Inc. REIT 143,575 1,938
- --------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(COST $575,181) 638,477
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.5%)
- --------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 2/3/97
(COST $16,611) $ 16,611 16,611
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $591,792) 655,088
- --------------------------------------------------------------------------------
<CAPTION>
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- --------------------------------------------------------------------------------
<S> <C>
Other Assets--Note C 11,845
Liabilities (12,265)
--------
(420)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 51,804,191 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $654,668
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.64
================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT JANUARY 31, 1997 , NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $591,404 $11.42
Overdistributed Net
Investment Income (32) --
Accumulated Net Realized Gains -- --
Unrealized Appreciation--Note E 63,296 1.22
- --------------------------------------------------------------------------------
NET ASSETS $654,668 $12.64
================================================================================
</TABLE>
34
<PAGE> 37
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>
- -------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1997
-------------------------------------------------------
GOLD & PRECIOUS UTILITIES
ENERGY METALS HEALTH CARE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) $9,329 $8,072 $25,834 $24,810
Interest 2,344 1,114 14,067 9,467
--------------------------------------------------------
Total Income 11,673 9,186 39,901 34,277
--------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 644 1,054 2,157 542
The Vanguard Group--Note C
Management and Administrative 1,593 1,482 5,285 1,882
Marketing and Distribution 136 127 456 145
Taxes (other than income taxes) 48 43 161 50
Custodian Fees 134 132 265 38
Auditing Fees 6 6 8 6
Shareholders' Reports 56 70 128 74
Annual Meeting and Proxy Costs 11 10 40 11
Directors' Fees and Expenses 2 2 7 2
--------------------------------------------------------
Total Expenses 2,630 2,926 8,507 2,750
Expenses Paid Indirectly--Note C (31) -- (179) (151)
--------------------------------------------------------
Net Expenses 2,599 2,926 8,328 2,599
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 9,074 6,260 31,573 31,678
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 23,932 (4,618) 73,879 19,203
Foreign Currencies 1 12 (50) --
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 23,933 (4,606) 73,829 19,203
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 191,762 (129,994) 331,291 (19,820)
Foreign Currencies 2 -- (20) --
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 191,764 (129,994) 331,271 (19,820)
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $224,771 $(128,340) $436,673 $31,061
=================================================================================================
</TABLE>
(1) Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $339,000.
35
<PAGE> 38
STATEMENT OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
MAY 13, 1996,* TO
JAN. 31, 1997
-----------------
REIT INDEX
PORTFOLIO
(000)
- --------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 9,276
Interest 382
-------
Total Income 9,658
-------
EXPENSES
Investment Advisory Fees--Note B 5
The Vanguard Group--Note C
Management and Administrative 533
Marketing and Distribution 16
Taxes (other than income taxes) 10
Custodian Fees 22
Auditing Fees 6
Shareholders' Reports --
Annual Meeting and Proxy Costs 4
Directors' Fees and Expenses --
-------
Total Expenses 596
Expenses Paid Indirectly--Note C --
-------
Net Expenses 596
- --------------------------------------------------------------------------
NET INVESTMENT INCOME 9,062
- --------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 145
Foreign Currencies --
- --------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 145
- --------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 63,296
Foreign Currencies --
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 63,296
- --------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $72,503
==========================================================================
</TABLE>
* Commencement of operations.
