<PAGE> 1
VANGUARD
SPECIALIZED
PORTFOLIOS
Annual Report -- January 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 2
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 6,000 highly
motivated men and women--who form the cornerstone of our operations. As with
any cornerstone, we could not survive long--let alone prosper--without it.
That's why we chose this fiscal year's annual report 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
CONTENTS
<TABLE>
<S> <C>
A Message To Our Shareholders . . . . . . . . 1
The Markets In Perspective. . . . . . . . . . 7
Reports From The Advisers . . . . . . . . . . 9
Performance Summaries . . . . . . . . . . . . 13
Portfolio Profiles. . . . . . . . . . . . . . 18
Financial Statements. . . . . . . . . . . . . 26
Report Of Independent Accountants . . . . . . 47
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
Mix solid economic growth with low inflation, stir in a dollop of
consumer confidence, and you have a formula for contented financial markets.
Just such conditions prevailed in the twelve months ended January 31, 1998, the
fiscal year for the five Vanguard Specialized Portfolios. The result was
another terrific year for U.S. stocks (up more than +25%) and a solid year for
bonds (returning better than +10%).
However, the conditions that were so generally pleasant for financial
assets were harsh for hard assets--commodities such as gold and oil--whose
prices fell sharply during the fiscal year. Results of the five Vanguard
Specialized Portfolios illustrated this divergence, as each earned a return
reflecting the market niche in which it invests. The table at right presents
the total return (capital change plus reinvested dividends) for each Portfolio
compared with the average fund in its category and an unmanaged benchmark: for
our three "regular" equity Portfolios, the Standard & Poor's 500 Composite
Stock Price Index; for our Gold & Precious Metals Portfolio, the Salomon
Brothers World Gold & Precious Metals Index; and for our REIT Index Portfolio,
the Morgan Stanley Real Estate Investment Trust Index.
Per-share figures for each Portfolio, including net asset values, income
dividends, and any capital gains distributions, are presented in the table that
follows this letter.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
JANUARY 31, 1998
- --------------------------------------------------------
<S> <C>
ENERGY PORTFOLIO + 3.8%
Average Natural Resources Fund - 6.2
- --------------------------------------------------------
HEALTH CARE PORTFOLIO +27.4%
Average Health-Care Fund +16.8
- --------------------------------------------------------
UTILITIES INCOME PORTFOLIO +23.2%
Average Utility Fund +22.5
- --------------------------------------------------------
S&P 500 Index +26.9%
- --------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO -29.8%
Average Gold Fund -36.3
Salomon World Gold Index -31.2
- --------------------------------------------------------
REIT INDEX PORTFOLIO +17.1%
Average Real Estate Fund +18.7
Morgan Stanley REIT Index +16.5
- --------------------------------------------------------
</TABLE>
THE FINANCIAL MARKETS IN BRIEF
U.S. economic conditions during the twelve months ended January 31 were ideal.
There was robust growth in business activity, employment, and corporate
earnings, yet the inflation rate actually subsided to +1.6%. Investor and
consumer optimism, already at high levels, rose further. The sole dark
cloud--severe turmoil that broke out during the summer in Asian economies and
financial markets--dampened Wall Street's mood only briefly. The stock market
declined sharply in October, then quickly rebounded. In late January, the S&P
500 Index reached an all-time high, surpassing the record set in early October.
The +26.9% return on the Index over the twelve months brought its cumulative
gain over the past three fiscal years to an amazing +122.3%.
Long-term interest rates rose early in the fiscal year on expectations
that the economy's rapid growth would cause inflation to accelerate. But after
peaking at 7.17% in mid-April, the yield on the 30-year U.S. Treasury bond
retreated, as the inflation news kept getting better rather than worse. By
January 31, the 30-year bond's yield had fallen to 5.80%, a percentage point
below where it had begun the year. The rate decline boosted prices of existing
bonds, and the Lehman Brothers Aggregate Bond Index, a good measure of the
taxable bond market, earned +10.7% during the fiscal year.
1
<PAGE> 4
Short-term interest rates bottomed out in June, then climbed irregularly.
The yield on three-month Treasury bills ended the fiscal year at 5.18%, a
smidgen higher than the 5.15% yield on T-bills when the year began. The spread
between yields on three-month T-bills and 30-year Treasury bonds narrowed from
1.64 percentage points at the start of the year to a slim 0.62 percentage point
at fiscal year-end. Such a "flattening" of the yield curve has more often than
not been a precursor of a slowing economy.
AN OVERVIEW OF THE PORTFOLIOS
A buoyant U.S. stock market did not lift all boats during the fiscal year.
Although health-care and utility stocks enjoyed strong gains, commodity-based
sectors generally languished. Currency and stock market crises in Thailand,
Indonesia, Malaysia, South Korea, and the Philippines were expected to retard
global economic growth and reduce demand for petroleum, gold, and other
commodities.
Although our returns ranged from marvelous (for our Health Care and
Utilities Income Portfolios) to horrible (for our Gold & Precious Metals
Portfolio), four of the five Vanguard Specialized Portfolios did better than
their average mutual fund competitors. The exception, our REIT Index Portfolio,
earned a strong return in its first full year of operation. A detailed look at
each Portfolio follows.
ENERGY PORTFOLIO
The Energy Portfolio's +3.8% return in fiscal 1998 fell some 23 percentage
points behind that of the S&P 500 Index, and was a far cry from the record
return of +40.3% we earned in fiscal 1997. Yet our return was 10 percentage
points ahead of the -6.2% decline recorded by the average natural resources
fund. Fiscal 1998 was the sixth consecutive year in which we outpaced our
average competitor.
One simple fact--the tumbling price of crude oil--pretty much tells the
story of the energy sector. Oil prices declined more than 25%, and natural gas
prices also fell sharply during the fiscal year. These declines hurt not only
companies that produce oil and gas but also those that provide equipment and
services needed to discover and produce energy. Our edge over competing funds
was due partly to the fact that we truly concentrate on energy stocks--95% of
assets in fiscal 1998--whereas some natural resources funds invest in nonenergy
sectors, including gold-mining companies, whose stocks were devastated during
the year.
Tending to our knitting in the energy sector is one reason for our
long-run dominance over competing funds. Another important factor is the fine
work done by our adviser, Wellington Management Company. Our low
costs--operating expenses amounted to a tiny 0.38% of average net assets in
fiscal 1998--are another key to our success. The average natural resources
fund's expense ratio is 1.75%, which means that we have a yearly head start of
nearly 1.4 percentage points in our effort to provide superior returns. This
expense advantage accounts for nearly one-third of the 4.7- percentage-point
annual margin we have earned over our competitors. Clearly, costs matter.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED JANUARY 31, 1998
-------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ----------------------------------------------------------------------
<S> <C> <C>
Energy Portfolio +14.6% $39,082
- ----------------------------------------------------------------------
Average Natural Resources Fund + 9.9% $25,623
- ----------------------------------------------------------------------
S&P 500 Index +17.7% $51,003
- ----------------------------------------------------------------------
</TABLE>
The table at left presents the average annual return over the past
decade for the Energy Portfolio,
2
<PAGE> 5
the average natural resources fund, and the S&P 500 Index. It also shows the
final value of hypothetical $10,000 investments made in each ten years ago. The
energy sector did not keep pace with the overall stock market. However, we are
pleased that a $10,000 investment in our Portfolio would have amassed $13,459
more than the same investment made in our average peer. The difference is an
astounding 135% of the initial stake.
Of course, the past isn't necessarily prologue. Returns in the future
may be higher or lower than those earned in the past decade.
GOLD & PRECIOUS METALS PORTFOLIO
There is no way to put the Gold & Precious Metals Portfolio's negative return
of -29.8% in a positive light. The fact that our fiscal 1998 return was 6.5
percentage points better than the -36.3% decline recorded by the average gold
fund is not much comfort to us or our fellow shareholders.
The problems for the Portfolio--and its competitors--began with weakness
in the price of gold, which declined from about $345 a troy ounce at the start
of the year to below $280 an ounce in December, a level untouched since the
late 1970s. Despite a rebound late in the fiscal year, gold ended the period at
$304 an ounce, down about -12% for the year. Gold-mining stocks, as usual, were
more volatile than bullion prices, and the Salomon World Gold Index was off by
- -31.2%.
Calamities rarely have a single cause, and the gold sector's problems
are a case in point. Fear of inflation--a reason many investors hold gold and
gold-mining stocks--has faded. Many individual investors and even some central
banks have questioned gold's longtime role as a substitute or support for paper
money. Sales of bullion by central banks added to gold supplies. Economic woes
in Asia forced some individuals to sell gold and made it too expensive for many
people in the region, traditionally an important source of demand for jewelry
and bullion. In addition, the dollar's rise versus other currencies diminished
the value to U.S. investors of gold stocks denominated in currencies such as
the Canadian dollar and South African rand.
Over the longer term--the decade ended January 31, 1998--our Portfolio's
barely positive return reflects the generally poor fundamentals for precious
metals during the period. The bright spot in this long-term record is that we
have outperformed the average gold fund by an average of 2.4 percentage points
a year. Identical $10,000 investments made at the beginning of the decade would
have been worth $10,254 in our Portfolio versus $8,087 for our average peer.
The difference of $2,167 is more than 20% of the original investment.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED JANUARY 31, 1998
-------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------------------------
<S> <C> <C>
Gold & Precious Metals
Portfolio +0.3% $10,254
- -----------------------------------------------------------------------
Average Gold Fund -2.1% $ 8,087
- -----------------------------------------------------------------------
Salomon World Gold Index +0.8% $10,788
- -----------------------------------------------------------------------
</TABLE>
Low cost was the main source of our advantage over the typical gold
fund. Our fiscal 1998 expense ratio of 0.62%, or $6.20 per $1,000 in assets,
is roughly one-third the 1.70% expense ratio charged by the average gold fund.
Our unmanaged Index benchmark, which exists only on paper, has no operating or
transaction costs, which accounts for its 0.5 percentage point annual margin of
superiority over the Portfolio.
3
<PAGE> 6
No one knows whether the severe slump of the past two years, when the
Salomon World Gold Index suffered a cumulative decline of more than -40%, sets
the stage for a rebound or further declines. No matter what the future brings
for gold and gold-mining stocks, we will adhere to our strategy of broad
diversification and low operating costs.
HEALTH CARE PORTFOLIO
Our Health Care Portfolio performed very well in fiscal 1998. Its +27.4% total
return surpassed that of the S&P 500 Index by 0.5 percentage point and was more
than 10 percentage points ahead of the average health-care fund.
Very large companies, particularly the big pharmaceutical makers, were
the strongest performers in the health-care sector. This fact worked in our
favor in comparison with other health-care funds, because large-capitalization
stocks represented a larger portion of our holdings than for our average
competitor. The market's extreme large-cap bias worked against us in comparison
with the S&P 500 Index. Although our return exceeded that earned by the overall
Index, we trailed the Index's health-care component--which is dominated by a
handful of large drug companies--by about 10 percentage points. The midpoint of
market capitalizations of stocks we hold is $16.6 billion, less than half the
median market cap of the S&P 500. Given this lopsided market, the stock
selections of our adviser, Wellington Management Company, performed admirably.
Our Portfolio's long-term record is also admirable, as shown in the
table below. The economic environment over the past decade has strongly favored
health-care stocks, which grew more rapidly than the overall economy.
Certainly, being in the "right" sector helps. But we achieved an average annual
return fully 2 percentage points above that of the average health-care fund, a
margin that made a tremendous difference. Identical $10,000 investments made a
decade ago in our Portfolio and its average competitor, with dividends and
capital gains distributions reinvested, would have grown to $73,473 and
$62,576, respectively. The difference of $10,897 exceeds the initial
investment.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED JANUARY 31, 1998
--------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ------------------------------------------------------------------------
<S> <C> <C>
Health Care Portfolio +22.1% $73,473
- ------------------------------------------------------------------------
Average Health-Care Fund +20.1% $62,576
- ------------------------------------------------------------------------
S&P 500 Index +17.7% $51,003
- ------------------------------------------------------------------------
</TABLE>
Two factors were responsible for our superiority: first, the skilled
investment management provided by our adviser; and, second, our low costs. Our
0.40% expense ratio in fiscal 1998 is a mere one-fourth the 1.68% expense ratio
of the average health-care fund, giving us a head start of nearly 1.3
percentage points a year versus the competition. Costs matter, especially over
the long run.
We reiterate that the past decade was an extraordinary period for
health-care stocks in general and for your Portfolio in particular. The
Portfolio earned returns exceeding +20% in eight of the past ten fiscal years.
Although we can't predict the future, we believe returns will certainly be
lower over the next decade.
UTILITIES INCOME PORTFOLIO
Utility stocks rebounded nicely during fiscal 1998, and so did the Utilities
Income Portfolio. Our +23.2% return bested the +22.5% earned by the average
utility fund but lagged the +26.4% return earned by a Composite Index weighted
to reflect our traditional
4
<PAGE> 7
allocation of 80% to utility stocks (half in the S&P Utilities Index and half
in the S&P Telephone Index) and 20% to utility bonds.
