<PAGE> 1
[VANGUARD STAR PORTFOLIO LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard STAR Portfolio and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising likea rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became ChiefExecutive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
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:
During the year ended December 31, 1995, Vanguard STAR Portfolio provided
shareholders with a total return of +28.6%, the best year in our history. Both
stocks and bonds enjoyed stupendous bull markets, and our traditional balanced
strategy placed the Fund in an enviable position to participate in both
explosive rallies. Overall, you couldn't ask for a better environment in which
to celebrate the Portfolio's 10th anniversary.
The following table compares STAR's total return (capital change plus
reinvested dividends) 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, 90-day U.S. Treasury bills. We
held our own relative to a composite of these three market indexes, weighted in
accordance with STAR's asset allocation guidelines. We also substantially
outpaced a comparably weighted index of mutual funds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURN
---------------------------
YEAR ENDED
DECEMBER 31, 1995
- ------------------------------------------------------------
<S> <C>
VANGUARD STAR PORTFOLIO +28.6%
- ------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +37.6%
LEHMAN AGGREGATE BOND INDEX +18.5
90-DAY U.S. TREASURY BILLS + 5.8
COMPOSITE MARKET INDEX +28.8%
- ------------------------------------------------------------
COMPOSITE FUND AVERAGE +23.9%
- ------------------------------------------------------------
</TABLE>
Note: Composite Market Index is 62.5% Standard & Poor's 500 Index, 25% Lehman
Aggregate Bond Index, and 12.5% Salomon 90-Day Treasury bills.
The total return of STAR is based on an increase in our net asset value from
$12.61 per share on December 31, 1994, to $15.03 on December 31, 1995, with the
latter figure adjusted to take into account the reinvestment of two semi-annual
dividends totaling $.59 per share from net investment income and two
distributions totaling $.57 per share from net capital gains realized during
1995.
THE FISCAL YEAR IN REVIEW
The great bull markets in stocks and bonds we enjoyed during the past year were
continuous and virtually uninterrupted. The dimension of the increase in both
markets was close to record breaking, delighting the bulls even as it
astonished the bears. In the stock market, when all was said and done, the
Standard & Poor's 500 Index had generated a total return of +37.6%--its best
year since 1958.
There were, as always, many opinions as to the source of the
surprising strength in the stock market. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) a growing
speculative fever in the marketplace, especially during the final weeks of the
year; and (3) a sharp decline in long-term interest rates. The rise in
corporate profits during the year was particularly striking. It's estimated
that operating earnings for the companies in the Standard & Poor's 500 Index
increased about +15% in 1995, after already rising +16% in 1994. (Since 1926,
earnings growth has averaged less than +7% per year.)
If there is a cautionary signal in this boom in profits, it is that
the two-year cumulative earnings growth of +33% has been accompanied by
dividend growth of only +11%. This subdued dividend growth in the face of
sharply higher stock prices resulted in a decline in the yield on the Index to
2.2%, the lowest level on record. Nonetheless, the Wall Street chorus sings
"this time it's different." Dividend yield and earnings growth--the two
fundamentals of stock returns--are clearly taking a back seat to the market's
high valuation of the long-term fundamentals. This is called "speculation," and
it is hardly an inconsequential component of 1995's high returns on stocks. So,
as 1996 begins, we face an environment that is surely sobering.
(continued)
1
<PAGE> 4
[FIGURE 2]
The huge decline in interest rates during the year not only provided a
major stimulus to the stock market, but also set bond prices afire. The yield
of the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during
1995, even below its level of 7.1% at the start of 1994. The 1995 decline drove
long-term bond prices upward by fully +19% resulting in a total return
(including the interest coupon) of +28%--remarkably competitive with the +37.6%
return on stocks.
Short-term rates also declined during 1995, as the Federal Reserve
reduced the Federal funds rate (the rate at which banks borrow from one
another) on two occasions, once in July and again in December. On balance
during the year, the yield on the U.S. Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate environment was
caused largely by a measurable softening in the growth of the U.S. economy,
perhaps with further weakness to come. A sluggish economy, in turn, engendered
continued optimism about the benign outlook for inflation. (Indeed, the
Consumer Price Index (CPI) was quite well-behaved in 1995, rising by but +2.6%,
its smallest increase since 1986.) Investors should carefully ponder the extent
to which today's high growth rate of corporate earnings is likely to be
sustained in a slowing economy.
THE 1990s SO FAR
During the first five years of the 1990s, as I noted in my letter to you one
year ago, stocks provided an average annual return of +8.7%, bonds +7.7%, and
cash reserves +4.9%. All of these figures seemed reasonably consistent with
long-term fundamental measures. But the remarkable returns of 1995 have
substantially raised the returns for stocks and bonds. With six years of the
1990s now history, the average annual returns for stocks and bonds have grown
to +13.1% and +9.4%, respectively. Make no mistake about it--such returns are
unlikely to characterize the remainder of the decade.
In any event, the chart to the left shows how fine the environment has
been for financial assets during this exciting period. Interestingly, you can
see that bonds have held their own with stocks, rather than muting the
fluctuations of the stock market, as had been customary in an earlier era.
Indeed, as the chart clearly depicts, there has been a tight correlation of
stock and bond returns so far during the 1990s. While the returns on cash
reserves lagged well behind those of these more aggressive asset classes, they
were nonetheless far ahead of historical norms. Under these circumstances, it
is hardly surprising that balanced funds have fared so well in recent years.
That said, given the decreasing tendency of the stock and bond markets
to fluctuate independently, it would seem that a new element of relative
volatility has been introduced to funds that adhere to a balanced investment
strategy. During the past year, and over the five preceding years, investors
holding a balanced portfolio of bonds and stocks have been handsomely rewarded,
as both of these asset classes climbed steadily higher. Inevitably, this
tighter correlation
2
<PAGE> 5
will be reflected on the minus side of the ledger at some point in the future.
Nonetheless, we remain confident that STAR's conservative balance among stocks,
bonds, and cash reserves will continue to provide an optimal combination of
current income, growth of capital, and reasonable risk.
