<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
Vanguard STAR Portfolio provided a solid total return of +6.1% for the six
months ended June 30, the first half of our 1996 fiscal year. Stock and bond
returns diverged during the period and, not surprisingly, STAR's return fell
between the robust positive returns provided by common stocks and the modest
losses posted by bonds.
The following table compares STAR's total return (capital change plus
reinvested dividends) for the period 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. STAR's
total return was a whisker behind the return of a composite of these three
market indexes, weighted in accordance with STAR's asset allocation guidelines.
We also trailed slightly the return of a comparably weighted average of mutual
funds.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURN
-----------------
SIX MONTHS ENDED
JUNE 30, 1996
- ---------------------------------------------------------------------
<S> <C>
VANGUARD STAR PORTFOLIO + 6.1%
- ---------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX + 10.1%
LEHMAN AGGREGATE BOND INDEX - 1.2
90-DAY U.S. TREASURY BILLS + 2.6
- ---------------------------------------------------------------------
COMPOSITE MARKET INDEX + 6.2%
- ---------------------------------------------------------------------
COMPOSITE FUND AVERAGE + 6.8%
- ---------------------------------------------------------------------
</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. Composite Fund
Average is similarly weighted using the average general equity mutual fund, the
average fixed-income fund, and the average money market fund.
The total return of STAR is based on net asset values of $15.03 per share on
December 31, 1995, and $15.69 per share on June 30, 1996, adjusted to take into
account the reinvestment of a dividend of $.25 per share from net investment
income.
THE PERIOD IN REVIEW
The U.S. stock market continued to surge upward during the first half of our
Portfolio's fiscal year, albeit below the near-record pace that prevailed in
1995. Even so, the advance was impressive, occurring as it did in the face of a
sharp rise in long-term interest rates.
While the stock market, as measured by the Standard & Poor's 500
Index, chalked up a +10.1% return from January through June, the bond market
slumped. The price of the benchmark 30-year U.S. Treasury bond fell -12%
during the half year, as its yield rose from 6.0% at the beginning of the year
to 7.0% at the end of June. The Lehman Aggregate Bond Index, a good measure of
the overall bond market, provided a total return of -1.2% in the half year,
earning income of 3.3% combined with a price decline of -4.5%. Short-term
interest rates inched higher during the period, with the rate on 90-day
Treasury bills rising from 5.0% to 5.2%.
The primary reason for the divergence in the returns of stocks and
bonds appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy. Faster-than-expected economic growth
during the first half of 1996 led stock investors to anticipate accelerated
growth in corporate earnings, even as bond investors worried about higher
inflation. It remains to be seen whether the bull market in stocks can
continue in the face of higher interest rates, which may provide heightened
competition for investors' dollars at a time when common stocks offer
historically low dividend yields.
The returns achieved by the Vanguard Funds held by STAR were in line
with those provided by the respective markets in which they invest. Growth
stocks generally outpaced value stocks during the half year, and three of the
four growth-oriented funds held by STAR--U.S. Growth, Morgan Growth, and
Explorer--outpaced the Standard & Poor's 500 Index (PRIMECAP fell a bit short
of the Index). Our value funds had mixed results, with Windsor II virtually
matching the Index and Windsor falling short.
