<PAGE> 1
VANGUARD
SPECIALIZED FUNDS
VANGUARD ENERGY FUND
VANGUARD GOLD AND PRECIOUS METALS FUND
VANGUARD HEALTH CARE FUND
VANGUARD UTILITIES INCOME FUND
VANGUARD REIT INDEX FUND
[PHOTO]
SEMIANNUAL
REPORT
July 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
6
REPORTS FROM
THE ADVISERS
8
FUND PROFILES
12
PERFORMANCE SUMMARIES
20
FINANCIAL STATEMENTS
23
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During the six months ended July 31, 1999, the first half of the fiscal year
for the Vanguard Specialized Funds, the bull market for U.S. stocks slowed
although the market's returns were generally in line with long-term norms.
Amid the slowdown, there was a change in market leadership.
Once-top-performing sectors offered lesser returns, while segments that had
lagged moved to the forefront. In this environment, the returns for our funds
ranged from a small gain of +2.6% for the Health Care Fund to a tremendous
advance of +36.4% for the Energy Fund. The table at right presents the
six-month total returns (capital change plus reinvested dividends) of each
fund, along with those of its comparative fund group and its target index.
Details on each fund, including per-share net asset values, income
dividends, and any capital gains distributions, are presented in the table that
follows this letter.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JULY 31, 1999
- -------------------------------------------------------------------------
<S> <C>
VANGUARD ENERGY FUND +36.4%
Average Natural Resources Fund +35.7
- -------------------------------------------------------------------------
VANGUARD HEALTH CARE FUND + 2.6%
Average Health-Care Fund - 1.3
- -------------------------------------------------------------------------
S&P 500 Index + 4.5%
- -------------------------------------------------------------------------
VANGUARD GOLD AND PRECIOUS
METALS FUND +10.2%
Average Gold Fund - 6.6
Salomon Smith Barney World
Equity Gold Index +12.3
- -------------------------------------------------------------------------
VANGUARD UTILITIES INCOME FUND + 3.0%
Average Utility Fund + 6.8
Utilities Composite Index* + 4.0
- -------------------------------------------------------------------------
VANGUARD REIT INDEX FUND + 4.4%
Average Real Estate Fund + 5.1
Morgan Stanley REIT Index + 4.1
- -------------------------------------------------------------------------
</TABLE>
*Weighted 63.75% S&P Utilities Index, 21.25% S&P
Telephone Index, and 15% Lehman Brothers
Utility Bond Index.
THE PERIOD IN REVIEW
The U.S. economy's impressive expansion, a strong showing in corporate profits,
and a general improvement in business conditions around the world pushed stock
prices higher during the six months ended July 31.
The U.S. stock market advanced broadly. The Wilshire 5000 Total Market
Index, which tracks the entire U.S. stock market, was up +4.4% during the
half-year. Small-capitalization stocks, which returned +4.9% (as measured by
the Russell 2000 Index), slightly outperformed large-caps, which gained +4.5%
(as measured by the Standard & Poor's 500 Index). The market's gain was not
straight up, however. The Wilshire 5000 Index declined in three of the six
months, including a -3.1% slide in July. "Reversion to the mean"--the strong
tendency of the returns on financial assets to move toward long-term
averages--appeared among value stocks. Such stocks--marked by below-average
share prices in relation to earnings, dividends, and book value--led the market
after having lagged growth stocks for most of the past five years. Such
value-oriented sectors as energy, materials & processing, and producer durables
were the big achievers during the half-year, boosted by higher demand and
higher prices for oil and a number of other commodities. The health-care sector
slumped.
1
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As is often the case, good news about economic growth was bad news for
the bond market. Throughout the period, bond investors grew increasingly
concerned that low unemployment (which puts pressure on employers to raise
wages) and a rebound in commodity prices (which can increase the prices of
finished goods) would push up overall inflation. As a result, the yields of
fixed-income securities moved higher across the board during the half-year.
With yields rising, bond prices fell. The Lehman Brothers Aggregate Bond Index,
a proxy for the U.S. bond market, declined -2.5% for the six months.
ENERGY FUND
Vanguard Energy Fund had a total return of +36.4% during the semiannual period,
a snappy turnaround from the -21.2% decline it posted for the twelve months
ended January 31. Virtually all of the fund's gain came in March and April in
response to rising prices for oil and natural gas and evidence of a recovery in
key Asian nations. Energy stocks were the market's leaders during the six-month
period. Our fund narrowly outpaced the +35.7% return of the average natural
resources fund, which tends to invest not only in energy companies but also in
mining companies, forestry, and other sectors. After lagging the S&P 500 Index
in the past two fiscal years, both our fund and its average peer drubbed the
benchmark during the half-year, returning roughly eight times as much. Of
course, the index is hardly an ideal benchmark, since it is a diversified
basket of large companies. As of July 31, energy stocks made up only about 7%
of the index.
A jump of some 67% in the price of oil--from around $12 per barrel on
January 31 to more than $20 on July 31--accounted for the sector's rally. The
rise--like the decline in oil prices in 1998--was quite simply the result of
supply and demand. OPEC and key non-OPEC nations agreed in March to reduce
daily oil production by about 2.5%. And worldwide consumption rose, aided by
strong economic activity in the United States and a resumption of growth in
Asia. Despite a mild winter, the North American natural gas market was also
strong: Spot prices shot up about 35% during the half-year.
Although the major oil companies, which combine exploration, refining,
and retail operations, performed well during the period, the biggest gains were
recorded by oil-services firms, such as Baker Hughes, which rocketed more than
+108%.
GOLD AND PRECIOUS METALS FUND
Vanguard Gold and Precious Metals Fund gained +10.2% for the half-year ended
July 31. We salute the fund's adviser, M&G Investment Management, whose adroit
positioning of the portfolio provided this excellent return--leagues better
than the -6.6% decline of the average gold fund--in a difficult market. The
price of gold fell by about -11.2% as central banks around the world continued
to sell the metal at auction. Silver declined by about -4.2%. Platinum was
essentially unchanged, and copper jumped about +16.7%. The fund's return was a
bit shy of the +12.3% return of the Salomon Smith Barney World Equity Gold
Index. The sector's overall gain was especially welcome because it followed a
trying run of losses that extended over three fiscal years.
Strong stock selection in nongold companies, such as platinum and
diversified- metals producers, contributed significantly to performance. Impala
Platinum Holdings and Anglo American Platinum, the two biggest platinum
producers in the world and two of the fund's largest holdings, soared to total
returns of +106% and +63%, respectively. Freeport-McMoRan Copper & Gold,
another sizable holding, gained +66%. Of course, not all of the adviser's
selections were prescient; Euro-Nevada Mining, the fund's seventh-largest
stake, lost -30% of its value during the period.
2
<PAGE> 5
HEALTH CARE FUND
After a long run of superior performance--the average health-care fund gained
an average of +20.8% a year during the ten years ended January 31--health-care
stocks finally cooled during the six months ended July 31. Vanguard Health Care
Fund did not avoid the chill, but it did well to post a +2.6% gain for the
half-year. Its performance easily exceeded those of both the average
health-care fund, which lost -1.3%, and the health-care stocks in the S&P 500
Index, which were down -7.6%. We trailed the index's overall gain of +4.5%,
however. Although we expect such cyclicality in a single economic sector--even
one as broad as health care--we recognize that shareholders may have been
surprised. The last time your fund's semiannual return was lower than +2.6% was
in the first six months of fiscal 1994. In the interim, the fund gained an
amazing +16% or more in seven of nine fiscal half-years.
The slump in health-care stocks was mainly a result of talk in the
nation's capital about including prescription drug coverage in the Medicare
program, which raised the possibility of drug price regulation. As was the case
in 1993, when the Clinton administration sought to institute a national
health-care program, some investors envisioned restraints on pharmaceutical
firms' profits. As a result, stocks of major drug makers suffered. Pfizer, for
instance, shed -20.7% of its value.
One health-care stock that was featured prominently in the news during
the period was McKesson HBOC, in which the fund held roughly the market weight
(1.6%) at the beginning of the fiscal year. The stock's price plummeted after
the company announced that it would lower its previously reported earnings as a
result of accounting irregularities at its recently acquired HBO unit. McKesson
shed -58% of its market value during the six-month period. Our adviser,
Wellington Management Company, believed that the market had overreacted to the
news, and added substantially to the fund's stake in McKesson after it tumbled,
bringing the fund's weighting in the stock to roughly 3% at the end of the
period.
There were, of course, some bright spots during the period. The fund's
Japanese stocks--a group of 13 issues that made up nearly 9% of assets on July
31--gained +25.9% in U.S. dollar-terms. We note that the fund may invest up to
30% of its assets in foreign stocks, which are subject to currency risk in
addition to the ordinary risks of domestic equities.
UTILITIES INCOME FUND
The Utilities Income Fund had a total return of +3.0% for the half-year,
trailing both the Utilities Composite Index (which posted a +4.0% return) and
the average utility fund (+6.8%). The fund fell short of its average peer
primarily because our adviser, Wellington Management Company, pursuing its
mandate to provide income, continued to focus on electric company stocks. The
average utility fund invested more heavily in telecommunications stocks, which
were the industry's hottest players. In addition, our choices within the
telecommunications group were subpar performers. Many telecom stocks pay little
or no dividends, making them off-limits for the Utilities Income Fund. On the
positive side, the fund's natural gas distribution stocks climbed about +21% in
the second quarter alone, aided by rising energy prices.
Rising interest rates, which mean lower bond prices, also posed a
significant hurdle for the fund. Our 11% commitment to bonds--more than three
times the average utility fund's stake in bonds--lost -4.8% for the six-month
period, as falling prices more than offset dividend income. The fund's current
annualized yield was 3.0% on July 31, down slightly from 3.1% on January 31.
3
<PAGE> 6
As described in our reports to you over the past two years, the fund's
exposure to bonds has been gradually reduced. As of July 31, the bond
allocation was about 11% of assets, down from roughly 15% of assets a year
earlier. We expect the fund's bond allocation to range between 10% and 20% of
assets. To reflect this strategy, we are changing our benchmark Utilities
Composite Index by reducing the weighting to bonds from 20% to 15%.
Similarly, we are adjusting the index's weighting in telephone stocks to
more closely reflect the fund's historical and expected exposure to this
sector, and to reflect merger activity that is reducing the number of U.S.
telephone companies in which the fund can invest. Until now, the index's
weighting in stocks has been split evenly between telephone companies and
electric and gas utilities. Going forward, the telephone stocks will account
for 25% of the index equity weighting, and the weighting of electric and gas
utilities will increase to 75%.
REIT INDEX FUND
Vanguard REIT Index Fund gained +4.4% for the six-month period, topping its
unmanaged benchmark, the Morgan Stanley REIT Index, by 0.3 percentage point but
trailing the average real estate fund by 0.7 percentage point. Prices for real
estate investment trusts (REITs) rebounded this spring. Analysts attributed the
rise in part to news that the investment company Berkshire Hathaway, managed by
the legendary Warren Buffett, had taken an interest in the sector. Reports said
Berkshire Hathaway had invested about $50 million--small change for that
firm--in a pair of REITs.
In addition to the "Buffett effect," REITs were aided by positive
fundamentals during the six months. The U.S. economy, for example, continued to
expand at a brisk pace, with strong retail sales. This strength was evident in
high occupancy rates and favorable leasing trends in both the shopping center
and regional mall segments of the real estate market. Reports suggesting that
industry consolidation--predicated on cost-cutting possibilities--would remain
the rule, rather than the exception, also lent a hand to REIT prices.
IN SUMMARY
When you invest in a sector mutual fund, such as any of our five Specialized
Funds, you incur industry-specific risks--such as exposure to rapid swings in
the price of oil or gold--that are barely noticed in a diversified stock
portfolio. That being so, we encourage you, as always, to maintain a balanced
mix of stock funds, bond funds, and short-term reserves appropriate for your
risk tolerance, time horizon, and financial resources. Sector funds can then
allow you to tailor your holdings to reflect your expectations for discrete
market niches.
We look forward to reporting to you on our full 2000 results six months
hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
August 17, 1999
4
<PAGE> 7
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -----------------------------------------------------------------------------------------------------------------------
SIX MONTHS
NET ASSET VALUE PER SHARE -----------------------------------------
-------------------------------- INCOME CAPITAL SIX-MONTH
VANGUARD SPECIALIZED FUND JAN. 31, 1999 JUL. 31, 1999 DIVIDENDS GAINS* TOTAL RETURN**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy $17.16 $23.40 $0.01 $0.00 +36.4%
Gold and Precious Metals 6.61 7.27 0.01 0.00 +10.2
Health Care 97.32 97.39 0.09 2.37 + 2.6
Utilities Income 16.27 16.14 0.26 0.33 + 3.0
REIT Index 10.81 11.00 0.28 0.00 + 4.4
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes both long-term and short-term capital gains distributions.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held less than one year in the Energy, Gold and Precious Metals, and
REIT Index Funds, or the 1% fee assessed on redemptions of Health Care Fund
shares held less than five years.