VANGUARD STAR PORTFOLIO IN 1995
As noted at the outset, 1995 was really the best of all worlds for balanced
funds, as both stocks and bonds recorded one of their best years ever. Vanguard
STAR Portfolio participated fully in the generous rewards of the financial
markets during 1995, providing the highest return (+28.6%) in its now ten years
of history. This table presents the 1995 results of the nine Vanguard Funds
which comprise STAR's portfolio, as well their percentage of net assets at year
end:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURN
--------------
% OF YEAR ENDED
STAR DECEMBER 31,
VANGUARD FUND ASSETS 1995
- --------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
WINDSOR II 35.5% +38.8%
WINDSOR FUND 11.9 +30.1
U.S. GROWTH PORTFOLIO 5.5 +38.4
MORGAN GROWTH FUND 3.2 +36.0
PRIMECAP FUND 3.4 +35.5
EXPLORER FUND 3.0 +26.6
- ------------------------------------------------------------------
BOND FUNDS
GNMA PORTFOLIO 12.5% +17.0%
LONG-TERM CORPORATE PORTFOLIO 12.6 +26.4
- ------------------------------------------------------------------
MONEY MARKET FUND
PRIME PORTFOLIO 12.4% + 5.8%
- ------------------------------------------------------------------
TOTAL 100% +28.6%
- ------------------------------------------------------------------
</TABLE>
The table reflects the partial reallocation of assets in STAR's stock fund
component that took place during the year. In fact, we are now in the process
of completing this reallocation. Ultimately, Windsor II's weighting will have
been reduced from 42% of net assets to about 30%. The assets from Windsor II
will be allocated among Windsor Fund, Morgan Growth Fund, Explorer Fund, and
PRIMECAP Fund. When this shift is completed sometime during the first half of
1996, the allocation of STAR's equity portfolio will be approximately as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
STAR EQUITY
FUND ALLOCATION
-----------------------------
VANGUARD FUND PRESENT PROJECTED
- ------------------------------------------------------------
<S> <C> <C>
WINDSOR II 36% 28%
WINDSOR FUND 12 15
U.S. GROWTH PORTFOLIO 6 5
MORGAN GROWTH FUND 3 5
PRIMECAP FUND 3 5
EXPLORER FUND 3 5
- ------------------------------------------------------------
TOTAL EQUITY ALLOCATION 63% 63%
- ------------------------------------------------------------
</TABLE>
The reasons for this reallocation are two-fold: first, to reduce STAR's heavy
weighting in Windsor II in order to broaden our equity diversification; second,
to temper STAR's bias toward our Vanguard value funds by modestly increasing
the Portfolio's exposure to our growth-oriented funds.
STAR OUTPACES OTHER MUTUAL FUNDS
As good as the past year was for STAR on an absolute basis, it was an even
better year when measured versus competitive norms. Our +28.6% return trounced
the +23.9% return of our composite mutual fund benchmark (weighted in
accordance with STAR's allocation guidelines) and virtually matched the +28.8%
return of our unmanaged market index composite. This past year marks the fourth
consecutive year in which we have exceeded the results of our mutual fund
standard.
The reasons for our wide margin over the mutual fund composite can be
easily captured. On
3
<PAGE> 6
[FIGURE 3]
the one hand, growth stocks (return of +38.1%) and value stocks (+37.0%) were
relatively equal participants in the bull market of 1995. As a result, STAR's
policy of holding Vanguard Funds that participate in both of these investment
"styles"-- albeit with a decided emphasis on value funds--had little impact on
our overall performance.
On the other hand, 1995 saw a clear progression of returns in terms of
market capitalization, with large-cap stocks leading the way (+37.6%), followed
by mid-cap stocks (+33.5%), followed in turn by small-cap stocks (+28.4%). This
juxtaposition clearly favored the STAR Portfolio, given that Windsor II,
Windsor, and U.S. Growth--which together comprise the lion's share of STAR's
equity assets--hold dominant positions in the large, blue-chip stocks. In
contrast, the equity mutual funds that are included in our fund composite (63%
of assets) generally maintain larger holdings in the more aggressive small-cap
arena. What's more, although both PRIMECAP Fund and Morgan Growth Fund hold a
blend of large and small stocks, they nonetheless achieved returns that were
far superior to most equity funds. In the end, only our modest position in the
small-cap-oriented Explorer Fund represented a significant drag on our relative
equity performance.
In the fixed-income arena during 1995, the steep decline in interest
rates drove prices of long-term bonds sharply higher. As would be expected in
this environment, our Long-Term Corporate Portfolio was a major beneficiary,
providing a return that was not too far short of the return on the average
equity fund. Given its shorter effective maturity, the GNMA Portfolio achieved
a more modest gain, albeit one that was well into double-digit territory. In
each case, the return of the average fixed-income mutual fund
4
<PAGE> 7
lagged behind, due largely to the representation of shorter-term bond funds in
this competitive mutual fund category. Finally, while the return of our Prime
Portfolio reflected the modest yields available on money market instruments
during the year, the Portfolio's return was better than that provided by the
average money market fund.
In all, our favorable margin of 4.7% over our competitors was one of
our largest advantages for any year in our history. This table provides an
overview of STAR's returns relative to those of the average mutual fund within
each asset class as well as the overall fund composite:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURN
-----------------------------------------
YEAR ENDED
DECEMBER 31, 1995
-----------------------------------------
VANGUARD COMPARABLE
STAR FUND STAR
FUND CATEGORY PORTFOLIO AVERAGE ADVANTAGE
- ------------------------------------------------------------
<S> <C> <C> <C>
STOCK +36.2% +31.1% +5.1%
BOND +21.7 +15.4 +6.3
MONEY MARKET + 5.8 + 5.4 +0.4
- ------------------------------------------------------------
TOTAL +28.6% +23.9% +4.7%
- ------------------------------------------------------------
</TABLE>
This package of mutual funds would seem to represent a reasonable benchmark
against which to measure STAR's performance. It should go without saying,
however, that the achievement of such handsome absolute and relative returns
for the Vanguard Portfolios held by STAR should not be considered a
representation of future returns. Indeed, a combination of such returns is
probably a once-in-a-decade phenomenon.
A LONGER-TERM PERSPECTIVE
The Fund's record over the past ten years relative to its customary comparative
standards is illustrated in the chart at the top of the previous page, both in
percentage terms and in dollar terms, based on an initial investment of
$10,000. The results are summarized in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURN
---------------------------------------
DECEMBER 31, 1985, TO
DECEMBER 31, 1995
---------------------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
------------------------------------------------------------
<S> <C> <C>
VANGUARD STAR PORTFOLIO +11.9% $30,840
- -------------------------------------------------------------
COMPOSITE FUND AVERAGE +10.7% $27,530
COMPOSITE MARKET INDEX +12.5 32,500
- ------------------------------------------------------------
</TABLE>
The chart reflects both ups and downs in the financial markets, and there is no
assurance that the ever-unpredictable markets of the future will provide better
returns or worse returns than those presented. However, during the decade, the
total return on the composite market index was well above its long-term norm of
+8.8%, going all the way back to 1926.
The solid annual margin we enjoyed over our composite fund average
(+1.2 percentage points) is extremely meaningful when achieved over a full
decade. Indeed, the final value of an initial $10,000 investment in STAR
Portfolio--$30,840--exceeded the comparable figure for the composite fund index
by $3,310, equivalent to 33% of the initial investment. This large difference
shows the substantial asset accumulation that can result from a combination of
skilled portfolio management, compound returns, and exceptionally low costs.
In this regard, it is worth noting that, while STAR incurs no direct
operating expenses, the underlying Vanguard Funds had a weighted average
expense ratio (operating expenses as a percentage of average net assets) of
0.38% during the period, about one-third of the 1.18% expense ratio for the
composite funds. This comparison would suggest that, all else being equal, we
should be able to outperform the fund composite by about 0.80% each year. Our
expectation is that this sustainable "natural" advantage will be enhanced over
time by the performance of the Vanguard Funds.