Returns on the bond segment of STAR were negative. The loss was a
scant -0.1% for the GNMA
1
<PAGE> 2
Portfolio, whose average maturity is less than one-half that of the Long-Term
Corporate Portfolio, which therefore suffered more from the rise in interest
rates during the six months. The Prime Portfolio, as it has habitually done,
outperformed the average money market mutual fund. This table summarizes the
six-month performance of the Vanguard Funds held by STAR:
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
-----------------
% OF SIX MONTHS ENDED
VANGUARD FUND STAR ASSETS JUNE 30, 1996
- ------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
WINDSOR II 27% + 10.0%
WINDSOR FUND 15 + 7.8
U.S. GROWTH PORTFOLIO 5 + 14.5
MORGAN GROWTH FUND 5 + 12.2
PRIMECAP FUND 5 + 8.6
EXPLORER FUND 5 + 12.1
- ------------------------------------------------------
BOND FUNDS
GNMA PORTFOLIO 13% - 0.1%
LONG-TERM CORPORATE
PORTFOLIO 13 - 4.6
- ------------------------------------------------------
MONEY MARKET FUND
PRIME PORTFOLIO 12% + 2.6%
- ------------------------------------------------------
TOTAL 100% + 6.1%
- ------------------------------------------------------
</TABLE>
Taken together, the performance of our Vanguard stock and bond funds resulted
in a total return of +6.1%, virtually equal to that of the unmanaged composite
index we use as a benchmark and just behind the return that would have been
earned by a mutual fund composite portfolio, weighted in the same manner as
STAR's investment policies. This composite index of funds is a benchmark that
we have outpaced for four consecutive years; when 1996 ends, we hope we will
have repeated that accomplishment.
IN SUMMARY
Six months ago, in our Annual Report on the 1995 fiscal year--the best in
STAR's history--we cautioned that the financial markets are not a "one-way
street." This fact clearly has been demonstrated by the bond market's recent
downturn. We urged you then to "stay the course" with your long-term investment
goals by maintaining a balanced portfolio of stocks, bonds, and cash reserves.
We believe that advice remains a sound approach to long-term investing and it
is precisely the strategy STAR Portfolio will continue to pursue. We look
forward to reporting to you in further detail in our 1996 Annual Report six
months hence.
Sincerely,
/s/ JOHN C. BOGLE
- --------------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- --------------------
John J. Brennan
President
July 9, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD STAR PORTFOLIO since inception through June 30, 1996. 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 +12.6
- -----------------------------------------------------------------------------------------------------------------------
1987 9.98 .75 .85 13.33 - 5.5 + 7.2 + 1.7 + 3.1
- -----------------------------------------------------------------------------------------------------------------------
1988 11.12 .03 .69 15.86 + 11.7 + 7.3 +19.0 +11.8
- -----------------------------------------------------------------------------------------------------------------------
1989 12.05 .38 .77 18.84 + 11.8 + 7.0 +18.8 +18.0
- -----------------------------------------------------------------------------------------------------------------------
1990 10.73 .16 .73 18.16 - 9.6 + 6.0 - 3.6 - 1.6
- -----------------------------------------------------------------------------------------------------------------------
1991 12.30 .37 .62 22.55 + 18.1 + 6.1 +24.2 +26.9
- -----------------------------------------------------------------------------------------------------------------------
1992 12.89 .18 .51 24.92 + 6.3 + 4.2 +10.5 + 8.0
- -----------------------------------------------------------------------------------------------------------------------
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 - 1.2
- -----------------------------------------------------------------------------------------------------------------------
1995 15.03 .57 .59 35.47 + 23.7 + 4.9 +28.6 +23.3
- -----------------------------------------------------------------------------------------------------------------------
1996 (6/30) 15.69 -- .25 37.62 + 4.4 + 1.7 + 6.1 + 6.8
- -----------------------------------------------------------------------------------------------------------------------
LIFETIME +276.2% +242.2%
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.5% +11.5%
- -----------------------------------------------------------------------------------------------------------------------
</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.