36
<PAGE> 39
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
------------------------ ------------------------
Year Ended January 31,
------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 9,074 $ 7,656 $ 6,260 $ 8,046
Realized Net Gain (Loss) 23,933 7,591 (4,606) 24,290
Change in Unrealized Appreciation
(Depreciation) 191,764 104,905 (129,994) 134,802
------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 224,771 120,152 (128,340) 167,138
------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (8,648) (7,929) (9,170) (7,813)
Realized Capital Gain (14,413) (8,594) (3,261) --
------------------------------------------------------
Total Distributions (23,061) (16,523) (12,431) (7,813)
------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)-Note A -- -- -- --
------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued 422,636 163,046 175,890 169,754
Issued in Lieu of Cash Distributions 21,861 15,560 11,571 7,233
Redeemed (161,805) (210,080) (232,481) (219,099)
------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 282,692 (31,474) (45,020) (42,112)
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 484,402 72,155 (185,791) 117,213
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 505,047 432,892 648,300 531,087
------------------------------------------------------
End of Period $989,449 $505,047 $462,509 $648,300
==================================================================================================================
(1)Shares Issued (Redeemed)
Issued 19,911 10,166 13,263 13,989
Issued in Lieu of Cash Distributions 992 926 916 604
Redeemed (8,060) (13,053) (17,991) (18,112)
------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 12,843 (1,961) (3,812) (3,519)
==================================================================================================================
</TABLE>
37
<PAGE> 40
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY GOLD & PRECIOUS
PORTFOLIO METALS PORTFOLIO
------------------------ ------------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 31,573 $ 17,501 $ 31,678 $ 32,367
Realized Net Gain (Loss) 73,829 39,020 19,203 3,435
Change in Unrealized Appreciation
(Depreciation) 331,271 378,961 (19,820) 136,947
-------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 436,673 435,482 31,061 172,749
-------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (31,986) (15,999) (30,454) (32,388)
Realized Capital Gain (53,604) (28,431) (1,026) --
-------------------------------------------------------
Total Distributions (85,590) (44,430) (31,480) (32,388)
-------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A -- -- (1,909) 495
-------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued 1,109,685 592,520 108,977 192,752
Issued in Lieu of Cash Distributions 82,165 42,849 25,266 25,709
Redeemed (350,498) (143,494) (268,802) (171,184)
-------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 841,352 491,875 (134,559) 47,277
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 1,192,435 882,927 (136,887) 188,133
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,653,641 770,714 780,741 592,608
-------------------------------------------------------
End of Period $2,846,076 $1,653,641 $643,854 $780,741
===========================================================================================================================
(1) Shares Issued (Redeemed)
Issued 20,050 13,423 8,741 16,949
Issued in Lieu of Cash Distributions 1,452 901 2,062 2,296
Redeemed (6,324) (3,400) (21,789) (15,333)
------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 15,178 10,924 (10,986) 3,912
===========================================================================================================================
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
-----------------
MAY 13, 1996,* to
JAN. 31, 1997
(000)
- --------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 9,062
Realized Net Gain (Loss) 145
Unrealized Appreciation (Depreciation) 63,296
---------
Net Increase (Decrease) in Net Assets
Resulting from Operations 72,503
---------
DISTRIBUTIONS
Net Investment Income (9,094)
Realized Capital Gain (145)
Return of Capital (371)
---------
Total Distributions (9,610)
---------
NET EQUALIZATION CREDITS (CHARGES)--NOTE A --
---------
CAPITAL SHARE TRANSACTIONS(1)
Issued 592,437
Issued in Lieu of Cash Distributions 8,367
Redeemed (9,029)
---------
Net Increase (Decrease) from Capital Share Transactions 591,775
- --------------------------------------------------------------------------
Total Increase (Decrease) 654,668
- --------------------------------------------------------------------------
NET ASSETS
Beginning of Period --
---------
End of Period $654,668
==========================================================================
(1)Shares Issued (Redeemed)
Issued 51,889
Issued in Lieu of Cash Distributions 695
Redeemed (780)
---------
Net Increase (Decrease) In Shares Outstanding 51,804
==========================================================================
* Commencement of operations.
