<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-88373) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 17 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 19 /X/
VANGUARD STAR FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS REQUESTED THAT THIS FILING BECOME EFFECTIVE
on April 29, 1996 pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1995 ON FEBRUARY 28, 1996.
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<PAGE> 2
VANGUARD STAR FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Trustees and Officers; Management of
STAR Fund; Investment Management
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Shares; STAR's Share
Price; Dividends, Capital Gains,
Distributions and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling My Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Management of STAR Fund; General
Information
Item 13. Investment Objective and Policies............. Investment Limitations
Item 14. Management of the Fund........................ Management of STAR Fund; Investment
Management
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of STAR Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of STAR Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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[VANGUARD STAR PORTFOLIO LOGO]
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PROSPECTUS -- APRIL 29, 1996
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT
OBJECTIVE AND
POLICIES Vanguard STAR Fund (the "Fund") is an open-end
non-diversified investment company which seeks to maximize
total investment return (i.e., capital growth and income)
subject to the investment restrictions and asset
allocation policies described in this Prospectus. The Fund
consists of six portfolios; however this prospectus
relates only to the STAR Portfolio. The STAR Portfolio
invests in a diversified portfolio of ten mutual funds
(the "Vanguard Funds"), all of which are members of The
Vanguard Group of Investment Companies. The STAR Portfolio
will invest 60% to 70% of its assets in seven Vanguard
Funds which invest primarily in equity securities, and 30%
to 40% of its assets in three Vanguard Funds which invest
primarily in fixed-income securities. There is no
assurance that the STAR Portfolio will achieve its stated
objective. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
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OPENING AN
ACCOUNT The STAR Portfolio is designed primarily for
tax-advantaged retirement accounts and other long-term
investment savings. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption
Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). If you are establishing an investment
account outside a Vanguard-sponsored retirement plan,
complete the Account Registration Form. If you need
assistance in completing these forms, please call the
Investor Information Department. The minimum initial
investment is $1,000 for all accounts.
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the STAR Portfolio
before you invest. It should be retained for future
reference. A "Statement of Additional Information"
containing additional information about Vanguard STAR Fund
has been filed with the Securities and Exchange
Commission. This Statement is dated April 29, 1995 and has
been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Fund
or by calling the Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Portfolio Expenses ................ 2 Investment Limitations ........... 14 SHAREHOLDER GUIDE
Financial Highlights ...............3 Management of the Opening an Account and
Yield and Total Return .............4 Portfolio ........................ 15 Purchasing Shares ............... 26
FUND INFORMATION Investment Management ............ 16 When Your Account Will
Investment Objective .............. 4 Performance Record ............... 22 Be Credited ..................... 29
Investment Policies ................5 Dividends, Capital Gains Selling Your Shares .............. 30
Investment Risks ................. 6 and Taxes ........................ 23 Exchanging Your Shares ......... 32
Who Should Invest ................ 8 Share Price of the Portfolio...... 25 Important Information about
Implementation of Policies .........8 General Information .............. 25 Telephone Transactions ......... 33
Transferring Registration.......... 34
Other Vanguard Services .......... 34
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the STAR Portfolio.
The expenses and fees set forth in the table are for the
1995 fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
------------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
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Management & Administrative Expenses.......................... None
Investment Advisory Fees...................................... None
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... None
Miscellaneous Expenses...................................... None
-----
Total Other Expenses.......................................... None
-----
TOTAL OPERATING EXPENSES............................. NONE
=====
</TABLE>
The STAR Portfolio did not incur any expenses in fiscal
year 1995, and has not incurred any operating expenses
since its inception in 1985. However, while the STAR
Portfolio is expected to operate without expenses,
shareholders in the STAR Portfolio bear indirectly the
expenses of the underlying Vanguard Funds in which the
STAR Portfolio invests. The following chart provides the
expense ratio for each of the underlying investments of
the Portfolio for its 1995 fiscal year as well as the
percentage of the STAR Portfolio's net assets invested in
each Fund as of December 31, 1995:
<TABLE>
<CAPTION>
PERCENTAGE
EXPENSE OF PORTFOLIO'S
RATIO NET ASSETS
-------- --------------
<S> <C> <C>
Vanguard/Windsor Fund................................... 0.45% 12%
Vanguard/Windsor II..................................... 0.40 36
Vanguard Explorer Fund.................................. 0.68 3
Vanguard/Morgan Growth Fund............................. 0.49 3
GNMA Portfolio.......................................... 0.29 13
Long-Term Corporate Portfolio........................... 0.31 13
Prime Portfolio......................................... 0.32 12
Vanguard/PRIMECAP Fund.................................. 0.58 3
Vanguard U.S. Growth Portfolio.......................... 0.47 5
---------
100%
</TABLE>
Based on these figures, the average weighted expense ratio
for the STAR Portfolio's underlying investments on
December 31, 1995 was .39 of 1%. This figure is only an
approximation of the Portfolio's underlying expense ratio,
since the assets of the Portfolio invested in each of the
underlying Funds change daily.