3
<PAGE> 4
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (100%)
- --------------------------------------------------------------------------------------------------------------------
Vanguard/Windsor II . . . . . . . . . . . . . . . . . . . . . . . . . . 65,015,927 $1,464,809
Vanguard/Windsor Fund . . . . . . . . . . . . . . . . . . . . . . . . . 51,095,621 789,938
Vanguard U.S. Growth Portfolio . . . . . . . . . . . . . . . . . . . . 11,726,280 273,222
Vanguard/Morgan Growth Fund . . . . . . . . . . . . . . . . . . . . . . 17,056,507 263,352
Vanguard/PRIMECAP Fund . . . . . . . . . . . . . . . . . . . . . . . . 9,434,149 267,458
Vanguard Explorer Fund . . . . . . . . . . . . . . . . . . . . . . . . 4,698,262 263,150
Vanguard Fixed Income Securities Fund-
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,629,203 670,290
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 77,982,197 675,326
Vanguard Money Market Reserves-
Prime Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . 665,810,029 665,810
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $4,467,665) . . . . . . . . . . . . . . . . . . . . . . . . . . 5,333,355
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,904
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,691)
------------
(1,787)
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------
Applicable to 339,712,596 shares of beneficial interest
(unlimited authorization--no par value) . . . . . . . . . . . . . . . $5,331,568
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . $15.69
====================================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,350,360 $12.80
OVERDISTRIBUTED NET INVESTMENT INCOME . . . . . . . . . . . . . . . . (16) --
ACCUMULATED NET REALIZED GAINS . . . . . . . . . . . . . . . . . . . . 115,534 .34
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE C . . . . . . . . . . . 865,690 2.55
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,331,568 $15.69
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1996 December 31, 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 83,908 $ 177,075
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . 116,398 170,349
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 100,950 723,462
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . 301,256 1,070,886
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (83,557) (177,410)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . -- (171,592)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (83,557) (349,002)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462,865 526,221
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . 81,716 342,586
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,552) (515,076)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . 272,029 353,731
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . 489,728 1,075,615
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . 4,841,840 3,766,225
- -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,331,568 $4,841,840
===================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,811 36,769
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 5,228 23,182
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,547) (36,506)
- -------------------------------------------------------------------------------------------------------------------
17,492 23,445
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,908
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income--Note B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,908
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,405
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,993
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,398
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,950
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . . . . . . . . . . $301,256
===================================================================================================================
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED ------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . $15.03 $12.61 $13.41 $12.89 $12.30 $10.73
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . .25 .590 .53 .47 .51 .62
Capital Gain Distributions Received . . . .04 .435 .26 .36 .18 .35
------ ------ ------ ------ ------ ------
Total Distributions Received . . . . . . .29 1.025 .79 .83 .69 .97
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . .62 2.550 (.82) .56 .59 1.59
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . .91 3.575 (.03) 1.39 1.28 2.56
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . (.25) (.590) (.52) (.47) (.51) (.62)
Distributions from Realized Capital Gains -- (.565) (.25) (.40) (.18) (.37)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . (.25) (1.155) (.77) (.87) (.69) (.99)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . $15.69 $15.03 $12.61 $13.41 $12.89 $12.30
==========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . +6.06% +28.64% -0.21% +10.88% +10.51% +24.18%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . $5,332 $4,842 $3,766 $3,628 $2,489 $1,574
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . 3.28%* 4.12% 4.01% 3.67% 4.36% 5.48%
Portfolio Turnover Rate . . . . . . . . . . . . 24%* 13% 9% 3% 3% 11%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
6
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
Vanguard STAR Portfolio is a Portfolio of Vanguard STAR Fund, which consists of
six 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 Portfolio 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 Portfolio 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 furnishes corporate
management, administrative, marketing, and distribution services to the
Portfolio. The special service agreement provides that Vanguard will reimburse
the Portfolio's expenses to the extent of savings in administrative and
marketing costs realized by Vanguard in the operation of the Portfolio.
Accordingly, all expenses incurred by the Portfolio during the six months ended
June 30, 1996, were reimbursed by Vanguard. The Portfolio's officers and
trustees are also officers and directors of Vanguard.
C. During the six months ended June 30, 1996, the Portfolio made purchases
of $757,774,000 and sales of $535,500,000 of investment securities. At June 30,
1996, unrealized appreciation for financial reporting and Federal income tax
purposes aggregated $865,690,000, of which $875,841,000 related to appreciated
securities and $10,151,000 related to depreciated securities.
7
<PAGE> 8
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
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.
