<PAGE> 1
VANGUARD
STAR
PORTFOLIO
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD STAR PORTFOLIO SEEKS BOTH CURRENT INCOME AND LONG-TERM GROWTH OF
CAPITAL AND INCOME. STAR INVESTS IN A COMBINATION OF VANGUARD EQUITY FUNDS
(ABOUT 63% OF NET ASSETS) FOR LONG-TERM GROWTH OF CAPITAL AND INCOME,
FIXED-INCOME FUNDS (ABOUT 25%) FOR GENEROUS CURRENT YIELD, AND A MONEY MARKET
FUND (ABOUT 12%) FOR PRINCIPAL PROTECTION AND CURRENT INCOME.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
The year ended December 31, 1994--Vanguard STAR Portfolio's ninth full year of
operations--was a challenging period for financial assets. The bond market took
something of a drubbing, while the stock market barely held its own. Sharply
rising rates in the short-term sector, however, were a boon to money market
investors. Considering this environment, STAR gave a good account of itself. We
virtually "held our own" during the year, with a total return of -0.2%. While
this minuscule negative return contrasts with the stock market's small gain,
our decline was less than that suffered by the bond market.
The following table compares STAR's total return (capital change plus
income) for the year with those of the benchmarks representing the three asset
classes in which we invest: for stocks, the unmanaged Standard & Poor's 500
Composite Stock Price Index; for bonds, the unmanaged Lehman Aggregate Bond
Index; and for cash reserves, the average money market mutual fund.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Return
-------------------------
Year Ended
December 31, 1994
- --------------------------------------------------------------------------------
<S> <C>
VANGUARD STAR PORTFOLIO -0.2%
- --------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +1.3%
LEHMAN AGGREGATE BOND INDEX -2.9
AVERAGE MONEY MARKET FUND +3.7
- --------------------------------------------------------------------------------
</TABLE>
The total return of STAR is based on net asset values of $13.41 per share on
December 31, 1993, and $12.61 per share on December 31, 1994, with the latter
figure adjusted to take into account the reinvestment of two semi-annual
dividends totaling $.52 per share from net investment income and a year-end
distribution of $.25 per share from net realized capital gains.
THE FINANCIAL MARKETS IN 1994
During the year, the stock market enjoyed four "ups" and endured four "downs."
A pattern of quarterly declines in the late weeks of March, June, and September
was broken when a November to mid-December decline was aborted by a solid
year-end rally, which recaptured most of the year's earlier lost ground. On
balance, the price of the Standard & Poor's 500 Composite Stock Price Index
edged just a notch lower, from 466 when the year began to 459 at its close,
down -1.5%. The positive total return (+1.3%) on the Index, then, was more than
accounted for by the dividend income that it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. A year ago,
stocks with smaller market capitalizations were ascendant over stocks with
large market capitalizations (which dominate the Standard & Poor's 500 Index).
This year, large-cap equities led the way, if by a far more modest margin. So,
just as last year redounded to the benefit of more aggressive small-cap
investors, this past year redounded to the benefit of investors in larger, more
conservative equities.
By the same token, in 1993 the returns on value stocks (those with
above-average yields and below-average price-to-book value ratios)
overwhelmingly dominated the returns on growth stocks (those with the opposite
characteristics, and with above-average prospects for consistent earnings
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
growth). In 1994, however, growth stocks turned the tables and led the way,
albeit by a more modest margin than for value stocks in 1993.
If the performance of the stock market was "so-so" during the year,
nothing that gentle could be said about the bond market. The return on the
Lehman Long-Term U.S. Treasury Bond Index was -7.6% (-14.5% decline in price,
partially offset by interest income of +6.9%), as Treasury yields rose from
6.4% to 7.8%. Yields on short-term and intermediate-term bonds also rose
sharply; however, because of their shorter maturities, price declines were
smaller. This rising rate environment was surely a major factor in dampening
the returns on stocks of all stripes.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
Of course, if higher interest rates are a bane to investors holding
long-term bonds, they are a boon to investors in "cash reserves." With the
yield on the 90-day U.S. Treasury bill rising steeply--from 3.0% at the outset
of the year to 5.6% at the year's conclusion--cash reserves turned in the best
performance of the three major financial asset classes in 1994. Short-term
rates are now as high as they have been in over three years.
To add some perspective to the performance of the financial markets in
1994, the chart to the left compares the cumulative returns on stocks, bonds,
and bills during the past five years. The chart reflects the fact that during
this period--the first half of the decade of the 1990s--both stocks and bonds
provided annual rates of return that were quite comparable (stocks +8.7%; bonds
+7.7%), while the average annual return on Treasury bills (+4.9%) lagged well
behind. As a result, balanced funds--which generally follow a policy of holding
about 60% of assets in stocks and 40% in bonds (typically including a modest
position in cash reserves)--gave a reasonably good account of themselves during
the period, all the while assuming a lower risk profile than an all-stock
portfolio.
As 1994 has now made obvious, there can be extended periods in which
bonds carry higher risks than stocks. It should also be clear that, while the
returns on cash reserves will likely fall short of those of stocks and bonds
over the long run--as would be expected given the lower risk profile of
bills--there can be infrequent periods (such as 1994) when reserves lead the
way. On balance, the often countervailing returns of these three asset classes
are what commend the balanced fund as a particularly suitable investment for
long-term investors seeking an optimal combination of current income and growth
of capital with reasonable risk.
2
<PAGE> 5
VANGUARD STAR PORTFOLIO IN 1994
The financial markets in 1994 were a challenging playing field for STAR's "fund
of funds" concept. On balance, the performance of our Vanguard stock and bond
funds--which represent a dominant portion of STAR's assets--came in on the
minus side of the ledger. However, the positive return of our Prime Money
Market Portfolio, which represents a 13% weighting in STAR, held our overall
decline to just -0.2%. I would note that this tiny annual decline is but the
second in our ten-year history (the other was -3.6%, in 1990).