Using an expense ratio of .39% for the STAR Portfolio's
underlying funds, the following example illustrates the
expenses that you would incur on a $1,000 investment over
various periods, assuming (1) a 5% annual rate of return
and
2
<PAGE> 5
(2) redemption at the end of each period. As noted in the
table showing shareholder transaction expenses, the
Portfolio charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 4 $13 $22 $ 49
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL
HIGHLIGHTS The following financial highlights, insofar as they relate
to each of the five years in the period ended December 31,
1995, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was
unqualified. This information should be read in
conjunction with the STAR Portfolio's financial statements
and notes thereto, which are incorporated by reference in
the Statement of Additional Information and this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Portfolio's 1995 Annual
Report to Shareholders. For a more complete discussion of
the Portfolio's performance, please see the Fund's 1995
Annual Report to Shareholders, which may be obtained
without charge by writing to the Fund or by calling our
Investor Information Department at 1-800-662-7447.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD............. $12.61 $13.41 $12.89 $12.30 $10.73 $12.05 $11.12 $ 9.98 $11.34 $11.45
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions Received... .590 .53 .47 .51 .62 .73 .84 .64 .72 .62
Capital Gain Distributions
Received...................... .435 .26 .36 .18 .35 .18 .34 .16 .59 .53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions Received.... 1.025 .79 .83 .69 .97 .91 1.18 .80 1.31 1.15
Net Realized and Unrealized Gain
(Loss) on Investments......... 2.550 (.82) .56 .59 1.59 (1.34) .90 1.06 (1.07) .31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.................. 3.575 (.03) 1.39 1.28 2.56 (.43) 2.08 1.86 .24 1.46
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DISTRIBUTIONS
Dividends From Net
Investment Income............. (.590) (.52) (.47) (.51) (.62) (.73) (.77) (.69) (.85) (.86)
Distributions From Realized
Capital Gains................. (.565) (.25) (.40) (.18) (.37) (.16) (.38) (.03) (.75) (.71)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (1.155) (.77) (.87) (.69) (.99) (.89) (1.15) (.72) (1.60) (1.57)
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NET ASSET VALUE, END OF PERIOD.... $15.03 $12.61 $13.41 $12.89 $12.30 $10.73 $12.05 $11.12 $ 9.98 $11.34
=============================================================================================================================
TOTAL RETURN(1)................... 28.64% (0.21)% 10.88% 10.51% 24.18% (3.62)% 18.80% 19.04% 1.66% 13.93%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)............... $4,842 $3,766 $3,628 $2,489 $1,574 $1,038 $949 $681 $567 $455
Ratio of Expenses to Average
Net Assets...................... 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets.............. 4.12% 4.01% 3.67% 4.36% 5.48% 6.65% 6.42% 5.87% 6.08% 5.44%
Portfolio Turnover Rate........... 13% 9% 3% 3% 11% 12% 7% 21% 17% 0%
(1) Not Annualized.
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</TABLE>
3
<PAGE> 6
YIELD AND
TOTAL RETURN From time to time the STAR Portfolio may advertise its
yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of the Portfolio refers to the average annual
compounded rates of return over one-, five- and ten- year
periods or for the life of the Portfolio (as stated in the
advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending
redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Portfolio is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account.