Q562-6/96
VANGUARD
STAR
PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1996
8
<PAGE> 9
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
Stock and bond market returns diverged in the first six months of 1996,
with equities taking the high road, advancing +10%, and bonds taking the low
road, declining in value as interest rates rose. The four LIFEStrategy
Portfolios all produced positive returns, ranging from a modest +1.2% for the
Income Portfolio (carrying 60% of its assets in bonds) to +6.8% for the Growth
Portfolio (with 80% of its assets in common stocks).
The table below shows the total return (capital change plus reinvested
dividends) of each Portfolio over the six months ended June 30, 1996. We also
present the results of a comparative benchmark, constructed from unmanaged
indexes weighted to parallel the target asset allocation of each Portfolio.
(These allocations are presented in the table at the top of page 2.)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
TOTAL RETURN
--------------------
SIX MONTHS ENDED
LIFESTRATEGY PORTFOLIO JUNE 30, 1996
- ------------------------------------------------------------------
<S> <C>
INCOME PORTFOLIO +1.2%
COMPOSITE INDEX* +1.8
- ------------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO +3.3%
COMPOSITE INDEX* +3.8
- ------------------------------------------------------------------
MODERATE GROWTH PORTFOLIO +4.8%
COMPOSITE INDEX* +5.0
- ------------------------------------------------------------------
GROWTH PORTFOLIO +6.8%
COMPOSITE INDEX* +7.1
- ------------------------------------------------------------------
</TABLE>
*Total returns for each composite index are calculated by applying the
Portfolio's target allocation to the returns of the following indexes: for U.S.
stocks, the Wilshire 5000 Index; for international stocks, the Morgan Stanley
Capital International (MSCI) Europe, Australasia and Far East (EAFE) Index; for
bonds, the Lehman Aggregate Bond Index; and for cash reserves, the 90-day U.S.
Treasury bill.
The Portfolios' net asset values at the beginning and the end of the period, as
well as income dividends for each Portfolio, are shown in the table at the
bottom of page 2.
THE PERIOD IN REVIEW
The U.S. stock market continued its upsurge during the first half of 1996,
albeit below the near-record pace that prevailed in 1995. Even so, the advance
was impressive, occurring as it did in the face of a sharp rise in long-term
interest rates.
While the total U.S. stock market, as measured by the Wilshire 5000
Index, chalked up a +10.3% return from January through June, the bond market
slumped. The price of the benchmark 30-year U.S. Treasury bond fell -12% during
the half year, as its yield rose from 6.0% at the beginning of the period to
7.0% at the end of June. The Lehman Aggregate Bond Index, a benchmark for the
overall bond market, provided a total return of -1.2% in the half year, earning
income of 3.3% combined with a price decline of -4.5%. Short-term interest
rates increased marginally during the same period, with the rate on 90-day
Treasury bills rising from 5.0% to 5.2%.
The primary reason for the divergence of stock and bond returns
appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy during the first half of 1996.
Faster-than-expected economic growth led stock investors to focus on
accelerated growth of corporate earnings, but led bond investors to worry about
higher inflation. It remains to be seen whether the bull market in stocks can
continue in the face of higher interest rates, which may provide heightened
competition for investors' dollars at a time when common stocks offer
historically low dividend yields.
Foreign stocks provided modest positive returns during the half year,
despite a general strengthening of the U.S. dollar, which diminishes the
returns that U.S. based investors receive from foreign holdings. The Morgan
Stanley Capital International Europe, Australasia, and Far East Index provided
a return of +4.7%. European markets provided solid returns during the period
(+6.7% for the European Index), while returns from the Pacific region (+2.7%)
trailed. The Pacific Index is dominated by Japan, where the local market return
of +7.6% was nearly offset by the dollar's 6% rise in value versus the yen.
