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VANGUARD
SPECIALIZED
PORTFOLIOS
Semiannual Report - July 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
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CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS ....................... 1
THE MARKETS IN PERSPECTIVE .......................... 6
REPORT FROM THE ADVISERS ............................ 8
PORTFOLIO PROFILES .................................. 12
PERFORMANCE SUMMARIES ............................... 20
FINANCIAL STATEMENTS ................................ 23
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All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Led by a relatively small but powerful group of large-capitalization growth
stocks, the U.S. stock market continued to post strong gains during the six
months ended July 31, 1998, the first half of the fiscal year for Vanguard
Specialized Portfolios.
Various sectors of the market turned in extremely disparate results,
ranging from superb for health-care stocks to poor for gold, real estate, and
energy stocks. Naturally, the six-month results of the five Specialized
Portfolios reflected these widely divergent performances, as reported in the
adjacent table. It shows the total return (capital change plus reinvested
dividends) for each portfolio and for the average competitor in its relevant
fund group. The table also presents the returns of the relevant unmanaged
benchmarks: for our Energy and Health Care Portfolios, the Standard & Poor's 500
Composite Stock Price Index; for our Utilities Income Portfolio, a Utilities
Composite Index; for our Gold & Precious Metals Portfolio, the Salomon Smith
Barney Global Gold Equity Index; and for our REIT Index Portfolio, the Morgan
Stanley Real Estate Investment Trust Index.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SIX MONTHS ENDED
JULY 31, 1998
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<S> <C>
ENERGY PORTFOLIO - 5.1%
Average Natural Resources Fund -13.4
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HEALTH CARE PORTFOLIO +17.0%
Average Health-Care Fund + 5.3
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S&P 500 Index +15.2%
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GOLD & PRECIOUS METALS PORTFOLIO -16.5%
Average Gold Fund -18.9
Salomon Global Gold Index -19.2
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UTILITIES INCOME PORTFOLIO + 5.1%
Average Utility Fund + 7.6
Utilities Composite Index* + 6.1
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REIT INDEX PORTFOLIO -10.1%
Average Real Estate Fund - 9.1
Morgan Stanley REIT Index -10.3
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*Weighted 40% S&P Utilities Index, 40% S&P Telephone Index, and
20% Lehman Utility Bond Index.
</TABLE>
Per-share figures for each portfolio, including net asset values, income
dividends, and any capital gain distributions, are listed in the table that
follows this letter.
THE FINANCIAL MARKETS IN BRIEF
For most of the six months ended July 31, 1998, optimism prevailed in U.S.
financial markets. The domestic economy grew at a robust pace, yet inflation and
interest rates remained stable at relatively low levels, making the United
States seem somewhat insulated from severe economic problems in Asia, Russia,
and several emerging markets. While those problems were strongly felt in reduced
demand and lower prices for a number of commodities--including oil and precious
metals--Asia's storm clouds had a silver lining for U.S. investors. Interest
rates and inflation were held down by lower commodity prices and by the dollar's
gains against a number of currencies, which reduced the costs of imported goods.
Despite a tumble during the spring, stock prices advanced--especially
those of large-cap growth stocks--and on July 17 the S&P 500 Index hit a record
high of 1186.75. However, the stock market's focus quickly switched to how the
dollar's strong rise was hurting profits of U.S. companies by reducing the value
of earnings from foreign operations, by making U.S.-made products more expensive
on world markets, and by
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making foreign-made products cheaper to American buyers. Also, the severity and
durability of Asia's economic slowdown were of increasing concern. During the
final two weeks of the half-year, the S&P 500 Index declined nearly -6%, and
smaller stocks, as measured by the Russell 2000 Index, were off more than -9%.
For the six months, the large-cap-dominated S&P 500 Index generated a fat +15.2%
return, while the rest of the stock market, as measured by the Wilshire 4500
Equity Index, gained only +4.7%.
Economic turmoil abroad helped keep U.S. interest rates low by
attracting capital to the "safe haven" of dollar-denominated assets. The yield
on the benchmark 30-year U.S. Treasury bond, for example, ended the period at
5.71%, 9 basis points below the 5.80% yield that prevailed on January 31.
Similarly, the yield on 3-month Treasury bills declined from 5.18% on January 31
to 5.07% on July 31.
ENERGY PORTFOLIO
The Energy Portfolio's total return of -5.1% during the half-year, while far
better than the -13.4% return on the average natural resources mutual fund, was
some 20 percentage points behind the +15.2% gain of the S&P 500 Index. The
prices of energy products--oil, natural gas, and refined petroleum products such
as gasoline--fell sharply during the period. For example, the price of crude oil
dropped by about $3 a barrel, or more than 15%, from the end of January to the
end of July. Prices were down even more for heating oil (-25%), gasoline (-21%),
and natural gas (-18%). Consequently, the stocks of oil and gas exploration
companies, and of oil-services and equipment firms, fell too.
The decline in energy prices resulted from lower-than-expected demand,
partly because of the economic slowdown in Asia, and from higher-than-expected
production. OPEC member nations tried to buoy the price of oil by agreeing to
production cutbacks, but production did not decline as much as the agreements
specified.
Our significant edge over the average competing fund was due in part to
our lower stake in energy-services stocks, whose prices tend to move more--up
and down--than prices of other energy stocks in response to changing crude-oil
prices. Also, our Energy Portfolio is focused entirely on the energy sector,
while the typical natural resources fund has significant stakes in precious
metals and mining, forestry, and other sectors hurt badly by declining commodity
prices.
GOLD & PRECIOUS METALS PORTFOLIO
Bullion prices declined for gold and silver during the six months ended July 31,
and share prices of mining companies did the same. The Gold & Precious Metals
Portfolio declined -16.5%, measurably less severe than the decline of either the
average precious metals fund (-18.9%) or our benchmark index (-19.2%).
Gold bullion's price fell by about $16 per ounce, or 5.5%, while the
price of an ounce of silver fell by more than 10%. Gold continued to suffer from
market uncertainty over whether the world's central banks will sell more of
their holdings of gold bullion. The U.S. dollar's rise against the Canadian,
Australian, and South African currencies deepened losses for many stocks, since
shares denominated in those currencies translated into fewer U.S. dollars.
The portfolio outperformed its comparative standards mainly because we
had lighter stakes in some of the more speculative, secondary mining stocks. We
also benefited by having a larger weighting than many competitors in
platinum-mining companies, since the price of platinum bullion fell by less than
3% during the half-year.
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HEALTH CARE PORTFOLIO
The Health Care Portfolio earned +17.0% during the half-year, outdistancing both
the average health-care fund, which returned +5.3%, and the S&P 500 Index, at
+15.2%. Our significant weighting in large-cap pharmaceutical companies was a
key reason for our impressive performance. These stocks benefited from generally
strong growth in earnings and from the market's tilt toward stocks regarded as
predictable engines of growth. We remind shareholders that the volatility of the
health-care sector, which will not always be on the upside as in recent years,
makes it important to have a long-term perspective toward investments in
health-care stocks.
UTILITIES INCOME PORTFOLIO
Our Utilities Income Portfolio's +5.1% return during the six months trailed the
average utility fund (+7.6%) and our Utilities Composite Index (+6.1%)--all well
behind the 15.2% gain of the S&P 500 Index. Our shortfall in relation to
competing funds resulted largely from our bond position, which we hold to
enhance the income we earn. At approximately 15% of assets, our bond weighting
is more than double that of the average utility fund. Although bonds performed
quite respectably, their return was about half that provided by utility stocks.
Our income mandate also results in an emphasis on dividend-paying
stocks, which put us at a bit of a disadvantage during the half-year, when some
of the utility sector's hottest performers were telecommunications stocks that
provide little or no dividend income. Our largest concentration is in stocks of
electric utilities, whose return trailed the returns earned in the telephone and
natural gas sectors. The portfolio's yield as of July 31 was 3.7%.
REIT INDEX PORTFOLIO
After large gains during the previous 20 months, share prices of real estate
investment trusts (REITs) fell during the half-year. Our REIT Index Portfolio
declined -10.1%, a hair better than the -10.3% decline in its target unmanaged
benchmark, the Morgan Stanley REIT Index. However, our result trailed by a
percentage point that of the average real estate mutual fund, which dropped
- -9.1%.
Share prices of REITs were hurt by concerns about overbuilding in some
areas and about higher property prices paid by some REITs. Some investors sold
REIT shares after the Federal Reserve Board, in a June letter to about 1,000
banks it supervises, noted that bank lending to REITs had risen sharply and said
that this might indicate lax lending standards. In addition, supply outpaced
demand somewhat as existing REITs issued additional shares and several trusts
made initial public offerings of shares.
IN SUMMARY
Events during the fiscal half-year ended July 31 showed the remarkable
volatility inherent in discrete sectors of the stock market. We believe that
shareholders who seek exposure to these specific market segments should come
with a long-term perspective and an ability and willingness to accept the
inevitable wide fluctuations in returns, both in absolute terms and in relation
to the broad stock market. For such investors, holdings in one or more of our
Specialized Portfolios can make sense as part of well-balanced investment
programs that include mainstream stock funds, bond funds, and money market
funds.
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A balanced program, tailored to each individual's own circumstances, is a
time-tested means of "staying the course" toward your long-term investment
objectives.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
August 13, 1998
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<CAPTION>
PORTFOLIO STATISTICS
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NET ASSET VALUE PER SHARE
--------------------------------- INCOME CAPITAL SIX MONTH
PORTFOLIO JAN. 31, 1998 JUL. 31, 1998 DIVIDENDS GAINS* TOTAL RETURN**
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy $22.68 $21.46 $0.02 $0.06 -5.1%
Gold & Precious Metals 7.53 6.27 0.02 0.00 -16.5
Health Care 74.02 85.28 0.07 1.21 +17.0
Utilities Income 14.97 15.30 0.29 0.15 +5.1
REIT Index 13.98 12.27 0.32 0.00 -10.1
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</TABLE>
* Includes both long-term and short-term capital gains distributions.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year in the Energy, Gold & Precious Metals,
Health Care, and REIT Index portfolios.
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NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders of Vanguard Specialized
Portfolios overwhelmingly approved three proposals. The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the fund pays annually by approximately $685,000 at
current asset levels. Approved as follows:
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PERCENT
PORTFOLIO FOR AGAINST ABSTAIN APPROVAL
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<S> <C> <C> <C> <C>
Energy 26,760,725 255,595 535,593 97.1%
Gold & Precious Metals 25,944,170 365,730 490,322 96.8
Health Care 42,558,649 493,599 919,707 96.8
Utilities Income 29,326,527 471,317 668,358 96.3
REIT Index 52,035,053 375,344 1,942,598 95.7
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</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits Vanguard Specialized Portfolios to participate in Vanguard's interfund
lending program, which allows funds to lend money to each other if--and only
if--it makes good financial sense to do so on both sides of the transaction. The
interfund lending program won't be an integral part of your fund's investment
program; it is a contingency arrangement for managing unusual cash flows.
Approved as follows:
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PERCENT
PORTFOLIO FOR AGAINST ABSTAIN APPROVAL
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<S> <C> <C> <C> <C>
Energy 25,717,328 974,655 859,929 93.3%
Gold & Precious Metals 24,337,008 1,707,524 755,690 90.8
Health Care 41,021,661 1,636,880 1,313,413 93.3
Utilities Income 28,397,329 988,919 1,079,954 93.2
REIT Index 50,836,484 1,122,398 2,394,112 93.5
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</TABLE>
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminated the portfolios' policy of avoiding
investments in securities that are owned in certain amounts by Trustees,
officers, and key advisory personnel. This policy was well-intentioned, but
wrongly focused and unnecessary in light of the portfolios' Code of Ethics and
other regulatory protections against conflicts of interest on the part of the
portfolios' management. Approved as follows:
<TABLE>
<CAPTION>
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PERCENT
PORTFOLIO FOR AGAINST ABSTAIN APPROVAL
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<S> <C> <C> <C> <C>
Energy 25,243,555 1,219,942 1,088,415 91.6%
Gold & Precious Metals 24,208,152 1,535,402 1,056,668 90.3
Health Care 40,091,312 2,058,900 1,821,743 91.2
Utilities Income 27,735,483 1,273,640 1,457,078 91.0
REIT Index 49,678,126 1,688,829 2,986,040 91.4
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</TABLE>
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THE MARKETS IN PERSPECTIVE
Six Months Ended July 31, 1998
The U.S. financial markets turned in a generally solid performance during the
six months ended July 31, 1998. Interest rates held fairly steady, so bond
prices were little changed. The stock market advanced, with large-capitalization
stocks gaining the most.