(continued)
5
<PAGE> 8
It should hardly go without saying that the chart and the table also
reflect STAR's annual shortfall of -0.6% relative to the composite market
index. This index, as you know, represents tough competition for STAR, and
especially for its composite group of mutual funds. First, it is a theoretical
construct, incurring none of the advisory fees, operating expenses, and
portfolio transaction costs that must be borne--to one extent or another--in
the real world in which mutual funds operate. (Given STAR's imputed annual
expense ratio of 0.38%, this factor alone would account for over one-half of
our shortfall.) Second, while the index is a fair standard, it does not provide
a precise guideline to the policies followed by STAR and our actively managed
competitors. In any event, we will continue to strive to outperform this
challenging standard.
IN SUMMARY
To state the obvious, 1995 was an extraordinarily bountiful year for
shareholders of STAR Portfolio. We should all take (only) a moment to bask in
the light of the generous rewards we earned. We should also recognize, however,
that the financial markets are never a "one-way street," and the risks that
exist today in both the stock and bond markets may well come home to roost in
1996 and erode our 1995 bounty. Put even more bluntly, STAR Portfolio
shareholders enjoyed an enhancement of nearly +29% in value during the year, a
remarkable increase for a conservative balanced fund. With this gain now behind
us, even significant market declines seem unlikely to take shareholders back to
where we were--presumably with satisfaction--just one year ago.
Under these circumstances, what course of action should STAR's
shareholders follow? In my Annual Report one year ago, under very different
circumstances, I urged you to "stay the course." Today, you should recognize
that, despite the short-term risks of investing, the biggest long-term risks
are: (1) failing to invest in stocks and bonds at all; and (2) following an
erratic and ever-changing course. For our part, we intend to adhere to the same
time-tested and conservative portfolio allocation that we've followed for the
past decade. "Stay the course" proved wise counsel a year ago; I reiterate it
today.
Sincerely,
/s/ JOHN C. BOGLE
- ----------------------
John C. Bogle
Chairman of the Board
February 8, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
6
<PAGE> 9
THE AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIO (PERIODS ENDED DECEMBER 31,
1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
---------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD STAR PORTFOLIO 3/29/85 +28.64% +14.33% +11.92% +6.03% +5.89%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
7
<PAGE> 10
The following table illustrates the results of a single-share investment in
Vanguard STAR Portfolio since inception through December 31, 1995. 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*
- ------------------------------------------------------------------------------------------------------------------------
Composite
Fund
STAR Portfolio Average**
Value with Income ------------------------------------------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------
<S> <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% +15.1%
- ------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------
1995 15.03 .57 .59 35.47 +23.7 +4.9 +28.6 +23.9
- ------------------------------------------------------------------------------------------------------------------------
LIFETIME +254.7% +217.0%
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.5% +11.3%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains
distributions for both the Portfolio and the Composite Fund Average.
** 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.
8
<PAGE> 11
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (100.1%)
- ------------------------------------------------------------------------------------------------------------------
Vanguard/Windsor II . . . . . . . . . . . . . . . . . . . . . . . . . . 83,010,068 $1,714,988
Vanguard/Windsor Fund . . . . . . . . . . . . . . . . . . . . . . . . . 39,560,873 574,820
Vanguard U.S. Growth Portfolio . . . . . . . . . . . . . . . . . . . . 12,907,823 262,674
Vanguard/Morgan Growth Fund . . . . . . . . . . . . . . . . . . . . . . 11,138,758 156,945
Vanguard/PRIMECAP Fund . . . . . . . . . . . . . . . . . . . . . . . . 6,217,568 163,087
Vanguard Explorer Fund . . . . . . . . . . . . . . . . . . . . . . . . 2,933,419 146,524
Vanguard Fixed Income Securities Fund-
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,234,419 607,385
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 64,758,590 613,911
Vanguard Money Market Reserves-Prime Portfolio . . . . . . . . . . . . . 604,439,588 604,440
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $4,080,034) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,844,774
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.1%)
- ------------------------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,953
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,887)
---------
(2,934)
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------
Applicable to 322,220,414 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . $4,841,840
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $15.03
==================================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- -------
<S> <C> <C>
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,078,331 $12.66
Overdistributed Net Investment Income . . . . . . . . . . . . . . . . . (367) --
Overdistributed Net Realized Gains . . . . . . . . . . . . . . . . . . (864) --
Unrealized Appreciation of Investments--Note C . . . . . . . . . . . . 764,740 2.37
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,841,840 $15.03
==================================================================================================================
</TABLE>
9
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
(000)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . . . . . . . . . . . . . . . . . . . . . . $ 177,075
- ----------------------------------------------------------------------------------------------------------
Net Investment Income--Note B . . . . . . . . . . . . . . . . . . . . . . . 177,075
- ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received . . . . . . . . . . . . . . . . . . . . . . . 131,140
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,209
- ----------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,349
- ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . 723,462
- ----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . . . . $1,070,886
==========================================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 177,075 $ 150,639
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . 170,349 72,622
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 723,462 (230,387)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 1,070,886 (7,126)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (177,410) (148,756)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . (171,592) (71,831)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (349,002) (220,587)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . . . 422,426 609,354
-- In Lieu of Cash Distributions . . . . . . . . . . . . . 342,586 216,115
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . 103,795 143,518
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . . . (271,580) (277,280)
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . (243,496) (325,980)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . 353,731 365,727
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . 1,075,615 138,014
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 3,766,225 3,628,211
- -------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,841,840 $ 3,766,225
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $.590 $.520
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . $.565 $.250
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,769 56,799
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 23,182 16,956
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,506) (45,491)
- -------------------------------------------------------------------------------------------------------------------
23,445 28,264
- -------------------------------------------------------------------------------------------------------------------
(3) Overdistributed Net Investment Income . . . . . . . . . . . . $ (367) $ (32)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $12.61 $13.41 $12.89 $12.30 $10.73
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . . . . . .590 .53 .47 .51 .62
Capital Gain Distributions Received . . . . . . . . .435 .26 .36 .18 .35
------ ------ ------ ------ ------
Total Distributions Received . . . . . . . . . . . 1.025 .79 .83 .69 .97
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . 2.550 (.82) .56 .59 1.59
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . 3.575 (.03) 1.39 1.28 2.56
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.590) (.52) (.47) (.51) (.62)
Distributions from Realized Capital Gains . . . . . (.565) (.25) (.40) (.18) (.37)
------ ------ ------ ------ ------
Total Distributions . . . . . . . . . . . . . (1.155) (.77) (.87) (.69) (.99)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $15.03 $12.61 $13.41 $12.89 $12.30
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +28.64% -0.21% +10.88% +10.51% +24.18%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $4,842 $3,766 $3,628 $2,489 $1,574
Ratio of Expenses to Average
Net Assets--Note B . . . . . . . . . . . . . . . . . 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 4.12% 4.01% 3.67% 4.36% 5.48%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 13% 9% 3% 3% 11%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
NOTES TO FINANCIAL STATMENTS
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.