(continued)
1
<PAGE> 10
THE LIFESTRATEGY PORTFOLIOS
As you know, each LIFEStrategy Portfolio is a diversified "fund of funds"
consisting of underlying Vanguard mutual funds chosen to represent a targeted
mix of stocks, bonds, and short-term reserves. The target asset allocation for
each Portfolio is shown in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
ASSET CLASS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. STOCKS 20% 35% 50% 65%
INTERNATIONAL
STOCKS -- 5 10 15
BONDS 60 40 40 20
RESERVES 20 20 -- --
- -----------------------------------------------------------------------------------------------------
TOTAL 100% 100% 100% 100%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Each Portfolio's return during the past six months reflects its asset
allocation policy. Because U.S. stocks produced the highest returns among the
major asset classes during the period, the higher the percentage of domestic
equities held by a Portfolio, the higher its return. In contrast, because bond
prices slumped during the half year, the heavier a Portfolio's weighting in
bonds, the lower its overall return. Of course, the higher expected long-term
returns associated with stocks come at a price--a higher risk of short-term
price fluctuations. This point is especially pertinent after the big gains
provided by the strong bull market in equities during 1995 and the first half
of 1996.
The slight underperformance of our Portfolios' returns relative to
their composite indexes was largely the result of the Portfolios' holdings in
Vanguard Asset Allocation Fund, whose total return during the half year was
+5.5%. The Fund's return was impeded by a shift in its allocation from 80%
stocks, 10% bonds, and 10% cash reserves at the beginning of the year to 60%
stocks and 40% bonds by late March. We might note that our investments in
Vanguard Asset Allocation Fund provided a solid positive impetus to the returns
of the LIFEStrategy Portfolios in 1995.
IN SUMMARY
The diversified makeup of our Portfolios is designed to allow investors to
select an asset mix that is appropriate to their long-term investment goals and
their tolerance for risk. This balanced approach cushions the risks of
investing in any single asset class, but certainly does not eliminate the
fluctuations that inevitably occur in financial markets. We continue to believe
that maintaining a balanced portfolio of stocks, bonds, and short-term reserves
is a sound investment approach, one that we will adhere to in managing our
LIFEStrategy Portfolios. We look forward to reporting to you in further detail
in our 1996 Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- ---------------------
John J. Brennan
President
July 9, 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, 1995 June 30, 1996 Dividends Distributions Yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME $11.54 $11.39 $.29 -- 5.70%
CONSERVATIVE GROWTH 11.68 11.84 .22 -- 4.61
MODERATE GROWTH 12.11 12.52 .17 -- 3.72
GROWTH 12.36 13.09 .11 -- 2.69
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 11
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Market
Value
INCOME PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (100.1%)
- -------------------------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 1,959,779 $ 34,825
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 4,209,622 44,959
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . . 1,817,442 17,375
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 2,018,045 17,476
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,723,143 17,335
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 420,011 6,884
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $136,611) 138,854
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.1%)
- -------------------------------------------------------------------------------------------------------------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,127)
----------
(162)
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------
Applicable to 12,178,307 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . . . $ 138,692
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $11.39
===================================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $136,314 $11.20
OVERDISTRIBUTED NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . (10) --
ACCUMULATED NET REALIZED GAINS . . . . . . . . . . . . . . . . . . . . . . 145 .01
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . . . . . . . . . . . . . 2,243 .18
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $138,692 $11.39
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
CONSERVATIVE GROWTH PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (95.1%)
- -------------------------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 4,684,798 $ 83,249
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 8,568,896 91,516
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 2,620,244 25,050
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 2,905,308 25,160
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,492,993 25,079
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 4,331,745 70,997
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 594,008 8,898
Pacific Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 746,633 8,870
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $318,827) 338,819
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (4.9%)
- -------------------------------------------------------------------------------------------------------------------
Receivables for Portfolio Shares Issued . . . . . . . . . . . . . . . . 24,109