The economy's rapid expansion early in 1998--when it grew at a 5.5%
pace--cooled down a bit in the spring and early summer. Even so, the nation was
producing 3.5% more goods and services during the April-June quarter of 1998
than during the same period a year earlier. Americans kept the economy humming
by continuing to spend, or as economists say, consume. Consumption spending was
5.2% higher in the April-June quarter than a year before, and the savings rate
plunged to a microscopic 0.2% in June, meaning that consumers in aggregate spent
an incredible 99.8% of after-tax, or disposable, income. Their ebullience was
not without foundation--unemployment hovered around 4.5% during the period;
wages were rising (personal income in June was 5% higher than in June 1997); and
inflation was tame (consumer prices in July were up only 1.7% from a year
before).
Consumers gave the economy more than enough momentum to offset the drag
caused by Asia's economic problems, which have been unexpectedly severe and
long-lasting. Asia's weakened currencies and shrinking economies have reduced
U.S. exports and cut the cost of Asian imports, sending the U.S. trade deficit
to record levels. However, the "Asian contagion" also has lessened the
inflationary pressures in the U.S. economy.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JULY 31, 1998
------------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 15.2% 19.3% 22.9%
Russell 2000 Index -2.0 2.3 13.8
MSCI EAFE Index 12.1 5.8 9.8
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FIXED-INCOME
Lehman Aggregate Bond Index 2.8% 7.9% 6.8%
Lehman 10-Year Municipal Bond Index 1.6 5.7 6.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.6 5.2 5.0
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OTHER
Consumer Price Index 1.0% 1.7% 2.5%
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</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Favorable economic conditions led to a continued rise in U.S. stock prices.
Although market averages set records, the advance was not uniform. Large-cap
growth stocks led the way, while small-cap stocks trailed well behind. However,
sentiment seemed to change abruptly in mid-July, and stock prices tumbled during
the final two weeks of the half-year. Problems that investors had shrugged off
earlier in the year--such as Asia's crises and a slowing in the growth of
corporate earnings--were now accorded greater weight. On balance, the
large-cap-dominated S&P 500 Index earned 15.2% during the six months, far above
the 4.7% return of the rest of the market (as measured by the Wilshire 4500
Index) and a remarkable 17.2 percentage points above the return of the small-cap
Russell 2000 Index, which declined 2.0%. There also was a wide disparity within
the S&P 500, as its growth-stock component rose 19.0%, well above the 11.1%
return on its value stocks.
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The rise in large-cap stock prices occurred despite lackluster growth in
corporate earnings--less than 5% for the stocks in the S&P 500. July was the
11th consecutive month in which securities analysts lowered their forecasts for
corporate earnings in 1998, according to I/B/E/S International, a financial
research group. It takes optimism for investors to reconcile sluggish earnings
growth with record price/earnings ratios on stocks, and some of that optimism
seemed to evaporate during late July.
Technology was the market's best-performing sector during the period,
with a 28% return. Other sector leaders included auto and transportation (up
24%), consumer discretionary (up 21%), and financial services (up 19%). Among
the laggards were companies hurt by falling commodity prices, such as
oil-services and oil-drilling firms and makers of paper, chemicals, and steel.
Prices also declined for companies seen as vulnerable to the stronger dollar,
including manufacturers of aircraft and construction equipment.
U.S. FIXED-INCOME MARKETS
Interest rates fluctuated within a band of roughly half a percentage point
during the six months, ending the period little changed. The 2.8% total return
of the Lehman Aggregate Bond Index during the half-year brought its return for
the 12 months ended July 31 to 7.9%, a generous 6.2% return above inflation. The
yield on 30-year U.S. Treasury bonds declined by 9 basis points (0.09 percentage
point) to 5.71% during the six months. Yields were slightly higher (13 basis
points) on 3-year Treasury notes, while the yield on 3-month Treasury bills
declined on balance by 11 basis points to 5.07%. Mild inflation kept the bond
market stable despite the economy's strong growth.
Yields rose a bit on corporate bonds and mortgage-backed securities,
which therefore had slight price declines and underperformed Treasury bonds.
Treasuries benefited to some degree from a "flight to quality" among some
investors, whereas corporate bond prices were weighed down by a large supply of
newly issued bonds. Mortgage-backed securities lagged Treasuries largely because
of expectations that many homeowners would pay off old, higher-coupon mortgage
loans and refinance with new, lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Europe's bull market in stocks galloped upward, while stocks in Asia and most
emerging markets registered significant declines in U.S. dollar terms. Overall,
international markets gained 12.1% in U.S. dollars, as measured by the Morgan
Stanley Capital International Europe, Australasia, Far East Index.
Europe's bourses, which as a group rose 22.3% in local currencies, rose
23.9% in U.S. dollars, thanks to a slight strengthening of most European
currencies against the dollar. Stocks benefited from optimism about economic
growth throughout the continent and the impending adoption by 11 countries of
the euro as a single European currency. Markets were also buoyed by signs of a
new corporate emphasis on increasing shareholder value.
The mood in most Asian and emerging stock markets was decidedly downbeat
as Japan--which had been counted on as the engine to propel the region's
weakened economies--itself fell into recession. Japanese stocks--which rose
slightly in yen but fell 11.7% in U.S.-dollar terms--were actually Asia's bright
spot during the period. Declines were worse in Singapore (-16.7%), Hong Kong
(-20.6%), and Malaysia (-29.6%), and the Pacific markets as a group were down
- -12.4%. Stock prices also tumbled for oil producers Mexico (-10.7%) and
Venezuela (-38.5%). Despite gains in some eastern European countries, emerging
markets on balance declined 7.5% during the half-year.
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Energy Portfolio
The Energy Portfolio declined 5.1% during the six months ended July 31, 1998.
The S&P 500 Index gained 15.2% during the same period, demonstrating that
returns in the energy sector at times correlate poorly with those of the general
market.
The poor performance resulted from four factors. These are, in order of
importance: the sharp decline in economic activity in Asia; the decision reached
late in 1997 by the OPEC cartel to increase production; the unusually mild
winter; and the sharp increase in Iraqi exports allowed by the United Nations.
These events kept the price of oil below $15 per barrel for most of the period.
Natural-gas prices generally were satisfactory at well over $2 per 1,000
cubic feet during the period. However, the mild winter left ample supplies in
storage for next year, creating concern about future prices. The oil-services
sector, which appreciated sharply last year, has subsequently suffered the
largest declines within the energy sector as oil companies cut back on drilling
in response to lower prices.
Looking forward, the recent cutbacks in production by a number of
oil-producing nations both inside and outside OPEC should result in a recovery
of oil prices later this year. We expect that Asia's demand for energy will
stabilize in the next 12 months and that, after El Nino has passed, more normal
winters will recur.
In our view, an oil price below $15 per barrel is too low to maintain
production of the 75 million barrels that are consumed worldwide each day, let
alone to support the investments necessary to accommodate future growth in oil
demand. We believe the portfolio is well positioned for the upturn that should
become visible later this year or in early 1999. Some of the hardest-hit
sectors, such as independent producers and oil-services companies, are expected
to show a strong recovery when this happens.
Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
August 14, 1998
INVESTMENT PHILOSOPHY
Each portfolio reflects a belief that investors who seek to emphasize a given
economic sector as part of a long-term, balanced investment program are best
served by holding a portfolio of securities well-diversified across that sector.
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REPORT FROM M&G INVESTMENT MANAGEMENT LTD.
Gold & Precious Metals Portfolio
The half-year ended July 31, 1998, was another very difficult period for gold
investing. The Gold & Precious Metals Portfolio declined by 16.5%, a better
result than either the 19.2% decline in the Salomon Smith Barney Global Gold
Equity Index or the 18.9% fall in the average gold fund.
The period was dominated by fear of continued selling by central banks
around the world, questions about the role of gold in the reserve policy of the
new European Central Bank, and increasing concern that the economic crisis in
Asia would reduce demand for gold. These factors kept the price of gold below
$300 an ounce throughout most of the period, depressing the share prices of most
gold equities. Even recent currency volatility and financial-market
instability--events that in the past would have prompted some investors to buy
gold--did not lead to a significant rise in bullion purchases.
The bulk of the portfolio's outperformance in relation to its
comparative benchmarks came from our avoidance of most stocks in the speculative
end of the market, where a lack of liquidity continued to depress prices among
smaller stocks. Our retreat from this sector over the past year has proven
correct. During the half-year, we sold some of these stocks, including Miramar
Mining, Nelson Gold, Philippine Gold, and Philex Gold, at significantly higher
prices than today's. The few small-cap stocks left in the portfolio showed the
extent of the sector's decline, with Atlas Corp. down 78%, Golden Star down 63%,
and Lone Star Exploration down 64%.
Our holding in physical bullion, equal to more than 7% of assets, did
not fall in value as much as most gold equities, and thus aided our relative
performance during the period. Stock holdings in platinum producers and
diversified metals producers, including Anglo American Platinum, Impala
Platinum, and Stillwater Mining, proved particularly beneficial because
platinum's price didn't fall as far as gold's.
The major negative impact on performance versus our index benchmark
during the half-year was our underweighting in Barrick Gold, which fell 10%,
less than the average gold stock. Although Barrick accounted for nearly 5% of
our assets as the fiscal year began, it constitutes nearly 20% of most gold
indexes. We also were hurt by declines in both the Australian dollar and the
South African rand versus the U.S. dollar; this exaggerated the drops in our
stock holdings in both countries.
Portfolio changes during the half-year were concentrated in South
Africa, where corporate restructuring led to the amalgamation of a number of our
holdings into two companies: Gold Fields ADRs and Anglogold ADRs. We
dramatically reduced our holding in Gold Fields after the restructuring. Other
significant changes included the sale of Ashanti Goldfields ADRs and Great
Central Mines and purchases of two Australian stocks, Lihir Gold and Goldfields
Ltd.
In summary, the portfolio performed a bit better than most funds during
a difficult period for the entire sector. We continue to believe that the gold
and precious metals group offers many attractions to the contrarian investor,
especially given the high values currently seen in many equity markets.
Graham E. French, Portfolio Manager
August 14, 1998
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Health Care Portfolio
The Health Care Portfolio earned 17.0% for the six months ended July 31, 1998, a
performance slightly ahead of the S&P 500 Index, which returned 15.2%. The
portfolio's gain exceeded by a much-wider margin the 5.3% return on the average
mutual fund in Lipper Analytical Services' health/biotechnology group.
The amazing strength of large-capitalization companies continued in the
first half of fiscal year 1999. The portfolio benefited from this trend, with
strong gains from big positions in the pharmaceutical companies Warner-Lambert,
Pfizer, and Pharmacia & Upjohn.
During the period, the portfolio also benefited from corporate
acquisition activity, including major gains from our holdings in DEKALB Genetics
and U.S. Surgical, which are being acquired by Monsanto and Tyco, respectively.
The portfolio's net assets burgeoned to $6.9 billion as of July 31,
1998. While large size somewhat inhibits our mobility, our strategy has always
been to create a broadly diversified portfolio, fully representative of all
areas of health care, with a long-term focus and low turnover. This strategy is
conducive to success with substantial assets.
In the last several reports, we have warned shareholders not to expect
the exceptional returns of the past to continue; and yet, to this point, they
have. Nevertheless, we still urge shareholders to be sure that their investment
time horizon remains long-term.
We believe the health-care industry is well-situated for the long term.
Strong demand for care is assured by the increasing average age of the
population in the developed world. Supply of innovative products with high
profit margins is also assured as one of the fruits of the biotechnology
revolution. However, while we regard the backdrop for the sector as quite
favorable, we recommend caution because stock prices have risen so high and for
so long.