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JULY 31, 1999
[PHOTO]
An improving global economy was the backdrop for generally higher stock prices
but lower bond prices during the six months ended July 31.
A powerful expansion of the U.S. economy--which is by far the world's
largest--attracted record levels of imported products, helping foreign
economies to begin recovering from recessions. Confidence grew that global
economic activity was likely to be solid, if unspectacular, throughout 1999,
with further gains expected in 2000. This was a marked change in sentiment from
autumn 1998, when many analysts feared that economic troubles in Asia, Latin
America, and Russia would eventually weaken even the robust U.S. economy. The
turnabout was due, in part, to actions by the Federal Reserve Board and other
central banks to ease monetary policy to foster growth and restore confidence
to financial markets.
As economic engines revved up during 1999, market interest rates rose
steadily. The Fed tapped the brakes on June 30, when it acted to boost
short-term interest rates by 0.25 percentage point. The move clearly signaled
that the Fed was more concerned about the danger of inflation than any risk of
an economic slowdown.
U.S. STOCK MARKETS
Stock prices rose during the half-year, largely because investors' expectations
for improved corporate earnings outweighed their concerns about rising interest
rates. Companies reporting higher-than-expected earnings outnumbered those with
lower-than-expected earnings, and analysts raised estimates for overall
corporate profits in 1999 and 2000. The total market, as measured by the
Wilshire 5000 Index, rose 4.4% during the six months ended July 31, while the
S&P 500 Index, a yardstick for large-capitalization stocks, gained 4.5%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JULY 31, 1999
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 4.5% 20.2% 26.2%
Russell 2000 Index 4.9 7.4 14.4
Wilshire 5000 Index 4.4 18.3 24.1
MSCI EAFE Index 7.5 10.0 8.9
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -2.5% 2.5% 7.3%
Lehman 10 Year Municipal Bond Index -2.6 2.8 6.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.3 4.7 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 2.1% 2.4%
- --------------------------------------------------------------------------------
</TABLE>
*Annualized.
Although stock returns seemed modest compared with the huge gains of
recent years, they were in line with historical norms and were impressive in
light of the rise in interest rates. Higher rates hurt stock prices because
many investors use current interest rates to discount the value of a stock's
projected earnings and dividends: the higher the rate used to discount them,
the lower the present value of future earnings and dividends.
Within the stock market, leadership changed during the period. Value
stocks-- characterized by below-average share prices in relation to earnings,
dividends, and book
6
<PAGE> 9
value--led the market's advance after having lagged growth stocks for most of
the past five years. Value stocks within the S&P 500 gained 8.3% for the six
months, while the index's growth stocks gained just 1.3%. Predominantly
value-stock industries such as energy, materials & processing, and machinery
were the big gainers during the half-year, buoyed by higher demand and prices
for oil and a number of other commodities. The worst-performing sectors were
health care (-7.6%) and consumer staples (-6.2%), both home to some
high-profile growth stocks that had infatuated investors until recently.
Small-cap stocks, as measured by the Russell 2000 Index, gained 4.9% for
the half-year, marginally better than the return on large stocks. Even that
small victory is noteworthy, given that the Russell 2000's cumulative return
over the past three years (46.6%) lags that of the S&P 500 Index (118.1%) by
more than 70 percentage points.
U.S. BOND MARKETS
The rapid economic expansion that boosted prospects for stock prices made bond
investors wary. Although inflation was well-behaved--consumer prices rose 1.5%
for the six months and 2.1% for the twelve months ended July 31--both investors
and the Fed's policymakers were looking ahead, not behind. The concern is that
the economy is becoming overheated; inflation-adjusted gross domestic product
during the second quarter was up 5.4% from a year earlier. Too-rapid expansion
might yet trigger significant increases in wages and overall prices, many fear.
Indeed, thanks to high employment and rising wages, total U.S. wage and salary
income in June 1999 was 6.5% higher than in June 1998. Unless productivity--the
amount workers produce per hour--continues to rise at very rapid rates, such
wage growth could cause companies to boost prices for products and services.
U.S. Treasury bond yields rose by roughly 1 percentage point--a hefty
boost for a six-month period. The yield of the 30-year Treasury bond rose 101
basis points, to 6.10% on July 31 from 5.09% on January 31. The yield of the
10-year Treasury--a benchmark especially for mortgage rates--rose 125 basis
points, to 5.90% from 4.65%. Money market rates didn't rise as far: Yields on
3-month T-bills increased on balance by 30 basis points, to 4.75% on July 31.
Bond prices, which move in the opposite direction from interest rates, fell.
The benchmark for the overall taxable bond market, the Lehman Aggregate Bond
Index, fell 2.5% on a total-return basis, as interest income of about 3.0% for
the six months was more than offset by a 5.5% average decline in bond prices.
INTERNATIONAL STOCK MARKETS
Stock prices in Japan and many emerging markets rebounded sharply from steep
losses in 1997 and 1998, as investors reckoned that these nations' economies
were finally on the mend. In Europe, stock prices were modestly higher in
local-currency terms but slightly negative for U.S. investors because of the
U.S. dollar's gains against European currencies. (Returns from abroad are
diminished when the dollar's value rises against other currencies, and
augmented when the dollar falls in value.)
Overall, the developed markets outside the United States gained 7.5% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The Pacific region was up 27.8% in
local-currency terms and 29.5% for U.S. investors, because the Japanese yen
gained against the dollar. Europe, which accounts for the lion's share of
EAFE's market capitalization, was up 3.7% in local currencies. But in U.S.
dollars, the return from European stocks was -0.8% because of weakness in
European currencies. The MSCI Select Emerging Markets Free Index shot up 30.9%,
led by gains of more than 60% in Indonesia, Singapore, and Turkey.
7
<PAGE> 10
REPORT FROM WELLINGTON
MANAGEMENT COMPANY, LLP
[PHOTO]
ENERGY FUND
During the six months ended July 31, Vanguard Energy Fund provided a total
return of 36.4%, compared with gains of 4.5% for the S&P 500 Index and 35.7%
for the average natural-resources fund.
As you probably recall, the energy sector performed poorly in 1998
largely because oil and natural gas prices fell. This was due to a combination
of factors--the Asian economic crisis, two consecutive mild winters, and a
rapid return to market of Iraqi oil production--that created surplus
inventories of oil and gas. In March 1999, the Organization of Petroleum
Exporting Countries (OPEC) finally instituted production cutbacks that, unlike
those implemented in 1998, were large enough to push oil prices up. At the same
time, the first signs of improving oil demand appeared in Asia, and oil
production outside of OPEC started to decline. Oil prices rose from about $12
per barrel late in January to about $20 in July.
Natural gas prices in North America rose because supplies were getting
tighter, despite the mild winter of 1998-1999. U.S. gas production has started
to decline as a result of reduced drilling activity. Natural gas prices
increased from $2.00 to $2.70 per thousand cubic feet during the six months.
Even though oil prices have returned to levels at which the industry can
earn satisfactory returns, oil-field exploration and production activity
remains subdued because many companies were much weakened after the 1998
collapse in prices. The industry is much more focused on reducing operating
costs and achieving efficiencies through mergers than it was during the
1995-1997 period, when volume growth was the main objective.
The outlook for oil and gas prices is positive. OPEC is in a good
position to prevent oil prices from falling because it will have to supply the
bulk of any incremental increase in world oil demand. The North American gas
market will remain strong as long as drilling activity is insufficient to
maintain productive capacity, as is the case today. Therefore, the earnings
outlook for energy companies for the remainder of 1999 and 2000 is encouraging.
During the first half of our fiscal year, all sectors except for
refining contributed to the fund's performance. Among the largest contributors
were Baker Hughes, Shell Transport & Trading, and Kerr-McGee. As in the overall
stock market, returns for the energy sector became more broad-based during the
first half of 1999, as the market stopped focusing so intently on only a narrow
list of large-capitalization stocks. We believe that Vanguard Energy Fund is
well positioned to participate in the continued recovery we foresee in the
sector.
Ernst H. von Metzsch, Senior Vice President and
Portfolio Manager
August 13, 1999
INVESTMENT PHILOSOPHY
Each fund 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.
8
<PAGE> 11
REPORT FROM M&G INVESTMENT
MANAGEMENT LTD.
GOLD AND PRECIOUS METALS FUND
Vanguard Gold and Precious Metals fund provided a total return of 10.2% during
the six months ended July 31, 1999. This compared with a -6.6% total return for
the average precious metals fund and a 12.3% advance for the fund's index
benchmark, the Salomon Smith Barney World Equity Gold Index.
Against a difficult market background, it is encouraging that the fund
has outperformed its average competitor by such a wide margin. The impact of
lower gold prices during the period has been varied, and the strongest gains
during the half-year were from companies that were protected from currency
fluctuations by hedging programs or that had a diversified portfolio of mining
interests. Those companies focused solely on gold production made little
progress.
Your fund got strong contributions from two South African platinum
producers--Impala Platinum and Anglo American Platinum--that together account
for more than 15% of the fund's assets. Their gains can largely be attributed
to two factors: first, a fear that Russia, a major platinum producer, would be
unable to meet future demand; and second, a pickup in demand for platinum from
Japan and elsewhere in Asia, where economic growth has resumed.
Also contributing to the fund's solid performance were our holdings in
Rio Tinto, Mount Isa Mines, Freeport-McMoRan, and Newcrest Mining. Newcrest got
a boost from its new management's actions to address operational concerns at
its Australian gold operations. The fund also benefited from its stake in
Getchell Gold, whose share price rose sharply after a takeover offer from
Placer Dome. The smaller, more speculative end of the precious-metals equity
market was particularly hard hit by the difficult conditions facing the
industry. Your fund is strongly biased toward larger companies--the "blue
chips" of the precious metals business. However, the few smaller companies we
owned, including Crown Resources and Greenstone Resources, were not spared a
drubbing. Our stake in Australian Resources, which went into liquidation,
illustrated the precarious position of many small producers due to the present
low price of gold. We intend to sell these smaller stocks when market
conditions are more suitable.
The fund's purchases were concentrated in large companies whose
diversified interests will, we believe, protect them somewhat from the falling
price of gold bullion. We established new holdings in WMC and Lonmin during the
second quarter, and we added to existing positions in three strong Australian
companies: Rio Tinto, Mount Isa Mines, and Lihir Gold. Among our sales were a
few speculative stocks and shares of highly leveraged enterprises such as the
exploration company Golden Star Resources.
Looking ahead, the price of gold is unlikely to rise while central banks
continue to sell significant portions of their gold reserves. In the short
term, closings of gold mines are likely to accelerate. However, mine closings
could result in a shrinkage of supply that, together with a pickup in demand
from Asia, could help to stabilize the price of this beleaguered metal.
Meanwhile, the strongest performance is likely to come from larger companies
that possess diversified interests capable of offsetting losses from gold
mining. The fund is heavily weighted toward such stocks.
Graham E. French, Portfolio Manager August 13, 1999
9
<PAGE> 12
REPORT FROM WELLINGTON
MANAGEMENT COMPANY, LLP
HEALTH CARE FUND
Vanguard Health Care Fund gained 2.6% for the six months ended July 31, 1999.
This result trailed the 4.5% return for the S&P 500 Index, but bettered the
- -1.3% decline of the average Lipper health-care mutual fund.
After three amazingly strong years, large-capitalization health-care
stocks took a breather during the first half of our fiscal year. In
anticipation of such a development, we had been reducing the fund's average
market capitalization by increasing the number of stocks held and by focusing
new purchases in the mid-cap area, which seemed to offer better value. This
move explains, in part, why we outperformed our peers during this period.
Another significant plus for us was our position of nearly 9% of assets in
Japanese stocks, which performed well during the half-year.
The fund's best-performing categories were biotechnology companies and
Japanese holdings. Immunex, Gilead Sciences, IDEC Pharmaceuticals, and Human
Genome Sciences were the biotech stocks that contributed most to our
performance. Takeda Chemical, Fujisawa Pharmaceutical, and Yamanouchi
Pharmaceuticals were our best-performing Japanese investments.
We believe the fund's modest returns of the past six months are more
representative of what can be expected in the future than the stellar returns
achieved during the past three-, five-, and ten-year periods. Prices of
health-care stocks already reflect lofty expectations for the industry's future
growth. The health-care sector is exciting, and its products are vital for all
of us. As investors, we need to remain focused on the long term, for, indeed,
the long-term future of this sector is bright.
Your fund is diversified across all health-care sectors and has a
healthy dose of international exposure. We focus on finding good value and
believe the Health Care Fund offers lower volatility than many of its peers,
while participating in the long-term upside of the health-care industry.
Edward P. Owens, Senior Vice President and Portfolio Manager
August 16, 1999
10
<PAGE> 13
REPORT FROM WELLINGTON
MANAGEMENT COMPANY, LLP
UTILITIES INCOME FUND
Vanguard Utilities Income Fund earned 3.0% during the six months ended July 31,
a result that was behind both the 4.0% return for the fund's composite index
and the 6.8% return for the average utility fund.