This table presents the 1994 results of the nine Vanguard Funds which
compose STAR's portfolio, as well as their percentage of net assets at year
end:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Total Return
% of Year Ended
Vanguard Fund STAR Assets December 31, 1994
- ------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
WINDSOR II 42% - 1.2%
WINDSOR FUND 7 - 0.1
U.S. GROWTH PORTFOLIO 5 + 3.9
MORGAN GROWTH FUND 3 - 1.7
PRIMECAP FUND 3 +11.4
EXPLORER FUND 2 + 0.5
- ------------------------------------------------------------------
BOND FUNDS
GNMA PORTFOLIO 13% - 1.0%
LONG-TERM CORPORATE
PORTFOLIO 12 - 5.3
- ------------------------------------------------------------------
MONEY MARKET FUND
PRIME PORTFOLIO 13% + 4.1%
- ------------------------------------------------------------------
TOTAL 100% - 0.2%
- ------------------------------------------------------------------
</TABLE>
The 1994 returns for the Vanguard stock funds were, as shown in the table
above, decidedly mixed. However, we did succeed in providing decent relative
returns in a very difficult year for equities. During a year in which growth
stocks tended to provide marginally better returns than value stocks, our
modest holding in PRIMECAP Fund turned in a remarkable gain, largely due to its
heavy weighting (44% of net assets) in the technology sector, the market's
best-performing major segment in 1994. The U.S. Growth Portfolio was also a
standout, and even Morgan Growth Fund, despite its slight negative return,
outpaced most comparable funds.
Smaller company stocks were generally poor performers in 1994;
however, Explorer Fund was able to "hold the line" and gain a positive return,
outpacing most other small-cap stock funds. The lag in value stock returns is
evidenced by the performance of Windsor Fund and Windsor II--just the reverse
of their success in 1993. Nonetheless, both Funds--which together comprise
STAR's largest concentration--provided competitive relative returns.
The past year witnessed a "reversal of fortune" for our fixed-income
Portfolios. In the declining interest rate environment of 1993, the Long-Term
Corporate Portfolio provided a double-digit return, while the return on the
GNMA Portfolio was more muted. With interest rates rising sharply in 1994, the
Long-Term Corporate Portfolio provided a negative return of -5.3%; given its
much shorter effective maturity, the decline in the GNMA Portfolio was limited
to -1.0%. Of course, in an environment of rising interest rates, "cash is king"
in the fixed-income markets. Thus, while the return on our Prime Money Market
Portfolio, at +4.1%, was modest to a fault, it was higher than the returns
achieved in every sector of the bond market.
Importantly, STAR again (for the third consecutive year) outpaced the
results of mutual funds weighted in accordance with STAR's allocation
guidelines. The table that follows illustrates STAR's returns relative to those
of the average mutual fund within each asset class and the fund composite. We
also show how the Portfolio measures up in each asset class, where we gained an
advantage, albeit modest, in each area.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Total Return
Year Ended December 31, 1994
----------------------------------------------------------
Vanguard Comparable STAR
Fund Category STAR Portfolio Fund Average Advantage
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCK +0.1% -1.7% +1.6%
BOND -3.0 -3.4 +0.4
MONEY MARKET +4.1 +3.7 +0.4
- --------------------------------------------------------------------------------------
TOTAL -0.2% -1.4% +1.2%
- --------------------------------------------------------------------------------------
</TABLE>
(continued)
3
<PAGE> 6
This package of mutual funds would seem to be a reasonable
benchmark against which to measure our performance. In all, you can see
that STAR's balanced investment approach goes a long way toward mitigating
the vagaries of return that invariably exist among the asset classes.
A LONGER-TERM VIEW
It seems to me that investors should give only limited weight to a mutual
fund's results--whether good or bad--in any single year. Rather, it is the
long-term record that should be emphasized. The chart below presents STAR's
record since its inception on March 31, 1985, compared to the results of
the composite fund standard that we described earlier, as well as the
results of a composite market index standard, also weighted in accordance
with STAR's portfolio. (We have also added the results of the unmanaged
Standard & Poor's 500 Index, a benchmark composed of 100% stocks.) The
following table summarizes the results.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Total Return
---------------------------------------
March 31, 1985, to December 31, 1994
---------------------------------------
Cumulative Average Annual
- ---------------------------------------------------------------------
<S> <C> <C>
VANGUARD STAR PORTFOLIO +176% +11.0%
- ---------------------------------------------------------------------
COMPOSITE FUND AVERAGE +156% +10.1%
COMPOSITE MARKET INDEX +199 +11.9
- ---------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX +250% +13.7%
- ---------------------------------------------------------------------
</TABLE>
Note: The annual rates of return for the components of the market index
standard were: stocks +13.7%; bonds +10.0%; Treasury bills +5.9%.
It should go without saying that the returns reflected in the table are
merely history. Future returns--both on an absolute basis and relative to
competitive standards--are unpredictable, and may be better or worse than
those illustrated.
The table clearly reflects our return advantage over the composite
fund average (+11.0% versus +10.1%). This peer group is a demanding
standard, composed, as it is, of funds managed by other professional
advisers generally seeking objectives similar to those of the underlying
Vanguard funds.
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- ------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD STAR PORTFOLIO -0.21% +7.91% +10.95%
COMPOSITE FUND AVERAGE** -1.44 +8.03 +10.12
COMPOSITE MARKET INDEX*** +0.62 +8.05 +11.88
STANDARD & POOR'S 500 INDEX +1.31 +8.68 +13.69
</TABLE>
*Inception: March 29, 1985. Performance begins March 31, 1985, to show
competitive data.
**Composite Fund Average is 62.5% Lipper General Equity, 25% Lipper Fixed
Income, and 12.5% Lipper Money Market.
***Composite Index is 62.5% S&P 500, 25% Lehman Aggregate, and 12.5%
Salomon 90-Day T-Bills.
Note: Past performance is not predictive of future performance.
4
<PAGE> 7
That said, we would note that, thus far, our advantage arises largely
from our competitively low expenses. While STAR incurs no direct operating
expenses, the underlying Funds had a weighted average expense ratio (operating
expenses as a percentage of average net assets) of 0.39% during the period,
about one-third of the 1.13% expense ratio for the composite funds. This
favorable annual "spread" of 0.74% should be sustainable in the years ahead. Our
expectation is that, over time, the performance of the Vanguard Funds will
enhance this "natural" expense advantage.
I should note that the returns achieved by our peers for their
shareholders are significantly overstated in the chart. All major
statistical services calculate fund returns without taking sales charges
into account. (We're not sure why!) Such a practice suggests that all of
the funds in our composite fund index are "no-load" funds, when in fact
only about one-half of these funds meet the no-load definition. Thus,
investors in STAR--a pure no-load offering--have enjoyed an even larger
margin of advantage over the competition than the chart would suggest.