We trailed the Composite Index because less than one-quarter of our
assets were in telecommunications stocks, well below the Index's roughly 40%
allocation to this sector, which was the strongest in the broader utility
group. Even so, the Portfolio outperformed its peers, a notable accomplishment
given that our stake of about 15% in long-term utility bonds during the second
half of the fiscal year was roughly three times larger than the bond allocation
of the average utility fund. Bonds earned solid returns during this period--the
Lehman Utility Bond Index earned +4.9% in the second half--but did not keep up
with the return on utility stocks. Our return, therefore, was enhanced by the
Board of Directors' decision during the year to allow the Portfolio to invest
up to 90% of its assets in equities, up from the 80% limitation previously in
force.
Our Utilities Income Portfolio has nearly six years under its belt. We
have built a solid lead over the average utility fund, even though our more
conservative stance-- reflected in our higher bond allocation--has been a bit
of a hindrance during this bullish period for equities. Identical $10,000
investments made in the Portfolio at its inception on May 15, 1992, and in its
average competitor would have grown to $20,814 and $19,281, respectively, a
difference of $1,533, or 15% of the initial investment.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
MAY 15, 1992, TO JANUARY 31, 1998
------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -------------------------------------------------------------------------
<S> <C> <C>
Utilities Income Portfolio +13.7% $20,814
- -------------------------------------------------------------------------
Average Utility Fund +12.2% $19,281
- -------------------------------------------------------------------------
Utilities Composite Index* +14.2% $21,370
- -------------------------------------------------------------------------
</TABLE>
*40% S&P Utilities Index, 40% S&P Telephone Index, and 20% Lehman Utility Bond
Index.
Neither our Portfolio nor its average competitor has beaten the
Composite Index. Our shortfall of 0.5 percentage point annually is due to the
fact that the Index bears no operating or transaction costs. However, cost is a
clear advantage for our Portfolio in relation to competing funds. Our operating
expenses in fiscal 1998 amounted to 0.44% of average net assets, 1 percentage
point below the 1.45% expense ratio charged by the average utility fund. This
cost advantage, which we believe will endure, has accounted for roughly
two-thirds of our annual margin over competitors. Costs matter.
We note that future returns will vary from year to year and may be
higher or lower than those earned since the Portfolio's inception.
REIT INDEX PORTFOLIO
The strong U.S. economy, which generated some 3 million new jobs during the
twelve months ended January 31, 1998, also increased demand for real estate and
for shares of real estate investment trusts. Consequently, REIT shares and your
Portfolio enjoyed a solid year. The Portfolio earned +17.1%, slightly ahead of
the +16.5% return of its target Morgan Stanley REIT Index. This deviation was
due to skillful trading of REIT shares by the Portfolio's adviser, Vanguard
Core
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
MAY 13, 1996, TO JANUARY 31, 1998
---------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -------------------------------------------------------------------------
<S> <C> <C>
REIT Index Portfolio +27.9% $15,258
- -------------------------------------------------------------------------
Average Real Estate Fund +26.5% $14,981
- -------------------------------------------------------------------------
Morgan Stanley REIT Index +27.6% $15,217
- -------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
Management Group. We lagged the average REIT fund by 1.6 percentage points,
largely because neither the Portfolio nor our target Index holds real estate
operating companies, which chalked up big gains during the fiscal year.
Over its brief lifetime, the Portfolio has outperformed both the average
REIT fund and the target Index. We stress that the absolute returns earned
during this period--less than 21 months--were far higher than should be
expected over the long run from any investment; future returns will surely be
lower. We also note that this period is too short to make a firm judgment about
any mutual fund. Nevertheless, we believe that the foundations of indexed
investing--low cost and broad diversification--are as important in the
specialized field of real estate investment trusts as in other financial
markets. The 1.68% expense ratio charged by the average REIT mutual fund is
seven times higher than our expense ratio of 0.24% in fiscal 1998. This gives
us a big advantage over the long run. We'll say it again: Costs matter.
IN SUMMARY
The disparate results of our five Portfolios during fiscal 1998 clearly
illustrate both the risks and rewards of investing in narrow segments of the
stock market. Returns in these sectors can be especially volatile, varying
widely year to year as events or market psychology turn one year's leaders into
the next year's laggards, and vice versa.
We believe that the special risks of investing in discrete market niches
can be rewarding and that our Portfolios provide a cost-effective way to add
diversification to a broadly apportioned investment program whose core consists
of mainstream stock funds, bond funds, and money market funds. Such
programs--tailored to suit an individual investor's objectives, time horizon,
financial situation, and tolerance for risk--provide the balance an investor
needs to "stay the course" toward long-term financial goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
- ------------------------- --------------------------------
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
February 17, 1998
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE 12 MONTHS
JANUARY 31, -----------------------------------------------------------
-------------------------- INCOME CAPITAL RETURN OF TOTAL
PORTFOLIO 1997 1998 DIVIDENDS GAINS* CAPITAL RETURN**
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy $23.44 $22.68 $0.32 $1.330 -- + 3.8%
Health Care 60.65 74.02 0.78 2.140 -- +27.4
Utilities Income 12.93 14.97 0.60 0.260 -- +23.2
Gold & Precious Metals 10.94 7.53 0.13 -- -- -29.8
REIT Index 12.64 13.98 0.59 0.086 $0.094 +17.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes both long-term and short-term capital gains distributions.
**Total returns do not reflect the 1% fee assessed by all but the Utilities
Income Portfolio on redemptions of shares held for less than one year.
6
<PAGE> 9
THE MARKETS IN PERSPECTIVE
Year Ended January 31, 1998
U.S. EQUITY MARKETS
Overall, the fiscal year that ended in January again provided U.S. equity
investors with exceptional returns, as illustrated by the 26.9% advance of the
S&P 500 Index. Investors' mettle was tested several times, however, and most
severely by the upheavals that devastated a number of Asian markets toward the
end of 1997. The region's turmoil created a high degree of uncertainty about
which countries and companies would be most affected. At a deeper level,
investors also were concerned about how local and global economic growth might
ultimately be affected by the Asian currency devaluations. As a result,
beginning in late October, the U.S. market grew increasingly volatile.
While the dust continued to settle, many investors sought the
traditional havens for periods of high uncertainty: large-capitalization issues
and particularly the "defensive" sectors of the stock market, such as utilities
and health care. The last four months of the fiscal year saw a broad advance in
these "safe" sectors, with utilities gaining 23.2% and health care 17.1%. By
contrast, concern regarding slowing economic activity in Asia had a pronounced
effect on oil prices and on the stocks of oil and oil-service companies. From
early October through mid-January, oil prices fell from nearly $23 a barrel to
less than $16, but ultimately recovered to $17.21. During this period,
integrated-oils stocks declined 8.8% and those of oil-service firms dropped
12.5%. The troubles in Asia also affected small-company stocks generally: After
posting strong results during the summer, these stocks fell 4.9% from September
through January.
Despite the recent changes in the investment environment, the fiscal
year that ended January 31 remained a stellar one for U.S. stock investors. The
best-performing sector, to the surprise of many analysts, was utilities, which
rose 38.6%. Utilities benefited from a number of factors, including the
strength of the economy, falling interest rates, and merger activity--plus, as
noted, a boost from investors hoping to avoid anything connected with Asia. In
contrast, the commodity-oriented materials & processing sector posted a gain of
9.1%. Despite the late-year rockiness, small-cap stocks also fared well
overall, as illustrated by the 18.1% increase of the Russell 2000 Index.
Small-company technology issues were a glaring exception, falling 2.3%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED JANUARY 31, 1998
-------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 26.9% 30.5% 20.3%
Russell 2000 Index 18.1 22.2 15.3
MSCI EAFE Index 10.6 9.6 12.7
- ------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 10.7% 10.2% 7.3%
Lehman 10-Year Municipal Bond Index 10.0 9.7 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- ------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.4% 2.5%
- ------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
In a fiscal year characterized by exceptionally low inflation, interest rates
fell, providing investors with very attractive total returns. The Lehman
Aggregate Bond Index, for
7
<PAGE> 10
example, posted a total return of 10.7% for the period, comprising 7.2% in
income return and 3.5% in capital appreciation. The decline in rates can be
attributed largely to better-than-expected reports about the inflation rate.
Early in the year, economists were projecting a 2.9% increase in the Consumer
Price Index (CPI) during 1997. In March, the Federal Reserve grew sufficiently
concerned to boost interest rates by 0.25% in an effort to temper economic
growth and thereby ward off inflation. The worries seemed to have been
unnecessary, as the actual CPI increase for calendar 1997 was a mere 1.7%.
The bond market gradually gathered strength during the year as investors
grew more confident that four seemingly strange bedfellows--strong economic
growth, reasonable inflation, low unemployment, and stable wage growth--would
continue to coexist peace-fully. The market also was bolstered, in the final
months of 1997, by the drop in oil prices and by the "flight to quality" among
investors concerned about Asia's problems. Overall, the longest-maturity issues
benefited most from the decline in interest rates. The yield on the 30-year
U.S. Treasury bond closed the fiscal year at 5.80%, compared with 6.79% on
January 31, 1997. Falling rates flattened the yield curve considerably: Only
0.62% separated the yield on Treasury bills from that on the 30-year issue,
down from a spread of 1.64% one year ago. This "tighter spread" reflects
expectations that inflation will remain modest.
The best-performing sector in 1997 was long-term Treasuries, as
illustrated by the exceptional 15.1% return of the Lehman Long U.S. Treasury
Index. Investors in lower-quality securities also fared well, with the Lehman
High Yield Bond Index generating a 12.8% gain. The strength of the economy,
together with the lack of inflationary pressure, created an ideal environment
for junk bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--especially, of course, those in Asia. Despite improved returns during
January 1998, the Morgan Stanley Capital International (MSCI) Pacific Index
declined by 14.7% in U.S. dollar terms over the fiscal year. Among individual
markets, the 12-month period saw sharp declines (in U.S. dollar terms) in
Singapore, down 43.8%, and Malaysia, down 72.3%. Many Asian markets continued
to reel from the problems that began in midsummer with currency devaluations by
a number of countries. The key issue in the region's markets is whether price
levels now fairly, excessively, or insufficiently reflect the challenges these
economies face.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and
subsequently recovered. The MSCI Europe Index posted a gain of 28.6% for the 12
months ended January 31. The robust character of the European markets reflected
strong corporate earnings and optimism that the European Monetary Union would
provide a solid framework for future fiscal responsibility and economic growth.
8
<PAGE> 11
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Energy Portfolio
Returns in the energy sector were disappointing during the fiscal
year ended January 31, 1998. The Energy Portfolio's total return of 3.8% fell
well behind the 26.9% return of the S&P 500 Index. Whereas the energy sector
benefited from positive dynamics in the previous year, in fiscal 1998 oil
prices declined from about $26 per barrel at the start to below $18 per barrel
at year-end. Similarly, the spot price of natural gas dropped by more than 40%
to around $2 per 1,000 cubic feet. Very cold weather early in the fiscal year
pushed up energy prices, but prices declined late in the year because an
unusually mild winter reduced demand and left ample inventories of oil.
Within the energy sector, petroleum refiners and oil-field service
companies provided the best returns during the fiscal year, although they also
lagged the general stock market. The underperformance of the Energy Portfolio
versus the overall market was concentrated in the November-January quarter of
fiscal 1998, when the Portfolio declined 11.4% while the S&P 500 Index gained
7.6%. The main negative factor during the quarter was the decision in early
December by the Organization of Petroleum Exporting Countries to increase its
oil production ceiling by about 10% in 1998, a time when economic turmoil in
Asia could curtail growth in demand for petroleum.
Spending on oil-field services remains robust, but could decrease if
lower oil prices persist for some time. Expectations of just such a slowdown
led to a particularly sharp decline in oil-services stock prices during the
final quarter. Finally, the market was affected by uncertainty regarding Iraq,
which could be producing a lot more oil or a lot less in the near future,
depending on whether its dispute with the United Nations is resolved by
diplomacy or prompts military conflict.
Looking forward, it is worth remembering that the energy sector at times
does not correlate well with the general stock market because share prices are
influenced less by general market conditions than by industry-specific factors,
such as the supply of and demand for oil and gas. We project that growth in oil
demand will be only moderately curtailed by Asia's economic crisis. U.S.
natural gas markets continue to be tight, despite the mild winter of 1997-1998.
We expect that the improved supply/demand characteristics of the energy sector,
which first became visible in 1995 and 1996, will push oil and gas prices up
from current levels. Our style of investing for the Portfolio--that is,
selecting successful companies across the various segments of the energy
sector--is, in our view, the best way to participate in these long-term trends.
Ernst H. von Metzsch, Senior Vice President and
Portfolio Manager
February 12, 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.
9
<PAGE> 12
REPORT FROM M&G INVESTMENT MANAGEMENT LTD.
Gold & Precious Metals Portfolio
The fiscal year ended January 31, 1998, was another difficult period for
gold investing. It is disappointing to report that the Gold & Precious Metals
Portfolio declined by 29.8%. Returns were even worse for the Salomon World Gold
Index (down 31.2%) and the average gold mutual fund (down 36.3%).
Continuing sales of gold by central banks, occurring amid a benign
global inflationary environment, caused gold bullion's price to fall from $345
per troy ounce at the start of the fiscal year to $276, an 18-year low.