The best-performing group in the utilities sector was natural gas
stocks, which gained 24.8% during the half-year. Natural gas companies
benefited from a sharp rise in prices for both oil and natural gas, as well as
from ongoing takeover activity and speculation. Stocks of telephone utilities
returned 8.5% during the six months, aided by takeovers of Frontier and
Ameritech and by investors' strong appetite for companies that are benefiting
from accelerating growth in data communications and wireless services (such as
Sprint PCS).
Bond prices suffered as interest rates rose throughout the semiannual
period. The total return for the fund's bond holdings was -4.8% for the
half-year, before expenses. Rising interest rates also hurt electric utility
stocks, which are defensive in nature and often perform in sympathy with the
fixed-income markets. The electric utility stocks in the S&P 500 Index declined
- -3.1% during the period.
The telephone sector continues to have by far the best growth story
among utility stocks that we monitor. As mentioned, telephone companies are
benefiting from the fast spread of new applications for data communications and
wireless services. We plan to maintain large positions within the group,
although we are somewhat constrained by our mandate to invest only in common
stocks that pay dividends. Our favorite telecommunications positions now are
Sprint, Bell Atlantic, and Ameritech. We are also investing in telecom through
an electric utility (Montana Power) and a natural gas pipeline company
(Williams Companies). Both of these companies have used their rights of way to
build fiber-optic networks to add value for shareholders.
The electric utilities are trading at historically low valuations in
relation to the overall market. Continued earnings disappointments and poor
returns from both overseas investments and domestic acquisitions by electric
companies have dulled investor interest in the sector. However, we believe
there are some good values within the group, including some of our larger
holdings, such as Pinnacle West Capital, Unicom, and DQE. We believe managers
of many utilities do not sufficiently understand the increased risk they face
in a deregulated market for energy. This is why constant reassessment of
company strategies and careful stock selection are imperative.
Mark J. Beckwith, Vice President and Portfolio Manager
August 16, 1999
11
<PAGE> 14
FUND PROFILE
ENERGY FUND
This Profile provides a snapshot of the fund's characteristics as of July 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
ENERGY S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 53 500
Median Market Cap $9.6B $64.5B
Price/Earnings Ratio 39.3x 28.1x
Price/Book Ratio 2.7x 5.1x
Yield 1.3% 1.3%
Return on Equity 10.9% 22.4%
Earnings Growth Rate 5.3% 15.0%
Foreign Holdings 25.2% 1.6%
Turnover Rate 8%* --
Expense Ratio 0.48%* --
Cash Reserves 3.9% --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- --------------------------------------
<S> <C>
STYLE VALUE
MARKET CAP MEDIUM
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
ENERGY S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.31 1.00
Beta 0.82 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Shell Transport & Trading Co. ADR 4.7%
Baker Hughes, Inc. 4.3
Unocal Corp. 4.3
USX-Marathon Group 4.1
Halliburton Co. 3.8
Mobil Corp. 3.7
Texaco Inc. 3.5
Exxon Corp. 3.3
Chevron Corp. 3.3
Schlumberger Ltd. 3.1
- -------------------------------------------------------
Top Ten 38.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------
JULY 31, 1998 JULY 31, 1999
-------------------------------------
ENERGY ENERGY
-------------------------------------
<S> <C> <C>
Auto & Transportation 0.4% 0.0%
Energy Miscellaneous 3.9 2.2
International 31.6 25.2
Machinery--Oil Well Equipment & Services 9.7 17.9
Materials & Processing 2.1 0.8
Offshore Drilling 1.4 1.0
Oil--Crude Producers 16.2 10.9
Oil--Integrated Domestic 22.8 29.2
Oil--Integrated International 9.5 11.0
Other 2.4 1.8
- ----------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
AVERAGE COUPON. The average interest rate paid on the securities held by a
fund. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the fund's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity (or are called) and are repaid. In general, the longer the average
maturity, the more a fund'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 fund'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 fund'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 fund 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 fund'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
and bond investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's total net assets invested
in securities of various countries.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund'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 fund'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 fund, 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 fund.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund'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 fund'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 fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
FUND ALLOCATION BY REIT TYPE. An indicator of diversification, this table shows
the percentage of the fund's noncash holdings invested in various real estate
investment trusts, classified according to the types of property they
emphasize.
13
<PAGE> 16
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's
assets invested in each stock. Stocks representing half of the fund's assets
have market capitalizations above the median, and the rest are below it.
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular bond issuer.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, 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 fund, 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 fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund'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 fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund'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 fund has invested in its ten largest stocks. As this percentage
rises, a fund's returns are likely to be more volatile because they are more
dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds 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 fund's income from interest and dividends. The yield,
expressed as a percentage of the fund'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 fund were held to their maturity dates.
14
<PAGE> 17
FUND PROFILE
GOLD AND PRECIOUS METALS FUND
This Profile provides a snapshot of the fund's characteristics as of July 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
GOLD AND
PRECIOUS METALS S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 38 500
Median Market Cap $3.1B $64.5B
Price/Earnings Ratio 21.4x 28.1x
Price/Book Ratio 3.6x 5.1x
Return on Equity 6.3% 22.4%
Earnings Growth Rate 11.9% 15.0%
Foreign Holdings 78.3% 1.6%
Turnover Rate 26%* --
Expense Ratio 0.78%* --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Newcrest Mining Ltd. 8.3%
Impala Platinum Holdings Ltd. ADR 8.2
Mount Isa Mines Holdings Ltd. 7.8
Anglo American Platinum Corp ADR 6.9
Newmont Mining Corp. 5.2
Stillwater Mining Co. 5.2
Euro-Nevada Mining Corp. 4.6
Freeport-McMoRan Copper & Gold, Inc.
Class A 4.2
Rio Tinto PLC 3.8
Delta Gold NL 3.4
- -------------------------------------------------------
Top Ten 57.6%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
GOLD AND
PRECIOUS METALS S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.16 1.00
Beta 0.87 1.00
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS)
- -----------------------------------------------
<S> <C>
Australia 35.8%
Canada 14.2
South Africa 18.3
United Kingdom 3.1
United States 19.8
- -----------------------------------------------
Subtotal 91.2%
Bullion 6.1
Cash Reserves 2.7
- -----------------------------------------------
Total 100.0%
</TABLE>
15
<PAGE> 18
FUND PROFILE
HEALTH CARE FUND
This Profile provides a snapshot of the fund's characteristics as of July 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
HEALTH CARE S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 138 500
Median Market Cap $11.6B $64.5B
Price/Earnings Ratio 31.2x 28.1x
Price/Book Ratio 4.2x 5.1x
Yield 0.8% 1.3%
Return on Equity 17.5% 22.4%
Earnings Growth Rate 3.6% 15.0%
Foreign Holdings 23.4% 1.6%
Turnover Rate 18%* --
Expense Ratio 0.43%* --
Cash Reserves 9.9% --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------
<S> <C>
STYLE GROWTH
MARKET CAP LARGE
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
HEALTH CARE S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.76 1.00
Beta 0.71 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Warner-Lambert Co. 4.3%
Pharmacia & Upjohn, Inc. 4.2
Immunex Corp. 3.8
AstraZeneca Group PLC 3.7
Johnson & Johnson 3.0
Bristol-Myers Squibb Co. 3.0
Allergan, Inc. 2.9
Abbott Laboratories 2.8
McKesson HBOC, Inc. 2.6
United Healthcare Corp. 2.4
- -------------------------------------------------------
Top Ten 32.7%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------
JULY 31, 1998 JULY 31, 1999
------------------------------------
HEALTH CARE HEALTH CARE
------------------------------------
<S> <C> <C>
Biotech Research & Production 2.3% 1.5%
Consumer Discretionary 0.1 0.6
Consumer Staples 0.0 0.2
Drugs & Pharmaceuticals 50.3 42.6
Electronics--Medical Systems 1.2 1.2
Health & Personal Care 0.6 3.4
Health Care Facilities 3.2 5.0
Health Care Management Services 5.3 7.6
International 19.3 23.4
Materials & Processing 5.9 2.2
Medical & Dental Instruments & Supplies 8.9 7.7
Medical Services 1.2 0.9
Miscellaneous Health Care 0.6 0.5
Producer Durables 1.0 0.3
Technology 0.0 0.1
Other 0.1 2.8
- --------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
FUND PROFILE
UTILITIES INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of July 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 13 and 14.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- -----------------------------------------------------------
<S> <C>
Yield 3.0%
Turnover Rate 44%*
Expense Ratio 0.43%*
Cash Reserves 1.3%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- ------------------------------
<S> <C>
STOCKS 88%
BONDS 11%
CASH RESERVES 1%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- ----------------------------------------------------------
UTILITIES
INCOME S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.32 1.00
Beta 0.34 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- -------------------------------------------------------
<S> <C>
Sprint 5.9%
Bell Atlantic Corp. 5.1
Ameritech Corp. 4.6
Enron Corp. 3.9
Pinnacle West Capital Corp. 3.9
Montana Power Co. 3.8
DQE Inc. 3.8
BellSouth Corp. 3.6
British Telecommunications PLC ADR 3.0
Unicom Corp. 2.9
- -------------------------------------------------------
Top Ten 40.5%
- -------------------------------------------------------
Top Ten as % of Total Net Assets 35.8%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------------------
JULY 31, 1998 JULY 31, 1999
-----------------------------------------
UTILITIES INCOME UTILITIES INCOME
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Electrical 43.3% 44.2%
Gas Distribution 11.4 4.7
Integrated Oils 3.6 4.7
Other Energy 2.9 6.8
Telecommunications 31.7 35.4
Water 0.7 2.2
Other 6.4 2.0
- -----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------
UTILITIES
INCOME S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 59 500
Median Market Cap $8.8B $64.5B
Price/Earnings Ratio 22.2x 28.1x
Price/Book Ratio 2.6x 5.1x
Dividend Yield 2.9% 1.3%
Return on Equity 15.8% 22.4%
Earnings Growth Rate 7.6% 15.0%
Foreign Holdings 11.8% 1.6%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------
<S> <C>
STYLE VALUE
MARKET CAP MEDIUM
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -----------------------------------------------------------
UTILITIES LEHMAN
INCOME INDEX*
- -----------------------------------------------------------
<S> <C> <C>
Number of Bonds 45 5,381
Yield to Maturity 7.0% 6.8%
Average Coupon 6.8% 6.8%
Average Maturity 9.6 years 9.0 years
Average Quality A1 Aaa
Average Duration 6.0 years 5.0 years
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ---------------------------------------------------------
<S> <C>
AVERAGE MATURITY LONG
CREDIT QUALITY INVESTMENT-GRADE CORPORATE
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- -------------------------------------------------------
<S> <C>
Electric 65.7%
Foreign 1.7
Gas 2.3
Telephone 30.3
Treasury/Agency 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ----------------------------------------------------
<S> <C>
Treasury/Agency 0.0%
Aaa 0.0
Aa 41.8
A 43.6
Baa 14.6
Ba 0.0
B 0.0
Not Rated 0.0
- ----------------------------------------------------
Total 100.0%
</TABLE>
18
<PAGE> 21
FUND PROFILE
REIT INDEX FUND
This Profile provides a snapshot of the fund's characteristics as of July 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 13 and 14.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
REIT INDEX S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 136 500
Median Market Cap $1.6B $64.5B
Price/Earnings Ratio 17.5x 28.1x
Price/Book Ratio 1.3x 5.1x
Dividend Yield 7.6%* 1.3%
Return on Equity 13.2% 22.4%
Earnings Growth Rate 20.1% 15.0%
Foreign Holdings 0.0% 1.6%
Turnover Rate 11%** --
Expense Ratio 0.32%** --
Cash Reserves 1.8% --
</TABLE>
*This dividend yield includes some payments that represent a return of capital
by the underlying REITs. The amount of such return of capital is only
determined by each REIT after its fiscal year ends.
**Annualized.
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------
<S> <C>
STYLE VALUE
MARKET CAP SMALL
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
REIT INDEX S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.17 1.00
Beta 0.36 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Equity Office Properties Trust REIT 5.3%
Equity Residential Properties Trust REIT 4.1
Simon Property Group, Inc. REIT 3.7
Public Storage, Inc. REIT 2.9
ProLogis Trust REIT 2.6
Vornado Realty Trust REIT 2.5
Archstone Communities Trust REIT 2.5
Crescent Real Estate, Inc. REIT 2.3
Apartment Investment & Management
Co. Class A REIT 2.1
Duke Realty Investments, Inc. REIT 2.1
- -------------------------------------------------------
Top Ten 30.1%
</TABLE>
<TABLE>
<CAPTION>
FUND ALLOCATION BY REIT TYPE
- ---------------------------------------------------------
<S> <C>
Retail 22%
Apartments 22
Office 20
Industrial 16
Diversified 13
Hotels 7
- ---------------------------------------------------------
Total 100%
</TABLE>
19
<PAGE> 22
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the funds. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
ENERGY FUND
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1999
- --------------------------------------------------------
ENERGY FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -1.9% 0.0% -1.9% 21.1%
1986 2.0 1.4 3.4 22.9
1987 25.8 6.1 31.9 33.9
1988 -5.7 6.5 0.8 -3.3
1989 20.3 3.9 24.2 20.1
1990 26.1 2.9 29.0 14.5
1991 -4.7 3.1 -1.6 8.4
1992 -1.9 3.2 1.3 22.7
1993 10.0 3.0 13.0 10.6
1994 25.0 2.3 27.3 12.9
1995 -10.6 1.5 -9.1 0.5
1996 26.6 2.1 28.7 38.7
1997 38.8 1.5 40.3 26.3
1998 2.4 1.4 3.8 26.9
1999 -22.6 1.4 -21.2 32.5
2000* 36.4 0.0 36.4 4.5
- --------------------------------------------------------
</TABLE>
*Six months ended July 31, 1999.