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,545
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,285)
---------
17,369
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------
Applicable to 30,078,389 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . . $356,188
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $11.84
===================================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $335,882 $11.17
UNDISTRIBUTED NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . 106 --
ACCUMULATED NET REALIZED GAINS . . . . . . . . . . . . . . . . . . . . . . 208 .01
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . . . . . . . . . . . . . 19,992 .66
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $356,188 $11.84
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
MODERATE GROWTH PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (95.0%)
- -------------------------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 6,672,691 $118,574
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 3,330,891 35,574
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 3,725,837 35,619
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 4,137,422 35,830
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,550,415 35,717
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 11,069,476 181,429
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737,438 26,027
Pacific Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 2,183,466 25,939
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $463,525) 494,709
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (5.0%)
- -------------------------------------------------------------------------------------------------------------------
Receivables for Portfolio Shares Issued . . . . . . . . . . . . . . . . 47,210
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,909
Payables for Investment Securities Purchased . . . . . . . . . . . . . . (22,447)
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (463)
---------
26,209
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------
Applicable to 41,617,282 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . . $520,918
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $12.52
===================================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $489,275 $11.76
OVERDISTRIBUTED NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . (48) --
ACCUMULATED NET REALIZED GAINS . . . . . . . . . . . . . . . . . . . . . . 507 .01
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . . . . . . . . . . . . . 31,184 .75
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $520,918 $12.52
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (96.6%)
- -------------------------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund . . . . . . . . . . . . . . . . . . . . . 5,782,073 $102,747
Vanguard Fixed Income Securities Fund-
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 954,010 10,189
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . 1,076,794 10,294
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . 1,197,529 10,371
GNMA Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,632 10,268
Vanguard Index Trust-
Total Stock Market Portfolio . . . . . . . . . . . . . . . . . . . . . 13,745,944 225,296
Vanguard International Equity Index Fund-
European Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 2,261,562 33,878
Pacific Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 2,923,848 34,735
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $399,088) 437,778
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.4%)
- -------------------------------------------------------------------------------------------------------------------
Receivables for Portfolio Shares Issued . . . . . . . . . . . . . . . . 44,678
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Payables for Investment Securities Purchased . . . . . . . . . . . . . . (28,227)
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,372)
---------
15,230
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------
Applicable to 34,608,802 shares of beneficial
interest (unlimited authorization--no par value) . . . . . . . . . . . $453,008
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $13.09
===================================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $413,950 $11.96
UNDISTRIBUTED NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . 107 --
ACCUMULATED NET REALIZED GAINS . . . . . . . . . . . . . . . . . . . . . . 261 .01
UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D . . . . . . . . . . . . . . 38,690 1.12
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $453,008 $13.09
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
CONSERVATIVE
INCOME GROWTH
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . . . . . . . . . . $3,464 $5,940
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income--Note B . . . . . . . . . . . 3,464 5,940
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received . . . . . . . . . . . 194 335
Investment Securities Sold . . . . . . . . . . . . . . . 2 (1)
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . 196 334
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . (2,036) 2,852
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $1,624 $9,126
===================================================================================================================
</TABLE>
7
<PAGE> 16
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
MODERATE
GROWTH GROWTH
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income Distributions Received . . . . . . . . . . . . . . . . . $ 6,344 $ 3,572