</TABLE>
39
<PAGE> 42
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 THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.19 $13.82 $15.77 $13.82 $12.73
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .27 .23 .31 .34
Net Realized and Unrealized Gain (Loss) on Investments 6.64 3.68 (1.65) 3.31 1.29
-------------------------------------------------------------------
Total from Investment Operations 6.89 3.95 (1.42) 3.62 1.63
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.24) (.28) (.24) (.29) (.36)
Distributions from Realized Capital Gains (.40) (.30) (.29) (1.38) (.18)
-------------------------------------------------------------------
Total Distributions (.64) (.58) (.53) (1.67) (.54)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $23.44 $17.19 $13.82 $15.77 $13.82
===============================================================================================================================
TOTAL RETURN* 40.32% 28.68% -9.15% 27.31% 13.02%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $989 $505 $433 $339 $164
Ratio of Total Expenses to Average Net Assets 0.39% 0.51% 0.30% 0.17% 0.21%
Ratio of Net Investment Income to Average Net Assets 1.36% 1.55% 1.66% 1.87% 2.47%
Portfolio Turnover Rate 15% 21% 13% 41% 37%
Average Commission Rate Paid $0484 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee that is assessed on
redemptions of shares that are held in the Portfolio for less than one
year.
40
<PAGE> 43
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.07 $10.71 $13.58 $ 7.29 $9.41
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .13 .17 .27 .20 .19
Net Realized and Unrealized Gain (Loss) on Investments (2.98) 3.36 (2.83) 6.30 (2.13)
-------------------------------------------------------------------
Total from Investment Operations (2.85) 3.53 (2.56) 6.50 (1.94)
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.21) (.17) (.31) (.21) (.18)
Distributions from Realized Capital Gains (.07) -- -- -- --
-------------------------------------------------------------------
Total Distributions (.28) (.17) (.31) (.21) (.18)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.94 $14.07 $10.71 $13.58 $7.29
===============================================================================================================================
TOTAL RETURN* -20.51% 33.24% -19.20% 89.24% -20.58%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $463 $648 $531 $613 $175
Ratio of Total Expenses to Average Net Assets 0.50% 0.60% 0.25% 0.26% 0.36%
Ratio of Net Investment Income to Average Net Assets 1.07% 1.38% 2.04% 2.04% 2.50%
Portfolio Turnover Rate 19% 5% 4% 14% 2%
Average Commission Rate Paid $.0085 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee that is assessed on
redemptions of shares that are held in the Portfolio for less than one
year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PORTFOLIO
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $52.09 $37.01 $36.51 $32.66 $35.54
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .71 .61 .55 .79 .70
Net Realized and Unrealized Gain (Loss) on Investments 9.88 16.06 2.83 5.79 (1.68)
-------------------------------------------------------------------
Total from Investment Operations 10.59 16.67 3.38 6.58 (.98)
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.74) (.57) (.57) (.76) (.70)
Distributions from Realized Capital Gains (1.29) (1.02) (2.31) (1.97) (1.20)
-------------------------------------------------------------------
Total Distributions (2.03) (1.59) (2.88) (2.73) (1.90)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $60.65 $52.09 $37.01 $36.51 $32.66
===============================================================================================================================
TOTAL RETURN* 20.65% 45.47% 9.79% 21.21% -2.92%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,846 $1,654 $771 $638 $562
Ratio of Total Expenses to Average Net Assets 0.38% 0.46% 0.40% 0.19% 0.22%
Ratio of Net Investment Income to Average Net Assets 1.41% 1.57% 1.58% 2.37% 2.06%
Portfolio Turnover Rate 7% 13% 25% 19% 15%
Average Commission Rate Paid $.0504 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee that is assessed on
redemptions of shares that are held in the Portfolio for less than one
year.