See Financial Highlights table on page 38 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
GOLD AND PRECIOUS METALS FUND
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1999
- --------------------------------------------------------
GOLD AND PRECIOUS METALS FUND SALOMON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -34.0% 0.0% -34.0% -34.4%
1986 15.2 1.1 16.3 3.6
1987 38.2 4.0 42.2 12.4
1988 -1.6 4.1 2.5 4.5
1989 3.2 2.9 6.1 -9.3
1990 29.4 4.0 33.4 72.3
1991 -33.6 2.4 -31.2 -41.1
1992 13.5 3.2 16.7 10.9
1993 -22.5 1.9 -20.6 -23.3
1994 86.3 2.9 89.2 121.5
1995 -21.1 1.9 -19.2 -21.1
1996 31.4 1.8 33.2 34.7
1997 -21.9 1.4 -20.5 -14.9
1998 -31.2 1.4 -29.8 -31.2
1999 -12.2 1.1 -11.1 -19.4
2000** 10.0 0.2 10.2 12.3
- --------------------------------------------------------
</TABLE>
*MSCI Gold Mines Index through December 31, 1994; Salomon Smith Barney World
Gold Index thereafter.
**Six months ended July 31, 1999.
See Financial Highlights table on page 39 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999*
- --------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Fund** 5/23/1984 0.26% 12.42% 9.21% 2.28% 11.49%
Gold and Precious Metals Fund** 5/23/1984 12.75 -8.70 -2.55 2.12 -0.43
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
20
<PAGE> 23
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the funds. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
HEALTH CARE FUND
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1999
- --------------------------------------------------------
HEALTH CARE FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1985 18.5% 0.0% 18.5% 21.1%
1986 32.9 0.8 33.7 22.9
1987 30.8 1.0 31.8 33.9
1988 -2.7 3.0 0.3 -3.3
1989 19.3 2.1 21.4 20.1
1990 17.7 2.5 20.2 14.5
1991 27.4 2.7 30.1 8.4
1992 32.0 2.0 34.0 22.7
1993 -4.8 1.9 -2.9 10.6
1994 18.7 2.5 21.2 12.9
1995 8.1 1.7 9.8 0.5
1996 43.8 1.7 45.5 38.7
1997 19.1 1.5 20.6 26.3
1998 26.0 1.4 27.4 26.9
1999 36.2 1.2 37.4 32.5
2000* 2.5 0.1 2.6 4.5
- --------------------------------------------------------
</TABLE>
*Six months ended July 31, 1999.
See Financial Highlights table on page 39 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
UTILITIES INCOME FUND
TOTAL INVESTMENT RETURNS: MAY 15, 1992-JULY 31, 1999
- ---------------------------------------------------------
UTILITIES INCOME FUND UTILITIES
COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1993 12.0% 2.5% 14.5% 12.2%
1994 8.0 5.1 13.1 12.9
1995 -9.7 5.2 -4.5 -2.0
1996 23.2 6.3 29.5 30.2
1997 0.9 4.6 5.5 4.5
1998 17.8 5.4 23.2 26.4
1999 15.6 4.3 19.9 23.8
2000** 1.3 1.7 3.0 4.0
- ---------------------------------------------------------
</TABLE>
*80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996;
40% S&P Utilities Index, 40% S&P Telephone Index, 20% Lehman Utility Bond
Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P
Telephone Index, 15% Lehman Utility Bond Index thereafter.
**Six months ended July 31, 1999.
See Financial Highlights table on page 40 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999*
- --------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care Fund 5/23/1984 22.26% 31.12% 21.30% 1.90% 23.20%
Fee-Adjusted Returns** 21.04 31.12 21.30 1.90 23.20
Utilities Income Fund 5/15/1992 16.53 17.18 9.34+ 4.96+ 14.30+
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Reflective of the 1% fee assessed on redemptions of shares held less than
five years. For shares purchased before April 19, 1999, the 1% fee is
assessed only on redemptions of shares held less than one year.
+Since inception.
21
<PAGE> 24
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the funds. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
REIT INDEX FUND
TOTAL INVESTMENT RETURNS: MAY 13, 1996-JULY 31, 1999
- ---------------------------------------------------------
REIT INDEX FUND MORGAN
STANLEY
REIT INDEX
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1997 26.6% 3.7% 30.3% 30.7%
1998 11.0 6.1 17.1 16.5
1999 -22.7 5.4 -17.3 -17.6
2000* 1.8 2.6 4.4 4.1
</TABLE>
*Six months ended July 31, 1999.
See Financial Highlights table on page 40 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999*
- -------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REIT Index Fund** 5/13/1996 -7.93% 4.24% 6.00% 10.24%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
22
<PAGE> 25
FINANCIAL STATEMENTS
July 31, 1999 (unaudited)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each fund'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 fund's designated industry; international securities, if
significant, may be presented in a separate group. The REIT Index Fund lists
its security holdings alphabetically. Other assets are added to, and
liabilities are subtracted from, the value of Total Investments to calculate
the fund's Net Assets. Finally, Net Assets are divided by the outstanding
shares of the fund 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 fund'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 fund 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 fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
ENERGY FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.1%)
- ----------------------------------------------------------
UNITED STATES (71.9%)
- ----------------------------------------------------------
ENERGY MISCELLANEOUS (2.2%)
Tosco Corp. 500,000 $ 13,187
Valero Energy Corp. 500,000 10,688
----------
23,875
----------
MACHINERY--OIL WELL EQUIPMENT & SERVICES (17.2%)
Baker Hughes, Inc. 1,375,500 47,884
Halliburton Co. 925,000 42,666
Schlumberger Ltd. 563,400 34,121
- - Weatherford International, Inc. 737,599 28,905
- - Noble Drilling Corp. 700,000 15,881
- - Rowan Cos., Inc. 778,800 14,651
- - Cooper Cameron Corp. 160,000 5,800
- - Nabors Industries, Inc. 46,400 1,082
----------
190,990
----------
MATERIALS & PROCESSING (0.7%)
Fluor Corp. 200,000 8,012
----------
OFFSHORE DRILLING (0.9%)
ENSCO International, Inc. 500,000 10,219
----------
OIL--CRUDE PRODUCERS (10.5%)
Vastar Resources, Inc. 487,200 31,851
Enron Oil & Gas Co. 654,400 13,988
Pogo Producing Co. 685,000 13,058
Anadarko Petroleum Corp. 300,000 11,456
- - Ocean Energy, Inc. 1,000,000 11,063
Ultramar Diamond
Shamrock Corp. 431,900 10,204
- - Santa Fe Snyder Corp. 1,077,900 9,970
Devon Energy Corp. 220,000 8,099
- - Barrett Resources Corp. 163,700 6,579
----------
116,268
----------
OIL--INTEGRATED DOMESTIC (28.1%)
Unocal Corp. 1,200,000 47,625
USX-Marathon Group 1,481,400 44,998
Chevron Corp. 400,000 36,500
Phillips Petroleum Co. 600,000 30,788
Equitable Resources, Inc. 719,300 26,659
Amerada Hess Corp. 400,000 23,675
Kerr-McGee Corp. 455,500 23,458
Ashland, Inc. 600,000 22,800
Murphy Oil Corp. 395,100 19,557
Sunoco, Inc. 639,967 19,519
Occidental Petroleum Corp. 850,000 16,628
----------
312,207
----------
OIL--INTEGRATED INTERNATIONAL (10.5%)
Mobil Corp. 400,000 40,900
Texaco Inc. 628,388 39,156
Exxon Corp. 466,200 37,005
----------
117,061
----------
OTHER (1.8%)
McDermott International, Inc. 700,000 19,731
----------
- ----------------------------------------------------------
TOTAL UNITED STATES 798,363
- ----------------------------------------------------------
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
ENERGY FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
INTERNATIONAL (24.2%)
- ----------------------------------------------------------
CANADA (11.9%)
Alberta Energy Co., Ltd. 850,000 $ 26,196
Suncor Energy, Inc. 631,477 25,837
Imperial Oil Ltd. 1,000,900 20,076
Petro-Canada 1,300,000 19,231
Paramount Resources Ltd. 1,080,900 15,306
- - Anderson Exploration Ltd. 1,012,401 13,121
Talisman Energy, Inc. 155,000 4,601
PanCanadian Petroleum Ltd. 283,400 4,438
Poco Petes Ltd. 400,000 3,532
----------
132,338
----------
FRANCE (2.3%)
Total SA ADR 398,489 25,354
----------
ITALY (1.8%)
ENI SpA ADR 330,500 20,140
----------
NORWAY (1.5%)
Norsk Hydro ASA ADR 340,000 13,387
- - Saga Petroleum ASA A Shares 190,000 3,294
----------
16,681
----------
SPAIN (1.1%)
Repsol SA ADR 577,500 11,947
----------
UNITED KINGDOM (5.6%)
Shell Transport & Trading
Co. ADR 1,080,000 52,177
Lasmo PLC 2,000,000 5,395
Burmah Castrol PLC 249,962 5,155
----------
62,727
----------
- ----------------------------------------------------------
TOTAL INTERNATIONAL 269,187
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $808,336) 1,067,550
- ----------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (4.0%)
- ----------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.07%, 8/2/1999 $43,169 $ 43,169
5.10%, 8/2/1999--Note H 806 806
- ----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $43,975) 43,975
- ----------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $852,311) 1,111,525
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- ----------------------------------------------------------
Other Assets--Note C 2,883
Liabilities--Note H (3,741)
-----------
(858)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 47,470,793 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $1,110,667
==========================================================
NET ASSET VALUE PER SHARE $23.40
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JULY 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 851,091 $17.93
Undistributed Net Investment
Income--Note G 8,342 .18
Accumulated Net Realized
Losses--Note G (7,979) (.17)
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 259,214 5.46
Foreign Currencies (1) --
- ----------------------------------------------------------
NET ASSETS $1,110,667 $23.40
==========================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
GOLD AND PRECIOUS VALUE*
METALS FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.2%)
- ----------------------------------------------------------
AUSTRALIA (35.8%)
- - Newcrest Mining Ltd. 11,400,000 $ 27,269
Mount Isa Mines
Holdings Ltd. 31,000,000 25,709
Rio Tinto Ltd. 700,000 12,530
Delta Gold NL 7,500,000 11,020
WMC Ltd. 2,300,000 10,048
- - Lihir Gold Ltd. 12,055,000 9,447
Sons of Gwalia Ltd. 3,500,000 9,142
Ashton Mining Ltd. 11,500,000 5,084
- - Aurora Gold Ltd. 8,950,000 3,448
Goldfields Ltd. 4,760,000 2,869
- - Bougainville Copper Ltd. 2,000,000 287
- - Tanami Gold NL 3,600,000 214
- - Normandy Mining Ltd.