You will note that, since its inception, STAR has achieved an
annual rate of return of +11.0%, below the +11.9% return of our Composite
Market Index. As you know, this standard is a theoretical construct,
existing only on paper and free of the "real world" expenses of fund
operations, advisory fees, and portfolio transaction costs. Nonetheless,
our objective is to surpass this benchmark over the longer term.
IN SUMMARY
In my letter to shareholders one year ago, following the Portfolio's highly
successful 1993, I cautioned that "the financial markets giveth and the
financial markets taketh away." As it turned out, this warning was timely.
But I hope that it did not deter shareholders from maintaining their
investments in Vanguard STAR Portfolio. While stocks and bonds are risky
investments in the short term, in combination, their risk is "less than the
sum of its parts." For the long-term investor, we would once again suggest
that the best strategy--come what may in the financial markets--is to "stay
the course."
For our part, we assure you that we, too, will stay the course,
holding fast to the conservative portfolio allocation that has served our
investors so well over the past nine years. We look forward to reporting to
you again in the coming year.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board January 23, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD STAR FUND-STAR PORTFOLIO since inception through December 31,
1994. During the period illustrated, stock and bond prices fluctuated
widely; these results should not be considered a representation of the
dividend income or capital gain or loss that may be realized from an
investment made in the Portfolio today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- -----------------------------------------------------------------------------------------------------------------------------------
Value with Income Vanguard STAR Portfolio Composite**
Year Ended Net Asset Capital Gains Income Dividends & Capital -------------------------------- Fund Average
December 31 Value Distributions Dividends Gains Reinvested Capital Income Total Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (3/85) $10.00 -- -- $10.00 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1985 11.45 -- $.05 11.50 +14.5% +0.5% + 15.0% + 15.2%
- ------------------------------------------------------------------------------------------------------------------------------------
1986 11.34 $.71 .86 13.11 + 5.5 +8.4 + 13.9 + 12.3
- ------------------------------------------------------------------------------------------------------------------------------------
1987 9.98 .75 .85 13.33 - 5.5 +7.2 + 1.7 + 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
1988 11.12 .03 .69 15.86 +11.7 +7.3 + 19.0 + 11.9
- ------------------------------------------------------------------------------------------------------------------------------------
1989 12.05 .38 .77 18.84 +11.8 +7.0 + 18.8 + 18.5
- ------------------------------------------------------------------------------------------------------------------------------------
1990 10.73 .16 .73 18.16 - 9.6 +6.0 - 3.6 - 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
1991 12.30 .37 .62 22.55 +18.1 +6.1 + 24.2 + 27.5
- ------------------------------------------------------------------------------------------------------------------------------------
1992 12.89 .18 .51 24.92 + 6.3 +4.2 + 10.5 + 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
1993 13.41 .40 .47 27.63 + 7.1 +3.8 + 10.9 + 10.6
- ------------------------------------------------------------------------------------------------------------------------------------
1994 12.61 .25 .52 27.58 - 4.1 +3.9 - 0.2 - 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +175.8% +156.0%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURN + 11.0% + 10.1%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital
gains distributions for both the Fund and the Index.
** Composite Fund Average shown for comparative purposes comprises the
Lipper General Equity Fund Average (62.5%), the Lipper Fixed Income
Fund Average (25%), and the Lipper Money Market Fund Average (12.5%).
Note: No adjustment has been made for income taxes payable by shareholders
on reinvested income dividends and capital gains distributions.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIO (PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
----------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD STAR PORTFOLIO 3/29/85 -0.21% +7.91% +10.95% +5.60% +5.35%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 9
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (100.2%)
- ----------------------------------------------------------------------------------------------------
Vanguard/Windsor II . . . . . . . . . . . . . . . . . . . . . 99,372,378 $1,572,071
Vanguard/Windsor Fund . . . . . . . . . . . . . . . . . . . . 20,812,451 262,029
Vanguard U.S. Growth Portfolio . . . . . . . . . . . . . . . . 13,193,129 202,251
Vanguard/Morgan Growth Fund . . . . . . . . . . . . . . . . . 9,555,931 108,555
Vanguard/PRIMECAP Fund . . . . . . . . . . . . . . . . . . . . 5,694,741 113,781
Vanguard Explorer Fund . . . . . . . . . . . . . . . . . . . . 2,325,186 99,657
Vanguard Fixed Income Securities Fund-
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . 49,280,655 472,109
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . 58,560,318 471,411
Vanguard Money Market Reserves-
Prime Portfolio . . . . . . . . . . . . . . . . . . . . . . 472,382,003 472,382
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $3,732,968) . . . . . . . . . . . . . . . . . . . . . 3,774,246
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.2%)
- ----------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 12,581
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (20,602)
----------
(8,021)
- ----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------
Applicable to 298,775,040 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . $3,766,225
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . $12.61
====================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . $3,724,600 $12.47
Overdistributed Net Investment Income . . . . . . . . . . . . (32) --
Accumulated Net Realized Gains . . . . . . . . . . . . . . . . 379 --
Unrealized Appreciation of Investments--Note C . . . . . . . . 41,278 .14
- ----------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $3,766,225 $12.61
====================================================================================================
</TABLE>
7
<PAGE> 10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
(000)
- ----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . . . . . . . . . . . . . . $ 150,639
- ----------------------------------------------------------------------------------------------------
Net Investment Income--Note B . . . . . . . . . . . . . . 150,639
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received . . . . . . . . . . . . . . . 75,262
Investment Securities Sold . . . . . . . . . . . . . . . . . . . (2,640)
- ----------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . 72,622
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . (230,387)
- ----------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . $ (7,126)
====================================================================================================
</TABLE>
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD STAR FUND-STAR PORTFOLIO
Corporate shareholders should note that for the year ended December 31, 1994,
41.9% of the Fund's investment income (i.e., dividend income plus short-term
capital gains) qualifies for the intercorporate dividends received deduction.