41
<PAGE> 44
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO
YEAR ENDED JANUARY 31,
---------------------------------------------------
MAY 15, 1992,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 1994 JAN. 31, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.84 $10.42 $11.67 $11.18 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .58 .56 .56 .57 .41
Net Realized and Unrealized Gain (Loss) on Investments .09 2.42 (1.10) .88 1.03
-------------------------------------------------------------------
Total from Investment Operations .67 2.98 (.54) 1.45 1.44
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.56) (.56) (.59) (.56) (.24)
Distributions from Realized Capital Gains (.02) -- (.12) (.40) (.02)
-------------------------------------------------------------------
Total Distributions (.58) (.56) (.71) (.96) (.26)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.93 $12.84 $10.42 $11.67 $11.18
===============================================================================================================================
TOTAL RETURN 5.51% 29.47% -4.47% 13.08% 14.51%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $644 $781 $593 $738 $361
Ratio of Total Expenses to Average Net Assets 0.40% 0.44% 0.50% 0.42% 0.45%**
Ratio of Net Investment Income to Average Net Assets 4.63% 4.88% 5.43% 4.82% 4.70%**
Portfolio Turnover Rate 38% 35% 35% 46% 20%
Average Commission Rate Paid $.0568 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
REIT INDEX PORTFOLIO
MAY 13, 1996,* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD JAN. 31, 1997
- --------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- --------------------------------------------------------------------------
<S> <C>
INVESTMENT OPERATIONS
Net Investment Income .341
Net Realized and Unrealized Gain (Loss) on Investments 2.659
-------
Total from Investment Operations 3.000
-------
DISTRIBUTIONS
Dividends from Net Investment Income (.341)
Distributions from Realized Capital Gains (.005)
Return of Capital (.014)
-------
Total Distributions (.360)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.64
==========================================================================
TOTAL RETURN** 30.33%
==========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 655
Ratio of Total Expenses to Average Net Assets 0.36%+
Ratio of Net Investment Income to Average Net Assets 5.55%+
Portfolio Turnover Rate 0%
Average Commission Rate Paid $ .0242
- --------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return figures do not reflect the 1% fee that is assessed on
redemptions of shares that are held in the Portfolio for less than one
year.
+ Annualized.
42
<PAGE> 45
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, and Health Care 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. Under a contract that expires April 30, 1998, the Energy, Health Care, and
Utilities Income Portfolios pay Wellington Management Company, llp, an advisory
fee calculated at an annual percentage rate of average net assets. For the year
ended January 31, 1997, the investment advisory fees of the Energy, Health Care,
and Utilities Income Portfolios represented effective annual rates of
43
<PAGE> 46
0.10%, 0.10%, and 0.08%, respectively, of average net assets. The basic fees
reflect fee waivers of $25,000, $86,000 and $70,000 (0.01%), respectively, for
the period February 1, 1996, to April 30, 1996.
Under a contract that expires January 30, 1998, the Gold & Precious Metals
Portfolio pays M&G Investment Management Ltd. an advisory fee calculated at an
annual percentage rate of average net assets. For the year ended January 31,
1997, the investment advisory fee represented an effective annual rate of 0.18%
of the Portfolio's average net assets after giving effect to a fee waiver of
$310,000 (0.05%) for the period February 1, 1996, to November 30, 1996.
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
year ended January 31, 1997, these arrangements reduced the expenses of the
Energy, Health Care, and Utilities Income Portfolios by $31,000 (0.01%),
$179,000 (0.01%), and $151,000 (0.02%), respectively.
At January 31, 1997, the Fund had contributed capital aggregating $452,000
to Vanguard (included in Other Assets), representing 2.3% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
D. During the year ended January 31, 1997, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
(000)
-------------------------
PORTFOLIO PURCHASES SALES
--------------------------------------------------------------------
<S> <C> <C>
Energy $325,918 $ 95,373
Gold & Precious Metals 105,710 151,299
Health Care 809,920 136,015
Utilities Income 255,439 384,296
REIT Index 577,392 478
--------------------------------------------------------------------
</TABLE>
Realized net gains of the REIT Index Portfolio include $221,000 of capital gain
distributions received from its REIT investments.
E. At January 31, 1997, net unrealized appreciation (depreciation) of
investment securities for financial reporting and federal income tax purposes
was:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
(000)
---------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
PORTFOLIO SECURITIES SECURITIES (DEPRECIATION)
---------------------------------------------------------------------
<S> <C> <C> <C>
Energy $266,138 $ (5,892) $260,246
Gold & Precious Metals* 79,120 (82,609) (3,489)
Health Care 923,593 (63,833) 859,760
Utilities Income 88,497 (5,036) 83,461
REIT Index 64,387 (1,091) 63,296
-----------------------------------------------------------------------
</TABLE>
* See Note F.