Consequently, gold equities collapsed--an effect especially pronounced in the
more speculative end of the market, which continued to be influenced by the
Bre-X scandal. Most companies have struggled because of the depressed gold
price, and many are unprofitable. Pegasus Gold and Rea Gold filed for
bankruptcy court protection, and a number of major producers, including Barrick
Gold, Echo Bay Mines, and Placer Dome, have written down the value of certain
assets.
The Portfolio outperformed its peers for three major reasons. First, we
did not own any "disaster stocks," such as Bre-X, Pegasus Gold, or Rea Gold.
The few exploration stocks we owned in the speculative end of the market
illustrated the general loss of confidence in this area: Philex Gold, down 83%,
Lone Star Exploration, off 86.6%, and Nelson Gold, down 69%. Second, we owned a
number of companies that produce platinum or diversified metals, including
Anglo American, Impala Platinum, and Rio Tinto, all of which, like our gold
bullion holdings, outperformed the gold stock indexes. Third, Homestake Mining
made a bid for our recently acquired stake in Plutonic Resources at a
substantial premium to the market price.
We were hurt versus the World Gold Index by having "only" about 3% of
our assets in Barrick Gold, which makes up a much-larger proportion of the
Index. Barrick's decline of 22.5% was nearly 10 percentage points better than
the Index return, so our underweighting hurt our relative performance.
Most changes in the Portfolio during fiscal 1998 served to increase our
weighting in blue chip names; notable purchases included Aber Resources and
Ashton Mining. We sold all or part of our holdings in Bakyrchik, Camelot
Resources, Amax Gold, Royal Oak Mines, and Gold Fields of South Africa ADR. We
also saw a number of our South African holdings merged into two new mining
groups, Gold Fields, Ltd. and Anglogold. The net effect of the changes was to
increase the Portfolio's holdings of Australian stocks, primarily at the
expense of South Africa.
Looking forward, we expect that gold prices will continue to be heavily
influenced by what central banks do with their bullion holdings. Also likely to
be important is the role of gold in the new European Monetary Union. We note
that world demand for gold continues to rise to record highs, despite the
slowdown in Asian economies. Given that mine closures are increasing, the
supply/demand equation could become more interesting. At a time when many of
the world's stock and bond markets are reaching historic highs, the severely
depressed gold market must appeal to the contrarian investor.
Graham E. French, Portfolio Manager
February 12, 1998
10
<PAGE> 13
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Health Care Portfolio
The Health Care Portfolio rang up another very strong performance during
the 12 months ended January 31, 1998. Our gain of 27.4% moderately outpaced the
S&P 500 Index return of 26.9% and far exceeded the 16.8% return of the average
health-care mutual fund.
What made the year unusual was that for the second year running,
large-capitalization stocks, the market's biggest companies, totally dominated
results and far outperformed smaller companies. Also for the second consecutive
year, Warner-Lambert, Pfizer, and Bristol-Myers Squibb were the biggest
contributors to the Portfolio's performance. Other important winners were
Immunex, Guidant, McKesson, and Nycomed Amersham.
The Portfolio continued to grow at a rapid pace, and its total net
assets now exceed $4.7 billion. Because of the Portfolio's large size, we
cannot realistically invest in smaller-company stocks to the same extent that
we did when the Portfolio was much smaller. (We would have to own nearly 10% of
a stock with a market capitalization of $500 million for that stock to
constitute 1% of our Portfolio.) Having said that, however, there is plenty of
opportunity and liquidity in medium- to larger-cap health-care stocks, and the
Portfolio remains broadly representative of the industry.
The exceptional returns enjoyed by the Health Care Portfolio in recent
years are unusual in a historical sense and unlikely to be repeated. In fact,
we would have to say that a correction of some magnitude is more likely in the
not-too-distant future than a continuation of the high returns achieved during
the past three years.
The health-care industry is dynamic and has a great long-term future,
and investors should be prepared to take a long-term view.
Edward P. Owens, Senior Vice President and Portfolio Manager
February 12, 1998
11
<PAGE> 14
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Utilities Income Portfolio
The Utilities Income Portfolio earned 23.2% for the fiscal year ended
January 31, 1998, just behind the 26.9% return of the S&P 500 Index. The
Portfolio's return was modestly above the 22.5% return for the average utility
fund, but below the 26.4% return of the Portfolio's composite benchmark, which
is weighted 40% in the S&P Utilities Index, 40% in the S&P Telephone Index, and
20% in the Lehman Utility Bond Index.
The shortfall compared with the Composite Index was due primarily to the
Portfolio's underweighting in telecommunications, which was by far the
best-performing utility sector (up 40.7% as measured by the S&P Telephone
Index) for the fiscal year. Telephone utilities continue to benefit from
ongoing delays in regulatory decision-making about allowing long-distance
carriers to compete in the market for providing local telephone service. Until
this issue is resolved, the regional Bell companies will be able to report
annual growth of 8% to 12% in operating earnings, which is significantly higher
than the earnings gains that most electric and gas utilities are achieving. The
telecommunications sector has also benefited from aggressive consolidation,
including significant transactions during the past 12 months by WorldCom and by
two of the Portfolio's holdings, SBC Communications and AT&T.
During the second half of the fiscal year, the Fund earned a 15.8%
return, well above the average utility fund's return of 13.1% but behind the
Composite Index return of 18.4%. In the same period, we added to the
Portfolio's telephone utilities by creating new positions in Ameritech and MCI
Communications and building on previous holdings in BellSouth. We modestly
decreased the Portfolio's exposure to gas utilities that also engage in the
exploration and production of natural gas by selling Sonat and Coastal Corp.
Among electric utilities, we added to positions in Duke Energy, Consolidated
Edison,Southern Company, and Endesa, while selling shares of CINergy, DQE, and
Baltimore Gas & Electric.
The dramatic spread between the stock market performance of telephone
and gas utilities in the most recent fiscal year has us looking for
opportunities in the gas sector, particularly given our belief that
consolidation of electric and gas distribution companies will continue.
As we reported to you six months ago, we modestly changed the
Portfolio's long-term posture by reducing bonds, now at 16% of assets, and by
moderately increasing exposure to foreign securities. Although we made these
changes based on a long-term perspective, we are happy to report that they
aided the Portfolio's second-half performance.
We look forward to the upcoming year and the challenges that
deregulation of all three utility sectors will continue to present.
Mark J. Beckwith, Vice President and Portfolio Manager
February 12, 1998
12
<PAGE> 15
PERFORMANCE SUMMARY
Energy Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JANUARY 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
- ----------------------------------------------------------
</TABLE>
See Financial Highlights table on page 41 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE
NATURAL
ENERGY RESOURCES S&P 500
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 11360 11151 10255
1988 07 11350 11224 10777
1988 10 11155 10948 11157
1989 01 12416 11834 12010
1989 04 13710 12358 12606
1989 07 14427 13050 14219
1989 10 14639 13149 14103
1990 01 16014 14133 13747
1990 04 15763 13512 13936
1990 07 18013 15034 15143
1990 10 16542 13469 13048
1991 01 15752 13218 14900
1991 04 17450 14161 16391
1991 07 17641 14392 17075
1991 10 17879 14636 17419
1992 01 15952 13899 18281
1992 04 16642 13978 18691
1992 07 17520 14443 19259
1992 10 17445 14157 19153
1993 01 18028 14269 20215
1993 04 21929 16326 20418
1993 07 22764 17181 20941
1993 10 23768 17672 22015
1994 01 22951 17709 22819
1994 04 22701 16755 21504
1994 07 23594 17303 22021
1994 10 24151 17720 22866
1995 01 20852 15716 22940
1995 04 24176 17723 25259
1995 07 24796 18428 27771
1995 10 23571 17531 28912
1996 01 26833 19795 31809
1996 04 31095 22521 32891
1996 07 29487 21377 32372
1996 10 34061 24193 35878
1997 01 37653 25768 40188
1997 04 34820 24108 41158
1997 07 41378 27560 49250
1997 10 44106 28169 47399
1998 01 39082 25623 51003
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Energy Portfolio* 3.80% 16.74% 14.60% $39,082
Average Natural Resources Fund -6.19 11.65 9.87 25,623
S&P 500 Index 26.91 20.33 17.70 51,003
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
- ----------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Portfolio** 5/23/1984 14.89% 19.15% 13.43% 2.51% 15.94%
- ----------------------------------------------------------------------------------------------------------------------------
</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.
13
<PAGE> 16
PERFORMANCE SUMMARY
Gold & Precious Metals Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JANUARY 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
- ----------------------------------------------------------
</TABLE>
*MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
See Financial Highlights table on page 42 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- -----------------------------------------------------------
GOLD & SALOMON
PRECIOUS AVERAGE WORLD
METALS GOLD GOLD
PORTFOLIO FUND INDEX
- -----------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 10744 10731 10468
1988 07 10991 10838 9871
1988 10 10378 9980 8989
1989 01 10614 10109 9075
1989 04 10370 9958 9353
1989 07 10880 10307 9887
1989 10 11578 10866 11345
1990 01 14157 12921 15633
1990 04 11142 10229 11061
1990 07 11845 10850 11373
1990 10 10519 9234 10418
1991 01 9739 8443 9207
1991 04 10573 8783 8993
1991 07 11654 9600 10742
1991 10 11501 9319 10352
1992 01 11362 9212 10210
1992 04 10360 8039 8508
1992 07 10976 9029 9339
1992 10 9382 8032 7952
1993 01 9024 7684 7832
1993 04 12664 10501 12166
1993 07 16452 13411 16858
1993 10 14842 12481 16056
1994 01 17078 13760 17351
1994 04 15803 12330 15476
1994 07 16422 12342 16046
1994 10 17936 13235 17726
1995 01 13800 10455 13686
1995 04 15334 12063 15172
1995 07 16185 12638 15326
1995 10 14663 11471 14503
1996 01 18386 14590 18438
1996 04 18373 15530 18656
1996 07 16236 13910 16393
1996 10 16355 13807 16624
1997 01 14616 12589 15689
1997 04 13746 11779 14902
1997 07 12971 13465 14536
1997 10 11179 13763 12304
1998 01 10254 8087 10788
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
-------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold & Precious Metals Portfolio* -29.85% 2.59% 0.25% $10,254
Average Gold Fund -36.29 0.68 -2.10 8,087
Salomon World Gold Index** -31.24 6.61 0.76 10,788
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index
thereafter.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
- ---------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gold & Precious Metals Portfolio** 5/23/1984 -38.92% 1.15% -4.51% 2.29% -2.22%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
14
<PAGE> 17
PERFORMANCE SUMMARY
Health Care Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JANUARY 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
- ---------------------------------------------------------
</TABLE>
See Financial Highlights table on page 42 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ----------------------------------------------------------
HEALTH AVERAGE
CARE HEALTH-CARE S&P 500
PORTFOLIO FUND INDEX
- ----------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 10493 10181 10255
1988 07 10988 10507 10777
1988 10 11554 10616 11157
1989 01 12143 11155 12010
1989 04 13151 12295 12606
1989 07 14304 13631 14219
1989 10 14114 14296 14103
1990 01 14598 13991 13747
1990 04 14982 14748 13936
1990 07 17208 17363 15143
1990 10 15715 15717 13048
1991 01 18991 19693 14900
1991 04 21403 22915 16391
1991 07 22461 24648 17075
1991 10 24297 28700 17419
1992 01 25442 32083 18281
1992 04 24084 27072 18691
1992 07 24897 28339 19259
1992 10 24667 27115 19153
1993 01 24699 28332 20215
1993 04 23979 25604 20418
1993 07 24288 26257 20941
1993 10 27667 29032 22015
1994 01 29937 31979 22819
1994 04 27551 28969 21504
1994 07 28218 28181 22021
1994 10 31710 31465 22866
1995 01 32867 32141 22940
1995 04 35025 33867 25259
1995 07 38862 37857 27771
1995 10 41728 40817 28912
1996 01 47812 47723 31809
1996 04 50649 49814 32891
1996 07 49095 44543 32372
1996 10 51796 48245 35878
1997 01 57684 53750 40188
1997 04 59133 49982 41158
1997 07 69869 60093 49250
1997 10 69426 62022 47399
1998 01 73473 62576 51003
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
------------------------------------ FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Care Portfolio* 27.37% 24.36% 22.07% $73,473
Average Health-Care Fund 16.79 17.81 20.13 62,576
S&P 500 Index 26.91 20.33 17.70 51,003
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
- --------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care Portfolio** 5/23/1984 28.57% 22.64% 21.03% 2.03% 23.06%
- --------------------------------------------------------------------------------------------------------------------------
</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.