Edward P. Owens, Senior Vice President and Portfolio Manager
August 14, 1998
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Utilities Income Portfolio
The Utilities Income Portfolio earned 5.1% in the six months ended July 31,
1998, slightly behind the returns of both our benchmark composite index (6.1%)
and the average fund in Lipper Analytical Services' utility group (7.6%).
Although the spread of returns from the three utility sectors was
relatively narrow (natural-gas utilities, 8.1%; telephone, 7.4%; and electric,
5.2%), there was significant volatility within the three groups. Among telephone
stocks, merger activity was the biggest factor in relative performance, with MCI
Communications, Ameritech, and WorldCom the big winners and AT&T the poorest
performer among the large companies. In the electric sector, lackluster
operating performance and trading losses in the deregulated
electricity-generation market heightened volatility in stock prices. Those
natural-gas utilities with large investments in exploration and production or in
international projects were relatively poor performers, which made stock
selection particularly important. Although bonds performed better in the
May-July quarter than in our first fiscal quarter, our overweighting in bonds
compared with most other utility funds hurt our relative performance, since the
portfolio's bond holdings earned 2.7% during the half-year while our equity
holdings returned 5.6%.
We have taken advantage of the weakness in the natural-gas sector to add
to our recently acquired positions in Enron and Williams Companies, emphasizing
our belief that both companies are well-positioned to be profitable leaders in
the electric and gas energy-services market. We continue to like the
telecommunications sector due to its high growth potential. Sprint, in
particular, is experiencing rapid growth in its national rollout of digital
wireless personal communications services (Sprint PCS), growth that is not fully
reflected in the stock. We believe investors will focus on the wireless business
after Sprint this fall converts its common stock into two separate stocks, one
tracking the wireless side of its business and one tracking the rest of its
business. We also expect positive earnings surprises over the next 12 to 24
months from selected names within the retail energy-services sector, including
PECO Energy and Montana Power.
Mark J. Beckwith, Vice President and Portfolio Manager
August 14, 1998
11
<PAGE> 14
PORTFOLIO PROFILE
Energy Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, 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 65 500
Median Market Cap $4.6B $52.3B
Price/Earnings Ratio 20.0x 24.2x
Price/Book Ratio 2.4x 4.5x
Yield 1.6% 1.4%
Return on Equity 11.3% 21.7%
Earnings Growth Rate 20.6% 16.4%
Foreign Holdings 31.6% 1.6%
Turnover Rate 12%* --
Expense Ratio 0.42%* --
Cash Reserves 3.3% --
</TABLE>
*Annualized.
EQUITY INVESTMENT FOCUS
- ---------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------------------
ENERGY S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.21 1.00
Beta 0.65 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------------------------
<S> <C>
Chevron Corp. 3.7%
Texaco Inc. 3.5
Unocal Corp. 3.3
ENI SpA ADR 3.2
Ashland, Inc. 3.1
Amerada Hess Corp. 3.1
Anadarko Petroleum Corp. 3.0
Total SA ADR 2.9
USX-Marathon Group 2.7
Phillips Petroleum Co. 2.7
- ----------------------------------------------------------------------
Top Ten 31.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------------------------
JULY 31, 1997 JULY 31, 1998
---------------------------------------------
ENERGY ENERGY
---------------------------------------------
<S> <C> <C>
Auto & Transportation 0.8% 0.4%
Energy Miscellaneous 5.5 3.9
International 24.2 31.6
Machinery--Oil Well Equipment & Services 10.8 9.7
Materials & Processing 2.4 2.1
Offshore Drilling 5.3 1.4
Oil--Crude Producers 17.7 16.2
Oil--Integrated Domestic 23.2 22.8
Oil--Integrated International 6.9 9.5
Other 3.2 2.4
- ------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 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 (or are called) 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 make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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 securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
COUNTRY DIVERSIFICATION. The percentages of a portfolio's net assets invested in
securities of various countries.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
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 average annual 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 (growth, value, or a blend).
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 common stocks represented by
stocks or American Depositary Receipts of companies based outside the United
States.
MEDIAN MARKET CAP. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalizations above the median, and the rest
are below it.
13
<PAGE> 16
NUMBER OF ISSUES/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 noncash holdings invested in various
real estate investment trusts, classified according to the types of property
they emphasize.
PORTFOLIO ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of assets.
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 whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS/STOCKS. The percentage of equity assets or of total net
assets that a portfolio has invested in its ten largest stocks. As this
percentage rises, a portfolio's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
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
income earned over the past 30 days and is annualized, or projected forward for
the coming year. Yields for benchmark indexes are based on the current
annualized rate of dividends paid on stocks in the index.
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
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, 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 48 500
Median Market Cap $2.6B $52.3B
Price/Earnings Ratio 31.3x 24.2x
Price/Book Ratio 2.7x 4.5x
Return on Equity 7.7% 21.7%
Earnings Growth Rate -3.1% 16.4%
Foreign Holdings 73.5% 1.6%
Turnover Rate 26%* --
Expense Ratio 0.80%* --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------
<S> <C>
Anglogold Ltd. ADR 8.3%
Euro-Nevada Mining Corp. 5.7
Freeport-McMoRan Copper & Gold, Inc. 5.2
Newmont Mining Corp. 5.1
Newcrest Mining Ltd. 4.9
Homestake Mining Co. 4.8
Stillwater Mining Co. 4.6
Franco-Nevada Mining Corp., Ltd. 4.3
Normandy Mining Ltd. 4.2
Anglo American Platinum Corp. ADR 4.2
- --------------------------------------------------------------------
Top Ten 51.3%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------------------
GOLD & PRECIOUS
METALS S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.03 1.00
Beta 0.40 1.00
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS)
- ----------------------------------------------------------------------
<S> <C>
Australia 30.6%
Canada 18.2
Ghana 0.9
South Africa 15.4
United Kingdom 1.0
United States 23.8
- ----------------------------------------------------------------------
Subtotal 89.9%
Bullion 7.5
Cash Reserves 2.6
- ----------------------------------------------------------------------
Total 100.0%
</TABLE>
15
<PAGE> 18
PORTFOLIO PROFILE
Health Care Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, 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 113 500
Median Market Cap $12.3B $52.3B
Price/Earnings Ratio 38.0x 24.2x
Price/Book Ratio 4.8x 4.5x
Yield 1.1% 1.4%
Return on Equity 20.9% 21.7%
Earnings Growth Rate 10.6% 16.4%
Foreign Holdings 19.3% 1.6%
Turnover Rate 4%* --
Expense Ratio 0.38%* --
Cash Reserves 12.6% --
- ----------------------------------------------------------------------
</TABLE>
*Annualized.
EQUITY INVESTMENT FOCUS
- ------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------
<S> <C>
Warner-Lambert Co. 5.5%
Pharmacia & Upjohn, Inc. 4.8
Pfizer, Inc. 4.4
Bristol-Myers Squibb Co. 3.7
Abbott Laboratories 3.6
McKesson Corp. 3.0
Johnson & Johnson 2.8
DEKALB Genetics Corp. Class B 2.7
Allergan, Inc. 2.6
Merck & Co., Inc. 2.2
- ----------------------------------------------------------------------
Top Ten 35.3%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------------------
HEALTH CARE S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.69 1.00
Beta 0.71 1.00
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ---------------------------------------------------------------------------------------------------------------------------
JULY 31, 1997 JULY 31, 1998
------------------------------------------
HEALTH CARE HEALTH CARE
------------------------------------------
<S> <C> <C>
Biotech Research & Production 2.1% 2.3%
Consumer Discretionary 0.6 0.1
Drugs & Pharmaceuticals 50.8 50.3
Electronics--Medical Systems 1.6 1.2
Health & Personal Care 0.4 0.6
Health Care Facilities 4.5 3.2
Health Care Management Services 4.0 5.3
International 21.4 19.3
Materials & Processing 2.5 5.9
Medical & Dental Instruments & Supplies 9.7 8.9
Medical Services 0.9 1.2
Miscellaneous Health Care 1.2 0.6
Other 0.0 0.1
Producer Durables 0.3 1.0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE
Utilities Income Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 13 and 14.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
<S> <C>
Yield 3.7%
Turnover Rate 73%*
Expense Ratio 0.40%*
Cash Reserves 2.4%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- ----------------------------------------------------------------------
<S> <C>
Stocks 83%
Bonds 15%
Cash Reserves 2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL PORTFOLIO VOLATILITY MEASURES
- ----------------------------------------------------------------------
UTILITIES
INCOME S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.38 1.00
Beta 0.48 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- ----------------------------------------------------------------------
<S> <C>
Pinnacle West Capital Corp. 4.1%
New England Electric System 4.1
U S West, Inc. 4.0
Ameritech Corp. 3.6
Duke Energy Corp. 3.5
Sprint Corp. 3.5
NIPSCO Industries, Inc. 3.4
MCI Communications Corp. 3.2
BellSouth Corp. 3.1
GPU, Inc. 3.0
- --------------------------------------------------------------------
Top Ten 35.5%
- --------------------------------------------------------------------
Top Ten as % of Total Net Assets 29.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ---------------------------------------------------------------------------------------------------------------------------
JULY 31, 1997 JULY 31, 1998
-------------------------------------------
UTILITIES INCOME UTILITIES INCOME
-------------------------------------------
<S> <C> <C>
Electrical 50.6% 43.3%
Gas Distribution 10.3 7.9
Integrated Oils 4.3 2.8
Miscellaneous 3.2 0.0
Other 0.7 6.4
Other Energy 1.2 7.2
Telecommunications 28.8 31.7
Water 0.9 0.7
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------------------
UTILITIES
INCOME S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 58 500
Median Market Cap $5.8B $52.3B
Price/Earnings Ratio 21.2x 24.2x
Price/Book Ratio 2.4x 4.5x
Dividend Yield 3.4% 1.4%
Return on Equity 14.5% 21.7%
Earnings Growth Rate 6.3% 16.4%
Foreign Holdings 8.3% 1.6%
- ----------------------------------------------------------------------
</TABLE>
EQUITY INVESTMENT FOCUS
- ------------------------
[GRAPH]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- ----------------------------------------------------------------------
<S> <C>
Number of Bonds 40
Yield to Maturity 6.3%
Average Coupon 7.0%
Average Maturity 10.8 years
Average Quality A1
Average Duration 6.7 years
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- --------------------------------------------------------------------
<S> <C>
Treasury/Agency 0.0%
Electric 58.7
Gas 3.6
Telephone 34.2
Foreign 3.5
- --------------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- --------------------------------------------------------------------
<S> <C>
Treasury/Agency 0.0%
Aaa 8.2
Aa 30.8
A 46.4
Baa 12.8
Ba 0.0
B 0.0
Not Rated 1.8
- --------------------------------------------------------------------
Total 100.0%
</TABLE>
18
<PAGE> 21
PORTFOLIO PROFILE
REIT Index Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, 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 S&P 500
- -----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 134 500
Median Market Cap $1.6B $52.3B
Price/Earnings Ratio 18.8x 24.2x
Price/Book Ratio 1.6x 4.5x
Dividend Yield 6.4%* 1.4%
Return on Equity 12.0% 21.7%
Earnings Growth Rate 26.7% 16.4%
Foreign Holdings 0.0% 1.6%
Turnover Rate 36%** --
Expense Ratio 0.26%** --
Cash Reserves 1.7% --
</TABLE>
*This dividend yield includes some payments that represent a return of capital
by the underlying REITs. The amount of such return of capital is only
determined by each REIT after its fiscal year ends.
**Annualized.
EQUITY INVESTMENT FOCUS
- ------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------
<S> <C>
Starwood Hotels & Resorts REIT 6.0%
Equity Office Properties Trust REIT 4.9
Equity Residential Properties Trust REIT 3.3
Crescent Real Estate, Inc. REIT 2.9
Simon DeBartolo Group, Inc. REIT 2.7
Public Storage, Inc. REIT 2.5
ProLogis Trust REIT 2.4
Archstone Communities Trust REIT 2.4
Vornado Realty Trust REIT 2.4
Patriot American Hospitality, Inc. REIT 2.2
- --------------------------------------------------------------------
Top Ten 31.7%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REIT TYPE*
- --------------------------------------------------------------------
<S> <C>
Retail 23%
Apartments 20%
Office 20%
Hotels 14%
Industrial 13%
Diversified 10%
- --------------------------------------------------------------------
Total 100%
</TABLE>
*Data as of June 30, 1998.