44
<PAGE> 47
The Health Care Portfolio had net unrealized foreign currency losses of $32,000
resulting from the translation of other assets and liabilities at January 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 year ended January 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 income as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
(000)
------------------------
INCREASE (DECREASE)
PORTFOLIO UNDISTRIBUTED NET INCOME
-----------------------------------------------------------------------
<S> <C>
Energy $ 1
Gold & Precious Metals 12
Health Care (50)
-----------------------------------------------------------------------
</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 Gold & Precious Metals Portfolio's investments
are in securities considered to be "passive foreign investment companies," for
which any unrealized appreciation and/or realized gains are required to be
included in distributable net investment income for tax purposes. Distributions
to shareholders from passive foreign investment company income during the year
ended January 31, 1997, were $2,594,000; the cumulative total of these
distributions related to passive foreign investment company holdings at January
31, 1997, was $5,021,000, and is reflected in the balance of overdistributed net
income.
Utilities Income Portfolio: The Utilities Income Portfolio used a capital
loss carryforward of $21,036,000 to offset taxable capital gains realized during
the year ended January 31, 1997, reducing the amount of capital gains that would
otherwise be available to distribute to shareholders. For federal tax purposes,
capital gains required to be distributed in December 1996 included net gains
realized through October 31, 1996. Subsequently the Utilities Income Portfolio
realized capital losses of $2,606,000, which are available to offset future
capital gains.
G. The market value of securities on loan to broker/dealers at
January 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 $ 6,706 $ 6,842
Gold & Precious Metals 27,239 34,747
Health Care 15,506 15,871
----------------------------------------------------------------------
</TABLE>
45
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Specialized Portfolios
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Energy, Gold & Precious Metals, Health Care, Utilities Income and REIT Index
Portfolios (constituting Vanguard Specialized Portfolios, hereafter referred to
as the "Fund") at January 31, 1997, and the results of each of their operations,
the changes in each of their net assets and the financial highlights for each of
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at January 31, 1997 by correspondence with the
custodian and, with respect to unsettled securities transactions, the
application of alternative auditing procedures, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 28, 1997
46
<PAGE> 49
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD SPECIALIZED PORTFOLIOS
This information for the fiscal year ended January 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Portfolios designate the following as capital gain dividends (from net
long-term capital gains):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
LONG-TERM CAPITAL GAINS
(000)
-------------------------------------------
AMOUNT BALANCE FOR
TOTAL DISTRIBUTED DISTRIBUTION IN
PORTFOLIO DESIGNATED IN 1996 MARCH 1997
---------------------------------------------------------------------------
<S> <C> <C> <C>
Energy $16,867 $ 9,729 $ 7,138
Health Care 40,789 11,244 29,545
Utilities Income 773 773 --
REIT Index 145 145 --
---------------------------------------------------------------------------
</TABLE>
The Gold & Precious Metals Portfolio has elected to pass through the credit
for taxes paid in foreign countries. The foreign income and foreign tax per
share outstanding on January 31, 1997, are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
-------------------------------------------------------------------------
<S> <C> <C>
Australia $.0459 $.0037
Canada .0125 .0019
Ghana .0036 .0004
Luxembourg .0035 .0000
South Africa .0962 .0006
United Kingdom .0097 .0015
-------------------------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit affected only shareholders on the
dividend record date in December 1996. Shareholders received more detailed
information along with their Form 1099-DIV in January 1997.
For corporate shareholders, the percentage of investment income (dividend
income plus short-term gains, if any) that qualifies for the dividends-received
deduction is as follows:
<TABLE>
<S> <C>
Energy 44.6%
Gold & Precious Metals 16.5%
Health Care 30.4%
Utilities Income 70.7%
REIT Index 0%
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
47
<PAGE> 50
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.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel 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 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.
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
Fund Information: 1-800-662-7447
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> 51
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q510-1/97