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, 1995, were
reimbursed by Vanguard. The Fund's officers and trustees are also officers and
directors of Vanguard.
C. During the year ended December 31, 1995, the Fund made purchases of
$650,167,000 and sales of $474,368,000 of investment securities. At December
31, 1995, unrealized appreciation for financial reporting and Federal income
tax purposes aggregated $764,740,000, which was entirely related to appreciated
securities.
13
<PAGE> 16
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, 1995, and 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
January 31, 1996
14
<PAGE> 17
SPECIAL TAX INFORMATION
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD STAR FUND-STAR PORTFOLIO
Corporate shareholders should note that for the year ended December 31, 1995,
31.0% of the Fund's investment income (i.e., dividend income plus short-term
capital gains) qualifies for the intercorporate dividends received deduction.
15
<PAGE> 18
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 Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
16
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[VANGUARD GROUP LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q560-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 20
VANGUARD STAR PORTFOLIO
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 cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through six.
A line chart of the Indexed Value between Standard & Poor's 500 Index and
Lehman Aggregate Bond Index and 90-Day U.S. Treasury Bills for the fiscal years
1990 through 1995 appears at the top of page two.
A line chart illustrating cumulative performance between Vanguard Star
Portfolio, Standard & Poor's 500 Index, Composite Market Index, Composite Fund
Average, average Annual Total Returns for the period December 31, 1985, to
December 31, 1995 appears at the top of page four.
A running head featuring an hourglass, compass & telescope and ships in the
background appears at the top of page seven.
A running head featuring a cannon and battleships in the background appears at
the top of page eight.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages nine through fourteen.
A running head featuring an hourglass, compass & telescope and ships in the
background appears at the top of page fifteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page sixteen.
A running head featuring birds flying and ships in the background appears at
the top of the inside of back cover.
<PAGE> 21
VANGUARD
LIFESTRATEGY
FUNDS
ANNUAL REPORT 1995
<PAGE> 22
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard LIFEStrategy Funds and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
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> 23
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
The year ended December 31, 1995, the first full year of operations
for Vanguard LIFEStrategy Funds, was a remarkable period indeed for U.S. stocks
and bonds. Buoyed by falling long-term interest rates and strong corporate
profits, U.S. stock prices rose dramatically, providing a total return of
+37.6%, as measured by the unmanaged Standard & Poor's 500 Composite Stock
Price Index. Long-term bonds had one of their best years on record, with the
30-year U.S. Treasury bond posting a return of +30.7%. In this salubrious
environment, each of our four Portfolios provided handsome returns to our
shareholders.
The table below presents the results for 1995, listing the total
return (capital change plus reinvested dividends) for each of the Portfolios.
We also provide the results of a comparative benchmark, constructed from
unmanaged indexes weighted to parallel the target asset class weightings of the
respective Portfolios as shown on page 3.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN
--------------------
YEAR ENDED
DECEMBER 31, 1995
- -----------------------------------------------------------------
<S> <C>
INCOME PORTFOLIO +23.0%
COMPOSITE INDEX* +19.2
- -----------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO +24.3%
COMPOSITE INDEX* +21.5
- -----------------------------------------------------------------
MODERATE GROWTH PORTFOLIO +27.9%
COMPOSITE INDEX* +26.5
- -----------------------------------------------------------------
GROWTH PORTFOLIO +29.2%
COMPOSITE INDEX* +28.9
- -----------------------------------------------------------------
</TABLE>
* Total returns for each composite index are based on applying the Portfolio's
target allocations to the results of the following indexes: for U.S. stocks,
the Wilshire 5000 Index; for international stocks, the Morgan Stanley Capital
International (MSCI) 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.
Detailed per share figures for each Portfolio, including net asset values,
income dividends, and any capital gains distributions are presented in the
table that follows this letter.
THE YEAR IN REVIEW
The U.S. stock market rose in almost straight-line fashion throughout 1995,
ending up some +34% higher than the level at which it began the year. Adding
the miserly dividend yield now available on stocks, the Standard & Poor's 500
Index provided a total return of +37.6%. Since 1926, there have been only five
years when the U.S. stock market has exceeded this return.
There were, as always, many opinions as to the source of the
surprising strength in the stock market. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) a growing
speculative fever in the marketplace, especially during the final weeks of the
year; and (3) a sharp decline in long-term interest rates. The rise in
corporate profits during the year was particularly striking. It's estimated
that operating earnings for the companies in the Standard & Poor's 500 Index
increased about +15% in 1995, after rising +16% in 1994. (Since 1926, earnings
growth has averaged less than +7% per year.) If there is a cautionary signal in
this boom in profits, it is that the two-year cumulative earnings growth of
+33% has been accompanied by dividend growth of only +11%.
The result of this subdued dividend growth in the face of sharply
higher stock prices was a decline in the yield on the Index to 2.2%, the lowest
level on record. Nonetheless, the Wall Street chorus sings "this time it's
different." Dividend yield and earnings growth--the two fundamentals of stock
returns--are clearly taking a back seat to the market's high valuation of the
long-term fundamentals. This is called "speculation," and it is hardly an
inconsequential component of 1995's high returns on stocks. So, as 1996 begins,
the low yield on stocks is surely a sobering statistic.
The huge decline in interest rates during the year not only provided a
major stimulus to the stock market, but also set bond prices afire. The yield
of the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during
1995, even below its level of 7.1% at the start of 1994. The 1995 decline drove
long-term bond prices up by fully +19%, resulting in a total return (including
the interest coupon) of +28%--remarkably competitive with the
1
<PAGE> 24
[FIGURE 2]
return on stocks and representing the third best year for bonds since 1926.
The decline in long-term interest rates was engendered largely by the
diminishing threat of additional increases in short-term interest rates by the
Federal Reserve Board. After a series of seven consecutive increases in the
Federal funds rate (the rate at which banks borrow from one another),
short-term rates then held fairly steady until this key rate was reduced by
1/4% in July 1995, to 5.75%. The Fed did not vary its target rate again until
December, when rates were cut by another 1/4% to 5.5%. On balance during the
year, the yield on the U.S. Treasury bill declined from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate
environment was caused largely by a measurable softening in the growth of the
U.S. economy, perhaps with further weakness to come. A sluggish economy, in
turn, engendered continued optimism about the benign outlook for inflation.
(Indeed, the Consumer Price Index (CPI) was quite well-behaved in 1995, rising
by but 2.6%, its smallest increase since 1986.) Investors should carefully
ponder the extent to which today's high growth rate of corporate earnings is
likely to be sustained in a slowing economy.
In contrast to the ebullience of the U.S. stock market, overseas
bourses provided mixed returns, averaging +11.6% for the MSCI EAFE Index when
considered in U.S. dollar terms. European markets proved quite strong, as the
European component of the Index returned +22.1% (a local market return of
+15.7%, plus the currency effect of a weaker dollar, which added +6.4% to local
returns).