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INVESTMENT
OBJECTIVE
THE STAR PORTFOLIO
SEEKS TO MAXIMIZE
TOTAL INVESTMENT
RETURN The objective of the STAR Portfolio is to maximize total
investment return (i.e., capital growth and income)
subject to the investment restrictions and asset
allocation policies described in this Prospectus. The
Portfolio invests in a diversified portfolio of ten mutual
funds (the "Vanguard Funds"), all of which are members of
The Vanguard Group of Investment Companies. There is no
assurance that the Portfolio will achieve its stated
objective.
This investment objective is fundamental and so cannot be
changed without the approval of a majority of the Fund's
shareholders.
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4
<PAGE> 7
INVESTMENT
POLICIES
THE STAR PORTFOLIO
INVESTS IN A
DIVERSIFIED PORTFOLIO
OF VANGUARD FUNDS The Portfolio will invest 60% to 70% of its assets in
seven Vanguard Funds which invest primarily in equity
securities and 30% to 40% of its assets in three Vanguard
Funds which invest primarily in fixed-income securities.
The following table shows how the Portfolio's assets are
divided among the ten Vanguard Funds:
<TABLE>
<CAPTION> PERCENTAGE
INVESTMENT OF STAR'S VANGUARD
CATEGORY NET ASSETS FUNDS
--------------------------------------------------------
<S> <C> <C>
Equity Funds 60-70% Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Explorer Fund
Vanguard/Morgan Growth Fund
Vanguard U.S. Growth Portfolio
Vanguard/PRIMECAP Fund
500 Portfolio
Fixed Income Funds
Bond Funds 20-30% GNMA Portfolio
Long-Term Corporate Portfolio
Money Market Fund 10-20% Prime Portfolio
</TABLE>
As investments for the Portfolio, the Fund's Trustees have
chosen Vanguard/ Windsor Fund, Vanguard/Windsor II,
Vanguard Explorer Fund, Vanguard/Morgan Growth Fund, the
Vanguard U.S. Growth Portfolio of Vanguard World Fund,
Inc. ("Vanguard U.S. Growth Portfolio"), Vanguard/PRIMECAP
Fund, Inc. ("Vanguard/PRIMECAP"), the 500 Portfolio of
Vanguard Index Trust ("500 Portfolio"), the GNMA and
Long-Term Corporate Portfolios of Vanguard Fixed Income
Securities Fund, and the Prime Portfolio of Vanguard Money
Market Reserves. The 500 Portfolio, although approved as
an additional investment by the Fund's Trustees, is not
currently being purchased by the STAR Portfolio. The
additions to the Portfolio's Equity component, the
Vanguard U.S. Growth Portfolio, Vanguard/PRIMECAP and the
500 Portfolio, are not considered Aggressive Growth funds.
The selection of the Vanguard Funds in which the Portfolio
will invest, as well as the maximum and minimum amounts of
the Portfolio's assets which can be invested in each Fund,
are fundamental policies and so cannot be changed without
the approval of a majority of the Portfolio's
shareholders. See "Implementation of Policies" for a
description of the ten Vanguard Funds in which the
Portfolio invests.
THE PORTFOLIO HOLDS A
STEADY BALANCE OF
STOCKS, BONDS AND
CASH RESERVES The allocation of the Portfolio's assets among the
Vanguard Funds will be made by the Officers of the Fund
under the supervision of the Fund's Board of Trustees,
within the percentage ranges set forth in the table above.
The ranges specified for the Portfolio's investments in
the underlying Funds are narrow and permit little
variation in the Portfolio's investment program. It is
expected that the Portfolio's allocation of investments
between the "investment categories" listed above will be
quite constant.
Since inception on March 29, 1985, the STAR Portfolio has
maintained fixed allocation targets for its investments in
equity (stock), bond and money market funds. The
Portfolio's investment in equity funds has been targeted
at 62.5% of
5
<PAGE> 8
assets, the Portfolio's investment in bond funds has been
targeted at 25% of assets, and the Portfolio's investment
in the money market fund at 12.5% of assets. This policy
reflects the Board of Trustees' belief that holding
relatively steady proportions of stocks, bonds and money
market instruments is more likely to provide favorable
long-term investment returns, with moderate risk, than
frequently rebalancing the Portfolio's investment holdings
based on short-term events.
The investment restrictions and asset allocation policies
set forth above are designed to assure that the Portfolio
maintains a consistent investment approach in pursuit of
its objective. Of course, due to the limits set on the
Fund's investments, the STAR Portfolio does not have the
same flexibility to maximize total return as a mutual fund
that is not so constrained in periods when a greater
commitment to stocks or to fixed-income securities would
provide a higher total investment return.