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income--Note B . . . . . . . . . . . . . . 6,344 3,572
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received . . . . . . . . . . . . . . 585 402
Investment Securities Sold . . . . . . . . . . . . . . . . . . (63) --
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . 522 402
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . 10,844 16,586
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . $17,710 $20,560
===================================================================================================================
</TABLE>
8
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
CONSERVATIVE
INCOME GROWTH
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended SIX MONTHS Year Ended
ENDED JUNE 30, December 31, ENDED JUNE 30, December 31,
1996 1995 1996 1995
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 3,464 $ 2,367 $ 5,940 $ 6,545
Realized Net Gain . . . . . . . . . . . 196 696 334 2,063
Change in Unrealized
Appreciation (Depreciation) . . . . . (2,036) 4,345 2,852 17,567
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . 1,624 7,408 9,126 26,175
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . (3,478) (2,360) (5,777) (6,597)
Realized Net Gain . . . . . . . . . . . -- (748) -- (2,176)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . (3,478) (3,108) (5,777) (8,773)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . 49,423 111,817 164,231 172,504
Issued in Lieu of Cash Distributions . . 2,989 2,568 5,278 8,031
Redeemed . . . . . . . . . . . . . . . . (32,605) (9,440) (35,938) (19,942)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . 19,807 104,945 133,571 160,593
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . 17,953 109,245 136,920 177,995
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . 120,739 11,494 219,268 41,273
- -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . $138,692 $120,739 $356,188 $219,268
===================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 4,294 9,932 13,903 15,673
Issued in Lieu of Cash
Distributions . . . . . . . . . 263 226 448 701
Redeemed . . . . . . . . . . . . . (2,842) (857) (3,041) (1,779)
- -------------------------------------------------------------------------------------------------------------------
1,715 9,301 11,310 14,595
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
MODERATE
GROWTH GROWTH
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended SIX MONTHS Year Ended
ENDED JUNE 30, December 31, ENDED JUNE 30, December 31,
1996 1995 1996 1995
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 6,344 $ 5,483 $ 3,572 $ 4,455
Realized Net Gain . . . . . . . . . . . 522 2,401 402 2,410
Change in Unrealized
Appreciation (Depreciation) . . . . . 10,844 20,764 16,586 22,691
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . 17,710 28,648 20,560 29,556
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . (6,364) (5,489) (3,411) (4,485)
Realized Net Gain . . . . . . . . . . . -- (2,428) -- (2,543)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . (6,364) (7,917) (3,411) (7,028)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . 312,131 192,871 244,345 166,422
Issued in Lieu of Cash Distributions . . 5,428 7,545 3,331 6,906
Redeemed . . . . . . . . . . . . . . . . (42,673) (21,265) (29,238) (16,192)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . 274,886 179,151 218,438 157,136
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . 286,232 199,882 235,587 179,664
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . 234,686 34,804 217,421 37,757
- -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . $520,918 $234,686 $453,008 $217,421
===================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 25,238 17,069 19,040 14,626
Issued in Lieu of Cash
Distributions . . . . . . . . . 437 631 256 567
Redeemed . . . . . . . . . . . . . (3,429) (1,859) (2,276) (1,406)
- -------------------------------------------------------------------------------------------------------------------
22,246 15,841 17,020 13,787
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INCOME
PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended September 30+ to
ENDED JUNE 30, December 31, December 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . $11.54 $ 9.88 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . . . . . . . . . . .29 .49 .14
Capital Gain Distributions Received . . . . . . . . . . . . . .01 .09 --
------ ------ ------
Total Distributions Received . . . . . . . . . . . . . . . . .30 .58 .14
Net Realized and Unrealized Gain (Loss) on Investments . . . . (.16) 1.66 (.12)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . .14 2.24 .02
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . (.29) (.49) (.14)
Distributions from Realized Capital Gains . . . . . . . . . . -- (.09) --
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . (.29) (.58) (.14)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . $11.39 $11.54 $ 9.88
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . +1.23% +22.99% +0.20%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . $139 $121 $11
Ratio of Total Expenses to Average Net Assets--Note B . . . . . . 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets . . . . . . 5.20%* 5.76% 7.31%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 19%* 4% 1%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
11
<PAGE> 20
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
CONSERVATIVE GROWTH
PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended September 30+ to