The Pacific region, on the other hand, proved disappointing, with the
Pacific component of the Index returning but +2.9%--a local market return of
+5.9%, minus the impact of a stronger dollar, which reduced the local return by
- -3.0%. (Currency returns work both ways!) In Japan, the dominant component of
the Pacific Index, stock prices declined sharply in the first part of the year,
just as the yen was soaring against the dollar, and then roared back in the
last half of the year, as the yen reversed course and weakened against the
dollar. In all, the Japanese market provided a meager +0.9% return to U.S.
investors over the complete year.
THE LIFESTRATEGY PORTFOLIOS
In order to meet the needs of investors with differing goals, time horizons,
and risk tolerances, Vanguard LIFEStrategy Funds are set up with differing
allocations among the major asset classes. The pie charts on the following page
show the target asset allocation of each of our Portfolios.
The Portfolios target their respective allocations by investing in
selected Vanguard Funds. We utilize index funds to provide the stock component.
In particular, the Total Stock Market Portfolio--which tracks the Wilshire 5000
Index, the broadest benchmark of the U.S. stock market--is the basis for our
U.S. stock holdings. The combination of Vanguard's European and Pacific
Portfolios provides participation in the international markets by mirroring the
MSCI EAFE Index. International stock funds--not held in the Income Portfolio,
but with substantial weightings in the Conservative Growth (5% of net assets),
Moderate Growth (10%), and Growth Portfolios (15%)--detracted from our returns
during the year. In other years, of course, these
2
<PAGE> 25
[FIGURE 3]
holdings may enhance returns. For bond holdings, we utilize a combination of
Vanguard high-grade bond portfolios, which together provide an
intermediate-term average maturity. For reserves, we employ our Short-Term
Corporate Bond Portfolio, which contains high-grade corporate bonds of two- to
three-year average maturity.
Included in each LIFEStrategy Portfolio is a commitment of 25%(1) of
assets to Vanguard Asset Allocation Fund, which uses a disciplined approach to
tactically allocate assets among U.S. stocks, bonds, and cash reserves based on
relative return forecasts. Our target portfolios assume a 60% stock/40% bond
position in the Asset Allocation Fund, but it may vary considerably, adding an
element of short-term tactics to the long-range strategic approach of the
LIFEStrategy Funds.
Vanguard Asset Allocation Fund enjoyed a particularly good year,
earning a total return of +35.5%. I should note that the Fund's common stock
portion is indexed to the Standard & Poor's 500 Index, and the bond portion
includes long-term U.S. Treasury bonds. The Fund's success was based both on
the allocations made by our adviser during the year (a strong bias toward
equities and a reduced bond allocation) and on the composition of investments
in each asset class. The large-capitalization stocks that dominate the Standard
& Poor's 500 Index outpaced mid-cap and small-cap stocks during the bull
market; the long-term U.S. Treasury bonds provided the highest returns of any
bond market segment, in fact, earning a return almost as high as the average
general equity mutual fund.
In all, our position in the Vanguard Asset Allocation Fund was largely
responsible for our extra returns relative to our composite index targets,
which are shown in the table at the beginning of this letter. As mentioned
earlier, the balance of the Asset Allocation Fund may vary considerably over
interim periods among the three asset classes described above, and, at year-end
1995, 80% of its assets comprised common stocks, 10% long-term bonds, and 10%
cash reserves. This table shows the allocations in place at year end:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
LIFESTRATEGY PORTFOLIO INVESTMENT ALLOCATIONS
DECEMBER 31, 1995
- ------------------------------------------------------------------------
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 25.0% 45.0% 65.0% 85.0%
BONDS 52.5 32.5 32.5 12.5
RESERVES 22.5 22.5 2.5 2.5
- ------------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------
</TABLE>
- -------------------
(1) The percentage in Vanguard Asset Allocation Fund was lowered from 30% to
25% in September 1995.
3
<PAGE> 26
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- -----------------------------------------------------------------
1 Year Since Inception
- -----------------------------------------------------------------
<S> <C> <C>
INCOME PORTFOLIO +22.99% +18.16%
COMPOSITE FUND AVERAGE* +16.02 +12.46
COMPOSITE MARKET INDEX** +19.20 +15.38
</TABLE>
* Composite Fund Average is 60% Lipper Fixed Income, 20% Lipper General
Equity, and 20% Lipper Money Market.
** Composite Market Index is 60% Lehman Aggregate Bond Index, 20% Wilshire 5000
Index, and 20% Salomon 90-Day T-bills.
Note: Past performance is not predictive of future performance.
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- -----------------------------------------------------------------
1 Year Since Inception
- -----------------------------------------------------------------
<S> <C> <C>
CONSERVATIVE GROWTH PORTFOLIO +24.35% +19.10%
COMPOSITE FUND AVERAGE* +17.98 +13.66
COMPOSITE MARKET INDEX** +21.45 +16.90
</TABLE>
* Composite Fund Average is 40% Lipper Fixed Income, 35% Lipper General
Equity, 20% Lipper Money Market, and 5% Lipper International.
** Composite Market Index is 40% Lehman Aggregate Bond Index, 35% Wilshire 5000
Index, 20% Salomon 90-Day T-bills, and 5% MSCI EAFE Index.
Note: Past performance is not predictive of future performance.
As would be expected in a year when stocks soared, our Portfolios with heavier
weightings in stocks earned higher returns. Of course, these higher stock
weightings also involve higher levels of short-term risk. So, 1995 played out
as the basic tenets of investment theory suggest they should: our more
conservative Portfolios earned the lowest returns, while our more aggressive
Portfolios earned the highest. What was so surprising was that even our most
conservative Portfolio, the Income Portfolio, provided a return exceeding +20%.
Our Portfolios each benefited from the fact that our index funds
tracked their benchmarks closely and our operating expenses for the underlying
funds were kept to a minimal level. These traits are dependable features of the
LIFEStrategy Funds. Our remarkable outperformance of the composite index
benchmark in 1995 was due to two factors: (1) the strong performance of
Vanguard Asset Allocation Fund; and (2) for our two more conservative
Portfolios, the Income and Conservative Growth Portfolios, the fact that we
have made a policy decision to use short-term bonds instead of money market
instruments for our 20% reserves position. In 1995, our Short-Term Corporate
Portfolio returned +12.7% versus +5.8% for 90-day Treasury bills. While both of
these factors worked to our benefit in 1995, they may not always do so.
Each of the LIFEStrategy Portfolios had an even stronger year when
compared to its competitive fund benchmark using hypothetical averages based on
the results of the average mutual fund in each asset class. The table on the
following page presents the comparison.
4
<PAGE> 27
[FIGURE 6]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- -----------------------------------------------------------------
1 Year Since Inception
- -----------------------------------------------------------------
<S> <C> <C>
MODERATE GROWTH PORTFOLIO +27.94% +21.07%
COMPOSITE FUND AVERAGE* +22.08 +16.21
COMPOSITE MARKET INDEX** +26.54 +20.39
</TABLE>
* Composite Fund Average is 50% Lipper General Equity, 40% Lipper Fixed
Income, and 10% Lipper International.