19
<PAGE> 22
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
ENERGY PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1998
- --------------------------------------------------------------------
ENERGY PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -1.9% 0.0% -1.9% 21.1%
1986 2.0 1.4 3.4 22.9
1987 25.8 6.1 31.9 33.9
1988 -5.7 6.5 0.8 -3.3
1989 20.3 3.9 24.2 20.1
1990 26.1 2.9 29.0 14.5
1991 -4.7 3.1 -1.6 8.4
1992 -1.9 3.2 1.3 22.7
1993 10.0 3.0 13.0 10.6
1994 25.0 2.3 27.3 12.9
1995 -10.6 1.5 -9.1 0.5
1996 26.6 2.1 28.7 38.7
1997 38.8 1.5 40.3 26.3
1998 2.4 1.4 3.8 26.9
1999* -5.2 0.1 -5.1 15.2
</TABLE>
*Six months ended July 31, 1998.
See Financial Highlights table on page 38 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
GOLD & PRECIOUS METALS PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1998
- --------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO SALOMON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -34.0% 0.0% -34.0% -34.4%
1986 15.2 1.1 16.3 3.6
1987 38.2 4.0 42.2 12.4
1988 -1.6 4.1 2.5 4.5
1989 3.2 2.9 6.1 -9.3
1990 29.4 4.0 33.4 72.3
1991 -33.6 2.4 -31.2 -41.1
1992 13.5 3.2 16.7 10.9
1993 -22.5 1.9 -20.6 -23.3
1994 86.3 2.9 89.2 121.5
1995 -21.1 1.9 -19.2 -21.1
1996 31.4 1.8 33.2 34.7
1997 -21.9 1.4 -20.5 -14.9
1998 -31.2 1.4 -29.8 -31.2
1999** -16.7 0.2 -16.5 -19.2
- --------------------------------------------------------------------
</TABLE>
*MSCI Gold Mines Index through December 31, 1994; Salomon Global Gold Index
thereafter.
**Six months ended July 31, 1998.
See Financial Highlights table on page 39 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Portfolio** 5/23/1984 6.48% 12.67% 11.49% 2.48% 13.97%
Gold & Precious Metals Portfolio** 5/23/1984 -33.02 -9.51 -4.20 2.26 -1.94
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
20
<PAGE> 23
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
HEALTH CARE PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1998
- ---------------------------------------------------------------------
HEALTH CARE PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1985 18.5% 0.0% 18.5% 21.1%
1986 32.9 0.8 33.7 22.9
1987 30.8 1.0 31.8 33.9
1988 -2.7 3.0 0.3 -3.3
1989 19.3 2.1 21.4 20.1
1990 17.7 2.5 20.2 14.5
1991 27.4 2.7 30.1 8.4
1992 32.0 2.0 34.0 22.7
1993 -4.8 1.9 -2.9 10.6
1994 18.7 2.5 21.2 12.9
1995 8.1 1.7 9.8 0.5
1996 43.8 1.7 45.5 38.7
1997 19.1 1.5 20.6 26.3
1998 26.0 1.4 27.4 26.9
1999* 16.9 0.1 17.0 15.2
- --------------------------------------------------------------------
</TABLE>
*Six months ended July 31, 1998.
See Financial Highlights table on page 39 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
UTILITIES INCOME PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 15, 1992-JULY 31, 1998
- ----------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO UTILITIES
COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 12.0% 2.5% 14.5% 12.2%
1994 8.0 5.1 13.1 12.9
1995 -9.7 5.2 -4.5 -2.0
1996 23.2 6.3 29.5 30.2
1997 0.9 4.6 5.5 4.5
1998 17.8 5.4 23.2 26.4
1999** 3.2 1.9 5.1 6.1
- ----------------------------------------------------------------------
</TABLE>
*80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996,
when the S&P Utilities component was separated into the S&P Utilities Index
and the S&P Telephone Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 40 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- --------------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care Portfolio** 5/23/1984 27.77% 28.11% 20.79% 2.03% 22.82%
Utilities Income Portfolio 5/15/1992 26.44 11.90 8.82+ 5.12+ 13.94+
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
+Since inception.
21
<PAGE> 24
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
REIT INDEX PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 13, 1996-JULY 31, 1998
- ----------------------------------------------------------------------
REIT INDEX PORTFOLIO MORGAN STANLEY
FISCAL CAPITAL INCOME TOTAL REIT INDEX
YEAR RETURN RETURN RETURN TOTAL RETURN
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 26.6% 3.7% 30.3% 30.7%
1998 11.0 6.1 17.1 16.5
1999* -12.2 2.1 -10.1 -10.3
- ----------------------------------------------------------------------
</TABLE>
*Six months ended July 31, 1998.
See Financial Highlights table on page 40 for dividend and capital gains
information since the portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REIT Index Portfolio** 5/13/1996 7.74% 14.12% 5.85% 19.97%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
22
<PAGE> 25
FINANCIAL STATEMENTS
July 31, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
sector within the portfolio's designated industry; international securities, if
significant, may be presented in a separate group. The REIT Index Portfolio
lists its security holdings alphabetically. Other assets are added to, and
liabilities are subtracted from, the value of Total Investments to calculate the
portfolio's Net Assets. Finally, Net Assets are divided by the outstanding
shares of the portfolio to arrive at its share price, or Net Asset Value (NAV)
Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the portfolio's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net income or net realized gains, will
appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
ENERGY PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (96.7%)
- ---------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (66.2%)
- ---------------------------------------------------------------------
AUTO & TRANSPORTATION (0.4%)
- - OMI Corp. 700,000 $ 3,500
---------
ENERGY MISCELLANEOUS (3.7%)
Tosco Corp. 500,000 14,000
Ultramar Diamond
Shamrock Corp. 431,900 11,310
Valero Energy Corp. 500,000 11,969
---------
37,279
---------
MACHINERY--OIL WELL EQUIPMENT & SERVICES (9.4%)
Baker Hughes, Inc. 900,000 21,994
Camco International, Inc. 130,000 9,230
- - Cooper Cameron Corp. 160,000 5,610
- - EVI Weatherford, Inc. 284,999 7,339
Halliburton Co. 325,000 11,802
- - Noble Drilling Corp. 700,000 13,212
- - Rowan Cos., Inc. 200,000 2,825
Schlumberger Ltd. 360,000 21,803
---------
93,815
---------
MATERIALS & PROCESSING (2.0%)
Fluor Corp. 400,000 16,825
- - J. Ray McDermott SA 120,000 3,390
---------
20,215
---------
OFFSHORE DRILLING (1.4%)
- - R & B Falcon Corp. 826,000 13,577
---------
OIL--CRUDE PRODUCERS (15.7%)
Anadarko Petroleum Corp. 860,000 29,509
Apache Corp. 100,000 2,650
- - Barrett Resources Corp. 196,700 6,417
Devon Energy Corp. 220,000 7,095
Enron Oil & Gas Co. 654,400 10,389
Noble Affiliates, Inc. 400,000 12,750
Occidental Petroleum Corp. 750,000 16,687
- - Oryx Energy Co. 1,000,000 18,437
Pogo Producing Co. 685,000 13,358
- - Santa Fe Energy
Resources, Inc. 1,165,200 10,268
- - Tom Brown, Inc. 228,100 3,778
Vastar Resources, Inc. 590,300 25,235
---------
156,573
---------
OIL--INTEGRATED DOMESTIC (22.1%)
Amerada Hess Corp. 600,000 30,412
Amoco Corp. 380,000 15,865
Ashland, Inc. 600,000 31,125
Kerr-McGee Corp. 350,000 17,959
Murphy Oil Corp. 370,100 16,400
Phillips Petroleum Co. 600,000 26,513
- - Seagull Energy Corp. 700,000 8,925
Sun Co., Inc. 339,967 12,728
USX-Marathon Group 800,000 27,300
Unocal Corp. 1,000,000 32,750
---------
219,977
---------
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
ENERGY PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
OIL--INTEGRATED INTERNATIONAL (9.2%)
Chevron Corp. 450,000 $ 37,181
Exxon Corp. 280,000 19,635
Texaco Inc. 578,388 35,173
---------
91,989
---------
OTHER (2.3%)
Foster Wheeler Corp. 290,000 4,549
McDermott International, Inc. 700,000 18,156
---------
22,705
---------
- ---------------------------------------------------------------------
TOTAL UNITED STATES 659,630
- ---------------------------------------------------------------------
INTERNATIONAL (30.5%)
- ---------------------------------------------------------------------
CANADA (13.8%)
Alberta Energy Co., Ltd. 1,097,870 24,511
- - Anderson Exploration Ltd. 1,012,401 10,680
Cabre Exploration Ltd. 290,000 2,213
Canadian Pacific Ltd. 800,000 19,161
Imperial Oil Ltd. 1,320,900 21,910
PanCanadian Petroleum Ltd. 283,400 4,137
Paramount Resources Ltd. 1,080,900 10,040
Penn West Petroleum Ltd. 352,143 3,972
- - Petro-Canada 1,000,000 14,364
Poco Petes Ltd. 400,000 3,623
Ranger Oil Ltd. 1,500,000 9,902
Rio Alto Exploration Ltd. 652,500 6,602
Talisman Energy, Inc. 255,000 6,471
---------
137,586
---------
FRANCE (2.9%)
Total SA ADR 508,989 29,108
---------
ITALY (3.2%)
ENI SpA ADR 500,500 32,345
---------
NORWAY (2.4%)
Norsk Hydro ASA ADR 480,000 21,240
Saga Petroleum ASA B Shares 190,000 2,517
---------
23,757
---------
SPAIN (2.7%)
Repsol SA ADR 492,500 26,441
---------
UNITED KINGDOM (2.1%)
Burmah Castrol PLC 299,955 5,275
Lasmo PLC 2,000,000 6,888
Shell Transport &
Trading Co. ADR 230,000 8,927
---------
21,090
---------
OTHER (3.4%)
Royal Dutch Petroleum-
NY Shares 320,000 16,320
YPF SA ADR 600,000 17,550
---------
33,870
---------
- ---------------------------------------------------------------------
TOTAL INTERNATIONAL 304,197
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $829,800) 963,827
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.1%)
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.64%, 8/3/1998 $33,083 33,083
5.64%, 8/3/1998--Note G 7,480 7,480
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $40,563) 40,563
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(COST $870,363) 1,004,390
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.8%)
- ---------------------------------------------------------------------
Other Assets--Note C 1,879
Liabilities--Note G (9,872)
---------
(7,993)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 46,436,756 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $ 996,397
=====================================================================
NET ASSET VALUE PER SHARE $21.46
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
- ---------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $831,193 $17.90
Undistributed Net Investment
Income--Note F 7,663 .16
Accumulated Net Realized
Gains--Note F 23,514 .51
Unrealized Appreciation--
Note E 134,027 2.89
- ---------------------------------------------------------------------
NET ASSETS $996,397 $21.46
=====================================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
GOLD & PRECIOUS VALUE*
METALS PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (89.9%)
- ---------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (30.6%)
Ashton Mining Ltd. 6,500,000 $ 3,947
- - Aurora Gold Ltd. 7,410,000 5,760
- - Australian Resources Ltd. 13,000,000 1,737
- - Australian Resources Ltd.
Rights Exp. 8/24/1998 3,250,000 41
- - Bougainville Copper Ltd. 2,000,000 449
- - Emperor Mines Ltd. 800,000 185
Goldfields Ltd. 5,000,000 4,858
Homestake Mining Co. 1,360,000 14,057
- - Lihir Gold Ltd. 5,000,000 5,921
- - Lone Star Exploration NL 1,272,300 31
Mount Isa Mines
Holdings Ltd. 24,000,000 11,368
- - Newcrest Mining Ltd. 13,000,000 14,526
Normandy Mining Ltd. 16,000,000 12,340
- - Normandy Mining Ltd.