8
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1994 December 31, 1993
(000) (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . $ 150,639 $ 116,645
Realized Net Gain . . . . . . . . . . . . . . . . . . . . 72,622 101,643
Change in Unrealized Appreciation (Depreciation) . . . . (230,387) 101,055
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . (7,126) 319,343
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . (148,756) (116,098)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . (71,831) (103,295)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . (220,587) (219,393)
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . 609,354 943,226
-- In Lieu of Cash Distributions . . . . . . . 216,115 214,329
-- Exchange . . . . . . . . . . . . . . . . . . 143,518 259,359
Redeemed -- Regular . . . . . . . . . . . . . . . . . . (277,280) (152,628)
-- Exchange . . . . . . . . . . . . . . . . . . (325,980) (225,356)
- ----------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . 365,727 1,038,930
- ---------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . 138,014 1,138,880
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . 3,628,211 2,489,331
- ---------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . $3,766,225 $3,628,211
===============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . $.52 $.47
Realized Net Gain . . . . . . . . . . . . . . . . . $.25 $.40
- ---------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . 56,799 89,113
Issued in Lieu of Cash Distributions . . . . . . . . 16,956 16,001
Redeemed . . . . . . . . . . . . . . . . . . . . . . (45,491) (27,795)
- ----------------------------------------------------------------------------------------------------------------
28,264 77,319
- ---------------------------------------------------------------------------------------------------------------
(3) Overdistributed Net Investment Income . . . . . $ (32) $ (1,915)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $13.41 $12.89 $12.30 $10.73 $12.05
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . . . . .53 .47 .51 .62 .73
Capital Gain Distributions Received . . . . . . . .26 .36 .18 .35 .18
------ ------ ------ ------ ------
Total Distributions Received . . . . . . . . . . .79 .83 .69 .97 .91
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . (.82) .56 .59 1.59 (1.34)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . (.03) 1.39 1.28 2.56 (.43)
- -----------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income . . . . . . . (.52) (.47) (.51) (.62) (.73)
Distributions from Realized Capital Gains . . . . (.25) (.40) (.18) (.37) (.16)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.77) (.87) (.69) (.99) (.89)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $12.61 $13.41 $12.89 $12.30 $10.73
================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . -0.21% +10.88% +10.51% +24.18% -3.62%
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $3,766 $3,628 $2,489 $1,574 $1,038
Ratio of Expenses to Average
Net Assets--Note B . . . . . . . . . . . . . . . . 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 4.01% 3.67% 4.36% 5.48% 6.65%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 9% 3% 3% 11% 12%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Vanguard STAR Portfolio (the "Fund") is a Portfolio of Vanguard STAR Fund,
which is comprised of five independent portfolios, each of which is registered
under the Investment Company Act of 1940 as an open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. VALUATION: Investments are valued at the price of each Vanguard Fund
determined as of the close of the New York Stock Exchange (generally
4:00 PM) on the valuation date.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
10
<PAGE> 13
3. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Income and capital gain distributions
received and distributions to shareholders are recorded on the
ex-dividend date.
B. Under a special service agreement, The Vanguard Group, Inc. furnishes
corporate management, administrative, marketing, and distribution services to
the Fund. The special service agreement provides that Vanguard will reimburse
the Fund's expenses to the extent of savings in administrative and marketing
costs realized by Vanguard in the operation of the Fund. Accordingly, all
expenses incurred by the Fund during the year ended December 31, 1994, were
reimbursed by Vanguard. The Fund's officers and trustees are also officers and
directors of Vanguard.
C. During the year ended December 31, 1994, the Fund made purchases of
$640,659,000 and sales of $282,500,000 of investment securities. At December
31, 1994, unrealized appreciation for financial reporting and Federal income
tax purposes aggregated $41,278,000, of which $107,082,000 related to
appreciated securities and $65,804,000 related to depreciated securities.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard STAR Fund
STAR Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard STAR Fund-STAR Portfolio (the "Fund") at December 31, 1994, the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 8, 1995
11
<PAGE> 14
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
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 Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
12
<PAGE> 15
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders
of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q560-12/94
<PAGE> 17
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Cumulative Performance of the Standard & Poor's
500 Index, Lehman Aggregate Bond Index and the 90 day U.S. Treasury Bills for
the period 1990-1994 at the top of page two.
A line chart depicting Cumulative Performance of Standard and Poor's
500 Index, Composite Market Index, Vanguard STAR Portfolio and Composite Fund
Average, for the period March 31, 1984, to December 31, 1994 including the
Average Annual Total Returns appears at the bottom of page four.
A running head featuring a lantern appears on page six.
A running head featuring a log book and pen appears on page seven
through eleven.
A running head featuring a compass appears on page twelve.
At the bottom of the inside back cover appears a triangle with the
sides labeled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of
the report.
<PAGE> 18
VANGUARD
LIFESTRATEGY
FUNDS
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 19
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a
balance is often achieved by a combination of Vanguard money market, bond, and
stock funds.
"Conservatism," too, remains our standard. Over the years, we have tried
to maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD LIFESTRATEGY FUNDS CONSISTS OF FOUR PORTFOLIOS--INCOME, CONSERVATIVE
GROWTH, MODERATE GROWTH, AND GROWTH--WHICH SEEK TO MAXIMIZE TOTAL RETURN
SUBJECT TO THEIR RESPECTIVE ASSET ALLOCATION POLICIES. EACH PORTFOLIO WILL
INVEST IN A COMBINATION OF VANGUARD STOCK AND BOND MUTUAL FUNDS ALLOCATED TO
REFLECT VARYING DEGREES OF POTENTIAL INVESTMENT RISK AND REWARD.
<PAGE> 20
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
It is my distinct pleasure to write to you in this first Annual Report of
Vanguard LIFEStrategy Funds. The four new Portfolios have been well-received by
investors, attracting over $125 million in assets during our first three months
of operations. This acceptance is testimony, I believe, to the soundness of the
LIFEStrategy concept.
INVESTMENT RESULTS
The Portfolios began investment operations on September 30, 1994. Clearly, the
period since then is too short to be in any way meaningful as a measure of how
well the Portfolios are doing, but the table below does demonstrate our
customary manner of presenting our investment results. We show the "total
return" of each Portfolio, a calculation that takes into account the
reinvestment of income dividends and any capital gain distributions, as well as
the change in the Portfolio's net asset value.