** Composite Market Index is 50% Wilshire 5000 Index, 40% Lehman Aggregate Bond
Index, and 10% MSCI EAFE Index.
Note: Past performance is not predictive of future performance.
[FIGURE 7]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- -----------------------------------------------------------------
1 Year Since Inception
- -----------------------------------------------------------------
<S> <C> <C>
GROWTH PORTFOLIO +29.24% +22.64%
COMPOSITE FUND AVERAGE* +24.09 +17.40
COMPOSITE MARKET INDEX** +28.88 +21.92
</TABLE>
* Composite Fund Average is 65% Lipper General Equity, 20% Lipper Fixed
Income, and 15% Lipper International.
** Composite Market Index is 65% Wilshire 5000 Index, 20% Lehman Aggregate Bond
Index, and 15% MSCI EAFE Index.
Note: Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURN
----------------------------------------
YEAR ENDED
DECEMBER 31, 1995
----------------------------------------
MUTUAL
LIFESTRATEGY FUND
PORTFOLIO PORTFOLIO BENCHMARK* DIFFERENCE
- ----------------------------------------------------------------------
<S> <C> <C> <C>
INCOME +23.0% +16.0% +7.0%
CONSERVATIVE
GROWTH +24.3 +18.0 +6.3
MODERATE GROWTH +27.9 +22.1 +5.8
GROWTH +29.2 +24.1 +5.1
- ----------------------------------------------------------------------
</TABLE>
* Total returns for the benchmarks are based on the results of a blended
composite, which weights the returns of the average comparable mutual fund
for each asset class in proportion with the target weighting of the
appropriate LIFEStrategy Portfolio.
It should go without saying that the returns reflected in the table are merely
history. Future returns of the Portfolios--both on an absolute basis and
relative to their benchmark standards--are unpredictable, and may be better or
worse than those shown in the table.
OFF TO A FINE START
As our first full calendar year of operations comes to a close, it is fair to
say that the Vanguard LIFEStrategy Funds are off to a fine start. From an
investment standpoint, we participated in the strongest U.S. stock and bond
markets in recent memory, and we provided excess returns over similarly
balanced index benchmarks. Our results over those achieved by comparably
weighted portfolios of actively managed mutual funds are surely repeatable, but
almost surely not in such high magnitudes.
There are now more than a dozen mutual funds which invest solely in
other mutual funds. Each seeks to provide asset allocations to investors
5
<PAGE> 28
with varying risk tolerances, income requirements, and long-run return
expectations. They also provide asset class allocation policies generally
similar to ours. However, with assets of $792 million at year end, our
LIFEStrategy Portfolios have attracted a tremendous amount of attention from
investors, suggesting that The Vanguard Group is especially highly regarded for
our skills in indexing and our conservative approach to investing.
Our growth, I think, also suggests that investors are coming to
understand the value that can be added for fund portfolios that carry very
small expense ratios. The operating expenses of our underlying Portfolios
averaged 0.33% of net assets in 1995. The average cost of our asset allocation
peers is roughly 1.20%. Thus, other factors equal, we gain a relative
performance enhancement of about 0.90% each year. This advantage means that,
over time, the LIFEStrategy Portfolios should provide higher returns relative
to the risks they incur. Or, put another way, our Portfolios should provide
comparable returns while assuming lower risks. Especially in asset allocation
portfolios, then, our large expense advantage is hardly a trivial factor.
IN SUMMARY
I would remind our shareholders that 1995 should be looked upon as an
extraordinary year for investors. One way to illustrate just how unusual the
year was would be to update the chart I used in last year's Annual Report,
which conveyed the hypothetical investment results for portfolios with the
asset allocation breakdowns targeted by our Portfolios. 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 the
chart demonstrates, 1995's results were at the very top of historical patterns.
To state the obvious, 1995 was an exceptionally bountiful year for the
shareholders in Vanguard LIFEStrategy Funds. We should all take (only) a moment
to bask in the light of the generous returns of 1995. However, we must also
recall that financial markets are never a "one-way street," and
[FIGURE 8]
6
<PAGE> 29
the risks that exist today in both stock and bond markets may well come home to
roost in 1996 and erode our 1995 bounty. Please remember that stock valuation
levels are at historically high levels by most standards and that bond
yields--under 6% for long-term Treasury bonds at year end--are low by recent
standards.
Of course, the Vanguard LIFEStrategy Funds are designed to be part of
a long-term investment program for shareholders who plan to buy and then hold
through thick and thin. Although none of our Portfolios can avoid the impact of
the inevitable bear market, their level of risk exposure will naturally differ
from Portfolio to Portfolio, from our most conservative (Income) Portfolio to
our most aggressive (Growth) Portfolio. However, over time, investors who
maintain and, if possible, continue to invest in their program should be
rewarded with a diversified and extremely low-cost participation in the major
financial asset classes.
In closing, I would note that you should periodically review your
investment approach to be comfortable that the allocation of the LIFEStrategy
Portfolio you have selected continues to meet your goals and risk tolerance.
After that, our best advice is simply to "stay the course."