15
<PAGE> 18
PERFORMANCE SUMMARY
Utilities Income Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MAY 15, 1992-JANUARY 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
- -----------------------------------------------------------
</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.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: MAY 15, 1992-JANUARY 31, 1998
- -------------------------------------------------------------
UTILITIES AVERAGE UTILITIES
INCOME UTILITY COMPOSITE S&P 500
PORTFOLIO FUND INDEX INDEX
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
May 15, 92 10000 10000 10000 10000
1992 07 10700 10430 10762 10397
1992 10 10750 10392 10688 10340
1993 01 11451 10899 11219 10915
1993 04 12220 11543 11899 11024
1993 07 12952 12103 12638 11307
1993 10 13392 12427 13158 11886
1994 01 12949 12183 12670 12320
1994 04 12143 11490 11843 11611
1994 07 12112 11345 11950 11890
1994 10 11942 11246 11693 12345
1995 01 12371 11440 12421 12385
1995 04 12924 11772 12847 13638
1995 07 13687 12486 13627 14995
1995 10 14851 13220 14908 15610
1996 01 16016 14309 16178 17175
1996 04 15540 14036 15409 17759
1996 07 15462 13913 15239 17478
1996 10 16310 14730 16002 19371
1997 01 16899 15737 16912 21699
1997 04 16477 15326 16676 22222
1997 07 17981 17043 18055 26591
1997 10 18491 17353 18624 25592
1998 01 20814 19281 21370 27534
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
--------------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utilities Income Portfolio 23.17% 12.69% 13.69% $20,814
Average Utility Fund 22.52 12.09 12.17 19,281
Utilities Composite Index* 26.36 13.75 14.21 21,370
S&P 500 Index 26.91 20.33 19.40 27,534
- -------------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Utilities Income Portfolio 5/15/1992 25.09% 13.18% 8.71% 5.21% 13.92%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
16
<PAGE> 19
PERFORMANCE SUMMARY
REIT Index Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MAY 13, 1996-JANUARY 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%
- -------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 43 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
CUMULATIVE PERFORMANCE: MAY 13, 1996-JANUARY 31, 1998
- -------------------------------------------------------
REIT AVERAGE MORGAN
INDEX REAL ESTATE STANLEY
PORTFOLIO FUND REIT INDEX
- -------------------------------------------------------
<S> <C> <C> <C>
May 13, 96 10000 10000 10000
1996 07 10270 10074 10276
1996 10 11186 10932 11201
1997 01 13033 12618 13066
1997 04 12637 12184 12664
1997 07 14067 13968 14081
1997 10 14825 14683 14842
1998 01 15258 14981 15217
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REIT Index Portfolio* 17.08% 27.87% $15,258
Average Real Estate Fund 18.73 26.47 14,981
Morgan Stanley REIT Index 16.46 27.63 15,217
- -------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REIT Index Portfolio** 5/13/1996 18.77% 24.12% 6.41% 30.53%
- -------------------------------------------------------------------------------------------------
</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.
17
<PAGE> 20
PORTFOLIO PROFILE
Energy Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 19 and 20.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
ENERGY S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 70 500
Median Market Cap $5.0B $36.7B
Price/Earnings Ratio 19.2x 21.6x
Price/Book Ratio 2.6x 4.1x
Yield 1.4% 1.6%
Return on Equity 9.1% 20.6%
Earnings Growth Rate 16.8% 17.9%
Foreign Holdings 27.3% 1.8%
Turnover Rate 19% --
Expense Ratio 0.38% --
Cash Reserves 3.5% --
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
ENERGY S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.16 1.00
Beta 0.55 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
<S> <C>
Amerada Hess Corp. 4.0%
Baker Hughes, Inc. 3.2
Ashland, Inc. 2.9
Texaco Inc. 2.8
ENI SPA ADR 2.7
Chevron Corp. 2.6
Schlumberger Ltd. 2.4
Total SA ADR 2.4
Phillips Petroleum Co. 2.4
Imperial Oil Ltd. 2.3
- --------------------------------------------------------
Top Ten 27.7%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------------------------------------
JANUARY 31, 1997 JANUARY 31, 1998
----------------------------------------------------
ENERGY ENERGY
----------------------------------------------------
<S> <C> <C>
Auto & Transportation . . . . . . . . . . . . . . . . . . . 0.8% 0.6%
Energy Miscellaneous. . . . . . . . . . . . . . . . . . . . 2.0 6.6
International . . . . . . . . . . . . . . . . . . . . . . . 18.6 27.3
Machinery--Oil Well Equipment & Services. . . . . . . . . . 10.7 11.8
Materials & Processing . . . . . . . . . . . . . . . . . . 2.3 1.9
Offshore Drilling . . . . . . . . . . . . . . . . . . . . . 6.9 4.7
Oil--Crude Producers. . . . . . . . . . . . . . . . . . . . 18.5 16.6
Oil--Integrated Domestic. . . . . . . . . . . . . . . . . . 20.9 20.7
Oil--Integrated International . . . . . . . . . . . . . . . 13.0 7.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 2.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
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 one percentage point, the share price of a portfolio with an
average duration of five years would decline by about 5%. If rates decrease by
a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (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 net assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
19
<PAGE> 22
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular issue.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PORTFOLIO ALLOCATION BY REIT TYPE. An indicator of diversification, this table
shows the percentage of the Portfolio's 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 asset.
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 past year.
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. The index yield is 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.
20
<PAGE> 23
PORTFOLIO PROFILE
Gold & Precious Metals Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 19 and 20.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
GOLD & PRECIOUS
METALS S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 56 500
Median Market Cap $1.2B $36.7B
Price/Earnings Ratio 30.4x 21.6x
Price/Book Ratio 2.7x 4.1x
Dividend Yield 1.7% 1.6%
Return on Equity 13.5% 20.6%
Earnings Growth Rate 3.1% 17.9%
Foreign Holdings 74.7% 1.8%
Turnover Rate 26% --
Expense Ratio 0.62% --
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Newmont Mining Corp. 7.0%
Euro-Nevada Mining Corp. 6.8
Franco-Nevada Mining Corp., Ltd. 5.8
Plutonic Resources Ltd. 4.9
Barrick Gold Corp. 4.6
Normandy Mining Ltd. 4.5
Freeport-McMoRan Copper &
Gold, Inc. 4.4
Rio Tinto 4.2
Newcrest Mining Ltd. 3.9
Anglo American Platinum Corp. ADR 3.8
- -------------------------------------------------------
Top Ten 49.9%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
GOLD & PRECIOUS
METALS S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.02 1.00
Beta 0.36 1.00
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Australia 26.5%
Canada 22.2
Ghana 1.5
South Africa 15.8
United Kingdom 1.1
United States 22.8
- -------------------------------------------------------
Subtotal 89.9%
Bullion 7.2
Cash Reserves 2.9
- -------------------------------------------------------
Total 100.0%
</TABLE>
21
<PAGE> 24
PORTFOLIO PROFILE
Health Care Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 19 and 20.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
HEALTH CARE S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 99 500
Median Market Cap $16.6B $36.7B
Price/Earnings Ratio 28.8x 21.6x
Price/Book Ratio 4.2x 4.1x
Yield 1.2% 1.6%
Return on Equity 24.0% 20.6%
Earnings Growth Rate 12.5% 17.9%
Foreign Holdings 21.5% 1.8%
Turnover Rate 10% --
Expense Ratio 0.40% --
Cash Reserves 9.1% --
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
HEALTH CARE S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.63 1.00
Beta 0.69 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
<S> <C>
Warner-Lambert Co. 5.9%
Pfizer, Inc. 5.2
Pharmacia & Upjohn, Inc. 5.1
Bristol-Myers Squibb Co. 4.8
Abbott Laboratories 3.6
Merck & Co., Inc. 2.7
Zeneca Group PLC ADR 2.7
McKesson Corp. 2.6
Johnson & Johnson 2.4
Novartis AG (Registered) 2.2
- --------------------------------------------------------
Top Ten 37.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------------------------------------
JANUARY 31, 1997 JANUARY 31, 1998
------------------------------------------------------
HEALTH CARE HEALTH CARE
------------------------------------------------------
<S> <C> <C>
Biotech Research & Production . . . . . . . . . . . . . . . -- 2.9%
Consumer Discretionary. . . . . . . . . . . . . . . . . . . 0.9% 0.1
Drugs & Pharmaceuticals . . . . . . . . . . . . . . . . . . 55.4 50.9
Electronics--Medical Systems. . . . . . . . . . . . . . . . 2.6 1.6
Health & Personal Care. . . . . . . . . . . . . . . . . . . -- 0.5
Health Care Facilities. . . . . . . . . . . . . . . . . . . 5.1 3.9
Health Care Management Services . . . . . . . . . . . . . . 4.6 5.2
International . . . . . . . . . . . . . . . . . . . . . . . 14.1 21.5
Materials & Processing. . . . . . . . . . . . . . . . . . . 4.2 1.6
Medical & Dental Instruments & Supplies . . . . . . . . . . 10.2 8.5
Medical Services. . . . . . . . . . . . . . . . . . . . . . 0.2 1.3
Miscellaneous Health Care . . . . . . . . . . . . . . . . . 1.5 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 1.3
Producer Durables . . . . . . . . . . . . . . . . . . . . . 0.3 0.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
PORTFOLIO PROFILE
Utilities Income Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 19 and 20.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
<S> <C>
Yield 3.9%
Turnover Rate 41%
Expense Ratio 0.44%
Cash Reserves 1.9%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- ----------------------------------------------------------
<S> <C>
Stocks 82%
Bonds 16%
Cash 2%
</TABLE>
<TABLE>
TOTAL PORTFOLIO VOLATILITY MEASURES
- ----------------------------------------------------------
UTILITIES
INCOME S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.36 1.00
Beta 0.45 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- -------------------------------------------------------
<S> <C>
New England Electric System 4.5%
BellSouth Corp. 4.5
Pinnacle West Capital Corp. 4.3
Sprint Corp. 4.2
NIPSCO Industries, Inc. 3.5
U S WEST Communications Group 3.4
Bell Atlantic Corp. 3.4
Duke Energy Corp. 3.3
Ameritech Corp. 3.0
Southern New England
Telecommunications Corp. 2.8
- -------------------------------------------------------
Top Ten 36.9%
- -------------------------------------------------------
Top Ten as % of Total Net Assets 30.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------------------------------
JANUARY 31, 1997 JANUARY 31, 1998
----------------------------------------------------
UTILITIES INCOME UTILITIES INCOME
----------------------------------------------------
<S> <C> <C>
Electrical. . . . . . . . . . . . . . . . . . . . . . . . . . 56.9% 46.1%
Gas Distribution. . . . . . . . . . . . . . . . . . . . . . . 10.4 9.4
Integrated Oils . . . . . . . . . . . . . . . . . . . . . . . 4.6 1.5
Materials & Processing. . . . . . . . . . . . . . . . . . . . 0.4 0.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 6.5
Other Energy. . . . . . . . . . . . . . . . . . . . . . . . . 0.0 2.7
Technology. . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 0.0
Telecommunications. . . . . . . . . . . . . . . . . . . . . . 22.8 32.9
Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.9
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------
UTILITIES
INCOME S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 59 500
Median Market Cap $5.0B $36.7B
Price/Earnings Ratio 17.8x 21.6x
Price/Book Ratio 2.4x 4.1x
Dividend Yield 3.6% 1.6%
Return on Equity 13.8% 20.6%
Earnings Growth Rate 6.8% 17.9%
Foreign Holdings 7.8% 1.8%
</TABLE>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- ----------------------------------------------------------
<S> <C>
Number of Bonds 38
Yield to Maturity 6.3%
Average Coupon 6.9%
Average Maturity 10.9 years
Average Quality A1
Average Duration 6.6 years
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- ----------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- ----------------------------------------------------------
<S> <C>
Treasury/Agency 0.0%
Electric 56.7
Gas 3.6
Telephone 39.7
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------------------------
<S> <C>
Aaa 12.5%
Aa 36.4
A 40.0
Baa 11.1
Ba 0.0
B 0.0
Not Rated 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
24
<PAGE> 27
PORTFOLIO PROFILE
REIT Index Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 19 and 20.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
REIT INDEX S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 125 500
Median Market Cap $1.3B $36.7B
Price/Earnings Ratio 24.9x 21.6x
Price/Book Ratio 2.1x 4.1x
Dividend Yield 5.6% 1.6%
Return on Equity 10.2% 20.6%
Earnings Growth Rate 23.4% 17.9%
Foreign Holdings 0% 1.8%
Turnover Rate 2% --
Expense Ratio 0.24% --
Cash Reserves 1.8% --
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
<S> <C>
Equity Office Properties Trust REIT 5.3%
Equity Residential Properties Trust REIT 4.0
Crescent Real Estate, Inc. REIT 3.6
Public Storage, Inc. REIT 3.1
Simon DeBartolo Group, Inc. REIT 3.0
Vornado Realty Trust REIT 2.9
Security Capital Industrial Trust REIT 2.6
Starwood Lodging Trust REIT 2.2
Spieker Properties, Inc. REIT 2.2
Security Capital Pacific, Inc. REIT 2.0
- --------------------------------------------------------
Top Ten 30.9%
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REIT TYPE*
- ----------------------------------------------------------
<S> <C>
Retail 24%
Apartments 24
Industrial 15
Office 24
Hotels 9
Diversified 4
- ----------------------------------------------------------
Total 100%
</TABLE>
*Data as of December 31, 1997.