Warrants Exp. 4/30/2001 1,620,000 94
- - Star Mining Corp. NL 26,000,000 68
- - Masmindo Mining
Corporation NL 127,230 9
Australian Resources Ltd. 16,250,000 0
----------
117,238
----------
CANADA (14.2%)
Euro-Nevada Mining Corp. 1,360,000 14,999
Franco-Nevada Mining
Corp., Ltd. 760,000 10,711
Aber Resources Ltd. 980,000 9,371
Placer Dome Inc. 600,000 6,177
Barrick Gold Corp. 200,000 3,725
- - Geomaque Explorations Ltd. 3,000,000 1,299
Princess Resources Ltd. 5,684,000 114
Greenstone Resources Ltd. 750,000 70
- - Vengold, Inc. 1,250,000 62
----------
46,528
----------
SOUTH AFRICA (18.3%)
Impala Platinum Holdings
Ltd. ADR 850,000 27,022
Anglo American Platinum
Corp ADR 953,400 22,586
Anglogold Ltd. ADR 500,000 10,563
----------
60,171
----------
UNITED KINGDOM (3.1%)
Rio Tinto PLC 300,000 5,689
Lonmin PLC 450,000 4,447
----------
10,136
----------
UNITED STATES (19.8%)
Newmont Mining Corp. 928,125 17,170
- - Stillwater Mining Co. 750,000 16,969
Freeport-McMoRan Copper &
Gold, Inc. Class A 877,000 13,922
Barrick Gold Corp. 575,000 10,673
- - Royal Gold, Inc. 726,200 2,769
Freeport-McMoRan Copper &
Gold, Inc. Gold Denomination
Shares Pfd. 150,000 2,578
- - Crown Resources Corp. 600,000 900
- - Atlas Corp. 1,000,000 38
----------
65,019
----------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $355,425) 299,092
- ----------------------------------------------------------
PRECIOUS METALS (6.1%)
- ----------------------------------------------------------
- - Gold Bullion (74,868 Ounces) 19,143
- - Platinum Bullion (2,009 Ounces) 693
- ----------------------------------------------------------
TOTAL PRECIOUS METALS
(COST $31,918) 19,836
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (3.4%)
- ----------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.07%, 8/2/1999 $9,040 9,040
5.10%, 8/2/1999--Note H 2,283 2,283
- ----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $11,323) 11,323
- ----------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(COST $398,666) 330,251
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.7%)
- ----------------------------------------------------------
Other Assets--Note C 859
Liabilities--Note H (3,266)
----------
(2,407)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 45,101,624 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $327,844
==========================================================
NET ASSET VALUE PER SHARE $7.27
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JULY 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $495,008 $10.98
Undistributed Net Investment
Income--Note G 1,690 .04
Accumulated Net Realized
Losses--Note G (100,439) (2.23)
Unrealized Depreciation--Note F (68,415) (1.52)
- ----------------------------------------------------------
NET ASSETS $327,844 $ 7.27
==========================================================
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- -----------------------------------------------------------
MARKET
VALUE*
HEALTH CARE FUND SHARES (000)
- -----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (89.9%)
- -----------------------------------------------------------
UNITED STATES (68.9%)
- -----------------------------------------------------------
BIOTECH RESEARCH & PRODUCTION (1.3%)
- -(1)Human Genome Sciences, Inc. 1,268,000 $ 66,015
- - Gilead Science, Inc. 1,510,000 25,116
- - IDEXX Laboratories Corp. 1,070,000 20,999
Baxter International, Inc. 300,000 20,606
- - Cephalon, Inc. 290,000 5,474
------------
138,210
------------
CONSUMER DISCRETIONARY (0.6%)
Kimberly-Clark Corp. 1,000,000 61,000
- -(1)Paragon Trade Brands, Inc. 1,124,100 632
------------
61,632
------------
CONSUMER STAPLES (0.2%)
Rite Aid Corp. 1,000,000 21,188
------------
DRUGS & PHARMACEUTICALS (38.3%)
Warner-Lambert Co. 6,971,172 460,097
Pharmacia & Upjohn, Inc. 8,277,800 445,449
- - Immunex Corp. 3,549,800 400,684
Johnson & Johnson 3,501,000 322,530
Bristol-Myers Squibb Co. 4,850,000 322,525
Allergan, Inc. 3,259,300 308,004
Abbott Laboratories 6,854,500 294,315
Pfizer, Inc. 6,015,000 204,134
American Home
Products Corp. 3,917,300 199,782
Merck & Co., Inc. 2,830,000 191,556
- - Genzyme Corp. 2,736,620 154,790
- - Gilead Sciences, Inc. 1,510,000 117,025
Cardinal Health, Inc. 1,556,072 106,202
- -(1)IDEC Pharmaceuticals Corp. 1,043,100 103,397
Bergen Brunswig
Corp. Class A 5,568,412 89,095
Eli Lilly & Co. 760,000 49,875
- -(1)Perrigo Co. 5,322,320 47,901
- -(1)Vertex Pharmaceuticals, Inc. 1,827,700 46,149
(1)Alpharma, Inc. Class A 1,083,713 40,233
- - AmeriSource Health Corp. 988,700 27,684
- -(1)Pharmacyclics, Inc. 800,000 22,550
Schering-Plough Corp. 440,000 21,560
- - Forest Laboratories, Inc. 326,400 16,728
- -(1)PAREXEL International Corp. 1,388,200 15,270
- - Cor Therapeutics, Inc. 530,000 10,567
Mylan Laboratories, Inc. 445,000 10,124
- - Triangle Pharmaceuticals, Inc. 564,800 9,849
- -(1)Alliance Pharmaceutical Corp. 2,467,688 8,174
- - BioCryst Pharmaceuticals, Inc. 352,100 4,291
- -(1)Magainin
Pharmaceuticals, Inc. 1,328,100 2,034
- - Scios, Inc. 491,750 1,967
- - Crescendo
Pharmaceuticals Corp. 51,500 892
- - Matrix Pharmaceutical, Inc. 200,500 752
- - U.S. Bioscience 80,400 678
------------
4,056,863
------------
ELECTRONICS--MEDICAL SYSTEMS (1.1%)
- -(1)Haemonetics Corp. 1,983,900 37,074
- - IDX Systems Corp. 1,209,200 25,242
Medtronic, Inc. 263,936 19,020
DENTSPLY International Inc. 500,000 13,531
- - Datascope Corp. 342,100 11,888
- - SpaceLabs Medical, Inc. 326,200 5,158
------------
111,913
------------
HEALTH & PERSONAL CARE (3.0%)
McKesson HBOC, Inc. 8,935,650 277,564
- -(1)Syncor International Corp. 856,559 25,376
Omnicare, Inc. 1,000,000 10,750
- - American Retirement Corp. 637,000 8,480
------------
322,170
------------
HEALTH CARE FACILITIES (4.5%)
Columbia/HCA
Healthcare Corp. 10,667,620 237,354
- - Tenet Healthcare Corp. 7,835,000 140,540
- -(1)Quest Diagnostics, Inc. 2,154,200 55,471
- - Beverly Enterprises, Inc. 3,030,000 17,422
- - Laboratory Corp. of America 3,796,216 12,338
- - Triad Hospitals, Inc. 691,715 7,306
- - LifePoint Hospitals, Inc. 691,715 6,831
------------
477,262
------------
HEALTH CARE MANAGEMENT SERVICES (6.8%)
United Healthcare Corp. 4,200,000 256,200
Aetna Inc. 1,332,000 109,224
- -(1)Humana, Inc. 9,845,000 107,064
Shared Medical Systems Corp. 1,100,000 65,863
- - Pacificare Health Systems, Inc. 920,193 62,746
- -(1)Cerner Corp. 2,006,600 33,485
- -(1)Sierra Health Services 2,089,600 27,034
- - Quorum Health Group, Inc. 2,145,000 21,584
- - Foundation Health Systems
Class A 663,100 10,071
- - Pediatrix Medical Group, Inc. 414,100 8,153
American Medical Security
Group, Inc. 678,000 7,204
United Wisconsin Services, Inc. 678,000 5,721
- - Mid Atlantic Medical
Services, Inc. 500,000 5,063
------------
719,412
------------
MATERIALS & PROCESSING (2.0%)
Sigma-Aldrich Corp. 4,656,000 156,558
Pioneer Hi-Bred
International, Inc. 1,170,700 45,511
Delta & Pine Land Co. 307,300 9,257
------------
211,326
------------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (6.9%)
(1) C.R. Bard, Inc. 3,237,900 157,443
- - Boston Scientific Corp. 3,073,700 124,677
Becton, Dickinson & Co. 3,562,500 97,746
- - St. Jude Medical, Inc. 2,551,300 94,876
PE Corp.-PE Biosystems Group 1,309,090 73,391
Beckman Coulter, Inc. 1,244,700 59,823
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- -----------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------
<S> <C> <C>
Biomet, Inc. 1,345,300 $ 48,935
(1) Owens & Minor, Inc.
Holding Co. 2,006,100 24,700
- - STERIS Corp. 1,150,000 15,525
- - Ventana Medical Systems, Inc. 614,400 12,826
- -(1)Collagen Aesthetics, Inc. 617,600 7,411
- - Safeskin Corp. 500,000 4,438
- - Sonosite, Inc. 204,166 3,688
- -(1)Cohesion Technologies, Inc. 525,800 3,089
- - Protocol Systems, Inc. 273,000 2,150
- - ADAC Laboratories 255,000 1,801
- - E-Z-EM, Inc. Class B 304,344 1,750
- -(1)E-Z-EM, Inc. Class A 219,258 1,288
------------
735,557
------------
MEDICAL SERVICES (0.8%)
- - Covance, Inc. 2,287,300 44,888
- -(1)Coventry Health Care Inc. 3,785,000 41,871
------------
86,759
------------
MISCELLANEOUS HEALTH CARE (0.5%)
Mallinckrodt, Inc. 1,397,900 47,354
------------
PRODUCER DURABLES (0.3%)
Pall Corp. 704,600 14,841
- - PE Corp.-Celera
Genomics Group 327,273 8,673
- - Varian Semiconductor
Equipment Associates, Inc. 253,000 5,882
------------
29,396
------------
TECHNOLOGY (0.1%)
Varian Medical Systems, Inc. 253,000 5,930
- - Varian, Inc. 253,000 3,842
- - DAOU Systems, Inc. 513,500 2,824
------------
12,596
------------
OTHER (2.5%)
Monsanto Co. 5,125,000 200,516
- - Thermo Electron Corp. 3,300,000 56,719
Carter-Wallace, Inc. 230,000 4,241
Carter-Wallace, Inc. Class B 24,000 442
------------
261,918
------------
- -----------------------------------------------------------
TOTAL UNITED STATES 7,293,556
- -----------------------------------------------------------
INTERNATIONAL (21.0%)
- -----------------------------------------------------------
JAPAN (8.9%)
Fujisawa Pharmaceutical
Co., Ltd. 7,670,000 144,696
Eisai Co., Ltd. 6,606,000 140,453
Takeda Chemical
Industries Ltd. 2,550,000 138,208
Banyu Pharmaceutical Co. 5,095,000 99,891
Yamanouchi Pharmaceuticals
Co., Ltd. 2,080,000 96,241
Chugai Pharmaceutical
Co., Ltd. 6,513,000 78,886
Sankyo Co., Ltd. 2,450,000 64,686
Daiichi Pharmaceutical
Co., Ltd. 2,900,000 48,392
Shionogi & Co., Ltd. 4,703,000 40,940
Olympus Optical Co., Ltd. 2,600,000 39,534
Tanabe Seiyaku Co., Ltd. 5,825,000 36,545
Terumo Corp. 326,000 8,139
Ono Pharmaceutical Co., Ltd. 200,000 7,651
------------
944,262
------------
UNITED KINGDOM (6.7%)
AstraZeneca Group PLC 7,086,372 260,424
SmithKline Beecham PLC ADR 3,524,500 211,690
AstraZeneca Group PLC ADR 3,531,500 128,990
Nycomed Amersham PLC 12,565,820 82,852
SSL International PLC 1,487,000 18,308
- - Oxford GlycoSciences PLC 375,000 2,078
Medeva PLC 287,781 564
------------
704,906
------------
OTHER (5.4%)
Novartis AG (Registered) 71,747 103,514
Rhone-Poulenc SA ADR 2,052,615 99,295
Roche Holdings AG
(Dividend-Right Certificates) 8,000 88,361
Bayer AG ADR 1,850,000 79,319
Bayer AG 1,328,300 57,009
Novo Nordisk A/S B Shares 500,000 55,310
Hoechst AG 900,000 38,232
Sanofi-Synthelabo SA 615,004 25,572
Schering AG 213,470 22,276
Gambro AB 1,000,000 10,122
------------
579,010
------------
- -----------------------------------------------------------
TOTAL INTERNATIONAL 2,228,178
- -----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $6,391,790) 9,521,734
- -----------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.2%)
- -----------------------------------------------------------
Laboratory Corp. 8.50% Cvt. Pfd.
(COST $23,484) 358,721 22,510
- -----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (10.4%)
- ----------------------------------------------------------
COMMERCIAL PAPER (8.5%)
Associates Corp
5.211%, 8/25/1999 $ 50,000 49,830
5.211%, 8/26/1999 50,000 49,823
General Electric Capital Corp.
5.197%, 9/2/1999 300,000 298,643
Merrill Lynch & Co.
5.153%, 8/26/1999 110,000 109,614
5.173%, 9/2/1999 200,000 199,099
Metlife Funding Inc.
5.151%, 8/5/1999 46,528 46,502
5.155%, 8/23/1999 57,291 57,114
5.164%, 8/9/1999 24,169 24,142
Proctor & Gamble Co.