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 17, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share
------------------------------------- Income Capital Gains SEC
LIFEStrategy Portfolio December 31, 1994 December 31, 1995 Dividends Distributions Yield
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME $9.88 $11.54 $.49 $.09 5.73%
CONSERVATIVE GROWTH 9.89 11.68 .47 .12 4.75
MODERATE GROWTH 9.86 12.11 .36 .13 3.82
GROWTH 9.93 12.36 .31 .15 2.81
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
--------------------------
INCEPTION TOTAL CAPITAL INCOME
PORTFOLIO DATE 1 YEAR RETURN RETURN RETURN
---------- --------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
INCOME 9/30/94 +22.99% +18.16% +12.82% +5.34%
CONSERVATIVE GROWTH 9/30/94 +24.35 +19.10 +13.95 +5.15
MODERATE GROWTH 9/30/94 +27.94 +21.07 +16.87 +4.20
GROWTH 9/30/94 +29.24 +22.64 +18.83 +3.81
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
7
<PAGE> 30
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
INCOME PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.7%)
- --------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . 1,760,717 $ 30,020
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . 3,585,755 39,121
Intermediate-Term Corporate Portfolio . . . . . 1,485,737 15,080
Long-Term Corporate Portfolio . . . . . . . . . 1,592,925 15,101
GNMA Portfolio . . . . . . . . . . . . . . . . . 1,443,379 15,054
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . 399,857 6,014
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $116,111) . . . . . . . . . . . . . . . . . 120,390
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- --------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . 1,545
Liabilities . . . . . . . . . . . . . . . . . . . (1,196)
--------
349
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 10,463,664 shares of beneficial
interest (unlimited authorization--no par value) $120,739
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . $11.54
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . $116,507 $11.13
UNDISTRIBUTED NET INVESTMENT INCOME . . . . . . . 4 --
OVERDISTRIBUTED NET REALIZED GAINS . . . . . . . . (51) --
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . 4,279 .41
- --------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . $120,739 $11.54
- --------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 31
<TABLE>
<CAPTION>
Market
Value
CONSERVATIVE GROWTH PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.7%)
- --------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . 3,188,547 $ 54,365
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . 5,519,686 60,220
Intermediate-Term Corporate Portfolio . . . . . 1,621,837 16,462
Long-Term Corporate Portfolio . . . . . . . . . 1,738,900 16,485
GNMA Portfolio . . . . . . . . . . . . . . . . . 1,575,801 16,435
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . 2,906,118 43,708
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . 392,679 5,505
Pacific Portfolio . . . . . . . . . . . . . . . 479,605 5,515
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $201,555) . . . . . . . . . . . . . . . . . 218,695
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- --------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . 2,458
Liabilities . . . . . . . . . . . . . . . . . . . (1,885)
--------
573
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 18,768,163 shares of beneficial
interest (unlimited authorization--no par value) $219,268
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . $11.68
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . $202,311 $10.78
OVERDISTRIBUTED NET INVESTMENT INCOME . . . . . . (57) --
OVERDISTRIBUTED NET REALIZED GAINS . . . . . . . . (126) (.01)
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . 17,140 .91
- --------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . $219,268 $11.68
- --------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 32
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
MODERATE GROWTH PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.2%)
- --------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . 3,403,213 $ 58,025
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . 1,603,849 17,498
Intermediate-Term Corporate Portfolio . . . . . 1,727,383 17,533
Long-Term Corporate Portfolio . . . . . . . . . 1,851,612 17,553
GNMA Portfolio . . . . . . . . . . . . . . . . . 1,678,498 17,507
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . 5,408,050 81,337
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . 849,890 11,915
Pacific Portfolio . . . . . . . . . . . . . . . 1,004,939 11,557
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $212,585) . . . . . . . . . . . . . . . . . 232,925
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.8%)
- --------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . 2,942
Liabilities . . . . . . . . . . . . . . . . . . . (1,181)
--------
1,761
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 19,371,778 shares of beneficial
interest (unlimited authorization--no par value) $234,686
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . $12.11
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . $214,389 $11.06
OVERDISTRIBUTED NET INVESTMENT INCOME . . . . . . (28) --
OVERDISTRIBUTED NET REALIZED GAINS . . . . . . . . (15) --
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . 20,340 1.05
- --------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . $234,686 $12.11
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 33
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.5%)
- --------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . 3,167,242 $ 54,001
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . 496,144 5,413
Intermediate-Term Corporate Portfolio . . . . . 534,932 5,430
Long-Term Corporate Portfolio . . . . . . . . . 573,583 5,437
GNMA Portfolio . . . . . . . . . . . . . . . . . 519,146 5,415
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . 7,189,090 108,124
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . 1,176,786 16,498
Pacific Portfolio . . . . . . . . . . . . . . . 1,387,443 15,956
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $194,170) . . . . . . . . . . . . . . . . . 216,274
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- --------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . 2,258
Liabilities . . . . . . . . . . . . . . . . . . . (1,111)
--------
1,147
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 17,588,772 shares of beneficial
interest (unlimited authorization--no par value) $217,421
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . $12.36
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . $195,512 $11.11
OVERDISTRIBUTED NET INVESTMENT INCOME . . . . . . (54) --
OVERDISTRIBUTED NET REALIZED GAINS . . . . . . . . (141) (.01)
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . 22,104 1.26
- --------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . $217,421 $12.36
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 34
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
CONSERVATIVE
INCOME GROWTH
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1995
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . $2,367 $ 6,545
- --------------------------------------------------------------------------------
Net Investment Income--Note B . . 2,367 6,545
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received . . . 695 2,063
Investment Securities Sold . . . . . . . 1 --
- --------------------------------------------------------------------------------
Realized Net Gain . . . . . . . 696 2,063
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . 4,345 17,567
- --------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . $7,408 $26,175
================================================================================
</TABLE>
12
<PAGE> 35
<TABLE>
<CAPTION>
MODERATE
GROWTH GROWTH
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1995
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . $ 5,483 $ 4,455
- --------------------------------------------------------------------------------
Net Investment Income--Note B . . . 5,483 4,455
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received . . . 2,399 2,405
Investment Securities Sold . . . . . . . 2 5
- --------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . 2,401 2,410
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . 20,764 22,691
- --------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . $28,648 $29,556
================================================================================
</TABLE>
13
<PAGE> 36
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
CONSERVATIVE
INCOME GROWTH
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED September 30+ to YEAR ENDED September 30+ to
December 31, December 31, DECEMBER 31, December 31,
1995 1994 1995 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 2,367 $ 153 $ 6,545 $ 552
Realized Net Gain . . . . . . . . . . . . . . 696 1 2,063 27
Change in Unrealized
Appreciation (Depreciation) . . . . . . . 4,345 (66) 17,567 (427)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . 7,408 88 26,175 152
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (2,360) (156) (6,597) (557)
Realized Net Gain . . . . . . . . . . . . . . (748) -- (2,176) (40)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (3,108) (156) (8,773) (597)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . 56,834 3,442 102,375 7,959
--In Lieu of Cash Distributions . . 2,568 108 8,031 532
--Exchange . . . . . . . . . . . . . 54,983 8,416 70,129 34,397
Redeemed --Regular . . . . . . . . . . . . . (2,113) (48) (4,871) (190)
--Exchange . . . . . . . . . . . . . (7,327) (356) (15,071) (980)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . . . . . 104,945 11,562 160,593 41,718
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . 109,245 11,494 177,995 41,273
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . 11,494 -- 41,273 --
- ------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . $120,739 $11,494 $219,268 $41,273
==============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $.49 $ .14 $.47 $ .14
Realized Net Gain . . . . . . . . . . . $.09 -- $.12 $ .01
- ------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 9,932 1,193 15,673 4,237