Warrants Exp. 4/30/2001 1,800,000 137
Rio Tinto Ltd. 900,000 9,849
Sons of Gwalia Ltd. 2,000,000 5,002
- - Star Mining Corp. NL 26,000,000 111
- - Tanami Gold NL 1,600,000 87
---------
90,406
---------
CANADA (18.2%)
Aber Resources Ltd. 350,000 2,972
Barrick Gold Corp. 200,000 3,278
Euro-Nevada Mining Corp. 1,360,000 16,738
Franco-Nevada
Mining Corp., Ltd. 760,000 12,833
- - Geomaque Explorations Ltd. 2,000,000 2,322
Golden Star Resources Ltd. 350,000 581
Greenstone Resources Ltd. 750,000 1,841
Placer Dome Inc. 850,000 8,882
Princess Resources Ltd. 6,000,000 279
- - TVX Gold, Inc. 1,250,000 2,861
- - Vengold, Inc. 1,250,000 1,161
---------
53,748
---------
GHANA (0.9%)
- - Ashanti Goldfields Co., Ltd. 399,998 2,733
---------
SOUTH AFRICA (15.4%)
Anglo American
Platinum Corp. ADR 903,400 12,304
Anglogold Ltd. ADR 1,159,662 24,504
- - Gold Fields Ltd. ADR 84,200 370
Impala Platinum
Holdings Ltd. ADR 750,000 8,445
---------
45,623
---------
UNITED KINGDOM (1.0%)
Rio Tinto PLC 250,000 2,814
---------
UNITED STATES (23.8%)
- - Atlas Corp. 1,000,000 190
Barrick Gold Corp. 575,000 9,416
- - Campbell Resources, Inc. 4,068,000 1,398
- - Crown Resources Corp. 600,000 2,250
Freeport-McMoRan Copper &
Gold, Inc. Class A 850,000 12,059
Freeport-McMoRan Copper &
Gold, Inc. Gold Denomination
Shares Pfd. 150,000 3,197
- - Getchell Gold Corp. 400,000 5,400
Newmont Gold Co. 125,000 2,422
Newmont Mining Corp. 800,000 15,100
Placer Dome, Inc. 350,000 3,631
- - Royal Gold, Inc. 480,000 1,800
- - Stillwater Mining Co. 500,000 13,687
---------
70,550
---------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $385,257) 265,874
- ---------------------------------------------------------------------
PRECIOUS METALS (7.5%)
- ---------------------------------------------------------------------
- - Gold Bullion (74,868 Ounces) 21,427
- - Platinum Bullion (2,009 Ounces) 752
- ---------------------------------------------------------------------
TOTAL PRECIOUS METALS
(COST $31,918) 22,179
- ---------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (4.9%)
- ---------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.64%, 8/3/1998 $7,777 7,777
5.64%, 8/3/1998--Note G 6,750 6,750
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $14,527) 14,527
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (102.3%)
(COST $431,702) 302,580
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.3%)
- ---------------------------------------------------------------------
Other Assets--Note C 838
Liabilities--Note G (7,564)
--------
(6,726)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 47,158,724 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $295,854
=====================================================================
NET ASSET VALUE PER SHARE $6.27
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
25
<PAGE> 28
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
GOLD & PRECIOUS AMOUNT PER
METALS PORTFOLIO (000) SHARE
- ----------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $510,271 $10.82
Overdistributed Net Investment
Income--Note F (2,535) (.05)
Accumulated Net Realized
Losses--Note F (82,758) (1.76)
Unrealized Depreciation--Note E
Investment Securities (129,122) (2.74)
Foreign Currencies (2) --
- ----------------------------------------------------------------------
NET ASSETS $295,854 $ 6.27
======================================================================
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (87.2%)
- ---------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (70.4%)
- ---------------------------------------------------------------------
BIOTECH RESEARCH & PRODUCTION (2.0%)
- - Allergan Specialty
Therapeutics, Inc. 157,395 $ 1,594
Baxter International, Inc. 300,000 17,925
- - Genentech, Inc.
Special Common Stock 1,406,900 97,164
- - IDEXX Laboratories Corp. 1,100,000 24,750
--------
141,433
--------
CONSUMER DISCRETIONARY (1.1%)
Kimberly-Clark Corp. 1,700,000 76,394
- -(1)Paragon Trade Brands, Inc. 1,124,100 4,777
--------
81,171
--------
DRUGS & PHARMACEUTICALS (43.8%)
Abbott Laboratories 6,090,000 253,116
- - Agouron Pharmaceuticals, Inc. 1,501,200 38,843
(1)Allergan, Inc. 3,509,600 183,377
- - Alliance Pharmaceutical Corp. 1,002,388 4,511
Alpharma, Inc. Class A 1,383,713 34,247
- - ALZA Corp. 1,030,000 40,041
American Home Products Corp. 2,030,000 104,545
- - Amgen, Inc. 880,000 64,625
- - Amylin Pharmaceuticals, Inc. 1,500,000 5,062
- - Anergen Inc. 400,000 725
Bergen Brunswig Corp. Class A 1,358,125 71,981
- - BioCryst Pharmaceuticals, Inc. 340,100 2,381
- - Biogen, Inc. 415,000 23,084
Bristol-Myers Squibb Co. 2,230,000 254,081
- - Cephalon, Inc. 270,000 1,620
- - Crescendo Pharmaceuticals
Corp. 51,500 666
- - Genzyme Corp. 2,041,300 64,237
- - Gilead Sciences, Inc. 1,500,000 35,250
- - Human Genome Sciences, Inc. 1,020,000 38,250
- - Immunex Corp. 1,330,100 94,104
Johnson & Johnson 2,547,500 196,794
Eli Lilly & Co. 650,000 43,712
- -(1)Magainin Pharmaceuticals, Inc. 1,278,100 6,470
- - Matrix Pharmaceutical, Inc. 200,500 702
McKesson Corp. 2,560,000 206,400
Merck & Co., Inc. 1,255,225 154,785
Mylan Laboratories, Inc. 445,000 12,098
- - Perrigo Co. 3,377,100 31,871
Pharmacia & Upjohn, Inc. 7,033,300 333,203
Pfizer, Inc. 2,800,000 308,000
Schering-Plough Corp. 220,000 21,285
- - Scios, Inc. 491,750 3,749
- - Triangle Pharmaceuticals, Inc. 564,800 9,319
- - Vertex Pharmaceuticals, Inc. 1,087,000 22,691
Warner-Lambert Co. 5,040,000 380,835
---------
3,046,660
---------
ELECTRONICS--MEDICAL SYSTEMS (1.1%)
- - ATL Ultrasound, Inc. 683,300 34,229
- - Datascope Corp. 340,100 7,737
- -(1)Haemonetics Corp. 1,647,500 27,081
- - SonoSight, Inc. 227,767 1,708
- - SpaceLabs Medical, Inc. 280,000 4,830
---------
75,585
---------
HEALTH & PERSONAL CARE (0.5%)
- -(1)American Retirement Corp. 637,000 10,232
- - PharMerica, Inc. 1,430,783 9,345
- -(1)Syncor International Corp. 856,559 15,525
---------
35,102
---------
HEALTH CARE FACILITIES (2.8%)
- - Beverly Enterprises, Inc. 2,287,600 23,019
Columbia/HCA Healthcare Corp. 4,140,620 118,008
- - Laboratory Corp. of America 3,692,116 7,846
- - Quest Diagnostics, Inc. 1,285,600 26,355
- - Tenet Healthcare Corp. 641,100 19,193
---------
194,421
---------
HEALTH CARE MANAGEMENT SERVICES (4.6%)
Aetna Inc. 1,030,000 71,392
- - Cerner Corp. 906,600 25,725
- - Humana, Inc. 3,195,000 86,864
- - MedPartners, Inc. 3,379,350 17,319
- - Mid Atlantic Medical
Services, Inc. 500,000 3,938
- - Oxford Health Plan 1,200,000 9,675
- - Pacificare Health Systems Inc.
Class B 712,300 51,108
United Healthcare Corp. 650,000 36,725
United Wisconsin Services, Inc. 678,000 15,848
---------
318,594
---------
MATERIALS & PROCESSING (4.2%)
DEKALB Genetics Corp. Class B 2,072,700 191,077
Pioneer Hi-Bred
International, Inc. 390,000 12,334
Sigma-Aldrich Corp. 2,718,600 78,500
---------
281,911
---------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (7.9%)
Allegiance Corp. 1,235,600 73,055
- - Arterial Vascular
Engineering, Inc. 165,000 6,517
(1)C.R. Bard, Inc. 3,373,100 136,610
Beckman Coulter, Inc. 1,202,200 72,282
Biomet, Inc. 1,170,300 36,572
Boston Scientific Corp. 200,000 15,325
(1)Collagen Corp. 525,800 8,774
- - DePuy, Inc. 366,600 12,556
- -(1)E-Z-EM, Inc. Class A 219,258 1,617
- -(1)E-Z-EM, Inc. Class B 304,344 2,282
(1)Owens & Minor, Inc.
Holding Co. 1,929,100 23,873
- - Protocol Systems, Inc. 273,000 2,525
- - ReSound Corp. 300,000 1,463
- - St. Jude Medical, Inc. 801,300 24,440
U.S. Surgical Corp. 2,606,300 120,053
- - Xomed Surgical Products Inc. 343,300 11,844
---------
549,788
---------
MEDICAL SERVICES (1.1%)
- - Covance, Inc. 2,100,000 50,269
- -(1)Coventry Health Care Inc. 3,243,000 23,309
---------
73,578
---------
MISCELLANEOUS HEALTH CARE (0.5%)
Mallinckrodt, Inc. 1,348,000 37,323
---------
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
PRODUCER DURABLES (0.7%)
Pall Corp. 250,000 $ 5,625
Perkin-Elmer Corp. 754,545 44,235
---------
49,860
---------
OTHER (0.1%)
Carter-Wallace, Inc. 266,000 4,805
Carter-Wallace, Inc. Class B 24,000 433
---------
5,238
---------
- ---------------------------------------------------------------------
TOTAL UNITED STATES 4,890,664
- ---------------------------------------------------------------------
INTERNATIONAL (16.8%)
- ---------------------------------------------------------------------
JAPAN (6.6%)
Banyu Pharmaceutical Co., Ltd. 4,082,000 45,407
Chugai Pharmaceutical Co., Ltd. 5,660,000 39,007
Daiichi Pharmaceutical Co., Ltd. 2,450,000 32,073
Eisai Co., Ltd. 5,685,000 72,413
Fujisawa
Pharmaceutical Co., Ltd. 6,530,000 56,763
Olympus Optical Co., Ltd. 1,800,000 18,951
Sankyo Co., Ltd. 2,350,000 52,737
Shionogi & Co., Ltd. 4,053,000 21,335
Takeda Chemical Industries Ltd. 2,700,000 69,382
Tanabe Seiyaku Co., Ltd. 5,025,000 21,579
Yamanouchi
Pharmaceuticals Co., Ltd. 1,330,000 27,590
---------
457,237
---------
UNITED KINGDOM (4.5%)
- - Nycomed Amersham PLC 10,816,218 72,197
- - Oxford GlycoSciences PLC 375,000 1,111
SmithKline Beecham PLC ADR 2,019,600 115,622
Zeneca Group PLC ADR 3,198,072 124,125
---------
313,055
---------
OTHER (5.7%)
Bayer AG ADR 1,850,000 84,175
Hoechst AG 800,000 35,625
Novartis AG (Registered) 61,747 104,150
Nycomed Amersham PLC
(Norway) 1,193,590 8,221
Rhone-Poulenc SA ADR 1,276,279 68,919
Roche Holdings AG
(Dividend-Right Certificates) 5,000 53,842
Schering AG 213,470 24,305
Synthelabo SA 118,270 18,297
---------
397,534
---------
- ---------------------------------------------------------------------
TOTAL INTERNATIONAL 1,167,826
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $3,743,952) 6,058,490
- ---------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.3%)
- ---------------------------------------------------------------------
Laboratory Corp. 8.50% Cvt. Pfd.
(COST $22,981) 347,721 18,255
- ---------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (14.1%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENTS (8.0%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.64%, 8/3/1998--Note G $ 52,083 52,083
Credit Suisse First Boston Corp.
(Dated 7/31/1998, Repurchase Value
$507,037,000, collateralized by
U.S. Treasury Note 5.75%,
4/30/2003) $506,008 506,008
---------
558,091
---------
COMMERCIAL PAPER (6.1%)
Metlife Funding Inc.