25
<PAGE> 28
FINANCIAL STATEMENTS
January 31, 1998
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 (95.9%)
- --------------------------------------------------------------------------------------
UNITED STATES (69.7%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
AUTO AND TRANSPORTATION (0.6%)
- - OMI Corp. 700,000 5,950
------------
ENERGY MISCELLANEOUS (6.3%)
McDermott International, Inc. 700,000 22,312
Tosco Corp. 500,000 16,719
Ultramar Diamond
Shamrock Corp. 431,900 14,388
Valero Energy Corp. 500,000 15,781
------------
69,200
------------
MACHINERY--OIL WELL EQUIPMENT & SERVICES (11.3%)
Baker Hughes, Inc. 900,000 34,706
Camco International, Inc. 130,000 7,109
- - Cooper Cameron Corp. 160,000 8,230
- - Noble Drilling Corp. 700,000 18,725
- - Rowan Cos., Inc. 200,000 5,275
Schlumberger Ltd. 360,000 26,527
- - Varco International, Inc. 600,000 12,300
- - Weatherford Enterra, Inc. 299,999 10,500
------------
123,372
------------
MATERIALS & PROCESSING (1.8%)
Fluor Corp. 400,000 15,075
- - J. Ray McDermott SA 120,000 4,298
------------
19,373
------------
OFFSHORE DRILLING (4.5%)
- - R & B Falcon Corp. 826,000 24,987
Transocean Offshore, Inc. 600,000 23,850
------------
48,837
------------
OIL--CRUDE PRODUCERS (15.9%)
Anadarko Petroleum Corp. 330,000 19,470
Apache Corp. 100,000 3,312
- - Barrett Resources Corp. 196,700 5,508
Devon Energy Corp. 220,000 7,672
Enron Oil & Gas Co. 654,400 13,088
Noble Affiliates, Inc. 200,000 7,275
Occidental Petroleum Corp. 750,000 19,125
- - Oryx Energy Co. 1,000,000 24,000
Pogo Producing Co. 685,000 19,437
- - Santa Fe Energy
Resources, Inc. 1,165,200 12,235
- - Tom Brown, Inc. 228,100 3,992
Union Texas Petroleum
Holdings, Inc. 1,000,000 18,937
Vastar Resources, Inc. 590,300 19,591
------------
173,642
------------
OIL--INTEGRATED DOMESTIC (19.8%)
Amerada Hess Corp. 800,000 43,750
Amoco Corp. 190,000 15,461
Ashland, Inc. 600,000 31,650
Kerr-McGee Corp. 350,000 21,919
Murphy Oil Corp. 370,100 18,482
Phillips Petroleum Co. 600,000 26,400
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
- - Seagull Energy Corp. 500,000 $ 8,469
Sun Co., Inc. 150,000 5,812
USX-Marathon Group 600,000 20,137
Unocal Corp. 696,000 23,925
------------
216,005
------------
OIL--INTEGRATED INTERNATIONAL (6.9%)
Chevron Corp. 380,000 28,429
Exxon Corp. 280,000 16,607
Texaco Inc. 578,388 30,112
------------
75,148
------------
OTHER (2.6%)
Canadian Pacific Ltd. 800,000 21,650
Foster Wheeler Corp. 290,000 6,960
------------
28,610
------------
- --------------------------------------------------------------------------------------
TOTAL UNITED STATES 760,137
- --------------------------------------------------------------------------------------
INTERNATIONAL (26.2%)
- --------------------------------------------------------------------------------------
CANADA (11.9%)
Alberta Energy Co., Ltd. 1,127,870 22,916
- - Anderson Exploration Ltd. 1,012,401 10,320
- - Cabre Exploration Ltd. 290,000 3,621
Imperial Oil Ltd. 440,300 25,558
PanCanadian Petroleum Ltd. 283,400 4,498
Paramount Resources Ltd. 1,080,900 10,907
- - Penn West Petroleum Ltd. 352,143 3,722
Petro-Canada 1,000,000 17,718
- - Poco Petes Ltd. 400,000 3,516
Ranger Oil Ltd. 1,500,000 8,928
- - Renaissance Energy Ltd. 250,000 4,977
- - Rio Alto Exploration Ltd. 652,500 5,691
Talisman Energy, Inc. 255,000 7,152
------------
129,524
------------
FRANCE (2.4%)
Total SA ADR 508,989 26,404
------------
ITALY (2.7%)
ENI SPA ADR 500,500 29,342
------------
UNITED KINGDOM (2.1%)
Burmah Castrol PLC 299,955 4,948
Lasmo PLC 2,000,000 8,567
Shell Transport & Trading
Co. ADR 230,000 9,315
------------
22,830
------------
OTHER (7.1%)
Norsk Hydro ASA ADR 480,000 21,600
Repsol SA ADR 492,500 21,024
Royal Dutch Petroleum
NY Shares 320,000 16,400
Saga Petroleum ASA B Shares 190,000 2,971
YPF SA ADR 500,000 15,219
------------
77,214
------------
- --------------------------------------------------------------------------------------
TOTAL INTERNATIONAL 285,314
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $828,361) 1,045,451
- --------------------------------------------------------------------------------------
<CAPTION>
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK (0.6%)
- --------------------------------------------------------------------------------------
Sun Co., Inc. $1.80 Cvt. Pfd.
Series A
(COST $5,046) 200,000 $ 6,975
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.0%)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.60%, 2/2/1998 $40,293 40,293
5.60%, 2/2/1998--Note G 13,900 13,900
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $54,193) 54,193
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.5%)
(COST $887,600) 1,106,619
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.5%)
- --------------------------------------------------------------------------------------
Other Assets--Note C 2,175
Liabilities--Note G (18,309)
------------
(16,134)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 48,072,364 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $1,090,485
======================================================================================
NET ASSET VALUE PER SHARE $22.68
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 868,386 $18.06
Undistributed Net Investment
Income--Note F 243 .01
Accumulated Net Realized
Gains--Note F 2,843 .06
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 219,019 4.55
Foreign Currencies (6) --
- ----------------------------------------------------------------------------------
NET ASSETS $1,090,485 $22.68
==================================================================================
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
GOLD & PRECIOUS VALUE*
METALS PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
COMMON STOCKS (90.0%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (26.5%)
Ashton Mining Ltd. 6,500,000 $ 6,459
- - Aurora Gold Ltd. 7,260,000 9,304
- - Australian Resources Ltd. 12,000,000 2,097
- - Bougainville Copper Ltd. 2,000,000 658
- - Emperor Mines Ltd. 2,150,000 928
Great Central Mines Ltd. 1,000,000 1,377
- - Lone Star Exploration NL 2,000,000 123
Mount Isa Mines Holdings Ltd. 13,500,000 8,419
- - Newcrest Mining Ltd. 10,000,000 12,679
Normandy Mining Ltd. 12,350,000 14,473
- - Normandy Mining Ltd.
Warrants Exp. 4/30/2001 1,800,000 241
Plutonic Resources Ltd. 5,000,000 16,105
Rio Tinto Ltd. 800,000 10,612
Sons of Gwalia Ltd. 1,000,000 2,981
- - Star Mining Corp. NL 26,000,000 196
- - Tanami Gold NL 1,600,000 143
------------
86,795
------------
CANADA (22.2%)
Aber Resources Ltd. 250,000 2,651
Barrick Gold Corp. 200,000 3,879
Euro-Nevada Mining Corp. 1,384,000 22,155
Franco-Nevada Mining
Corp., Ltd. 860,000 18,826
Golden Star Resources Ltd. 350,000 1,640
Greenstone Resources Ltd. 750,000 4,746
- - IAMGOLD (International African
Mining Gold Corp.) 527,600 1,859
Miramar Mining Corp. 750,000 1,211
- - Nelson Gold Corp. Ltd. 3,050,000 626
- - Philex Gold, Inc. 215,000 191
Placer Dome Inc. 550,000 7,187
- - Princess Resources Ltd. 6,000,000 287
- - South Pacific Resources Corp. 150,000 21
- - TVX Gold, Inc. 2,000,000 6,184
Vengold, Inc. 1,250,000 1,240
------------
72,703
------------
GHANA (1.6%)
Ashanti Goldfields Co., Ltd. 399,998 3,550
Ashanti Goldfields Co., Ltd. GDR 150,000 1,463
------------
5,013
------------
SOUTH AFRICA (15.8%)
Anglo American Platinum
Corp. ADR 903,401 12,359
Beatrix Gold Mines ADR 1,800,000 5,256
Elandsrand Gold Mining
Ltd. ADR 1,720,000 5,143
Evander Gold Mines Ltd. ADR 385,800 694
Free State Consolidated Gold
Mines Ltd. ADR 400,000 1,950
Impala Platinum Holdings
Ltd. ADR 750,000 7,140
Southvaal Holdings Ltd. ADR 230,000 4,336
Vaal Reefs Exploration &
Mining Co. Ltd. ADR 1,600,000 7,575
Western Deep Levels Ltd. ADR 325,000 7,272
------------
51,725
------------
UNITED KINGDOM (1.1%)
- - Philippine Gold PLC 1,525,000 374
Rio Tinto PLC 250,000 3,196
------------
3,570
------------
UNITED STATES (22.8%)
- - Atlas Corp. 1,000,000 160
Barrick Gold Corp. 575,000 11,141
- - Campbell Resources, Inc. 5,000,000 2,813
- - Crown Resources Corp. 600,000 2,813
Freeport-McMoRan Copper &
Gold, Inc. Class A 747,000 11,018
Freeport-McMoRan Copper &
Gold, Inc. Gold Denomination
Shares Pfd. 150,000 3,450
- - Getchell Gold Corp. 250,000 6,375
Newmont Gold Co. 125,000 3,641
Newmont Mining Corp. 800,000 22,800
Placer Dome Inc. 350,000 4,506
- - Stillwater Mining Co. 300,000 5,906
------------
74,623
------------
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $383,799) 294,429
- --------------------------------------------------------------------------------------
PRECIOUS METALS (7.2%)
- --------------------------------------------------------------------------------------
- - Gold Bullion (74,868 Ounces) 22,644
- - Platinum Bullion (2,009 Ounces) 781
- --------------------------------------------------------------------------------------
TOTAL PRECIOUS METALS
(COST $31,918) 23,425
- --------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.1%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.60%, 2/2/1998 $12,931 12,931
5.60%, 2/2/1998--Note G 23,553 23,553
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $36,484) 36,484
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (108.3%)
(COST $452,201) 354,338
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-8.3%)
- --------------------------------------------------------------------------------------
Other Assets--Note C 1,103
Security Lending Collateral Payable
to Brokers--Note G (23,553)
Other Liabilities (4,570)
------------
(27,020)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 43,496,038 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $327,318
======================================================================================
NET ASSET VALUE PER SHARE $7.53
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
28
<PAGE> 31
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $482,650 $11.10
Overdistributed Net Investment
Income--Note F (4,036) (.09)
Accumulated Net Realized
Losses--Note F (53,432) (1.23)
Unrealized Depreciation--Note E
Investment Securities (97,863) (2.25)
Foreign Currencies (1) --
- ------------------------------------------------------------------------------------
NET ASSETS $327,318 $ 7.53
====================================================================================
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
HEALTH CARE PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
COMMON STOCKS (90.5%)
- --------------------------------------------------------------------------------------
UNITED STATES (71.0%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY (0.1%)
- -(1)Paragon Trade Brands, Inc. 1,124,100 $ 5,410
------------
BIOTECH RESEARCH & PRODUCTION (2.6%)
Baxter International, Inc. 300,000 16,706
- - Genentech, Inc. Special
Common Stock 1,406,900 91,449
- - IDEXX Laboratories Corp. 1,100,000 15,056
------------
123,211
------------
DRUGS & PHARMACEUTICALS (46.1%)
Abbott Laboratories 2,400,000 169,950
- - Agouron Pharmaceuticals, Inc. 560,500 19,477
Allergan, Inc. 3,095,900 105,261
- - Alliance Pharmaceutical Corp. 1,002,388 7,142
(1) Alpharma, Inc. Class A 1,348,713 27,733
- - ALZA Corp. 1,030,000 36,694
American Home Products Corp. 970,000 92,574
- - Amgen, Inc. 650,000 32,500
- - Amylin Pharmaceuticals, Inc. 750,000 3,937
- - Anergen Inc. 520,000 682
Bergen Brunswig Corp. Class A 800,125 36,456
- - BioCryst Pharmaceuticals, Inc. 340,100 2,551
- - Biogen, Inc. 365,000 15,011
Bristol-Myers Squibb Co. 2,260,000 225,294
- - Cephalon, Inc. 270,000 2,649
- - Crescendo Pharmaceuticals
Corp. 51,500 599
- - Genzyme Corp. 1,743,100 46,519
- - Human Genome Sciences, Inc. 855,500 32,402
- - Immunex Corp. 1,174,000 64,497
Johnson & Johnson 1,722,500 115,300
Eli Lilly & Co. 703,148 47,462
- - Magainin Pharmaceuticals, Inc. 694,400 4,774
- - Matrix Pharmaceutical, Inc. 200,500 689
McKesson Corp. 2,560,000 122,560
Merck & Co., Inc. 1,095,225 128,415
- -(1)OraVax, Inc. 602,600 1,205
- - Perrigo Co. 3,357,100 39,026
Pfizer, Inc. 3,020,000 247,451
Pharmacia & Upjohn, Inc. 6,308,100 242,467
Schering-Plough Corp. 260,000 18,817
- - Scios, Inc. 491,750 4,672
- -(1)Targeted Genetics Corp. 1,224,600 2,219
Warner-Lambert Co. 1,850,000 278,425
------------
2,175,410
------------
ELECTRONICS--MEDICAL SYSTEMS (1.4%)
- - ATL Ultrasound, Inc. 683,300 28,357
- - Datascope Corp. 340,100 7,780
- -(1)Haemonetics Corp. 1,647,500 25,639
- - SpaceLabs Medical, Inc. 280,000 5,670
------------
67,446
------------
HEALTH & PERSONAL CARE (0.4%)
- - Matria Healthcare, Inc. 196,700 959
- - PharMerica, Inc. 605,283 6,809
- -(1)Syncor International Corp. 856,559 12,420
------------
20,188
------------
HEALTH CARE FACILITIES (3.6%)
- - Beverly Enterprises, Inc. 1,330,000 18,454
Columbia/HCA
Healthcare Corp. 4,010,620 100,265
- - Laboratory Corp. of America 3,692,116 7,384
- - Quest Diagnostics, Inc. 1,243,100 20,667
- - Tenet Healthcare Corp. 611,100 21,083
------------
167,853
------------
HEALTH CARE MANAGEMENT SERVICES (4.7%)
- - Cerner Corp. 706,600 14,706
- - Humana, Inc. 2,430,000 48,752
- - MedPartners, Inc. 3,299,900 32,793
- - Mid Atlantic Medical
Services, Inc. 500,000 4,719
- - Oxford Health Plan 1,600,000 28,000
- - Pacificare Health Systems Inc.