5.185%, 9/15/1999 70,000 69,565
----------
904,332
----------
REPURCHASE AGREEMENTS (1.4%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.10%, 8/2/1999--Note H 30,822 30,822
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ----------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
HEALTH CARE FUND (000) (000)
- ----------------------------------------------------------
<S> <C> <C>
Lehman Brothers
5.05%, 8/2/1999
(Dated 7/30/1999, Repurchase
Value $119,909,000, collateralized
by U.S. Treasury Bond, 10.625%,
8/15/2015 and U.S. Treasury
Note, 7.50%, 2/15/2005) $119,859 $ 119,859
------------
150,681
------------
U.S. GOVERNMENT OBLIGATION (0.5%)
U.S. Treasury Bill
4.58%, 10/28/1999 55,000 54,388
------------
- ----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,109,394) 1,109,401
- ----------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(COST $7,524,668) 10,653,645
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.5%)
- ----------------------------------------------------------
Other Assets--Note C 16,113
Liabilities--Note H (77,484)
------------
(61,371)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 108,759,460 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $10,592,274
==========================================================
NET ASSET VALUE PER SHARE $97.39
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
(1)Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $873,661,000.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JULY 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 7,109,936 $65.37
Undistributed Net Investment
Income--Note G 52,076 .48
Accumulated Net Realized
Gains--Note G 308,404 2.84
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 3,128,977 28.77
Foreign Currencies and
Forward Currency Contracts (7,119) (.07)
- ----------------------------------------------------------
NET ASSETS $10,592,274 $97.39
==========================================================
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
UTILITIES INCOME FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (87.9%)
- ----------------------------------------------------------
ELECTRICAL (38.9%)
Pinnacle West Capital Corp. 844,300 $ 33,719
Montana Power Co. 492,200 33,316
DQE Inc. 827,930 32,807
Unicom Corp. 650,000 25,513
New England Electric System 467,100 24,202
GPU, Inc. 558,700 21,440
NiSource, Inc. 731,000 18,960
Texas Utilities Co. 425,000 18,036
Edison International 650,000 16,453
PECO Energy Corp. 375,000 15,891
DPL Inc. 783,000 15,024
Duke Energy Corp. 227,220 12,028
Endesa SA ADR 599,800 11,846
FirstEnergy Corp. 400,000 11,425
CMS Energy Corp. 300,000 11,212
Public Service Enterprise
Group, Inc. 250,000 10,078
PowerGen PLC ADR 254,500 9,941
Central Hudson Gas &
Electric Corp. 216,300 9,057
Northern States Power Co. 397,800 8,951
FPL Group, Inc. 150,000 8,091
DTE Energy Co. 199,500 7,805
PacifiCorp 350,000 6,388
Cilcorp, Inc. 85,000 5,440
Minnesota Power, Inc. 230,000 4,356
National Power PLC ADR 150,000 4,350
Public Service Co. of
New Mexico 200,000 3,988
Cinergy Corp. 100,000 2,994
----------
383,311
----------
GAS DISTRIBUTION (4.1%)
National Fuel Gas Co. 350,000 16,428
Sempra Energy 374,071 8,300
ONEOK, Inc. 145,400 4,626
KeySpan Corp. 150,000 4,163
MCN Energy Group Inc. 137,000 2,920
Peoples Energy Corp. 75,000 2,761
Public Service Co. of
North Carolina, Inc. 39,300 1,177
----------
40,375
----------
INTEGRATED OILS (4.1%)
Enron Corp. 400,000 34,075
Coastal Corp. 175,000 6,923
----------
40,998
----------
OTHER ENERGY (6.0%)
Williams Cos., Inc. 550,000 23,134
El Paso Energy Corp. 636,400 22,791
Columbia Energy Group 187,500 11,156
Westcoast Energy Inc. 100,000 1,906
----------
58,987
----------
TELECOMMUNICATIONS (31.1%)
Bell Atlantic Corp. 695,000 44,306
- - Sprint Corp. 834,200 43,118
Ameritech Corp. 550,000 40,287
BellSouth Corp. 655,200 31,450
British Telecommunications
PLC ADR 150,000 26,400
Frontier Corp. 440,200 24,403
ALLTEL Corp. 330,000 23,698
Vodafone Airtouch Group
PLC ADR 100,000 21,050
AT&T Corp. 375,000 19,477
Telecom Corp. of New Zealand
Ltd. ADR 300,800 10,735
- - Telefonica SA 187,458 8,951
Sprint PCS 128,550 7,793
BCE, Inc. 100,000 4,969
----------
306,637
----------
WATER (2.0%)
American Water Works Co., Inc. 346,300 10,367
Suez Lyonnaise des Eaux 50,000 8,830
----------
19,197
----------
OTHER (1.7%)
MDU Resources Group, Inc. 300,000 7,313
UtiliCorp United, Inc. 285,750 6,804
BCT.Telus Communications, Inc. 100,912 2,259
BCT.Telus Communications, Inc., 33,637 736
(non-voting)
----------
17,112
----------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $670,442) 866,617
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (10.6%)
- ----------------------------------------------------------
ELECTRIC (7.1%)
Alabama Power Co.
5.35%, 11/15/2003 $ 2,000 1,912
Appalachian Power Co.
6.60%, 5/1/2009 2,000 1,898
Arizona Public Service Co.
6.25%, 1/15/2005 2,000 1,912
Baltimore Gas & Electric Co.
7.50%, 1/15/2007 4,000 4,124
Carolina Power & Light Co.
8.625%, 9/15/2021 3,000 3,369
Central Power & Light Co.
7.25%, 10/1/2004 2,000 2,038
Consolidated Edison Co. of
New York, Inc.
6.45%, 12/1/2007 4,000 3,860
Duke Energy Corp.
6.625%, 2/1/2003 4,000 4,010
Florida Power & Light Corp.
6.00%, 6/1/2008 4,000 3,750
Florida Power Corp.
6.75%, 2/1/2028 4,000 3,693
GTE Southwest Inc.
6.23%, 1/1/2007 1,000 953
Kentucky Utilities Co.
7.92%, 5/15/2007 2,000 2,101
Louisville Gas & Electric
Energy Corp.
6.00%, 8/15/2003 2,000 1,954
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ----------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
UTILITIES INCOME FUND (000) (000)
- ----------------------------------------------------------
<S> <C> <C>
NRG Energy, Inc.
7.50%, 6/15/2007 $ 1,000 $ 988
Northern States Power Co.
5.75%, 10/1/2003 4,000 3,897
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 1,275 1,153
PECO Energy
6.50%, 5/1/2003 3,000 2,983
PP&L Capital Funding Inc.
6.79%, 11/22/2004 2,000 1,948
Pennsylvania Electric Co.
6.125%, 4/1/2009 2,000 1,881
Potomac Electric Power Co.
6.50%, 9/15/2005 1,000 982
Public Service Co. of Colorado
7.125%, 6/1/2006 4,000 4,046
Puget Sound Energy Inc.
6.46%, 3/9/2009 1,000 955
Southern Indiana Gas & Electric Co.
8.875%, 6/1/2016 2,000 2,324
Virginia Electric & Power Co.
6.00%, 8/1/2001 2,000 1,986
West Texas Utilities Co.
7.75%, 6/1/2007 1,500 1,572
Wisconsin Electric Power Co.
6.625%, 11/15/2006 2,000 1,979
Wisconsin Power & Light
5.70%, 10/15/2008 4,000 3,679
Wisconsin Public Service Corp.
6.80%, 2/1/2003 4,500 4,541
----------
70,488
----------
GAS (0.2%)
Atlanta Gas Light Co.
5.90%, 10/6/2003 2,000 1,945
Wisconsin Gas Co.
5.50%, 1/15/2009 535 484
----------
2,429
----------
TELEPHONE (3.3%)
AT&T Corp.
7.00%, 5/15/2005 2,000 2,013
Bell Atlantic Pennsylvania, Inc.
6.625%, 9/15/2002 3,500 3,521
Chesapeake & Potomac
Telephone Co. (MD)
8.30%, 8/1/2031 1,000 1,104
Chesapeake & Potomac
Telephone Co. (VA)
7.875%, 1/15/2022 2,000 2,149
GTE California Inc.
6.70%, 9/1/2009 2,000 1,956
GTE Corp.
7.51%, 4/1/2009 2,000 2,062
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 2,000 1,977
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 3,000 3,197
New York Telephone Co.
8.625%, 11/15/2010 2,500 2,801
Pacific Bell
6.625%, 11/1/2009 3,000 2,921
Southwestern Bell Telephone Co.
6.625%, 4/1/2005 3,000 2,984
Sprint Capital Corp.
5.70%, 11/15/2003 3,000 2,866
United Telephone Co. of Florida
6.25%, 5/15/2003 2,000 1,960
WorldCom Inc.
6.40%, 8/15/2005 1,000 972
----------
32,483
----------
- ----------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $107,163) 105,400
- ----------------------------------------------------------
FOREIGN BOND (U.S. DOLLAR-DENOMINATED)(0.2%)
- ----------------------------------------------------------
United Utilities PLC
6.45%, 4/1/2008
(COST $1,999) 2,000 1,871
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.4%)
- ----------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.07%, 8/2/1999 8,401 8,401
5.10%, 8/2/1999--Note H 14,923 14,923
- ----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $23,324) 23,324
- ----------------------------------------------------------
TOTAL INVESTMENTS (101.1%)
(COST $802,928) 997,212
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.1%)
- ----------------------------------------------------------
Other Assets--Note C 5,979
Liabilities--Note H (16,934)
----------
(10,955)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 61,115,598 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $986,257
==========================================================
NET ASSET VALUE PER SHARE $16.14
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JULY 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $757,345 $12.39
Undistributed Net
Investment Income 1,155 .02
Accumulated Net Realized Gains 33,473 .55
Unrealized Appreciation--
Note F 194,284 3.18
- ----------------------------------------------------------
NET ASSETS $986,257 $16.14
==========================================================
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
REIT INDEX FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (98.2%)
- ----------------------------------------------------------
Equity Office Properties
Trust REIT 2,078,001 $ 52,210
Equity Residential Properties
Trust REIT 972,678 40,184
Simon Property Group,
Inc. REIT 1,381,376 36,693
Public Storage, Inc. REIT 1,093,436 28,088
ProLogis Trust REIT 1,297,473 25,220
Vornado Realty Trust REIT 684,182 24,203
Archstone Communities
Trust REIT 1,120,627 24,163
Crescent Real Estate, Inc. REIT 1,020,900 22,460
Apartment Investment &
Management Co. Class A REIT 499,750 20,396
Duke Realty Investments, Inc.
REIT 932,311 20,394
Spieker Properties, Inc. REIT 509,200 19,477
Host Marriott Corp. REIT 1,836,000 18,934
Kimco Realty Corp. REIT 480,500 18,019
Avalonbay Communities, Inc.
REIT 522,027 17,716
Boston Properties, Inc. REIT 512,550 17,555
Cornerstone Properties, Inc.
REIT 1,032,600 16,457
AMB Property Corp. REIT 699,400 15,736
Rouse Co. REIT 590,600 14,359
New Plan Excel Realty Trust REIT 729,161 13,581
General Growth Properties Inc.
REIT 402,300 13,301
Mack-Cali Realty Corp. REIT 469,400 13,143
CarrAmerica Realty Corp. REIT 542,900 13,097
Liberty Property Trust REIT 532,900 12,590
Post Properties, Inc. REIT 302,813 12,113
Arden Realty Group, Inc. REIT 507,500 11,990
Hospitality Properties Trust REIT 437,800 11,930
Highwood Properties, Inc. REIT 487,400 11,454
Prison Realty Trust, Inc. REIT 798,800 11,083
FelCor Lodging Trust, Inc. REIT 553,600 10,795
Franchise Finance Corp. of
America REIT 458,300 10,426
Regency Realty Corp. REIT 469,300 9,914
United Dominion Realty Trust
REIT 836,676 9,569
Camden Property Trust REIT 333,826 9,389
Cousins Properties, Inc. REIT 255,065 9,374
Westfield America, Inc. REIT 592,300 9,255
BRE Properties Inc. Class A REIT 366,200 9,201
Weingarten Realty Investors
REIT 217,700 8,790
First Industrial Realty Trust
REIT 300,800 7,783
Developers Diversified Realty
Corp. REIT 492,500 7,449
MeriStar Hospitality Corp. REIT 387,096 7,403
Federal Realty Investment Trust
REIT 325,600 7,367
Prentiss Properties Trust REIT 304,900 7,032
The Macerich Co. REIT 280,900 6,847
Storage USA, Inc. REIT 223,600 6,820
Cabot Industrial Trust REIT 325,500 6,632
Chateau Communities, Inc. REIT 228,140 6,416
Shurgard Storage Centers, Inc.
Class A REIT 230,100 6,213
CenterPoint Properties Corp.
REIT 165,500 5,917
Colonial Properties Trust REIT 212,600 5,767
JDN Realty Corp. REIT 269,600 5,746
Brandywine Realty Trust REIT 303,800 5,696
Taubman Co. REIT 426,100 5,646
Realty Income Corp. REIT 222,200 5,361
Trinet Corporate Realty Trust,
Inc. REIT 206,100 5,333
Reckson Associates Realty
Corp. REIT 229,900 5,130
Manufactured Home
Communities, Inc. REIT 209,200 5,073
CBL & Associates Properties,
Inc. REIT 200,500 5,037
Gables Residential Trust REIT 206,300 5,003
Charles E. Smith Residential
Realty, Inc. REIT 144,800 4,905
Kilroy Realty Corp. REIT 216,900 4,880
Washington REIT 288,200 4,863
Summit Properties, Inc. REIT 229,200 4,699
Sun Communities, Inc. REIT 135,600 4,627
Glenborough Realty Trust, Inc.
REIT 262,900 4,601
Essex Property Trust, Inc. REIT 135,900 4,587
Urban Shopping Centers, Inc.