Each Portfolio's total return reflects the experience of an investor who
holds the Portfolio over the entire measurement period. We compare each
Portfolio's total return to that of an unmanaged Composite Index, constructed
to parallel the asset class weightings of the respective Portfolios. Here are
the summary results since our inception:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Total Return
----------------------
September 30, 1994, to
December 31, 1994
- --------------------------------------------------------------------
<S> <C>
INCOME PORTFOLIO +0.2%
COMPOSITE INDEX +0.3
- --------------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO +0.1%
COMPOSITE INDEX +0.1
- --------------------------------------------------------------------
MODERATE GROWTH PORTFOLIO -0.7%
COMPOSITE INDEX -0.3
- --------------------------------------------------------------------
GROWTH PORTFOLIO -0.1%
COMPOSITE INDEX -0.6
- --------------------------------------------------------------------
</TABLE>
The following matrix illustrates the make-up of each Portfolio's Composite
Index at year end. I would emphasize again that the Index weightings parallel
those of the respective LIFEStrategy Portfolios.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Conservative Moderate
Income Growth Growth Growth
Asset Class Portfolio Portfolio Portfolio Portfolio
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. STOCKS 20% 35% 50% 65%
INTERNATIONAL STOCKS -- 5 10 15
BONDS 60 40 40 20
RESERVES 20 20 -- --
--- --- --- ---
TOTAL 100% 100% 100% 100%
- --------------------------------------------------------------------
</TABLE>
Note: Total returns for each asset class reflect the results of the following
indexes: for U.S. stocks, the Wilshire 5000 Index; for international stocks,
the Morgan Stanley Capital International Europe, Australia, and Far East
("EAFE") Index; for bonds, the Lehman Aggregate Bond Index; and for cash
reserves, the 90-day U.S. Treasury bill.
The table on page 6 presents the per share dividend distributions for each
Portfolio, as well as net asset values at the beginning and the end of the
period. I should note that it was a complete coincidence that, despite their
different make-up, the four Porfolios had the same dividend distribution of
$.14 per share. The reason for this coincidence is that some of the Vanguard
Funds owned by each Portfolio pay distributions only annually (at year end).
One of the important differences among the four Portfolios is the extent
to which they emphasize income as opposed to capital growth. This income
differential will become apparent in 1995. For your
[FIGURE 1]
1
<PAGE> 21
planning purposes, this table sets out our early expectations for dividend
distributions in 1995, as well as the dividend frequency for each Portfolio:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
LIFEStrategy Estimated Annual
Portfolio Dividend Per Share Dividend Frequency
- ---------------------------------------------------------------------
<S> <C> <C>
INCOME $.60-.70 QUARTERLY
CONSERVATIVE GROWTH .50-.60 QUARTERLY
MODERATE GROWTH .40-.50 SEMI-ANNUALLY
GROWTH .30-.40 SEMI ANNUALLY
- ---------------------------------------------------------------------
</TABLE>
These dividend ranges are merely estimates, and are dependent on investment
conditions in 1995. Capital gains distributions, if any, are payable at year
end.
1994 IN REVIEW
The final three months of 1994--the period in which the Fund operated--was a
turbulent time in the financial markets; however, when all was said and done,
the turmoil was of little net consequence for diversified investors. By
mid-December the U.S. stock market had declined -6.0% from its October high.
Then, the equity markets rallied to recoup most, if not all, of the decline.
International equity markets were, on balance, somewhat negative during the
final quarter of 1994. In particular, Japanese equity investments declined as
the U.S. dollar strengthened against the yen.
The U.S. bond market actually improved somewhat in the final months of
1994, as the yield on the long-term U.S. Treasury bond declined from 8.0% in
early October to 7.8% at year end, pushing bond prices slightly higher. In the
"outer reaches" of the investment world, there were some dramatic events (e.g.,
the abrupt decline in both the Mexican peso and the Mexican stock market), but
I am pleased to say they had no direct impact on our Portfolios.
As our returns for the three-month period suggest, the overall impact on
our LIFEStrategy Portfolios from these "twists and turns" in the financial
markets was negligible. Overall, our Portfolios' returns--in the -0.7% to +0.2%
range--were in line with those of their respective Composite Indexes.
If the final months of 1994 were "much ado about nothing," the earlier
months of the year were much more consequential, at least for the bond and
money markets. The most noteworthy development of 1994 was the substantial rise
in short- and long-term interest rates. The Federal Reserve took decisive steps
to quell inflationary fears by raising the Federal funds rate (at which banks
borrow from one another) on six separate occasions from February to November,
pushing the rate from 3.00% to 5.50%.
These steps were good news indeed for money market investors, as yields
increased. For bond investors, however, the accompanying rise in long-term
rates, from 6.4% on the long-term Treasury bond at the beginning of 1994 to
7.8% at the end, was anything but good news. Measured by the Lehman U.S.
Treasury Bond Index, the total return of long bonds was -7.6% for the twelve
months, reflecting a decline of -14.5% in principal value that was only
partially offset by income of +6.9%.
Surprisingly, despite the carnage in the bond market, U.S. stock prices
were remarkably resilient. Often, bond and stock prices move in tandem;
this year, the broad U.S. stock indexes varied in a narrow range. On
balance, the return of the Wilshire 5000 Index--a broad market indicator
that includes both small cap stocks and large cap stocks--just barely
slipped into negative territory (-0.1%). (The Standard & Poor's 500
Composite Stock Price Index--which includes more conservative large cap
stocks--earned a positive return of +1.3%, as a modest price decline of
- -1.5% was more than offset by dividend income.)
In international equity markets, the European bourses provided negative
returns for the year in local currency terms, but moved into positive territory
in U.S. dollar terms. In contrast, the Japanese stock market came in on the
plus side of the ledger, and further benefited from a sharp rise in the yen
versus the dollar.
This table summarizes the returns for each of the major asset classes
over the full calendar year:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Total Return
----------------------------
Year Ended December 31, 1994
- ------------------------------------------------------------
<S> <C>
U.S. STOCKS - 0.1%
- ------------------------------------------------------------
INTERNATIONAL STOCKS + 8.1%
EUROPE + 2.8
PACIFIC +12.8
- ------------------------------------------------------------
TREASURY BONDS - 7.6%
- ------------------------------------------------------------
TREASURY BILLS + 4.2%
- ------------------------------------------------------------
</TABLE>
2
<PAGE> 22
[FIGURE 2]
LIFESTRATEGY FUNDS IN REVIEW
The divergent returns of the various components of the financial markets
highlight the appeal of one of the key tenets of the LIFEStrategy Funds:
balance. In an inevitably uncertain investment world, it is just plain common
sense to balance your holdings among distinct financial investment classes.