Issued in Lieu of Cash Distributions . . 226 11 701 54
Redeemed . . . . . . . . . . . . . . . (857) (41) (1,779) (118)
- ------------------------------------------------------------------------------------------------------------------------------
9,301 1,163 14,595 4,173
- ------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income . . . . . . . $ 4 $ (3) $ (57) $ (5)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
14
<PAGE> 37
<TABLE>
<CAPTION>
MODERATE
GROWTH GROWTH
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED September 30+ to YEAR ENDED September 30+ to
DECEMBER 31, December 31, DECEMBER 31, December 31,
1995 1994 1995 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 5,483 $ 439 $ 4,455 $ 469
Realized Net Gain . . . . . . . . . . . . . . 2,401 45 2,410 62
Change in Unrealized
Appreciation (Depreciation) . . . . . . . 20,764 (424) 22,691 (587)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . 28,648 60 29,556 (56)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (5,489) (461) (4,485) (493)
Realized Net Gain . . . . . . . . . . . . . . (2,428) (33) (2,543) (70)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (7,917) (494) (7,028) (563)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . 113,757 8,619 101,608 10,707
--In Lieu of Cash Distributions . . 7,545 472 6,906 551
--Exchange . . . . . . . . . . . . . 79,114 27,317 64,814 28,250
Redeemed --Regular . . . . . . . . . . . . . (6,215) (78) (3,872) (123)
--Exchange . . . . . . . . . . . . . (15,050) (1,092) (12,320) (1,009)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . . . . . 179,151 35,238 157,136 38,376
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . 199,882 34,804 179,664 37,757
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . 34,804 -- 37,757 --
- ------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . $234,686 $34,804 $217,421 $37,757
==============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $.36 $.14 $.31 $ .14
Realized Net Gain . . . . . . . . . . . $.13 $.01 $.15 $ .02
- ------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 17,069 3,600 14,626 3,860
Issued in Lieu of Cash Distributions . 631 48 567 55
Redeemed . . . . . . . . . . . . . . . (1,859) (118) (1,406) (114)
- ------------------------------------------------------------------------------------------------------------------------------
15,841 3,530 13,787 3,801
- ------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income . . . . . . . . $ (28) $ (22) $ (54) $ (24)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
15
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE
INCOME GROWTH
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED September 30+ to YEAR ENDED September 30+ to
DECEMBER 31, December 31, DECEMBER 31, December 31,
For a Share Outstanding Throughout Each Period 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $ 9.88 $10.00 $ 9.89 $10.03
------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . .49 .14 .47 .14
Capital Gain Distributions Received . . . . . .09 -- .11 .01
------ ------ ------ ------
Total Distributions Received . . . . . . . . .58 .14 .58 .15
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . 1.66 (.12) 1.80 (.14)
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS . . . . . . . . . . . . 2.24 .02 2.38 .01
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.49) (.14) (.47) (.14)
Distributions from Realized Capital Gains . . (.09) -- (.12) (.01)
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (.58) (.14) (.59) (.15)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $11.54 $ 9.88 $11.68 $ 9.89
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . +22.99% +0.20% +24.35% +0.10%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $121 $11 $219 $41
Ratio of Expenses to Average
Net Assets--Note B . . . . . . . . . . . . . 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 5.76% 7.31%* 5.14% 7.07%*
Portfolio Turnover Rate . . . . . . . . . . . . . 4% 1% 1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
16
<PAGE> 39
<TABLE>
<CAPTION>
MODERATE
GROWTH GROWTH
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED September 30+ to YEAR ENDED September 30+ to
DECEMBER 31, December 31, DECEMBER 31, December 31,
For a Share Outstanding Throughout Each Period 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $ 9.86 $10.08 $ 9.93 $10.10
------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . .36 .14 .32 .13
Capital Gain Distributions Received . . . . . .13 .01 .14 .02
------ ------ ------ ------
Total Distributions Received . . . . . . . . .49 .15 .46 .15
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . 2.25 (.22) 2.43 (.16)
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS . . . . . . . . . . . . 2.74 (.07) 2.89 (.01)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.36) (.14) (.31) (.14)
Distributions from Realized Capital Gains . . (.13) (.01) (.15) (.02)
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (.49) (.15) (.46) (.16)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $12.11 $ 9.86 $12.36 $ 9.93
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . +27.94% -0.70% +29.24% -0.10%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $235 $35 $217 $38
Ratio of Expenses to Average
Net Assets--Note B . . . . . . . . . . . . . 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 4.42% 7.10%* 3.67% 7.06%*
Portfolio Turnover Rate . . . . . . . . . . . . . 1% 0% 1% 1%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
17
<PAGE> 40
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 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.
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, 1995, were
reimbursed by Vanguard. The Fund's officers and trustees are also officers and
directors of Vanguard.
C. During the year ended December 31, 1995, purchases and sales of investment
securities were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000)
-----------------------------------
Portfolio Purchases Sales
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME $106,447 $1,780
CONSERVATIVE GROWTH 161,483 1,000
MODERATE GROWTH 179,774 1,339
GROWTH 157,946 1,000
- --------------------------------------------------------------------------------
</TABLE>
D. At December 31, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000)
-------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Appreciation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME $ 4,279 -- $ 4,279
CONSERVATIVE GROWTH 17,140 -- 17,140
MODERATE GROWTH 20,340 -- 20,340
GROWTH 22,104 -- 22,104
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 41
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, 1995, and 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
January 31, 1996
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD STAR FUND
Corporate shareholders should note that for the year ended December 31, 1995,
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>
<S> <C>
Income Portfolio . . . . . . . . . . . 8.7%
Conservative Growth Portfolio . . . . . 14.5%
Moderate Growth Portfolio . . . . . . . 24.7%
Growth Portfolio . . . . . . . . . . . 35.2%
</TABLE>
19
<PAGE> 42
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 Co., Alco Standard Corp.,
Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MacLAURY, President of The Brookings
Institution; Director of American Express Bank Ltd. and
The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern
New England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer
of The Nature Conservancy; formerly, Director and
Senior Partner of McKinsey & Co. and President of New
York University; Director of Pacific Gas and Electric Co.
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman and Director of RJR
Nabisco; Director of TECO Energy, Inc. and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Co.; Director of Cummins
Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice
President and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The
Vanguard Group, Inc., and 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
ROBERT A. DiSTEFANO IAN A. MacKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM McNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
20
<PAGE> 43
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
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.
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q880-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 44
VANGUARD LIFESTRATEGY FUNDS
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 cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through seven.
A line chart of the Indexed Value between Standard & Poor's 500 Index, Lehman
Aggregate Bond Index, and 90-Day Treasury Bills for the fiscal years 1990
through 1995 appears at the top of page two.
Pie charts illustrating LIFEStrategy Funds Target Portfolios (Income,
Conservative Growth, Moderate Growth & Growth Portfolios) appears at the top of
page three.
A line chart illustrating cumulative performance between the
LIFEStrategy-Income Portfolio, Composite Market Index and Composite Fund
Average, average Annual Total Returns for the period September 30, 1994, to
December 31, 1995 appears at the top of page four.
A line chart illustrating cumulative performance between
LIFEStrategy-Conservative Growth Portfolio, Composite Market Index, and
Composite Fund Average, average Annual Total Returns for the period September
30, 1994, to December 31, 1995 appears at the top of page four.
A line chart illustrating cumulative performance between LIFEStrategy-Moderate
Growth Portfolio, Composite Market Index, and Composite Fund Average, average
Annual Total Returns for the period September 30, 1994, to December 31, 1995
appears at the top of page five.
A line chart illustrating cumulative performance between LIFEStrategy-Growth
Portfolio, Composite Market Index, and Composite Fund Average, average Annual
Total Returns for the period September 30, 1994, to December 31, 1995 appears
at the top of page five.
A bar chart illustrating a hypothetical LIFEStrategy Portfolios, average Annual
Total Returns for the twenty five years ended December 31, 1995 appears at the
bottom of page six.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages eight through nineteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