ENDED JUNE 30, December 31, December 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . $11.68 $ 9.89 $10.03
------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . . . . . . . . . . .22 .47 .14
Capital Gain Distributions Received . . . . . . . . . . . . . .02 .11 .01
------ ------ ------
Total Distributions Received . . . . . . . . . . . . . . . . .24 .58 .15
Net Realized and Unrealized Gain (Loss) on Investments . . . . .14 1.80 (.14)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . .38 2.38 .01
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . (.22) (.47) (.14)
Distributions from Realized Capital Gains . . . . . . . . . . -- (.12) (.01)
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . (.22) (.59) (.15)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . $11.84 $11.68 $ 9.89
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . +3.27% +24.35% +0.10%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . $356 $219 $41
Ratio of Total Expenses to Average Net Assets--Note B . . . . . . 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets . . . . . . 4.13%* 5.14% 7.07%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 1%* 1% 0%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
12
<PAGE> 21
<TABLE>
<CAPTION>
MODERATE GROWTH
PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended September 30+ to
ENDED JUNE 30, December 31, December 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . $12.11 $ 9.86 $10.08
------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . . . . . . . . . . .17 .36 .14
Capital Gain Distributions Received . . . . . . . . . . . . . .01 .13 .01
------ ------ ------
Total Distributions Received . . . . . . . . . . . . . . . . .18 .49 .15
Net Realized and Unrealized Gain (Loss) on Investments . . . . .40 2.25 (.22)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . .58 2.74 (.07)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . (.17) (.36) (.14)
Distributions from Realized Capital Gains . . . . . . . . . . -- (.13) (.01)
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . (.17) (.49) (.15)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . $12.52 $12.11 $ 9.86
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . +4.80% +27.94% -0.70%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . $521 $235 $35
Ratio of Total Expenses to Average Net Assets--Note B . . . . . . 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets . . . . . . 3.20%* 4.42% 7.10%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 1%* 1% 0%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
13
<PAGE> 22
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended September 30+ to
ENDED JUNE 30, December 31, December 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . $12.36 $ 9.93 $10.10
------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received . . . . . . . . . . . . . . . . .11 .32 .13
Capital Gain Distributions Received . . . . . . . . . . . . . .02 .14 .02
------ ------ ------
Total Distributions Received . . . . . . . . . . . . . . . . .13 .46 .15
Net Realized and Unrealized Gain (Loss) on Investments . . . . .68 2.43 (.16)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . .81 2.89 (.01)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . (.11) (.31) (.14)
Distributions from Realized Capital Gains . . . . . . . . . . -- (.15) (.02)
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . (.11) (.46) (.16)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . $13.09 $12.36 $ 9.93
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . +6.80% +29.24% -0.10%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . $453 $217 $38
Ratio of Total Expenses to Average Net Assets--Note B . . . . . . 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets . . . . . . 2.15%* 3.67% 7.06%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 0% 1% 1%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
14
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard LIFEStrategy Portfolios consists of the Income, Conservative Growth,
Moderate Growth, and Growth Portfolios of Vanguard STAR Fund. Each Portfolio 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 Portfolios 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 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 furnishes corporate
management, administrative, marketing, and distribution services to the
Portfolios. The special service agreement provides that Vanguard will reimburse
the Portfolios' expenses to the extent of savings in administrative and
marketing costs realized by Vanguard in the operation of the Portfolios.
Accordingly, all expenses incurred by the Portfolios during the six months
ended June 30, 1996, were reimbursed by Vanguard. The Portfolios' officers and
trustees are also officers and directors of Vanguard.
C. During the six months ended June 30, 1996, purchases and sales of
investment securities were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
---------------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
INCOME $ 32,931 $12,433
CONSERVATIVE GROWTH 118,196 923
MODERATE GROWTH 252,451 1,448
GROWTH 204,917 --
- -------------------------------------------------------
</TABLE>
D. At June 30, 1996, net 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 $ 4,049 $(1,806) $ 2,243
CONSERVATIVE GROWTH 20,707 (715) 19,992
MODERATE GROWTH 33,769 (2,585) 31,184
GROWTH 39,093 (403) 38,690
- ----------------------------------------------------------------------
</TABLE>
15
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
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.
Q882-6/96
VANGUARD
LIFESTRATEGY
PORTFOLIOS
SEMI-ANNUAL REPORT
JUNE 30, 1996
8