Of course, the difficult question for investors is how to allocate
their assets across the range of potential investment options. The
proliferation of mutual funds--now exceeding 5,300--has made this task
needlessly complex and daunting. The four LIFEStrategy Portfolios are designed
to simplify your decision-making and yet provide a remarkably compelling
opportunity for long- term investors. We have incorporated in these Portfolios
the following tenets of our basic investment philosophy:
CHOOSE A BASIC ASSET ALLOCATION STRATEGY THAT MEETS YOUR NEEDS
Your first step should be to select a mix of stocks, bonds, and short-term
reserves that meets your personal goals and matches your risk tolerance. Simply
put, the longer your investment time frame and the greater your ability to
withstand short-term risks, the greater the role that stocks should play in
your portfolio, as stocks have historically offered the highest long-term
returns (along with the highest short-term risks) of the three major asset
classes. Conversely, the shorter your timeframe and the lower your tolerance
for short-term risk, the greater the role that bonds and short-term reserves
should play in your Portfolio.
The chart above illustrates the composition of each LIFEStrategy
Portfolio, and also provides a description of the kind of investor who would
typically be best-suited to each particular Portfolio. As you know, all
investments entail a trade-off between risk and reward, and investors must
decide what weight to assign to each of these factors. For instance, an
investor who is approaching retirement would understandably be averse to
principal volatility. However, it would be imprudent for such an investor to
focus solely on principal conservation and ignore the long-term needs for
income and capital growth.
To help you gauge the level of volatility engendered by each LIFEStrategy
Portfolio, as well as the range of potential returns, the chart on the
following page illustrates hypothetical investment results over the past 25
years, assuming that each Portfolio's target asset allocation is maintained
3
<PAGE> 23
throughout the period. For each Portfolio, the chart shows the worst annual
return, the best annual return, and the average annual return that would have
been achieved during the 25-year period.
As you can see, the chart clearly illustrates the gradual reduction in
portfolio volatility as the stock component is reduced. Interestingly, this
decrease in volatility is seemingly achieved without a significant diminution
in return. I would strongly caution against reading too much into this
phenomenon, since any analysis of past returns is necessarily "period
dependent." In particular, this period was one in which stocks and bonds
provided returns that were quite comparable. What is more, with inflation at
historically high levels throughout most of the period--reaching double-digit
levels on several occasions during the 1970s--short-term reserves provided
unusually generous returns. In today's lower-inflation environment, the
sacrifice in return for holding short-term instruments is likely to be much
more dramatic.
In any event, you should always remember that history provides only "a
lantern over the stern." It helps you to develop reasonable expectations about
investment performance, but it does not provide accurate predictions of future
returns in the financial markets.
MAKE TACTICAL ADJUSTMENTS IN YOUR ASSET ALLOCATION SPARINGLY
One of the most common mistakes of individual investors is to make abrupt
changes to their portfolios in response to discrete stock and bond market
events. The danger of market timing is, of course, that you buy in at the top
and sell at the bottom--often phrased as "getting whipsawed." Our usual
recommendation to avoid this fate is "stay the course." In our LIFEStrategy
Portfolios, we have set allocation targets that will remain constant. However,
by including Vanguard Asset Allocation Fund as a 30% component in each
Portfolio, we have provided an element of active management of the
stock/bond/reserves ratio "at the margin."
Our experience with Vanguard Asset Allocation Fund has been that the
manager, Mellon Capital
[FIGURE 3]
4
<PAGE> 24
Management, generally moves gradually between stocks and bonds--with
occasional forays into cash reserves--following a disciplined valuation
methodology. In recent years, the range has been narrow (generally from 70%
stocks/30% bonds to 40%/60%), and we would expect that such a range will
typically be maintained in the future. If so, each LIFEStrategy Portfolio might
typically vary the stock component by plus or minus 6% from its target range
(i.e., a 60% stock allocation might range between 54% and 66% in stocks).
However, if the Asset Allocation Fund were at 100%/0% or 0%/100% (an unlikely
event), the 60% target for stocks in our Moderate Growth Portfolio could reach
as high as 75% or as low as 45%.
In the past, Mellon's judgments have added value by providing a level of
return comparable to that of stocks, but with significantly less risk. It
should go without saying that there can be no assurance of such favorable
results in the future. Thus, you should be aware that the addition of Vanguard
Asset Allocation Fund at 30% of each Portfolio adds a moderate element of
"allocation risk" to the equation.
AN INDEXING STRATEGY: DIVERSIFICATION, LOW COST, COMPETITIVE RESULTS
Each of the LIFEStrategy Portfolios uses an indexed strategy for its stock
holdings for three primary reasons. First, it's critical to hold many different
individual securities within each asset class. By investing in established and
broadly diversified Vanguard Funds, our LIFEStrategy Portfolios provide a
remarkable level of diversification. Each of the four Portfolios--through
participation in six to eight underlying Vanguard Funds--indirectly holds some
13,000 securities.
Second, one of the few certainties of the investment world is that costs
detract from return. So, it's critical to keep costs as low as is reasonably
possible. With the index-oriented LIFEStrategy Portfolios, you have done just
that. The effective annual expense ratio (expressed as a percent of average net
assets) of the Vanguard Funds in our Portfolios is 0.20% to 0.50%, which
compares to 1.38% for the average equity mutual fund and 1.02% for the average
bond fund. Thus, you start with an annual advantage of from 1.18% to 0.52%
compared to the average mutual fund. And the LIFEStrategy Portfolios are, of
course, offered on a pure no- load basis, meaning you may purchase shares with
no sales commissions.
Third, largely because of this broad diversification and substantial cost
advantage, equity index funds have outperformed three-quarters of actively
managed mutual funds over time. While an indexed fund will never be the top
performer in any given year, neither will it be at the "bottom of the deck."
Over a long time horizon, you can be confident that index fund returns will be
fully competitive. Indeed, based on history, an index fund might reasonably be
expected to exceed the long-term returns earned by about 75% of traditionally
managed mutual funds.
"YOUR PART OF THE BARGAIN"
With these features, we are confident in the ability of the LIFEStrategy Funds
to meet your long-term investment needs. To ensure that the program
successfully accomplishes your goals, however, we would encourage you to:
* PERIODICALLY REVIEW YOUR INVESTMENT GOALS.