REIT 147,100 4,505
PS Business Parks, Inc. REIT 175,100 4,268
Chelsea GCA Realty, Inc. REIT 121,700 4,229
Mills Corp. REIT 197,153 4,042
SL Green Realty Corp. REIT 192,700 3,986
Home Properties of New York,
Inc. REIT 144,700 3,970
Walden Residential Properties,
Inc. REIT 196,900 3,963
Koger Equity, Inc. REIT 212,600 3,827
Bradley Real Estate Inc. REIT 191,440 3,709
Pacific Gulf Properties, Inc.
REIT 160,100 3,682
Cornerstone Realty Income
Trust, Inc. REIT 343,900 3,611
Berkshire Realty Co., Inc. REIT 299,800 3,504
Alexandria Real Estate Equities,
Inc. REIT 112,200 3,352
Pan Pacific Retail Properties,
Inc. REIT 168,700 3,311
Mid-America Apartment
Communities, Inc. REIT 151,000 3,303
Bedford Property Investors,
Inc. REIT 182,800 3,267
Burnham Pacific Properties,
Glimcher Realty Trust REIT 191,200 3,155
Inc. REIT 257,100 3,246
AMLI Residential Properties
Trust REIT 133,700 2,883
Commercial Net Lease
Realty REIT 243,300 2,859
Prime Retail, Inc. REIT 340,208 2,849
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
REIT INDEX FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
JP Realty Inc. REIT 138,500 $ 2,735
Parkway Properties Inc. REIT 81,500 2,710
Sunstone Hotel Investors, Inc.
REIT 296,600 2,706
Equity Inns, Inc. REIT 290,300 2,685
IRT Property Co. REIT 267,900 2,612
RFS Hotel Investors, Inc. REIT 204,300 2,579
EastGroup Properties, Inc. REIT 131,450 2,448
Innkeepers USA Trust REIT 275,800 2,448
Sovran Self Storage, Inc. REIT 99,200 2,424
National Golf Properties, Inc.
REIT 103,100 2,423
Reckson Associates Realty
Corp. Class B REIT 108,899 2,409
Town & Country Trust REIT 133,600 2,346
Pennsylvania REIT 109,700 2,215
Center Trust, Inc. 195,500 2,187
Capital Automotive REIT 165,000 2,104
Great Lakes, Inc. REIT 130,300 2,085
U.S. Restaurant Properties,
Inc. REIT 111,000 2,081
American Industrial
Properties REIT 159,100 2,058
Prime Group Realty Trust REIT 116,300 1,963
Konover Property Trust, Inc. REIT 248,500 1,957
Boykin Lodging Co. REIT 143,200 1,951
Entertainment Properties
Trust REIT 110,400 1,904
Associated Estates Realty
Corp. REIT 177,400 1,863
LaSalle Hotel Properties REIT 117,000 1,748
Lexington Corporate Properties
Trust REIT 145,500 1,682
Western Investment Real Estate
Trust REIT 150,300 1,681
Tanger Factory Outlet Centers,
Inc. REIT 64,300 1,624
Crown American Realty
Trust REIT 218,900 1,573
First Washington Realty Trust,
Inc. REIT 68,800 1,570
Saul Centers, Inc. REIT 102,100 1,569
Lexford Residential Trust REIT 72,600 1,343
Golf Trust of America, Inc. REIT 60,000 1,343
Winston Hotels, Inc. REIT 143,075 1,341
Mid Atlantic Realty Trust REIT 119,300 1,238
Jameson Inns, Inc. REIT 114,500 1,109
Kranzco Realty Trust REIT 82,700 1,075
Corporate Office Properties
Trust, Inc. REIT 120,400 1,008
Captec Net Lease Realty, Inc.
REIT 76,600 972
Phillips International Realty
Corp. REIT 57,000 958
Ramco-Gershenson Properties
Trust REIT 57,500 913
Correctional Properties Trust REIT 54,400 867
Grove Property Trust REIT 63,000 866
Equity One, Inc. REIT 79,500 815
Investors Real Estate Trust REIT 109,200 805
- - Reckson Service Industries,
Inc. REIT 26,196 431
Wyndham International, Inc.
Class A REIT 86,444 367
- - Interstate Hotels Corp. REIT 52,528 217
- - Merry Land Properties, Inc. REIT 16,985 86
- - Horizon Group Properties,
Inc. REIT 22,070 77
- ----------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(COST $1,007,319) 961,784
- ----------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.0%)
- ----------------------------------------------------------
Prime Retail, Inc. 8.50% Series B
Cvt. Pfd. (COST $338) 16,100 251
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (1.4%)
- ----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.07%, 8/2/1999
(COST $13,925) $13,925 13,925
- ----------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $1,021,582) 975,960
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- ----------------------------------------------------------
Other Assets--Note C 6,020
Liabilities (2,023)
----------
3,997
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 89,125,679 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $979,957
==========================================================
NET ASSET VALUE PER SHARE $11.00
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT JULY 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,076,279 $12.08
Undistributed Net
Investment Income 9,119 .10
Accumulated Net
Realized Losses (59,819) (.67)
Unrealized Depreciation--
Note F (45,622) (.51)
- ----------------------------------------------------------
NET ASSETS $ 979,957 $11.00
==========================================================
</TABLE>
32
<PAGE> 35
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each fund during
the reporting period, and details the operating expenses charged to the fund.
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
fund's securities. Currency gains (losses) on the translation of other assets
and liabilities are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GOLD AND UTILITIES
ENERGY PRECIOUS HEALTH CARE INCOME
FUND METALS FUND FUND FUND
-------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1999
-------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 10,305 $ 3,213 $ 44,257** $12,727
Interest 1,083 214 30,934 3,967
Security Lending 35 42 315 157
-------------------------------------------------------------------
Total Income 11,423 3,469 75,506 16,851
-------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 312 352 3,340 306
The Vanguard Group--Note C
Management and Administrative 1,831 814 17,678 1,657
Marketing and Distribution 76 25 772 64
Custodian Fees 69 36 701 12
Auditing Fees 4 4 7 4
Shareholders' Reports 23 13 132 16
Trustees' Fees and Expenses 1 -- 8 1
-------------------------------------------------------------------
Total Expenses 2,316 1,244 22,638 2,060
Expenses Paid Indirectly--Note D (74) -- (1,546) (80)
-------------------------------------------------------------------
Net Expenses 2,242 1,244 21,092 1,980
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 9,181 2,225 54,414 14,871
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 7,166 (6,708) 300,985** 33,827
Foreign Currencies and Forward
Currency Contracts 2 (94) 14,850 --
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 7,168 (6,802) 315,835 33,827
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 272,097 35,528 (75,959) (20,731)
Foreign Currencies and Forward
Currency Contracts (1) -- (13,315) --
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 272,096 35,528 (89,274) (20,731)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $288,445 $30,951 $280,975 $27,967
=========================================================================================================================
</TABLE>
*Gold and Precious Metals Fund dividends are net of foreign withholding taxes
of $112,000.
**Dividend income and realized net loss from affiliated companies were
$2,601,000 and $28,194,000, respectively.
33
<PAGE> 36
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
REIT INDEX FUND
SIX MONTHS ENDED JULY 31, 1999
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $34,390
Interest 439
Security Lending 21
------------
Total Income 34,850
------------
EXPENSES
Investment Advisory Fees--Note B 51
The Vanguard Group--Note C
Management and Administrative 1,350
Marketing and Distribution 97
Custodian Fees 6
Auditing Fees 4
Shareholders' Reports 24
Trustees' Fees and Expenses 1
------------
Total Expenses 1,533
Expenses Paid Indirectly--Note D --
------------
Net Expenses 1,533
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 33,317
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (20,034)
Foreign Currencies and Forward Currency Contracts --
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (20,034)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 23,555
Foreign Currencies and Forward Currency Contracts --
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 23,555
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $36,838
=========================================================================================================================
</TABLE>
34
<PAGE> 37
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each fund's total net assets changed during the two
most recent report-ing periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund'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 fund, 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 AND PRECIOUS
FUND METALS FUND
-------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1999 JAN. 31, 1999 JUL. 31, 1999 JAN. 31, 1999
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 9,181 $ 14,666 $ 2,225 $ 4,302
Realized Net Gain (Loss) 7,168 470 (6,802) (36,317)
Change in Unrealized Appreciation
(Depreciation) 272,096 (231,896) 35,528 (6,079)
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 288,445 (216,760) 30,951 (38,094)
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (462) (15,275) (467) (4,222)
Realized Capital Gain -- (18,471) -- --
----------------------------------------------------------------------
Total Distributions (462) (33,746) (467) (4,222)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 191,041 283,737 41,366 134,740
Issued in Lieu of Cash Distributions 432 31,524 431 3,874
Redeemed* (129,118) (394,911) (54,256) (113,797)
----------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 62,355 (79,650) (12,459) 24,817
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 350,338 (330,156) 18,025 (17,499)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 760,329 1,090,485 309,819 327,318
----------------------------------------------------------------------
End of Period $1,110,667 $ 760,329 $327,844 $309,819
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 9,458 13,075 5,871 19,282
Issued in Lieu of Cash Distributions 22 1,690 65 568
Redeemed (6,315) (18,532) (7,701) (16,479)
----------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 3,165 (3,767) (1,765) 3,371
=========================================================================================================================
</TABLE>
*Net of redemption fees of $318,000, $654,000, $160,000, and $461,000,
respectively.
35
<PAGE> 38
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (continued)
- -------------------------------------------------------------------------------------------------------------------------
HEALTH CARE UTILITIES INCOME
FUND FUND
-------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1999 JAN. 31, 1999 JUL. 31, 1999 JAN. 31, 1999
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 54,414 $ 78,548 $ 14,871 $ 27,934
Realized Net Gain (Loss) 315,835 417,148 33,827 65,412
Change in Unrealized Appreciation
(Depreciation) (89,274) 1,684,504 (20,731) 52,370
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 280,975 2,180,200 27,967 145,716
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (9,642) (74,779) (15,578) (29,408)
Realized Capital Gain (253,776) (253,199) (19,438) (53,436)
----------------------------------------------------------------------
Total Distributions (263,418) (327,978) (35,016) (82,844)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,083,929 3,680,601 128,671 268,167
Issued in Lieu of Cash Distributions 251,258 311,662 30,014 70,652
Redeemed* (644,812) (679,962) (117,062) (148,945)
----------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 690,375 3,312,301 41,623 189,874
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 707,932 5,164,523 34,574 252,746
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 9,884,342 4,719,819 951,683 698,937
----------------------------------------------------------------------
End of Period $10,592,274 $9,884,342 $986,257 $951,683
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 11,222 42,315 7,985 16,838
Issued in Lieu of Cash Distributions 2,618 3,515 1,912 4,463
Redeemed (6,644) (8,032) (7,267) (9,519)
----------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 7,196 37,798 2,630 11,782
=========================================================================================================================
</TABLE>
*Health Care Fund amounts are net of redemption fees of $266,000 and $418,000,
respectively.
36
<PAGE> 39
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
REIT INDEX
FUND
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUL. 31, 1999 JAN. 31, 1999
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 33,317 $ 57,718
Realized Net Gain (Loss) (20,034) (39,785)
Change in Unrealized Appreciation (Depreciation) 23,555 (236,893)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 36,838 (218,960)
----------------------------------
DISTRIBUTIONS
Net Investment Income (23,865) (57,832)
Realized Capital Gain -- --
Return of Capital -- (12,496)
----------------------------------
Total Distributions (23,865) (70,328)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 177,364 374,461
Issued in Lieu of Cash Distributions 21,176 63,043
Redeemed* (135,828) (560,676)
----------------------------------
Net Increase (Decrease) from Capital Share Transactions 62,712 (123,172)
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 75,685 (412,460)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 904,272 1,316,732
----------------------------------
End of Period $979,957 $ 904,272
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 15,938 29,719
Issued in Lieu of Cash Distributions 1,960 5,251
Redeemed (12,456) (45,501)
----------------------------------
Net Increase (Decrease) in Shares Outstanding 5,442 (10,531)
=========================================================================================================================
</TABLE>
*Net of redemption fees of $203,000 and $1,252,000, respectively.