5.579%, 8/20/1998 50,981 50,832
Merrill Lynch & Co.
5.636%, 8/27/1998 100,000 99,601
Associates Corp.
5.647%, 8/31/1998 75,000 74,654
General Electric Capital Corp.
5.52%, 8/21/1998 50,000 49,847
5.636%, 8/26/1998 75,000 74,712
E.I. du Pont de Nemours & Co.
5.611%, 8/18/1998 75,000 74,805
---------
424,451
---------
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $982,542) 982,542
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (101.6%)
(COST $4,749,475) 7,059,287
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.6%)
- ---------------------------------------------------------------------
Other Assets--Note C 26,370
Liabilities--Note G (136,338)
---------
(109,968)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 81,484,278 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $6,949,319
=====================================================================
NET ASSET VALUE PER SHARE $85.28
=====================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
(1)Considered an affiliated company as the portfolio owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $443,927,000.
ADR--American Depositary Receipt.
<TABLE>
- ---------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,575,562 $56.14
Undistributed Net Investment
Income--Note F 37,239 .46
Accumulated Net Realized
Gains--Note F 26,707 .33
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 2,309,812 28.35
Foreign Currencies (1) --
=====================================================================
NET ASSETS $6,949,319 $85.28
=====================================================================
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
UTILITIES INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (82.5%)
- ---------------------------------------------------------------------
<S> <C> <C>
ELECTRICAL (35.7%)
CMS Energy Corp. 150,000 $ 6,328
Central & South West Corp. 250,000 6,359
Central Hudson Gas &
Electric Corp. 216,300 9,328
Cilcorp, Inc. 85,000 3,979
Consolidated Edison Inc. 238,600 10,096
DPL Inc. 533,000 9,094
DQE Inc. 427,930 14,924
DTE Energy Co. 250,000 10,031
Endesa SA ADR 349,800 7,630
Energy East Corp. 40,900 1,636
GPU, Inc. 508,700 18,186
Houston Industries, Inc. 100,000 2,794
Montana Power Co. 357,200 12,524
NIPSCO Industries, Inc. 781,000 20,794
National Power PLC ADR 150,000 5,325
New England Electric System 617,100 25,147
Northern States Power Co. 397,800 10,467
PECO Energy Corp. 475,000 14,220
Pinnacle West Capital Corp. 594,300 25,406
PowerGen PLC ADR 254,500 13,616
Public Service Co. of
New Mexico 200,000 4,300
Public Service Enterprise
Group, Inc. 350,000 11,441
Texas Utilities Co. 200,000 8,013
Unicom Corp. 250,000 8,641
Wisconsin Energy Corp. 200,000 5,688
---------
265,967
---------
GAS DISTRIBUTION (6.5%)
Energen Corp. 200,000 3,438
KN Energy, Inc. 175,000 8,652
MCN Energy Group Inc. 287,000 7,121
National Fuel Gas Co. 175,000 7,230
ONEOK, Inc. 145,400 4,962
Peoples Energy Corp. 50,000 1,750
Public Service Co. of
North Carolina, Inc. 39,300 786
Questar Corp. 210,600 3,922
- - Sempra Energy 424,072 10,681
---------
48,542
---------
INTEGRATED OILS (2.3%)
Enron Corp. 250,000 13,234
Equitable Resources, Inc. 150,000 3,694
---------
16,928
---------
OTHER ENERGY (5.9%)
Columbia Energy Group 337,500 17,951
El Paso Natural Gas 461,400 15,688
Westcoast Energy Inc. 100,000 1,906
Williams Cos., Inc. 265,000 8,496
---------
44,041
---------
TELECOMMUNICATIONS (26.2%)
AT&T Corp. 200,000 12,125
ALLTEL Corp. 130,000 5,452
Ameritech Corp. 450,000 22,134
BCE, Inc. 100,000 4,031
BellSouth Corp. 277,600 18,964
Frontier Corp. 370,200 12,425
GTE Corp. 200,000 10,875
MCI Communications Corp. 300,000 19,425
Southern New England
Telecommunications Corp. 250,000 17,219
Sprint Corp. 307,100 21,497
Telecom Corp. of New Zealand
Ltd. ADR 300,800 10,490
Telefonica SA 109,090 15,872
U S West, Inc. 457,000 24,392
---------
194,901
---------
WATER (0.6%)
American Water Works Co., Inc. 146,300 4,380
---------
OTHER (5.3%)
Duke Energy Corp. 377,220 21,549
MDU Resources Group, Inc. 300,000 6,806
New Century Energies, Inc. 169,600 7,060
TELUS Corp. 173,100 3,962
---------
39,377
---------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $475,840) 614,136
- ---------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (14.5%)
- ---------------------------------------------------------------------
ELECTRIC (8.8%)
Arizona Public Service Co.
6.25%, 1/15/2005 $ 2,000 1,980
Baltimore Gas & Electric Co.
7.50%, 1/15/2007 4,000 4,323
Carolina Power & Light Co.
8.625%, 9/15/2021 3,000 3,686
Central Power & Light Co.
7.25%, 10/1/2004 2,000 2,109
Consolidated Edison Inc.
6.45%, 12/1/2007 4,000 4,049
Duke Energy Corp.
6.625%, 2/1/2003 4,000 4,098
Florida Power Corp.
6.75%, 2/1/2028 2,900 2,964
GTE Southwest Inc.
6.23%, 1/1/2007 1,000 990
Kentucky Utilities Co.
7.92%, 5/15/2007 2,000 2,237
Louisville Gas & Electric
Energy Corp.
6.00%, 8/15/2003 2,000 2,009
NRG Energy, Inc.
7.50%, 6/15/2007 3,000 3,121
Northern States Power Co.
5.75%, 10/1/2003 4,000 3,955
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 1,275 1,266
PECO Energy
6.50%, 5/1/2003 3,000 3,041
Pennsylvania Power &
Light Co.
6.79%, 11/22/2004 MTN 2,000 2,026
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
UTILITIES INCOME PORTFOLIO (000) (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Potomac Electric Power Co.
6.50%, 9/15/2005 $ 1,000 $ 1,021
Public Service Co. of Colorado
7.125%, 6/1/2006 5,000 5,234
Southern California Edison Co.
6.25%, 6/15/2003 3,000 3,020
Southern Indiana Gas & Electric Co.
8.875%, 6/1/2016 3,400 4,299
Virginia Electric & Power Co.
6.00%, 8/1/2001 2,000 2,006
West Texas Utilities Co.
7.75%, 6/1/2007 1,500 1,650
Wisconsin Electric Power Co.
6.625%, 11/15/2006 2,000 2,055
Wisconsin Public Service Corp.
6.80%, 2/1/2003 4,500 4,647
---------
65,786
---------
GAS (0.5%)
Atlanta Gas Light Co.
5.90%, 10/6/2003 MTN 4,000 3,990
---------
TELEPHONE (5.2%)
AT&T Corp.
7.00%, 5/15/2005 2,000 2,098
Bell Atlantic Pennsylvania, Inc.
6.625%, 9/15/2002 3,500 3,584
Century Telephone Enterprises
6.30%, 1/15/2008 2,000 1,976
Chesapeake & Potomac
Telephone Co. (MD)
8.30%, 8/1/2031 1,000 1,237
Chesapeake & Potomac
Telephone Co. (VA)
7.875%, 1/15/2022 2,000 2,323
GTE California Inc.
6.70%, 9/1/2009 2,000 2,051
GTE Corp.
7.51%, 4/1/2009 2,000 2,149
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 3,000 3,320
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 3,000 3,524
New York Telephone Co.
8.625%, 11/15/2010 2,500 2,972
Pacific Bell
6.625%, 11/1/2009 3,000 3,084
Southwestern Bell Telephone Co.
6.625%, 4/1/2005 3,000 3,061
U S WEST Capital Funding, Inc.
6.375%, 7/15/2008 3,000 2,972
United Telephone Co. of Florida
6.25%, 5/15/2003 4,000 4,047
---------
38,398
---------
- ---------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $104,642) 108,174
- ---------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(0.5%)
- ---------------------------------------------------------------------
Australian Gas Light Co.
6.40%, 4/15/2008 2,000 1,999
United Utilities PLC
6.45%, 4/1/2008 2,000 1,980
- ---------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $3,992) 3,979
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.8%)
- ---------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.64%, 8/3/1998 15,206 15,206
5.64%, 8/3/1998--Note G 12,780 12,780
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $27,986) 27,986
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (101.3%)
(COST $612,460) 754,275
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.3%)
- ---------------------------------------------------------------------
Other Assets--Note C 5,316
Liabilities--Note G (15,169)
---------
(9,853)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 48,660,153 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $744,422
=====================================================================
NET ASSET VALUE PER SHARE $15.30
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $550,935 $11.32
Undistributed Net
Investment Income 7,833 .16
Accumulated Net Realized Gains 43,839 .90
Unrealized Appreciation--
Note E 141,815 2.92
=====================================================================
NET ASSETS $744,422 $15.30
=====================================================================
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (98.3%)
- ---------------------------------------------------------------------
<S> <C> <C>
Alexander Haagen
Properties, Inc. REIT 151,200 $ 2,136
Alexandria Real Estate
Equities, Inc. REIT 75,000 2,184
AMB Property Corp. REIT 375,000 8,953
American General Hospitality
Corp. REIT 255,100 4,863
American Industrial
Properties REIT 40,000 500
AMLI Residential Properties
Trust REIT 163,800 3,573
Apartment Investment &
Management Co. Class A REIT 431,050 16,380
Archstone Communities
Trust REIT 1,285,127 26,988
Arden Realty Group, Inc. REIT 567,200 13,400
Associated Estates Realty
Corp. REIT 177,300 3,202
Avalon Bay Communities REIT 554,427 19,890
Bedford Property
Investors, Inc. REIT 195,500 3,653
Berkshire Realty Co., Inc. REIT 350,100 3,829
Boston Properties, Inc. REIT 553,850 17,896
Boykin Lodging Co. REIT 159,300 2,698
Bradley Real Estate Inc. REIT 215,300 4,589
Brandywine Realty Trust REIT 302,400 6,029
BRE Properties Inc.