At least annually, you should consider the LIFEStrategy Portfolio you have
selected to ensure that it continues to meet your objectives and risk
tolerance.
* HAVE REASONABLE EXPECTATIONS FOR RETURNS DURING THE REMAINDER OF THE 1990S.
The stellar returns of the 1980s are long behind us. More moderate
returns--in the range of perhaps 4% to 6% for reserves, 7% to 8% for bonds,
and 6% to 10% for stocks--may well be in prospect for the remainder of the
decade.
* BE PREPARED FOR PERIODS OF DISAPPOINTMENT. There will undoubtedly be periods
of negative returns, even in our more conservative Portfolios. We encourage
you to "stay the course."
* IF AT ALL POSSIBLE, ADD TO YOUR SAVINGS. Investing regularly "through thick
and thin"--at best through a dollar-cost averaging program--is one secret
5
<PAGE> 25
to building capital over time. Looking at the minuscule U.S. personal
savings rate, it often seems that saving is a lost art in this country. Given
the power of compound returns, it can be a very rewarding discipline for
meeting your future needs.
Once again, I offer my welcome to Vanguard LIFEStrategy Funds. I look
forward to reporting to you again six months from now.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
January 24, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Net Asset Value Per Share
-------------------------------------- Income Capital Gains SEC
LIFEStrategy Portfolio September 30, 1994 December 31, 1994 Dividend Distributions* Yield
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME $10.00 $9.88 $.14 -- 5.90%
CONSERVATIVE GROWTH 10.03 9.89 .14 $ .01 5.01
MODERATE GROWTH 10.08 9.86 .14 .01 4.04
GROWTH 10.10 9.93 .14 .02* 3.26
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Capital gains are long-term gains, except for the Growth Portfolio, which
consists of $.005 per share of short-term gains and $.015 per share of
long-term gains.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
-------------------------------------
INCEPTION TOTAL INCOME CAPITAL
PORTFOLIO DATE RETURN RETURN RETURN
- ---------- -------- ------ ------ ------
<S> <C> <C> <C> <C>
INCOME 9/30/94 +0.20% +1.40% -1.20%
CONSERVATIVE GROWTH 9/30/94 +0.10 +1.40 -1.30
MODERATE GROWTH 9/30/94 -0.70 +1.38 -2.08
GROWTH 9/30/94 -0.10 +1.39 -1.49
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 26
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
INCOME PORTFOLIO Shares (000)+
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.0%)
- ----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 250,721 $ 3,395
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 345,916 3,563
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 143,265 1,282
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 159,050 1,280
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,008 1,284
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 50,448 574
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $11,444) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,378
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- ----------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (140)
-----
116
- ----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------
Applicable to 1,162,928 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . . $11,494
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $9.88
====================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,562 $9.94
Overdistributed Net Investment Income . . . . . . . . . . . . . . . . (3) --
Accumulated Net Realized Gains . . . . . . . . . . . . . . . . . . . . 1 --
Unrealized Depreciation of Investments--Note D . . . . . . . . . . . . (66) (.06)
- ----------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,494 $9.88
- ----------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 27
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
CONSERVATIVE GROWTH PORTFOLIO Shares (000)+
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
INVESTMENTS (98.5%)
- ----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 893,943 $12,104
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 1,066,363 10,983
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 317,716 2,844
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 352,060 2,834
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,208 2,847
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 611,932 6,958
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 79,319 933
Pacific Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 101,071 1,142
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $41,072) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,645
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- ----------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,445
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (817)
-----
628
- ----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------
Applicable to 4,172,817 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . $41,273
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $9.89
====================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
------- ------
<S> <C> <C>
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,718 $9.99
Overdistributed Net Investment Income . . . . . . . . . . . . . . . . (5) --
Overdistributed Net Realized Gains . . . . . . . . . . . . . . . . . . (13) --
Unrealized Depreciation of Investments--Note D . . . . . . . . . . . . (427) (.10)
- ----------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,273 $9.89
- ----------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 28
<TABLE>
<CAPTION> Market
Value
MODERATE GROWTH PORTFOLIO Shares (000)+
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (96.9%)
- ----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 786,710 $10,652
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 203,933 2,101
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 234,668 2,100
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 261,127 2,102
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,067 2,089
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 1,002,063 11,393
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 124,285 1,462
Pacific Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 161,487 1,825
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $34,148) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,724
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.1%)
- ----------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,644
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (564)
------
1,080
- ----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------
Applicable to 3,530,279 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . $34,804
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $9.86
====================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,238 $9.98
Overdistributed Net Investment Income . . . . . . . . . . . . . . . . (22) --
Accumulated Net Realized Gains . . . . . . . . . . . . . . . . . . . . 12 --
Unrealized Depreciation of Investments--Note D . . . . . . . . . . . . (424) (.12)
- ----------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,804 $9.86
- ----------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 29
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- ----------------------------------------------------------------------------------------------------
INVESTMENTS (97.0%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 839,956 $11,373
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 89,823 925
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 103,755 929
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 115,964 934
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,121 930
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 1,415,599 16,095
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 208,837 2,456
Pacific Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 264,662 2,991
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $37,220) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,633
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.0%)
- ----------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,725
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (601)
1,124
- ----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------
Applicable to 3,801,457 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . $37,757
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $9.93
====================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
------ -----
<S> <C>
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,376 $10.09
Overdistributed Net Investment Income . . . . . . . . . . . . . . . . (24) (.01)
Overdistributed Net Realized Gains . . . . . . . . . . . . . . . . . . (8) --
Unrealized Depreciation of Investments--Note D . . . . . . . . . . . . (587) (.15)
- ----------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,757 $9.93
- ----------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 30
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30+ TO SEPTEMBER 30+ TO SEPTEMBER 30+ TO SEPTEMBER 30+ TO
DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . $ 153 $ 552 $ 439 $ 469
- --------------------------------------------------------------------------------------------------------------------------------
Net Investment Income--Note B . . 153 552 439 469
- --------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received . . 2 27 45 66
Investment Securities Sold . . . . . . (1) -- -- (4)
- --------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . 1 27 45 62
- --------------------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION
(DEPRECIATION) OF
INVESTMENT SECURITIES . . . . . . . . . (66) (427) (424) (587)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . $ 88 $ 152 $ 60 $ (56)
===============================================================================================================================
</TABLE>
+Commencement of Operations.