Class B 712,300 41,313
United Healthcare Corp. 650,000 33,312
United Wisconsin Services, Inc. 678,000 17,374
------------
220,969
------------
MATERIALS & PROCESSING (1.5%)
DEKALB Genetics Corp.
Class B 2,076,100 56,833
Pioneer Hi-Bred
International, Inc. 130,000 13,008
------------
69,841
------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (7.7%)
Allegiance Corp. 1,235,600 39,616
(1) C.R. Bard, Inc. 3,226,400 100,018
Beckman Instruments, Inc. 1,202,200 51,770
Biomet, Inc. 1,170,300 33,500
- - Boston Scientific Corp. 200,000 10,150
(1) Collagen Corp. 525,800 9,202
DePuy, Inc. 366,600 9,944
- -(1)E-Z-EM, Inc. Class A 219,258 1,644
- - E-Z-EM, Inc. Class B 289,095 1,951
Owens & Minor, Inc. Holding Co. 1,429,100 19,382
- - Protocol Systems, Inc. 273,000 2,355
- - ReSound Corp. 300,000 1,538
- - St. Jude Medical, Inc. 600,000 19,500
U.S. Surgical Corp. 2,254,900 64,406
------------
364,976
------------
MEDICAL SERVICES (1.1%)
- - Covance, Inc. 1,905,200 36,080
- - Coventry Corp. 1,350,000 18,141
------------
54,221
------------
PRODUCER DURABLES (0.7%)
Perkin-Elmer Corp. 536,545 31,656
------------
OTHER (1.1%)
Carter-Wallace, Inc. 266,000 4,456
Carter-Wallace, Inc. Class B 24,000 402
Mallinckrodt, Inc. 1,348,000 47,770
------------
52,628
------------
- --------------------------------------------------------------------------------------
TOTAL UNITED STATES 3,353,809
- --------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
INTERNATIONAL (19.5%)
- --------------------------------------------------------------------------------------
JAPAN (6.0%)
Banyu Pharmaceutical Co. 1,905,000 $ 27,343
Chugai Pharmaceutical Co., Ltd. 2,910,000 17,281
Eisai Co., Ltd. 4,985,000 73,124
Fujisawa Pharmaceutical
Co., Ltd. 3,910,000 35,770
Sankyo Co., Ltd. 2,250,000 58,734
Shionogi & Co., Ltd. 853,000 4,379
Takeda Chemical Industries Ltd. 1,850,000 52,232
Tanabe Seiyaku Co., Ltd. 2,360,000 13,587
------------
282,450
------------
UNITED KINGDOM (6.2%)
Nycomed Amersham PLC 1,995,400 78,300
SmithKline Beecham PLC ADR 1,359,600 85,740
Zeneca Group PLC ADR 1,066,024 126,923
------------
290,963
------------
OTHER (7.3%)
Bayer AG ADR 1,850,000 69,144
Hoechst AG 400,000 14,070
Novartis AG (Registered) 61,747 105,865
- - Nycomed Amersham PLC
(Norway) 230,870 8,957
Rhone-Poulenc SA ADR 1,276,279 58,868
Roche Holdings AG (Dividend-
Right Certificates) 5,000 51,977
Schering AG 213,470 22,188
Synthelabo 118,270 15,629
------------
346,698
------------
- --------------------------------------------------------------------------------------
TOTAL INTERNATIONAL 920,111
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $2,741,867) 4,273,920
- --------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.4%)
- --------------------------------------------------------------------------------------
Laboratory Corp. of America 8.50% Cvt. Pfd.
(COST $22,981) 347,721 17,560
- --------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (10.6%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.60%, 2/2/1998 $476,678 476,678
5.60%, 2/2/1998--Note G 25,423 25,423
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $502,101) 502,101
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.5%)
(COST $3,266,949) 4,793,581
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.5%)
- --------------------------------------------------------------------------------------
Other Assets--Note C 14,379
Liabilities--Note G (88,141)
------------
(73,762)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 63,764,951 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $4,719,819
======================================================================================
NET ASSET VALUE PER SHARE $74.02
======================================================================================
</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 $185,490,000.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,107,260 $48.73
Undistributed Net Investment
Income--Note F 3,458 .05
Accumulated Net Realized
Gains--Note F 82,473 1.29
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 1,526,632 23.95
Foreign Currencies (4) --
- -----------------------------------------------------------------------------------
NET ASSETS $4,719,819 $74.02
===================================================================================
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
UTILITIES INCOME PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
COMMON STOCKS (82.2%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRICAL (37.9%)
- - Ameren Corp. 125,000 $ 4,578
Baltimore Gas & Electric Co. 104,600 3,177
Boston Edison Co. 100,000 3,725
CMS Energy Corp. 304,000 12,939
Carolina Power & Light Co. 50,000 2,031
Central & South West Corp. 350,000 9,472
Central Hudson Gas &
Electric Corp. 216,300 8,611
Cilcorp, Inc. 85,000 3,804
CINergy Corp. 413,321 14,260
Consolidated Edison Inc. 238,600 9,857
DPL Inc. 633,000 11,592
DQE Inc. 350,250 11,449
DTE Energy Co. 100,000 3,588
Edison International 200,000 5,375
Endesa SA ADR 249,800 4,793
GPU, Inc. 330,000 12,973
NIPSCO Industries, Inc. 390,500 19,940
National Power PLC ADR 125,000 5,359
New England Electric System 617,100 25,918
Northern States Power Co. 198,900 10,666
Pinnacle West Capital Corp. 619,300 24,772
PowerGen PLC ADR 214,500 11,838
Public Service Co. of
New Mexico 275,000 6,222
Sierra Pacific Resources 202,600 7,167
Southern Co. 550,000 13,372
TECO Energy, Inc. 74,000 1,919
Texas Utilities Co. 372,200 15,307
------------
264,704
------------
GAS DISTRIBUTION (7.8%)
Columbia Energy Group 75,000 5,691
Energen Corp. 100,000 3,900
KN Energy, Inc. 125,000 6,281
MCN Energy Group Inc. 287,000 10,619
National Fuel Gas Co. 225,000 10,350
Pacific Enterprises 282,000 10,170
Public Service Co. of
North Carolina, Inc. 39,300 823
Questar Corp. 155,300 6,464
------------
54,298
------------
INTEGRATED OILS (1.2%)
Coastal Corp. 48,400 2,807
Equitable Resources, Inc. 175,000 5,753
------------
8,560
------------
OTHER ENERGY (2.2%)
El Paso Natural Gas Co. 105,700 6,758
ONEOK, Inc. 145,400 4,971
Westcoast Energy Inc. 150,000 3,600
------------
15,329
------------
TELECOMMUNICATIONS (27.0%)
ALLTEL Corp. 80,000 3,420
Ameritech Corp. 400,000 17,175
BCE, Inc. 100,000 3,125
Bell Atlantic Corp. 211,200 19,549
BellSouth Corp. 427,600 25,897
Frontier Corp. 445,200 11,603
GTE Corp. 200,000 10,913
MCI Communications Corp. 300,000 13,931
SBC Communications Inc. 107,700 8,374
Southern New England
Telecommunications Corp. 250,000 16,281
Sprint Corp. 407,100 24,172
Telecom Corp. of New Zealand
Ltd. ADR 275,800 9,998
Telefonica de Espana SA ADR 50,000 4,881
U S WEST Communications
Group 407,000 19,587
------------
188,906
------------
WATER (0.7%)
Southern California Water Co. 200,700 5,080
------------
OTHER (5.4%)
Duke Energy Corp. 352,220 19,086
Energy Group PLC ADR 125,000 6,141
New Century Energies, Inc. 194,600 8,866
TELUS Corp. 173,100 3,825
------------
37,918
------------
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $416,989) 574,795
- --------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------
BONDS (15.9%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC (9.0%)
Arizona Public Service Co.
6.25%, 1/15/2005 $ 2,000 1,987
Baltimore Gas & Electric Co.
7.50%, 1/15/2007 4,000 4,361
Carolina Power & Light Co.
8.625%, 9/15/2021 3,000 3,660
Central Power & Light Co.
7.25%, 10/1/2004 2,000 2,130
Consolidated Edison Inc.
6.45%, 12/1/2007 4,000 4,066
Duke Energy Corp.
6.625%, 2/1/2003 4,000 4,128
Florida Power & Light Co.
7.00%, 9/1/2025 4,000 4,085
GTE Southwest Inc.
6.23%, 1/1/2007 1,000 997
Kentucky Utilities Co.
7.92%, 5/15/2007 2,000 2,252
Louisville Gas & Electric
Energy Corp.
6.00%, 8/15/2003 2,000 2,018
NRG Energy Inc.
7.50%, 6/15/2007 2,000 2,100
Northern States Power Co.
5.75%, 10/1/2003 4,000 3,967
PECO Energy Corp.
6.50%, 5/1/2003 2,000 2,030
Pennsylvania Power & Light Co.
6.79%, 11/22/2004 MTN 2,000 2,031
Public Service Co. of Colorado
7.125%, 6/1/2006 5,000 5,289
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Southern California Edison Co.
6.25%, 6/15/2003 $ 3,000 $ 3,032
Southern Indiana Gas & Electric Co.
8.875%, 6/1/2016 3,400 4,271
Virginia Electric & Power Co.
6.00%, 8/1/2001 4,000 4,019
West Texas Utilities Co.
7.75%, 6/1/2007 1,500 1,655
Wisconsin Public Service Corp.
6.80%, 2/1/2003 4,500 4,705
------------
62,783
------------
GAS (0.6%)
Atlanta Gas Light Co.
5.90%, 10/6/2003 MTN 4,000 4,005
------------
TELEPHONE (6.3%)
AT&T Corp.
7.00%, 5/15/2005 2,000 2,104
Bell Atlantic Pennsylvania, Inc.
6.625%, 9/15/2002 3,500 3,597
BellSouth Telecommunications
6.75%, 10/15/2033 4,000 3,896
Century Telephone Enterprises
6.30%, 1/15/2008 2,000 1,975
Chesapeake & Potomac
Telephone Co. (VA)
7.875%, 1/15/2022 2,000 2,287
GTE California Inc.
6.70%, 9/1/2009 1,000 1,023
GTE Corp.
7.51%, 4/1/2009 2,000 2,155
Illinois Bell Telephone Co.
7.25%, 3/15/2024 2,000 2,060
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 2,000 2,193
Michigan Bell Telephone Co.
6.375%, 9/15/2002 2,000 2,052
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 3,000 3,547
New York Telephone Co.
8.625%, 11/15/2010 2,500 3,002
Pacific Bell
6.625%, 11/1/2009 3,000 3,082
Southwestern Bell Telephone Co.
6.625%, 4/1/2005 3,000 3,092
U S WEST Communications Group
6.875%, 9/15/2033 2,000 1,955
United Telephone Co. of Florida
6.25%, 5/15/2003 4,000 4,070
Wisconsin Bell, Inc.
6.75%, 8/15/2024 2,000 1,969
------------
44,059
------------
- --------------------------------------------------------------------------------------
TOTAL BONDS
(COST $106,008) 110,847
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.1%)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.60%, 2/2/1998 $ 9,254 $ 9,254
5.60%, 2/2/1998--Note G 12,420 12,420
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $21,674) 21,674
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(COST $544,671) 707,316
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- --------------------------------------------------------------------------------------
Other Assets--Note C 5,258
Liabilities--Note G (13,637)
------------
(8,379)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 46,703,762 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $698,937
======================================================================================
NET ASSET VALUE PER SHARE $14.97
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $520,482 $11.15
Undistributed Net
Investment Income 7,652 .16
Accumulated Net Realized Gains 8,158 .18
Unrealized Appreciation--Note E 162,645 3.48
- ----------------------------------------------------------------------------------
NET ASSETS $698,937 $14.97
==================================================================================
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (98.2%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Alexander Haagen Properties,
Inc. REIT 151,200 $ 2,552
Alexandria Real Estate Equities,
Inc. REIT 15,000 501
Ambassador Apartments
Inc. REIT 115,100 2,374
American General Hospitality
Corp. REIT 185,100 5,102
AMLI Residential Properties
Trust REIT 188,200 4,364
Apartment Investment &
Management Co. Class A REIT 476,700 17,697
Arden Realty Group, Inc. REIT 426,800 12,057
Associated Estates Realty
Corp. REIT 204,200 4,620
Avalon Properties, Inc. REIT 458,200 13,488
Bay Apartment Communities,
Inc. REIT 294,700 11,180
Bedford Property Investors,
Inc. REIT 154,500 3,274
Berkshire Realty Co., Inc. REIT 420,100 4,962
Boston Properties, Inc. REIT 105,000 3,734
Boykin Lodging Co. REIT 119,300 3,340
Bradley Real Estate Inc. REIT 272,700 5,607
Brandywine Realty Trust REIT 284,600 6,830
BRE Properties Inc. Class A REIT 489,700 13,497
Burnham Pacific Properties, Inc.