37
<PAGE> 40
FINANCIAL HIGHLIGHTS
This table summarizes each fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund'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 fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the
fund; and the extent to which the fund 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 fund for
one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ENERGY FUND
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1999 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.16 $22.68 $23.44 $17.19 $13.82 $15.77
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .20 .33 .32 .25 .27 .23
Net Realized and Unrealized Gain (Loss)
on Investments 6.05 (5.08) .57 6.64 3.68 (1.65)
-------------------------------------------------------------------------
Total from Investment Operations 6.25 (4.75) .89 6.89 3.95 (1.42)
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.01) (.35) (.32) (.24) (.28) (.24)
Distributions from Realized Capital Gains -- (.42) (1.33) (.40) (.30) (.29)
-------------------------------------------------------------------------
Total Distributions (.01) (.77) (1.65) (.64) (.58) (.53)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $23.40 $17.16 $22.68 $23.44 $17.19 $13.82
=========================================================================================================================
TOTAL RETURN* 36.43% -21.20% 3.80% 40.32% 28.68% -9.15%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,111 $760 $1,090 $989 $505 $433
Ratio of Total Expenses to
Average Net Assets 0.48%** 0.41% 0.38% 0.39% 0.51% 0.30%
Ratio of Net Investment Income to
Average Net Assets 1.90%** 1.46% 1.36% 1.36% 1.55% 1.66%
Portfolio Turnover Rate 8%** 22% 19% 15% 21% 13%
=========================================================================================================================
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
38
<PAGE> 41
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GOLD AND PRECIOUS METALS FUND
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1999 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $6.61 $7.53 $10.94 $14.07 $10.71 $13.58
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .05 .10 .14 .13 .17 .27
Net Realized and Unrealized Gain (Loss)
on Investments .62 (.93) (3.42) (2.98) 3.36 (2.83)
-----------------------------------------------------------------------
Total from Investment Operations .67 (.83) (3.28) (2.85) 3.53 (2.56)
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.01) (.09) (.13) (.21) (.17) (.31)
Distributions from Realized Capital Gains -- -- -- (.07) -- --
-----------------------------------------------------------------------
Total Distributions (.01) (.09) (.13) (.28) (.17) (.31)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $7.27 $6.61 $ 7.53 $10.94 $14.07 $10.71
=======================================================================================================================
TOTAL RETURN* 10.15% -11.06% -29.85% -20.51% 33.24% -19.20%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $328 $310 $327 $463 $648 $531
Ratio of Total Expenses to
Average Net Assets 0.78%** 0.77% 0.62% 0.50% 0.60% 0.25%
Ratio of Net Investment Income to
Average Net Assets 1.40%** 1.33% 1.41% 1.07% 1.38% 2.04%
Portfolio Turnover Rate 26%** 23% 26% 19% 5% 4%
=======================================================================================================================
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
HEALTH CARE FUND
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1999 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $97.32 $74.02 $60.65 $52.09 $37.01 $36.51
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .86 .80 .71 .61 .55
Net Realized and Unrealized Gain (Loss)
on Investments 2.03 26.36 15.49 9.88 16.06 2.83
------------------------------------------------------------------------
Total from Investment Operations 2.53 27.22 16.29 10.59 16.67 3.38
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.09) (.84) (.78) (.74) (.57) (.57)
Distributions from Realized Capital Gains (2.37) (3.08) (2.14) (1.29) (1.02) (2.31)
------------------------------------------------------------------------
Total Distributions (2.46) (3.92) (2.92) (2.03) (1.59) (2.88)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $97.39 $97.32 $74.02 $60.65 $52.09 $37.01
=========================================================================================================================
TOTAL RETURN* 2.64% 37.39% 27.37% 20.65% 45.47% 9.79%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $10,592 $9,884 $4,720 $2,846 $1,654 $771
Ratio of Total Expenses to
Average Net Assets 0.43%** 0.36% 0.40% 0.38% 0.46% 0.40%
Ratio of Net Investment Income to
Average Net Assets 1.04%** 1.13% 1.28% 1.41% 1.57% 1.58%
Portfolio Turnover Rate 18%** 11% 10% 7% 13% 25%
=========================================================================================================================
</TABLE>
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than five years (or less than one year in the case of
shares purchased prior to April 19, 1999).
**Annualized.
39
<PAGE> 42
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES INCOME FUND
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1999 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.27 $14.97 $12.93 $12.84 $10.42 $11.67
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .55 .58 .58 .56 .56
Net Realized and Unrealized Gain (Loss)
on Investments .21 2.35 2.32 .09 2.42 (1.10)
------------------------------------------------------------------------
Total from Investment Operations .46 2.90 2.90 .67 2.98 (.54)
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.59) (.60) (.56) (.56) (.59)
Distributions from Realized Capital Gains (.33) (1.01) (.26) (.02) -- (.12)
------------------------------------------------------------------------
Total Distributions (.59) (1.60) (.86) (.58) (.56) (.71)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.14 $16.27 $14.97 $12.93 $12.84 $10.42
=========================================================================================================================
TOTAL RETURN 2.95% 19.92% 23.17% 5.51% 29.47% -4.47%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $986 $952 $699 $644 $781 $593
Ratio of Total Expenses to
Average Net Assets 0.43%* 0.38% 0.44% 0.40% 0.44% 0.50%
Ratio of Net Investment Income to
Average Net Assets 3.07%* 3.51% 4.30% 4.63% 4.88% 5.43%
Portfolio Turnover Rate 44%* 55% 41% 38% 35% 35%
=========================================================================================================================
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
REIT INDEX FUND
YEAR ENDED JANUARY 31, MAY 13, 1996,* TO
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1999 1999 1998 JAN. 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.81 $13.98 $12.64 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .38 .666 .590 .341
Net Realized and Unrealized Gain (Loss)
on Investments .09 (3.026) 1.520 2.659
-------------------------------------------------------
Total from Investment Operations .47 (2.360) 2.110 3.000
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.28) (.666) (.590) (.341)
Distributions from Realized Capital Gains -- -- (.086) (.005)
Return of Capital -- (.144) (.094) (.014)
-------------------------------------------------------
Total Distributions (.28) (.810) (.770) (.360)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.00 $10.81 $13.98 $12.64
============================================================================================================================
TOTAL RETURN** 4.42% -17.31% 17.08% 30.33%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $980 $904 $1,317 $655
Ratio of Total Expenses to
Average Net Assets 0.32%+ 0.26% 0.24% 0.36%+
Ratio of Net Investment Income to
Average Net Assets 7.04%+ 5.19% 4.66% 5.55%+
Portfolio Turnover Rate 11%+ 29% 2% 0%
============================================================================================================================
</TABLE>
*Inception.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
+Annualized.
40
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
Vanguard Specialized Funds comprise the Energy, Gold and Precious Metals,
Health Care, Utilities Income, and REIT Index Funds, each of which is
registered under the Investment Company Act of 1940 as a diversified open-end
investment company, or mutual fund. The Energy, Gold and Precious Metals,
Health Care, and Utilities Income Funds 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 Fund 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 funds consistently follow such
policies in preparing their 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, and temporary cash investments acquired over 60
days to maturity, 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. Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The Health Care Fund enters into forward
currency contracts to protect the value of securities and related receivables
and payables against changes in future foreign exchange rates. The fund's risks
in using these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the ability of the counterparties to
fulfill their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in
the financial statements. Fluctuations in the value of the contracts are
recorded in the Statement of Net Assets as an asset (liability) and in the
Statement of Operations as unrealized appreciation (depreciation) until the
contracts are closed, when they are recorded as realized forward currency
contract gains (losses).
4. REPURCHASE AGREEMENTS: The funds, along with other members of The
Vanguard Group, transfer uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
41
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS (continued)
6. OTHER: Dividend income is recorded on the ex-dividend date. The REIT
Index Fund's dividend income includes some payments that represent a return of
capital from its REIT investments. The amount of such return of capital is only
determined by each REIT after its fiscal year ends. No estimate of return of
capital distributions has been recorded in the financial statements. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities. Fees assessed on
redemptions of capital shares are credited to paid in capital.
B. Wellington Management Company, LLP, provides investment advisory services to
the Energy, Health Care, and Utilities Income Funds for fees calculated at an
annual percentage rate of average net assets. For the six months ended July 31,
1999, the investment advisory fees of the Energy, Health Care, and Utilities
Income Funds represented an effective annual rate of 0.06% of each fund's
average net assets.
M&G Investment Management Ltd. provides investment advisory services to
the Gold and Precious Metals Fund for a fee calculated at an annual percentage
rate of average net assets. For the six months ended July 31, 1999, the
investment advisory fee represented an effective annual rate of 0.22% of the
fund's average net assets.
The Vanguard Group furnishes investment advisory services to the REIT
Index Fund 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 fund under methods approved by the Board of Trustees. Each fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At July 31, 1999, the funds had contributed capital to Vanguard
(included in Other Assets) of:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
CAPITAL CONTRIBUTION PERCENTAGE PERCENTAGE OF
TO VANGUARD OF FUND VANGUARD'S
SPECIALIZED FUND (000) NET ASSETS CAPITALIZATION
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy $ 230 0.02% 0.2%
Gold and Precious Metals 70 0.02 0.1
Health Care 2,320 0.02 2.3
Utilities Income 210 0.02 0.2
REIT Index 210 0.02 0.2
------------------------------------------------------------------------------------------------
</TABLE>
The funds' Trustees and officers are also Directors and officers of Vanguard.
D. Vanguard has asked the funds' investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the funds part of the commissions generated. Such
rebates are used solely to reduce the funds' management and administrative
expenses. The funds' custodian banks have also agreed to reduce their fees when
42
<PAGE> 45
the funds maintain cash on deposit in their non-interest-bearing custody
accounts. For the six months ended July 31, 1999, these arrangements reduced
expenses by:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
EXPENSE
REDUCTION TOTAL EXPENSE
(000) REDUCTION AS
------------------------------------- A PERCENTAGE
MANAGEMENT AND CUSTODIAN OF AVERAGE
SPECIALIZED FUND ADMINISTRATIVE FEES NET ASSETS
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy $ 72 $2 0.02%*
Health Care 1,542 4 0.03*
Utilities Income 80 -- 0.02*
-----------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
E. During the six months ended July 31, 1999, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(000)
---------------------------------
SPECIALIZED FUND PURCHASES SALES
---------------------------------------------------------------------------------------------
<S> <C> <C>
Energy $ 111,260 $ 35,115
Gold and Precious Metals 40,457 50,236
Health Care 1,645,732 838,279
Utilities Income 244,736 206,580
REIT Index 119,673 49,197
---------------------------------------------------------------------------------------------
</TABLE>
F. At July 31, 1999, net unrealized appreciation (depreciation) of investment
securities for federal income tax purposes was:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(000)
----------------------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
SPECIALIZED FUND SECURITIES SECURITIES (DEPRECIATION)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy $ 289,229 $ (30,015) $ 259,214
Gold and Precious Metals* 57,962 (126,472) (68,510)
Health Care 3,418,459 (289,482) 3,128,977
Utilities Income 204,274 (9,990) 194,284
REIT Index 46,494 (92,116) (45,622)
------------------------------------------------------------------------------------------------
</TABLE>
*See Note G.
At July 31, 1999, the Health Care Fund had open forward currency
contracts to deliver foreign currency in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(000)
----------------------------------------------------------
CONTRACT AMOUNT
----------------------
FOREIGN U.S. MARKET VALUE IN UNREALIZED
CONTRACT SETTLEMENT DATE CURRENCY DOLLARS U.S. DOLLARS DEPRECIATION
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deliver:
10/15/1999 JPY 17,832,450 $149,924 $157,047 $(7,123)
---------------------------------------------------------------------------------------------------
</TABLE>
JPY--Japanese yen.
43
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (continued)
Net unrealized appreciation on open futures contracts is required to be treated
as realized gain for tax purposes.
At July 31, 1999, the Energy and Health Care Funds had net unrealized
foreign currency gains (losses) resulting from the translation of other assets
and liabilities of $(1,000) and $4,000, respectively.
G. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
During the six months ended July 31, 1999, the funds realized net foreign
currency gains (losses) that increased (decreased) distributable net income for
tax purposes; accordingly such gains (losses) have been reclassified from
accumulated net realized gains (losses) to undistributed net investment income
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
(000)
-----------------------------------
INCREASE (DECREASE) UNDISTRIBUTED
SPECIALIZED FUND NET INVESTMENT INCOME
--------------------------------------------------------------------------------------------------
<S> <C>
Energy $ 2
Gold and Precious Metals (94)
Health Care 73
--------------------------------------------------------------------------------------------------
</TABLE>
At January 31, 1999, the Gold and Precious Metals Fund had available
realized losses of $90,606,000 to offset future net capital gains of $2,873,000
through January 31, 2005, $19,472,000 through January 31, 2006, $67,666,000
through January 31, 2007, and $595,000 through January 31, 2008. Certain of the
fund'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.
During the six months ended July 31, 1999, the Gold and Precious Metals Fund
realized gains on the sale of passive foreign investment companies of
$3,125,000, 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. The cumulative
total of distributions related to passive foreign investment company holdings
at July 31, 1999, was $95,000, and is reflected in the balance of undistributed
net investment income.
At January 31, 1999, the REIT Index Fund had available realized losses
of $19,865,000 to offset future net capital gains of $7,983,000 through January
31, 2007, and $31,802,000 through January 31, 2008.
H. The market value of securities on loan to broker/dealers at July 31, 1999,
and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(000)
-----------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
SPECIALIZED FUND SECURITIES RECEIVED
----------------------------------------------------------------------------------------------
<S> <C> <C>
Energy $ 789 $ 806
Gold and Precious Metals 2,071 2,283
Health Care 26,044 30,822
Utilities Income 14,464 14,923
----------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
44
<PAGE> 47
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JoANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., The Medical Center at Princeton, and Women's Research and
Education Institute.
BRUCE K. MacLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress
& Co., The Jeffrey Co., and Select Sector SPDR Trust.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
MANAGING DIRECTOR, INDIVIDUAL INVESTOR GROUP.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 48
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago,
on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the funds' shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q512-09/22/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