11
<PAGE> 31
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30+ TO SEPTEMBER 30+ TO SEPTEMBER 30+ TO SEPTEMBER 30+ TO
DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . $ 153 $ 552 $ 439 $ 469
Realized Net Gain . . . . . . . . . . . . . . . 1 27 45 62
Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . (66) (427) (424) (587)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . 88 152 60 (56)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . (156) (557) (461) (493)
Realized Net Gain . . . . . . . . . . . . . . . -- (40) (33) (70)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (156) (597) (494) (563)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . 3,442 7,959 8,619 10,707
--In Lieu of Cash Distributions . . 108 532 472 551
--Exchange . . . . . . . . . . . . 8,416 34,397 27,317 28,250
Redeemed --Regular . . . . . . . . . . . . . (48) (190) (78) (123)
--Exchange . . . . . . . . . . . . (356) (980) (1,092) (1,009)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . . . . . . . 11,562 41,718 35,238 38,376
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . 11,494 41,273 34,804 37,757
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . $11,494 $41,273 $34,804 $37,757
================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . $ .14 $ .14 $ .14 $ .14
Realized Net Gain . . . . . . . . . -- $ .01 $ .01 $ .02
- --------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 1,193 4,237 3,600 3,860
Issued in Lieu of Cash Distributions 11 54 48 55
Redeemed . . . . . . . . . . . . . (41) (118) (118) (114)
- --------------------------------------------------------------------------------------------------------------------------------
1,163 4,173 3,530 3,801
- --------------------------------------------------------------------------------------------------------------------------------
(3) Overdistributed Net Investment
Income . . . . . . . . . . . . . . $ (3) $ (5) $ (22) $ (24)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
12
<PAGE> 32
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30+ TO DECEMBER 31, 1994
---------------------------------------------------------------
For a Share Outstanding Throughout the Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . $10.00 $10.03 $10.08 $10.10
------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . .14 .14 .14 .13
Capital Gain Distributions Received . . -- .01 .01 .02
------ ----- ----- -----
Total Distributions Received . . . . . .14 .15 .15 .15
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . (.12) (.14) (.22) (.16)
------ ----- ----- -----
TOTAL FROM INVESTMENT . . . .
OPERATIONS . . . . . . . . . .02 .01 (.07) (.01)
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . (.14) (.14) (.14) (.14)
Distributions from Realized Capital Gains -- (.01) (.01) (.02)
------ ----- ----- -----
Total Distributions . . . . . (.14) (.15) (.15) (.16)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . $9.88 $9.89 $9.86 $9.93
======================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . +0.20% +0.10% -0.70% -0.10%
- ----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . $11 $41 $35 $38
Ratio of Expenses to Average
Net Assets--Note B . . . . . . . . . . . 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . 7.31%* 7.07%* 7.10%* 7.06%*
Portfolio Turnover Rate . . . . . . . . . . 1% 0% 0% 1%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
13
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
Vanguard LIFEStrategy Funds (the "Fund") consists of the Income, Conservative
Growth, Moderate Growth, and Growth Portfolios of Vanguard STAR Fund. Each
Portfolio of Vanguard STAR Fund is registered under the Investment Company Act
of 1940 as an open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. VALUATION: Investments are valued at the price of each Vanguard Fund
determined as of the close of the New York Stock Exchange (generally 4:00
PM) on the valuation date.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Income and capital gain distributions received and distributions to
shareholders are recorded on the ex-dividend date.
B. Under a special service agreement, The Vanguard Group, Inc. furnishes
corporate management, administrative, marketing, and distribution services to
the Fund. The special service agreement provides that Vanguard will reimburse
the Fund's expenses to the extent of savings in administrative and marketing
costs realized by Vanguard in the operation of the Fund. Accordingly, all
expenses incurred by the Fund during the period ended December 31, 1994, were
reimbursed by Vanguard. The Fund's officers and trustees are also officers and
directors of Vanguard.
C. During the period ended December 31, 1994, purchases and sales of
investment securities were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(000)
------------------------
Portfolio Purchases Sales
- -------------------------------------------------------------------
<S> <C> <C>
INCOME $11,519 $ 75
CONSERVATIVE GROWTH 41,072 --
MODERATE GROWTH 34,149 1
GROWTH 37,397 175
- -------------------------------------------------------------------
</TABLE>
D. At December 31, 1994, unrealized depreciation of investment securities for
financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(000)
-----------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Depreciation
- -------------------------------------------------------------------
<S> <C> <C> <C>
INCOME $12 $ (78) $ (66)
CONSERVATIVE GROWTH 25 (452) (427)
MODERATE GROWTH 19 (443) (424)
GROWTH 8 (595) (587)
- -------------------------------------------------------------------
</TABLE>
14
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard STAR Fund
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Income, Conservative Growth, Moderate Growth, and Growth Portfolios of
Vanguard STAR Fund (the "Fund") at December 31, 1994, the results of each of
their operations, the changes in each of their net assets and the financial
highlights for the period presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 8, 1995
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD STAR FUND
Corporate shareholders should note that for the year ended December 31,
1994, the percentage of investment income (i.e., dividend income plus
short-term capital gains, where applicable) which qualifies for the
intercorporate dividends received deduction is as follows:
<TABLE>
<CAPTION>
<S> <C>
Income Portfolio . . . . . . . . . . . . . . 32.4%
Conservative Growth Portfolio . . . . . . . 38.7%
Moderate Growth Portfolio . . . . . . . . . 49.1%
Growth Portfolio . . . . . . . . . . . . . . 54.6%
</TABLE>
15
<PAGE> 35
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
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 Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
16
<PAGE> 36
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders
of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no- load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets
(not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at
the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 37
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q880-12/94
<PAGE> 38
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the Vanguard
ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through the sea
appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through six.
A photograph of John C. Bogle appears at the lower-right of page one.
A pie chart depicting Lifestrategy Portfolios appears at the top of page
three.
A bar chart depicting Hypothetical Lifestrategy Portfolios for 25 years
Ended December 31, 1994 appears at the bottom of page four.
A running head featuring a log book and pen appears on page seven through
fifteen.
A running head featuring a compass appears on page sixteen.
At the bottom of the inside back cover appears a triangle of the sides
labeled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of the
report.