REIT 297,400 4,442
Camden Property Trust REIT 367,856 10,967
CarrAmerica Realty Corp. REIT 784,200 22,987
CBL & Associates Properties,
Inc. REIT 304,400 7,515
CenterPoint Properties
Corp. REIT 240,000 8,055
Charles E. Smith Residential
Realty, Inc. REIT 167,200 5,789
Chateau Communities, Inc. REIT 318,140 9,763
Chelsea GCA Realty, Inc. REIT 174,900 6,668
Colonial Properties Trust REIT 242,300 7,360
Commercial Net Lease
Realty REIT 314,800 5,489
Cornerstone Properties,
Inc. REIT 477,300 8,890
Cornerstone Realty Income
Trust, Inc. REIT 39,400 502
Cousins Properties, Inc. REIT 367,500 11,048
Crescent Real Estate, Inc. REIT 1,338,000 46,997
Crown American Realty
Trust REIT 347,000 3,123
Developers Diversified Realty
Corp. REIT 316,100 12,545
Duke Realty Investments,
Inc. REIT 887,600 21,081
EastGroup Properties, Inc. REIT 181,050 3,802
Equity Inns, Inc. REIT 412,700 6,371
Equity Office Properties
Trust REIT 2,314,649 70,163
Equity Residential Properties
Trust REIT 1,024,037 52,354
Essex Property Trust, Inc. REIT 171,800 5,916
Excel Realty Trust, Inc. REIT 241,500 7,728
- - FAC Realty Inc. REIT 121,800 898
Federal Realty Investment
Trust REIT 493,000 12,202
Felcor Suite Hotels, Inc. REIT 441,100 16,459
First Industrial Realty Trust REIT 428,500 15,372
First Union Real Estate REIT 324,400 3,873
First Washington Realty Trust,
Inc. REIT 68,800 1,806
Franchise Finance Corp. of
America REIT 514,200 14,333
Gables Residential Trust REIT 251,700 6,875
General Growth Properties
Inc. REIT 408,900 15,027
Glenborough Realty Trust,
Inc. REIT 352,500 11,192
Glimcher Realty Trust REIT 284,800 6,266
Golf Trust of America, Inc. REIT 10,000 291
Great Lakes, Inc. REIT 22,900 451
Highwood Properties, Inc. REIT 544,900 19,719
Home Properties of New York,
Inc. REIT 75,000 2,002
Horizon Group, Inc. REIT 298,700 3,622
Hospitality Properties Trust REIT 355,600 12,157
Innkeepers USA Trust REIT 394,400 6,039
IRT Property Co. REIT 403,300 4,739
Irvine Apartment Communities,
Inc. REIT 249,900 8,012
Jameson Inns, Inc. REIT 114,700 1,391
JDN Realty Corp. REIT 209,700 6,828
JP Realty Inc. REIT 222,100 5,400
Kilroy Realty Corp. REIT 277,400 7,906
Kimco Realty Corp. REIT 483,700 16,688
Koger Equity, Inc. REIT 266,000 6,052
Kranzco Realty Trust REIT 129,600 2,495
Lexington Corporate Properties
Trust REIT 171,300 2,677
Liberty Property Trust REIT 591,500 16,044
The Macerich Co. REIT 328,700 9,327
Mack-Cali Realty Corp. REIT 594,900 23,982
Manufactured Home
Communities, Inc. REIT 317,500 8,334
Mark Centers Trust REIT 107,100 957
Meridian Industrial Trust,
Inc. REIT 197,000 5,060
Merry Land & Investment Co.,
Inc. REIT 483,200 11,144
MGI Properties, Inc. REIT 170,600 4,265
Mid Atlantic Realty Trust REIT 132,300 1,877
Mid-America Apartment
Communities, Inc. REIT 175,900 5,090
Mills Corp. REIT 281,800 7,221
National Golf Properties,
Inc. REIT 156,200 4,735
New Plan Realty Trust REIT 745,500 18,824
Oasis Residential, Inc. REIT 205,100 4,487
Pacific Gulf Properties,
Inc. REIT 213,000 4,886
Parkway Properties Inc. REIT 96,500 3,293
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Patriot American Hospitality,
Inc. REIT 826,543 $ 21,180
Pennsylvania REIT 109,700 2,688
Post Properties, Inc. REIT 380,413 14,622
Prentiss Properties Trust REIT 384,600 10,480
Price REIT, Inc. 134,000 5,946
Prime Retail, Inc. REIT 304,300 4,507
Public Storage, Inc. REIT 1,241,700 40,821
Realty Income Corp. REIT 296,900 7,905
Reckson Associates Realty
Corp. REIT 432,900 11,174
Regency Realty Corp. REIT 248,500 6,756
RFS Hotel Investors, Inc. REIT 306,900 5,678
Rouse Co. REIT 293,100 9,856
Saul Centers, Inc. REIT 153,700 2,613
Security Capital Atlantic,
Inc. REIT 561,300 12,103
- - Security Capital Group Inc. REIT
Warrants Exp. 9/18/1998 153,893 539
Security Capital Industrial
Trust REIT 1,313,743 33,583
Security Capital Pacific,
Inc. REIT 1,112,327 26,209
Shurgard Storage Centers,
Inc. Class A REIT 353,500 10,097
Simon DeBartolo Group,
Inc. REIT 1,205,276 40,000
Sovran Self Storage, Inc. REIT 155,000 4,766
Spieker Properties, Inc. REIT 681,400 28,789
Starwood Lodging Trust REIT 543,900 29,575
Storage Trust Realty REIT 161,900 4,179
Storage USA, Inc. REIT 343,300 13,410
Summit Properties, Inc. REIT 291,500 5,866
Sun Communities, Inc. REIT 201,600 7,043
Sunstone Hotel Investors,
Inc. REIT 349,600 5,878
Tanger Factory Outlet Centers,
Inc. REIT 64,300 1,985
Taubman Co. REIT 638,700 8,303
Town & Country Trust REIT 196,500 3,439
Trinet Corporate Realty Trust,
Inc. REIT 256,100 10,020
United Dominion Realty Trust
REIT 1,098,976 15,248
Urban Shopping Centers,
Inc. REIT 218,600 7,432
Vornado Realty Trust REIT 832,882 37,896
Walden Residential Properties,
Inc. REIT 219,800 5,880
Washington REIT 417,100 6,986
Weeks Corp. REIT 218,500 6,814
Weingarten Realty
Investors REIT 336,400 14,802
Western Investment Real Estate
Trust REIT 214,900 2,955
Westfield America, Inc. REIT 377,000 6,715
Winston Hotels, Inc. REIT 199,175 2,639
- --------------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(COST $1,124,693) 1,292,409
- --------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.9%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.60%, 2/2/1998 $31,071 $ 31,071
5.60%, 2/2/1998--Note G 34,065 34,065
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $65,136) 65,136
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.1%)
(COST $1,189,829) 1,357,545
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.1%)
- --------------------------------------------------------------------------------------
Other Assets--Note C 5,224
Liabilities--Note G (46,037)
------------
(40,813)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 94,213,745 outstanding
$.001 par value shares
(authorized 1,200,000,000 shares) $1,316,732
======================================================================================
NET ASSET VALUE PER SHARE $13.98
======================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,149,235 $12.20
Overdistributed Net
Investment Income (219) --
Accumulated Net Realized Gains -- --
Unrealized Appreciation--Note E 167,716 1.78
- --------------------------------------------------------------------------------------
NET ASSETS $1,316,732 $13.98
======================================================================================
</TABLE>
35
<PAGE> 38
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
---------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998
---------------------------------------------------------------------
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $14,188 $ 7,267 $ 40,092 $ 21,223
Interest 4,501 987 23,495 8,117
---------------------------------------------------------------------
Total Income 18,689 8,254 63,587 29,340
---------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 863 826 3,062 484
The Vanguard Group--Note C
Management and Administrative 2,686 1,380 10,210 1,954
Marketing and Distribution 237 97 831 128
Taxes (other than income taxes) 81 31 277 46
Custodian Fees 166 113 478 20
Auditing Fees 7 6 9 6
Shareholders' Reports 47 43 171 50
Annual Meeting and Proxy Costs 16 10 58 10
Directors' Fees and Expenses 3 1 9 2
---------------------------------------------------------------------
Total Expenses 4,106 2,507 15,105 2,700
Expenses Paid Indirectly--Note C (94) -- -- (105)
---------------------------------------------------------------------
Net Expenses 4,012 2,507 15,105 2,595
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 14,677 5,747 48,482 26,745
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 54,590 (47,806) 171,438 22,544
Foreign Currencies (7) (55) (77) --
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 54,583 (47,861) 171,361 22,544
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (41,227) (99,395) 666,872 79,184
Foreign Currencies (6) (1) 28 --
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (41,233) (99,396) 666,900 79,184
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $28,027 $(141,510) $886,743 $128,473
========================================================================================================================
</TABLE>
*Gold & Precious Metals Portfolio dividends are net of foreign withholding
taxes of $243,000.
36
<PAGE> 39
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
-----------------
YEAR ENDED
JANUARY 31, 1998
-----------------
(000)
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 47,152
Interest 1,278
----------------
Total Income 48,430
----------------
EXPENSES
Investment Advisory Fees--Note B 22
The Vanguard Group--Note C
Management and Administrative 1,999
Marketing and Distribution 225
Taxes (other than income taxes) 72
Custodian Fees 6
Auditing Fees 7
Shareholders' Reports 19
Annual Meeting and Proxy Costs 12
Directors' Fees and Expenses 2
----------------
Total Expenses 2,364
Expenses Paid Indirectly--Note C --
----------------
Net Expenses 2,364
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 46,066
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 6,711
Foreign Currencies --
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 6,711
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 104,420
Foreign Currencies --
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 104,420
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $157,197
==========================================================================================
</TABLE>
37
<PAGE> 40
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
--------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 14,677 $ 9,074 $ 5,747 $ 6,260
Realized Net Gain (Loss) 54,583 23,933 (47,861) (4,606)
Change in Unrealized Appreciation
(Depreciation) (41,233) 191,764 (99,396) (129,994)
--------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 28,027 224,771 (141,510) (128,340)
--------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (14,815) (8,648) (5,466) (9,170)
Realized Capital Gain (60,830) (14,413) -- (3,261)
--------------------------------------------------------------------
Total Distributions (75,645) (23,061) (5,466) (12,431)
--------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A -- -- -- --
--------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 374,120 422,636 159,325 175,890
Issued in Lieu of Cash Distributions 71,118 21,861 5,078 11,571
Redeemed (296,584) (161,805) (152,618) (232,481)
--------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 148,654 282,692 11,785 (45,020)
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 101,036 484,402 (135,191) (185,791)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 989,449 505,047 462,509 648,300
--------------------------------------------------------------------
End of Year $1,090,485 $989,449 $327,318 $462,509
========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 15,493 19,911 17,750 13,263
Issued in Lieu of Cash Distributions 3,106 992 750 916
Redeemed (12,742) (8,060) (17,263) (17,991)
--------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 5,857 12,843 1,237 (3,812)
========================================================================================================================
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE UTILITIES INCOME
PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 48,482 $ 31,573 $ 26,745 $ 31,678
Realized Net Gain (Loss) 171,361 73,829 22,544 19,203
Change in Unrealized Appreciation (Depreciation) 666,900 331,271 79,184 (19,820)
--------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 886,743 436,673 128,473 31,061
--------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (46,289) (31,986) (27,443) (30,454)
Realized Capital Gain (121,343) (53,604) (11,501) (1,026)
--------------------------------------------------------------------
Total Distributions (167,632) (85,590) (38,944) (31,480)
--------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A -- -- (644) (1,909)
--------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,378,304 1,109,685 105,388 108,977
Issued in Lieu of Cash Distributions 160,547 82,165 31,731 25,266
Redeemed (384,219) (350,498) (170,921) (268,802)
--------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 1,154,632 841,352 (33,802) (134,559)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 1,873,743 1,192,435 55,083 (136,887)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,846,076 1,653,641 643,854 780,741
--------------------------------------------------------------------
End of Year $4,719,819 $2,846,076 $698,937 $643,854
=============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 20,122 20,050 7,656 8,741
Issued in Lieu of Cash Distributions 2,370 1,452 2,322 2,062
Redeemed (5,652) (6,324) (13,079) (21,789)
--------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 16,840 15,178 (3,101) (10,986)
=============================================================================================================================
</TABLE>
39
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
--------------------------------------
YEAR ENDED MAY 13, 1996,* TO
JAN. 31, 1998 JAN. 31, 1997
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 46,066 $ 9,062
Realized Net Gain (Loss) 6,711 145
Change in Unrealized Appreciation (Depreciation) 104,420 63,296
--------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 157,197 72,503
--------------------------------------
DISTRIBUTIONS
Net Investment Income (46,253) (9,094)
Realized Capital Gain (6,711) (145)
Return of Capital (7,411) (371)
--------------------------------------
Total Distributions (60,375) (9,610)
--------------------------------------
NET EQUALIZATION CHARGES--Note A -- --
--------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 637,888 592,437
Issued in Lieu of Cash Distributions 52,704 8,367
Redeemed (125,350) (9,029)
--------------------------------------
Net Increase (Decrease) from Capital Share Transactions 565,242 591,775
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 662,064 654,668
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 654,668 --
--------------------------------------
End of Period $1,316,732 $654,668
=============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 48,033 51,889
Issued in Lieu of Cash Distributions 3,915 695
Redeemed (9,538) (780)
--------------------------------------
Net Increase (Decrease) in Shares Outstanding 42,410 51,804
=============================================================================================================================
</TABLE>
*Commencement of operations.