Class A REIT 394,600 9,964
Burnham Pacific
Properties, Inc. REIT 297,400 4,108
Camden Property Trust REIT 403,726 11,632
- - CapStar Hotel Co. REIT 10,400 261
Captec Net Lease
Realty, Inc. REIT 37,500 544
CarrAmerica Realty Corp. REIT 577,900 15,567
CBL & Associates
Properties, Inc. REIT 226,800 5,514
CCA Prison Realty Trust REIT 165,000 3,558
CenterPoint Properties
Corp. REIT 190,900 6,347
Charles E. Smith
Residential Realty, Inc. REIT 147,200 4,563
Chateau Communities, Inc. REIT 256,040 7,361
Chelsea GCA Realty, Inc. REIT 158,000 5,727
Colonial Properties Trust REIT 217,300 5,949
Commercial Net Lease
Realty REIT 277,800 4,375
Cornerstone
Properties, Inc. REIT 872,900 13,966
Cornerstone Realty
Income Trust, Inc. REIT 144,400 1,706
Cousins Properties, Inc. REIT 291,300 8,411
Crescent Real Estate, Inc. REIT 1,077,700 31,657
Crown American Realty
Trust REIT 263,000 2,367
Developers Diversified
Realty Corp. REIT 251,600 9,309
Duke Realty
Investments, Inc. REIT 728,900 15,626
EastGroup Properties, Inc. REIT 161,050 3,020
Entertainment Properties
Trust REIT 105,800 1,944
Equity Inns, Inc. REIT 336,900 4,253
Equity Office Properties
Trust REIT 2,195,301 54,608
Equity Residential Properties
Trust REIT 872,537 36,647
Essex Property Trust, Inc. REIT 148,800 4,538
Excel Realty Trust, Inc. REIT 230,900 6,032
- - FAC Realty Inc. REIT 121,800 1,028
Federal Realty Investment
Trust REIT 360,800 8,434
Felcor Lodging Trust, Inc. REIT 420,900 11,627
First Industrial Realty Trust REIT 345,000 9,531
First Union Real Estate REIT 284,400 2,115
First Washington Realty
Trust, Inc. REIT 68,800 1,608
Franchise Finance Corp. of
America REIT 411,900 10,246
Gables Residential Trust REIT 201,500 5,403
General Growth
Properties Inc. REIT 328,800 11,960
Glenborough Realty
Trust, Inc. REIT 282,500 6,957
Glimcher Realty Trust REIT 232,800 4,234
Golf Trust of America, Inc. REIT 10,000 306
Great Lakes, Inc. REIT 71,800 1,126
Highwood Properties, Inc. REIT 475,900 14,723
Home Properties of
New York, Inc. REIT 75,000 1,912
- - Horizon Group
Properties, Inc. REIT 22,070 108
Hospitality Properties
Trust REIT 375,600 10,869
Innkeepers USA Trust REIT 313,900 3,826
IRT Property Co. REIT 313,300 3,368
Irvine Apartment
Communities, Inc. REIT 179,900 5,082
Jameson Inns, Inc. REIT 114,700 1,262
JDN Realty Corp. REIT 281,100 6,044
JP Realty Inc. REIT 166,100 3,675
Kilroy Realty Corp. REIT 257,400 5,840
Kimco Realty Corp. REIT 502,500 18,593
Koger Equity, Inc. REIT 262,400 4,887
Kranzco Realty Trust REIT 103,700 1,867
- - Lexford Residential Trust REIT 45,000 886
Lexington Corporate
Properties Trust REIT 171,300 2,227
Liberty Property Trust REIT 534,200 13,388
The Macerich Co. REIT 261,400 7,139
Mack-Cali Realty Corp. REIT 527,900 16,398
Manufactured Home
Communities, Inc. REIT 245,300 6,056
Meridian Industrial
Trust, Inc. REIT 217,000 4,340
Merry Land &
Investment Co., Inc. REIT 395,000 8,641
MGI Properties, Inc. REIT 130,600 3,436
Mid Atlantic Realty Trust REIT 132,300 1,720
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Mid-America Apartment
Communities, Inc. REIT 175,900 $ 4,639
Mills Corp. REIT 205,700 4,744
National Golf Properties,
Inc. REIT 124,200 3,454
New Plan Realty Trust REIT 546,300 12,462
Pacific Gulf Properties, Inc. REIT 180,000 3,746
Pan Pacific Retail
Properties, Inc. REIT 67,600 1,394
Parkway Properties Inc. REIT 96,500 2,871
Patriot American
Hospitality, Inc. REIT 1,270,142 24,133
Pennsylvania REIT 109,700 2,407
Post Properties, Inc. REIT 323,113 12,824
Prentiss Properties Trust REIT 365,600 8,706
Prime Group Realty Trust REIT 20,000 368
Prime Retail, Inc.REIT
8.50% Series B Cvt. Pfd. 31,100 618
Prime Retail, Inc. REIT 384,208 4,659
ProLogis Trust REIT 1,131,643 27,018
PS Business Parks, Inc. REIT 105,000 2,376
Public Storage, Inc. REIT 1,057,700 28,029
Realty Income Corp. REIT 251,000 6,040
Reckson Associates
Realty Corp. REIT 363,000 8,236
- - Reckson Service
Industries, Inc. REIT 181,440 386
Regency Realty Corp. REIT 248,500 5,902
RFS Hotel Investors, Inc. REIT 240,300 4,100
Rouse Co. REIT 593,000 17,308
Saul Centers, Inc. REIT 125,300 2,083
- - Security Capital Group Inc.
REIT Warrants Exp. 9/18/1998 153,893 19
Shurgard Storage Centers, Inc.
Class A REIT 270,200 7,431
Simon DeBartolo
Group, Inc. REIT 979,476 30,486
SL Green Realty Corp. REIT 160,000 3,520
Sovran Self Storage, Inc. REIT 124,200 3,159
Spieker Properties, Inc. REIT 555,300 19,956
Starwood Hotels &
Resorts REIT 1,608,589 66,053
Storage Trust Realty REIT 149,000 3,315
Storage USA, Inc. REIT 242,300 7,905
Summit Properties, Inc. REIT 261,200 4,718
Sun Communities, Inc. REIT 161,000 5,404
Sunstone Hotel
Investors, Inc. REIT 349,600 3,889
Tanger Factory Outlet
Centers, Inc. REIT 64,300 1,845
Taubman Co. REIT 484,600 6,330
Tower Realty Trust, Inc. REIT 130,200 2,978
Town & Country Trust REIT 172,800 2,786
Trinet Corporate Realty
Trust, Inc. REIT 230,600 7,595
U.S. Restaurant
Properties, Inc. REIT 20,000 515
United Dominion Realty
Trust REIT 907,076 11,395
Urban Shopping
Centers, Inc. REIT 158,600 5,214
Vornado Realty Trust REIT 736,882 26,620
Walden Residential
Properties, Inc. REIT 174,500 4,155
Washington REIT 339,100 5,744
Weeks Corp. REIT 188,200 5,434
Weingarten Realty
Investors REIT 248,100 9,350
Western Investment Real Estate
Trust REIT 178,400 2,241
Westfield America, Inc. REIT 614,900 10,838
Winston Hotels, Inc. REIT 185,175 2,037
- ---------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(COST $1,100,623) 1,090,614
- ---------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (2.5%)
- ---------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.64%, 8/3/1998 $19,146 19,146
5.64%, 8/3/1998--Note G 8,709 8,709
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $27,855) 27,855
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(COST $1,128,478) 1,118,469
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.8%)
- ---------------------------------------------------------------------
Other Assets--Note C 7,108
Liabilities--Note G (15,900)
---------
(8,792)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 90,464,577 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $1,109,677
=====================================================================
NET ASSET VALUE PER SHARE $12.27
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,101,105 $12.17
Undistributed Net
Investment Income 8,777 .10
Accumulated Net
Realized Gains 9,804 .11
Unrealized Depreciation--
Note E (10,009) (.11)
=====================================================================
NET ASSETS $1,109,677 $12.27
=====================================================================
</TABLE>
32
<PAGE> 35
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each portfolio
during the reporting period, and details the operating expenses charged to the
portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any Net
Gain (Loss) realized on the sale of investments, and the increase or decrease in
the Unrealized Appreciation (Depreciation) on investments during the
period--these amounts include the effect of foreign currency movements on the
value of a portfolio's securities. Currency gains (losses) on the translation of
other assets and liabilities are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GOLD & PRECIOUS UTILITIES
ENERGY METALS HEALTH CARE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
---------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 9,156 $ 3,271 $ 30,522 $ 10,791
Interest 1,554 420 19,414 4,290
-----------------------------------------------------------
Total Income 10,710 3,691 49,936 15,081
-----------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 402 363 2,163 262
The Vanguard Group--Note C
Management and Administrative 1,626 828 7,705 1,066
Marketing and Distribution 150 41 636 70
Taxes (other than income taxes) 44 13 216 28
Custodian Fees 80 58 337 12
Auditing Fees 3 3 5 3
Shareholders' Reports 34 19 127 20
Annual Meeting and Proxy Costs 6 3 24 3
Trustees' Fees and Expenses 1 -- 6 1
-----------------------------------------------------------
Total Expenses 2,346 1,328 11,219 1,465
Expenses Paid Indirectly--Note C (15) -- (129) (82)
-----------------------------------------------------------
Net Expenses 2,331 1,328 11,090 1,383
- ----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,379 2,363 38,846 13,698
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 23,510 (29,326) 27,531 42,751
Foreign Currencies (13) 29 (245) --
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 23,497 (29,297) 27,286 42,751
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (84,992) (31,259) 783,180 (20,830)
Foreign Currencies 6 (1) 3 --
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (84,986) (31,260) 783,183 (20,830)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (53,110) $ (58,194) $ 849,315 $ 35,619
============================================================================================================================
</TABLE>
* Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $109,000.
**Dividend income and realized net loss from affiliated
companies were $4,099,000 and $4,877,000, respectively.
33
<PAGE> 36
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
----------------
SIX MONTHS ENDED
JULY 31, 1998
----------------
(000)
- ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 38,136
Interest 1,656
----------------
Total Income 39,792
----------------
EXPENSES
Investment Advisory Fees--Note B 15
The Vanguard Group--Note C
Management and Administrative 1,301
Marketing and Distribution 190
Taxes (other than income taxes) 48
Custodian Fees 7
Auditing Fees 3
Shareholders' Reports 23
Annual Meeting and Proxy Costs 6
Trustees' Fees and Expenses 1
----------------
Total Expenses 1,594
Expenses Paid Indirectly--Note C --
----------------
Net Expenses 1,594
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 38,198
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
- ----------------------------------------------------------------------------------------
Investment Securities Sold 9,804
Foreign Currencies --
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 9,804
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (177,725)
Foreign Currencies --
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (177,725)
- ----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(129,723)
========================================================================================
</TABLE>
34
<PAGE> 37
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
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the portfolio's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
portfolio, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ENERGY GOLD & PRECIOUS
PORTFOLIO METALS PORTFOLIO
-------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 8,379 $ 14,677 $ 2,363 $ 5,747
Realized Net Gain (Loss) 23,497 54,583 (29,297) (47,861)
Change in Unrealized Appreciation
(Depreciation) (84,986) (41,233) (31,260) (99,396)
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (53,110) 28,027 (58,194) (141,510)
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (946) (14,815) (891) (5,466)
Realized Capital Gain (2,839) (60,830) -- --
----------------------------------------------------------------------
Total Distributions (3,785) (75,645) (891) (5,466)
----------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A -- -- -- --
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 154,010 374,120 72,772 159,325
Issued in Lieu of Cash Distributions 3,542 71,118 826 5,078
Redeemed (194,745) (296,584) (45,977) (152,618)
----------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (37,193) 148,654 27,621 11,785
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (94,088) 101,036 (31,464) (135,191)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,090,485 989,449 327,318 462,509
----------------------------------------------------------------------
End of Period $ 996,397 $ 1,090,485 $ 295,854 $ 327,318
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 6,360 15,493 9,826 17,750
Issued in Lieu of Cash Distributions 139 3,106 106 750
Redeemed (8,134) 12,742) (6,269) (17,263)
----------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding (1,635) 5,857 3,663 1,237
==========================================================================================================================
</TABLE>
35
<PAGE> 38
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
HEALTH CARE UTILITIES INCOME
PORTFOLIO PORTFOLIO
-------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 38,846 $ 48,482 $ 13,698 $ 26,745
Realized Net Gain (Loss) 27,286 171,361 42,751 22,544
Change in Unrealized Appreciation
(Depreciation) 783,183 666,900 (20,830) 79,184
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 849,315 886,743 35,619 128,473
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,820) (46,289) (13,790) (27,443)
Realized Capital Gain (83,297) (121,343) (7,070) (11,501)
----------------------------------------------------------------------
Total Distributions (88,117) (167,632) (20,860) (38,944)
----------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A -- -- 273 (644)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,601,252 1,378,304 87,609 105,388
Issued in Lieu of Cash Distributions 84,296 160,547 17,201 31,731
Redeemed (217,246) (384,219) (74,357) (170,921)
----------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 1,468,302 1,154,632 30,453 (33,802)
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 2,229,500 1,873,743 45,485 55,083
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 4,719,819 2,846,076 698,937 643,854
----------------------------------------------------------------------
End of Period $ 6,949,319 $ 4,719,819 $ 744,422 $ 698,937
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 19,313 20,122 5,707 7,656
Issued in Lieu of Cash Distributions 1,043 2,370 1,101 2,322
Redeemed (2,637) (5,652) (4,852) (13,079)
----------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 17,719 16,840 1,956 (3,101)
==========================================================================================================================
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
-------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998
(000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 38,198 $ 46,066
Realized Net Gain (Loss) 9,804 6,711
Change in Unrealized Appreciation (Depreciation) (177,725) 104,420
-------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (129,723) 157,197
-------------------------------
DISTRIBUTIONS
Net Investment Income (29,202) (46,253)
Realized Capital Gain -- (6,711)
Return of Capital -- (7,411)
-------------------------------
Total Distributions (29,202) (60,375)
-------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A -- --
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 221,082 637,888
Issued in Lieu of Cash Distributions 26,227 52,704
Redeemed (295,439) (125,350)
-------------------------------
Net Increase (Decrease) from Capital Share Transactions (48,130) 565,242
- --------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (207,055) 662,064
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,316,732 654,668
-------------------------------
End of Period $ 1,109,677 $ 1,316,732
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 16,221 48,033
Issued in Lieu of Cash Distributions 1,995 3,915