40
<PAGE> 43
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the Securities and Exchange
Commission beginning in 1996. This rate is calculated by dividing total
commissions paid on portfolio securities by the total number of shares
purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ENERGY PORTFOLIO
YEAR ENDED JANUARY 31,
-----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $23.44 $17.19 $13.82 $15.77 $13.82
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .25 .27 .23 .31
Net Realized and Unrealized Gain (Loss) on Investments .57 6.64 3.68 (1.65) 3.31
-----------------------------------------------------------
Total from Investment Operations .89 6.89 3.95 (1.42) 3.62
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.24) (.28) (.24) (.29)
Distributions from Realized Capital Gains (1.33) (.40) (.30) (.29) (1.38)
-----------------------------------------------------------
Total Distributions (1.65) (.64) (.58) (.53) (1.67)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.68 $23.44 $17.19 $13.82 $15.77
=========================================================================================================================
TOTAL RETURN* 3.80% 40.32% 28.68% -9.15% 27.31%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,090 $989 $505 $433 $339
Ratio of Total Expenses to Average Net Assets 0.38% 0.39% 0.51% 0.30% 0.17%
Ratio of Net Investment Income to Average Net Assets 1.36% 1.36% 1.55% 1.66% 1.87%
Portfolio Turnover Rate 19% 15% 21% 13% 41%
Average Commission Rate Paid $.0508 $.0484 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
41
<PAGE> 44
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
GOLD & PRECIOUS METALS PORTFOLIO
YEAR ENDED JANUARY 31,
---------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.94 $14.07 $10.71 $13.58 $ 7.29
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .13 .17 .27 .20
Net Realized and Unrealized Gain (Loss) on Investments (3.42) (2.98) 3.36 (2.83) 6.30
---------------------------------------------------------------
Total from Investment Operations (3.28) (2.85) 3.53 (2.56) 6.50
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.13) (.21) (.17) (.31) (.21)
Distributions from Realized Capital Gains -- (.07) -- -- --
---------------------------------------------------------------
Total Distributions (.13) (.28) (.17) (.31) (.21)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 7.53 $10.94 $14.07 $10.71 $13.58
===========================================================================================================================
TOTAL RETURN* -29.85% -20.51% 33.24% -19.20% 89.24%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $327 $463 $648 $531 $613
Ratio of Total Expenses to Average Net Assets 0.62% 0.50% 0.60% 0.25% 0.26%
Ratio of Net Investment Income to Average Net Assets 1.41% 1.07% 1.38% 2.04% 2.04%
Portfolio Turnover Rate 26% 19% 5% 4% 14%
Average Commission Rate Paid $.0117 $.0085 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $60.65 $52.09 $37.01 $36.51 $32.66
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .80 .71 .61 .55 .79
Net Realized and Unrealized Gain (Loss) on Investments 15.49 9.88 16.06 2.83 5.79
-------------------------------------------------------------
Total from Investment Operations 16.29 10.59 16.67 3.38 6.58
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.78) (.74) (.57) (.57) (.76)
Distributions from Realized Capital Gains (2.14) (1.29) (1.02) (2.31) (1.97)
-------------------------------------------------------------
Total Distributions (2.92) (2.03) (1.59) (2.88) (2.73)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $74.02 $60.65 $52.09 $37.01 $36.51
=========================================================================================================================
TOTAL RETURN* 27.37% 20.65% 45.47% 9.79% 21.21%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,720 $2,846 $1,654 $771 $638
Ratio of Total Expenses to Average Net Assets 0.40% 0.38% 0.46% 0.40% 0.19%
Ratio of Net Investment Income to Average Net Assets 1.28% 1.41% 1.57% 1.58% 2.37%
Portfolio Turnover Rate 10% 7% 13% 25% 19%
Average Commission Rate Paid $.0516 $.0504 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
42
<PAGE> 45
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
UTILITIES INCOME PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.93 $12.84 $10.42 $11.67 $11.18
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .58 .58 .56 .56 .57
Net Realized and Unrealized Gain (Loss) on
Investments 2.32 .09 2.42 (1.10) .88
-------------------------------------------------------------
Total from Investment Operations 2.90 .67 2.98 (.54) 1.45
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.60) (.56) (.56) (.59) (.56)
Distributions from Realized Capital Gains (.26) (.02) -- (.12) (.40)
-------------------------------------------------------------
Total Distributions (.86) (.58) (.56) (.71) (.96)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.97 $12.93 $12.84 $10.42 $11.67
=======================================================================================================================
TOTAL RETURN 23.17% 5.51% 29.47% -4.47% 13.08%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $699 $644 $781 $593 $738
Ratio of Total Expenses to Average Net Assets 0.44% 0.40% 0.44% 0.50% 0.42%
Ratio of Net Investment Income to Average Net Assets 4.30% 4.63% 4.88% 5.43% 4.82%
Portfolio Turnover Rate 41% 38% 35% 35% 46%
Average Commission Rate Paid $.0583 $.0568 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
REIT INDEX PORTFOLIO
YEAR ENDED MAY 13, 1996,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JAN. 31, 1998 JAN. 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.64 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .590 .341
Net Realized and Unrealized Gain (Loss) on Investments 1.520 2.659
-----------------------------------
Total from Investment Operations 2.110 3.000
-----------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.590) (.341)
Distributions from Realized Capital Gains (.086) (.005)
Return of Capital (.094) (.014)
-----------------------------------
Total Distributions (.770) (.360)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.98 $12.64
===========================================================================================================================
TOTAL RETURN** 17.08% 30.33%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,317 $655
Ratio of Total Expenses to Average Net Assets 0.24% 0.36%+
Ratio of Net Investment Income to Average Net Assets 4.66% 5.55%+
Portfolio Turnover Rate 2% 0%
Average Commission Rate Paid $.0262 $.0242
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
+Annualized.
43
<PAGE> 46
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 cost, which
approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the bid
prices of those currencies against U.S. dollars last quoted by major banks as
of 5:00 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. EQUALIZATION: The Utilities Income Portfolio follows the accounting
practice known as "equalization," under which a portion of the price of capital
shares issued and redeemed, equivalent to undistributed net investment income
per share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income per share is unaffected
by capital share transactions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Wellington Management Company, LLP, provides investment advisory services
to the Energy, Health Care, and Utilities Income Portfolios for fees
calculated at an annual percentage rate of average net assets. For the year
ended January 31, 1998, the investment advisory fees of the Energy,
44
<PAGE> 47
Health Care, and Utilities Income Portfolios each represented an effective
annual rate of 0.08% of average net assets.
M&G Investment Management Ltd. provides investment advisory services to
the Gold & Precious Metals Portfolio for a fee calculated at an annual
percentage rate of average net assets. For the year ended January 31, 1998, the
investment advisory fee represented an effective annual rate of 0.20% of the
Portfolio's average net assets.
The Vanguard Group furnishes investment advisory services to the REIT
Index Portfolio on an at-cost basis.
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to each Portfolio under methods approved by the Board of
Directors.
Vanguard has asked the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended January 31, 1998, these arrangements reduced the expenses of the
Energy and Utilities Income Portfolios by $94,000 (0.01% of average net
assets), and $105,000 (0.01%), respectively.
At January 31, 1998, the Fund had contributed capital aggregating
$515,000 to Vanguard (included in Other Assets), representing 2.6% of
Vanguard's capitalization. The Fund's Directors and officers are also Directors
and officers of Vanguard.
D. During the year ended January 31, 1998, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
(000)
-----------------------------
PORTFOLIO PURCHASES SALES
-----------------------------------------------------------------------
<S> <C> <C>
Energy $ 303,809 $191,830
Gold & Precious Metals 119,053 100,292
Health Care 1,217,565 350,902
Utilities Income 249,446 295,853
REIT Index 578,697 23,335
-----------------------------------------------------------------------
</TABLE>
E. At January 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 $ 248,352 $ (29,333) $ 219,019
Gold & Precious Metals* 46,313 (148,680) (102,367)
Health Care 1,635,112 (108,480) 1,526,632
Utilities Income 163,631 (986) 162,645
REIT Index 173,922 (6,206) 167,716
--------------------------------------------------------------------------------------------
</TABLE>
*See Note F.
45
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (continued)
At January 31, 1998, net unrealized foreign currency losses resulting
from the translation of other assets and liabilities were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
(000)
-------------------------
NET UNREALIZED
PORTFOLIO FOREIGN CURRENCY LOSSES
----------------------------------------------------------------
<S> <C>
Energy $(6)
Gold & Precious Metals (1)
Health Care (4)
----------------------------------------------------------------
</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 year ended January 31, 1998, the Portfolios realized net
foreign currency losses which decreased distributable net income for tax
purposes; accordingly such losses have been reclassified from accumulated net
realized losses to undistributed net investment income as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
(000)
-----------------------
DECREASE UNDISTRIBUTED
PORTFOLIO NET INVESTMENT INCOME
--------------------------------------------------------------
<S> <C>
Energy $ (7)
Gold & Precious Metals (55)
Health Care (77)
--------------------------------------------------------------
</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 January 31, 1998, was $4,504,000, and is
reflected in the balance of overdistributed net investment income. During the
year ended January 31, 1998, the Portfolio realized gains on the sale of
passive foreign investment companies of $1,008,000, which were included in
prior years' distributable net income for tax purposes; accordingly such gains
have been reclassified from accumulated net realized losses to undistributed
net investment income.
G. The market value of securities on loan to brokers/dealers at January 31,
1998, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
(000)
------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
---------------------------------------------------------------------
<S> <C> <C>
Energy $12,723 $13,900
Gold & Precious Metals 21,999 23,553
Health Care 23,716 25,423
Utilities Income 11,893 12,420
REIT Index 33,538 34,065
---------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
46
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Specialized Portfolios
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Energy Portfolio, Gold & Precious Metals Portfolio, Health Care Portfolio,
Utilities Income Portfolio, and REIT Index Portfolio (constituting Vanguard
Specialized Portfolios, hereafter referred to as the "Fund") at January 31,
1998, the results of each of their operations for the year then ended, and the
changes in each of their net assets and the financial highlights for each of
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at January 31, 1998 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased had not been settled, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 6, 1998
47
<PAGE> 50
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD SPECIALIZED PORTFOLIOS
This information for the fiscal year ended January 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The table below shows the amounts designated as capital gain dividends
(from net long-term capital gains) and, of the total capital gain dividends, the
portion designated as a 20% rate gain distribution.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
CAPITAL GAIN DIVIDENDS
(000)
----------------------------------------------------------------------------
TO BE
DISTRIBUTED DISTRIBUTED 20% RATE GAIN
PORTFOLIO 1997 MARCH 1998 TOTAL DISTRIBUTION
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Energy $42,062 $ 2,847 $ 44,909 $ 21,311
Health Care 82,835 77,592 160,427 126,204
Utilities Income 9,984 7,108 17,092 12,385
REIT Index 4,123 -- 4,123 3,101
-------------------------------------------------------------------------------------------------
</TABLE>
The Gold & Precious Metals Portfolio has elected to pass through the
credit for taxes paid in foreign countries. The foreign income and foreign tax
per share outstanding on January 31, 1998, are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
------------------------------------------------------------------------------------------
<S> <C> <C>
Australia $.0433 $.0036
Canada .0078 .0012
Ghana .0031 .0000
South Africa .0881 .0000
United Kingdom .0054 .0008
------------------------------------------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit affected only shareholders on
the dividend record date in December 1997. Shareholders received more detailed
information along with their Form 1099-DIV in January 1998.
For corporate shareholders, the percentage of investment income
(dividend income plus short-term gains, if any) that qualifies for the
dividends-received deduction is as follows:
<TABLE>
----------------------------------------------------
<S> <C>
Energy Portfolio 42.7%
Gold & Precious Metals Portfolio 18.1
Health Care Portfolio 53.7
Utilities Income Portfolio 65.9
REIT Index Portfolio 0.0
----------------------------------------------------
</TABLE>
48
<PAGE> 51
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England 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., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. 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 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 52
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
Treasury Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Q510-1/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