Redeemed (21,965) (21,965) (9,538)
-------------------------------
Net Increase (Decrease) in Shares Outstanding (3,749) 42,410
==============================================================================================================
</TABLE>
37
<PAGE> 40
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ENERGY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.68 $23.44 $17.19 $13.82 $ 15.77 $13.82
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .32 .25 .27 .23 .31
Net Realized and Unrealized Gain (Loss)
on Investments (1.31) .57 6.64 3.68 (1.65) 3.31
-----------------------------------------------------------------
Total from Investment Operations (1.14) .89 6.89 3.95 (1.42) 3.62
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.02) (.32) (.24) (.28) (.24) (.29)
Distributions from Realized Capital Gains (.06) (1.33) (.40) (.30) (.29) (1.38)
-----------------------------------------------------------------
Total Distributions (.08) (1.65) (.64) (.58) (.53) (1.67)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.46 $22.68 $23.44 $17.19 $ 13.82 $15.77
===============================================================================================================================
TOTAL RETURN* -5.08% 3.80% 40.32% 28.68% -9.15% 27.31%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $996 $1,090 $ 989 $ 505 $ 433 $ 339
Ratio of Total Expenses to
Average Net Assets 0.42%** 0.38% 0.39% 0.51% 0.30% 0.17%
Ratio of Net Investment Income to
Average Net Assets 1.48%** 1.36% 1.36% 1.55% 1.66% 1.87%
Portfolio Turnover Rate 12%** 19% 15% 21% 13% 41%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
38
<PAGE> 41
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.53 $10.94 $14.07 $10.71 $13.58 $ 7.29
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .06 .14 .13 .17 .27 .20
Net Realized and Unrealized Gain (Loss)
on Investments (1.30) (3.42) (2.98) 3.36 (2.83) 6.30
---------------------------------------------------------------------------
Total from Investment Operations (1.24) (3.28) 2.85) 3.53 (2.56) 6.50
---------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.02) (.13) (.21) (.17) (.31) (.21)
Distributions from Realized Capital Gains -- -- (.07) -- -- --
---------------------------------------------------------------------------
Total Distributions (.02) (.13) (.28) (.17) (.31) (.21)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $6.27 $ 7.53 $10.94 $14.07 $10.71 $13.58
=================================================================================================================================
TOTAL RETURN* -16.52% -29.85% -20.51% 33.24% -19.20% 89.24%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $296 $327 $463 $648 $531 $613
Ratio of Total Expenses to
Average Net Assets 0.80%** 0.62% 0.50% 0.60% 0.25% 0.26%
Ratio of Net Investment Income to
Average Net Assets 1.43%** 1.41% 1.07% 1.38% 2.04% 2.04%
Portfolio Turnover Rate 26%** 26% 19% 5% 4% 14%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PORTFOLIO
YEAR ENDED JANUARY 31,
------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $74.02 $60.65 $52.09 $37.01 $36.51 $32.66
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .48 .80 .71 .61 .55 .79
Net Realized and Unrealized Gain (Loss)
on Investments 12.06 15.49 9.88 16.06 2.83 5.79
--------------------------------------------------------------------
Total from Investment Operations 12.54 16.29 10.59 16.67 3.38 6.58
--------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.07) (.78) (.74) (.57) (.57) (.76)
Distributions from Realized Capital Gains (1.21) (2.14) (1.29) (1.02) 2.31) (1.97)
--------------------------------------------------------------------
Total Distributions (1.28) (2.92) (2.03) (1.59) (2.88) (2.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $85.28 $74.02 $60.65 $52.09 $37.01 $36.51
=================================================================================================================================
TOTAL RETURN* 17.04% 27.37% 20.65% 45.47% 9.79% 21.21%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $6,949 $4,720 $2,846 $1,654 $771 $638
Ratio of Total Expenses to
Average Net Assets 0.38%** 0.40% 0.38% 0.46% 0.40% 0.19%
Ratio of Net Investment Income to
Average Net Assets 1.31%** 1.28% 1.41% 1.57% 1.58% 2.37%
Portfolio Turnover Rate 4%** 10% 7% 13% 25% 19%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
39
<PAGE> 42
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $14.97 $12.93 $12.84 $10.42 $11.67 $11.18
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS
Net Investment Income .29 .58 .58 .56 .56 .57
Net Realized and Unrealized Gain (Loss)
on Investments .48 2.32 .09 2.42 1.10) .88
--------------------------------------------------------------------
Total from Investment Operations .77 2.90 .67 2.98 (.54) 1.45
--------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.29) (.60) (.56) (.56) (.59) (.56)
Distributions from Realized Capital Gains (.15) (.26) (.02) -- (.12) (.40)
--------------------------------------------------------------------
Total Distributions (.44) (.86) (.58) (.56) (.71) (.96)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $15.30 $14.97 $12.93 $12.84 $10.42 $11.67
=================================================================================================================================
TOTAL RETURN 5.08% 23.17% 5.51% 29.47% -4.47% 13.08%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $744 $699 $644 $781 $593 $738
Ratio of Total Expenses to
Average Net Assets 0.40%* 0.44% 0.40% 0.44% 0.50% 0.42%
Ratio of Net Investment Income to
Average Net Assets 3.71%* 4.30% 4.63% 4.88% 5.43% 4.82%
Portfolio Turnover Rate 73%* 41% 38% 35% 35% 46%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
REIT INDEX PORTFOLIO
SIX MONTHS ENDED YEAR ENDED MAY 13, 1996,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JUL. 31, 1998 JAN. 31, 1998 JAN. 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.98 $12.64 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .42 .590 .341
Net Realized and Unrealized Gain (Loss) on Investments (1.81) 1.520 2.659
--------------------------------------------
Total from Investment Operations (1.39) 2.110 3.000
--------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.590) (.341)
Distributions from Realized Capital Gains -- (.086) (.005)
Return of Capital -- (.094) (.014)
--------------------------------------------
Total Distributions (.32) (.770) (.360)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.27 $13.98 $12.64
=================================================================================================================================
TOTAL RETURN** -10.08% 17.08% 30.33%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,110 $1,317 $655
Ratio of Total Expenses to Average Net Assets 0.26%+ 0.24% 0.36%+
Ratio of Net Investment Income to Average Net Assets 6.13%+ 4.66% 5.55%+
Portfolio Turnover Rate 36%+ 2% 0%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
+ Annualized.
40
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
Vanguard Specialized Portfolios is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and comprises the Energy,
Gold & Precious Metals, Health Care, Utilities Income, and REIT Index
Portfolios. The Energy, Gold & Precious Metals, Health Care, and Utilities
Income Portfolios may invest in securities of foreign issuers, which may subject
them to investment risks not normally associated with investing in securities of
United States corporations. Certain investments of the Utilities Income
Portfolio are in debt instruments for which the issuers' abilities to meet their
obligations may be affected by economic developments in the utilities industry.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities 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. Prices are taken from the primary market in which
each security trades. Precious metals are valued at the mean of the latest
quoted bid and asked 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 amortized
cost, which approximates market value. Securities for which market quotations
are not readily available are valued by methods deemed by the Board of Trustees
to represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
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. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
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. Fees assessed on redemptions
of capital shares are credited to paid in capital.
41
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS (continued)
B. Wellington Management Company, LLP, provides investment advisory services to
the Energy, Health Care, and Utilities Income Portfolios for fees calculated at
an annual percentage rate of average net assets. For the six months ended July
31, 1998, the investment advisory fees of the Energy, Health Care, and Utilities
Income Portfolios each represented an effective annual rate of 0.07% of average
net assets.
M&G Investment Management Ltd. provides investment advisory services to
the Gold & Precious Metals Portfolio for a fee calculated at an annual
percentage rate of average net assets. For the six months ended July 31, 1998,
the investment advisory fee represented an effective annual rate of 0.22% of the
portfolio's average net assets.
The Vanguard Group furnishes investment advisory services to the REIT
Index Portfolio on an at-cost basis.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to each portfolio under methods approved by the Board of Trustees.
Vanguard has asked the fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the fund part of the commissions generated. Such
rebates are used solely to reduce the fund's administrative expenses. For the
six months ended July 31, 1998, directed brokerage arrangements reduced expenses
by:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
EXPENSE EXPENSE REDUCTION
REDUCTION AS A PERCENT OF
PORTFOLIO (000) AVERAGE NET ASSETS
- -----------------------------------------------------------------
<S> <C> <C>
Energy $015 --
Health Care 129 --
Utilities Income 82 0.02%*
- -----------------------------------------------------------------
</TABLE>
*Annualized.
At July 31, 1998, the fund had contributed capital aggregating
$1,932,000 to Vanguard (included in Other Assets), representing 2.8% of
Vanguard's capitalization. The fund's Trustees and officers are also Directors
and officers of Vanguard.
D. During the six months ended July 31, 1998, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
- -----------------------------------------------------------------
(000)
---------------------------------------
PORTFOLIO PURCHASES SALES
- -----------------------------------------------------------------
<S> <C> <C>
Energy $ 63,084 $ 90,201
Gold & Precious Metals 72,034 41,250
Health Care 1,068,259 93,668
Utilities Income 280,967 262,195
REIT Index 221,806 255,681
- -----------------------------------------------------------------
</TABLE>
42
<PAGE> 45
E. At July 31, 1998, net unrealized appreciation (depreciation) of investment
securities for federal income tax purposes was:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(000)
------------------------------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
PORTFOLIO SECURITIES SECURITIES (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy $ 195,995 $ (61,968) $ 134,027
Gold & Precious Metals* 31,090 (164,716) (133,626)
Health Care 2,554,399 (244,587) 2,309,812
Utilities Income 144,620 (2,805) 141,815
REIT Index 56,687 (66,696) (10,009)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*See Note F.
At July 31, 1998, net unrealized foreign currency losses resulting from
the translation of other assets and liabilities were as follows:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
(000)
-------------------------
NET UNREALIZED
PORTFOLIO FOREIGN CURRENCY LOSSES
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Gold & Precious Metals $(2)
Health Care (1)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
F. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
During the six months ended July 31, 1998, the portfolios realized net
foreign currency gains (losses) that increased (decreased) distributable net
income for tax purposes; accordingly such gains (losses) have been reclassified
from accumulated net realized gains (losses) to undistributed net investment
income as follows:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
(000)
--------------------------------
INCREASE (DECREASE) UNDISTRIBUTED
PORTFOLIO NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Energy $ (13)
Gold & Precious Metals 29
Health Care (245)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Gold & Precious Metals Portfolio: At January 31, 1998, the Gold &
Precious Metals Portfolio had available realized losses of $53,432,000 to offset
future net capital gains of $2,873,000 through January 31, 2005, $19,472,000
through January 31, 2006, and $31,087,000 through January 31, 2007. Certain of
the portfolio's investments are in securities considered to be "passive foreign
investment companies," for which any unrealized appreciation and/or realized
gains are required to be included in distributable net income for tax purposes.
The cumulative total of distributions related to passive foreign investment
company holdings at July 31, 1998, was $4,504,000, and is reflected in the
balance of overdistributed net investment income.
43
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (continued)
G. The market value of securities on loan to brokers/dealers at July 31, 1998,
and collateral received with respect to such loans were:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
(000)
-----------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Energy $ 7,095 $ 7,480
Gold & Precious Metals 6,302 6,750
Health Care 48,581 52,083
Utilities Income 12,043 12,780
REIT Index 8,175 8,709
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
44
<PAGE> 47
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications 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.,
NACCO Industries, and Newfield Exploration Co.
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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 48
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Specialized Portfolios
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Treasury Portfolio
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Portfolio
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Fixed Income Securities Fund
GNMA Portfolio
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Intermediate-Term Corporate
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Treasury Portfolio
Long-Term Corporate
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High-Yield Portfolio
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Intermediate-Term Portfolio
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(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
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Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
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STAR Portfolio
Tax-Managed Fund
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Wellesley Income Fund
Wellington Fund
Q512-7/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
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