From time to time, the Portfolio's investments in the
underlying Vanguard Funds may be limited by certain
factors. The Board of Trustees of any of the underlying
Vanguard Funds may impose limits on additional investments
in a particular Fund. For example, restrictions on
additional investments in Vanguard/Windsor Fund imposed by
its Board of Trustees have limited the Portfolio's
investment in that Fund. From December 5, 1985 to May 23,
1988, the Fund was unable to purchase additional shares of
Vanguard/Windsor Fund. After May 23, 1988, the Portfolio
was permitted to purchase an additional $50 million in
shares of Vanguard/Windsor Fund. Additional restrictions
on purchases of Vanguard/PRIMECAP Fund were placed in
effect on March 7, 1995.
See "Implementation of Policies" for a description of
other investment practices of the STAR Portfolio.
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INVESTMENT RISKS Like any investment program, an investment in the STAR
Portfolio entails certain risks. The Portfolio invests in
common stock funds and fixed-income funds and is therefore
subject to stock market risk, bond market risk and
inflation risk.
MARKET RISK --
STOCKS
As a mutual fund investing a little more than 60% of its
assets in common stocks, The Portfolio is subject to stock
MARKET RISK -- i.e., the possibility that stock prices in
general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for U.S. stock
market returns as well as the average return for the
period from 1926 to 1995, as measured by the Standard &
Poor's 500 Composite Stock Price Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
6
<PAGE> 9
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1995. The
return in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices. Average return may not be useful for
forecasting future returns in any particular period, as
stock returns are quite volatile from year to year and
interim losses are inevitable. For example, after the
"bear market" of 1973-1974, it took four years for many
investors to recover their losses (assuming dividends were
reinvested). And if you were invested in stocks during the
Great Crash of 1929, it would have taken an average of
eight years for your investment to return to its original
value.
MARKET RISK --
BONDS The bond market is typically less risky than the stock
market, although there have been times when some bonds
were just as risky as stocks. For example, bond prices
fell 48% from December 1976 to September 1981. The risk of
bonds declining in value, however, may be offset in whole
or in part by the high level of income that bonds provide.
Bond prices are linked to prevailing interest rates in the
economy. The price volatility of a bond depends on its
maturity; the longer the maturity of a bond, the greater
its sensitivity to interest rates. In general, when
interest rates rise, the prices of bonds fall; conversely,
when interest rates fall, bond prices generally rise.
From time to time, the stock and bond markets may
fluctuate independently of one another. In other words, a
decline in the stock market may in certain instances be
offset by a rise in the bond market, or vice versa. As a
result, the Portfolio, with its balance of common stock,
bond and money market investments, is expected in the long
run to entail less investment risk (and potentially less
investment return) than a mutual fund investing
exclusively in common stocks.
INFLATION RISK Like market risk, inflation represents a significant
threat to even a well-diversified portfolio because
inflation erodes the real return of an investment in
stocks, bonds or reserves. Historically, inflation has
averaged 3.1%, offsetting most of the return from reserves
and bonds, but less than half of the return from stocks.
For this reason, stocks are referred to as an "inflation
hedge," a way to protect your money against inflation.
The Portfolio is concentrated in investment companies in
The Vanguard Group, so investors should be aware that the
Portfolio's performance is directly related to the
investment performance of the Vanguard Funds in which it
invests. First, changes in the net asset values of the
underlying Vanguard Funds affect the Portfolio's net asset
value. Second, over the long-term, the Portfolio's ability
to meet its investment objective depends on the underlying
Vanguard Funds meeting their investment objectives.
INVESTORS ARE
EXPOSED TO
MANAGER RISK The investment advisers manage the underlying Vanguard
Funds (except for the 500 Portfolio) according to the
traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economics, financial and market analysis and
investment judgement. Manager risk refers to the
possibility that each Fund's investment adviser may
fail to execute the
7
<PAGE> 10
Fund's investment strategy effectively. As a result, the
Fund may fail to achieve its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING
A BALANCED
RETIREMENT
INVESTMENT PROGRAM The STAR Portfolio is designed primarily for investors
planning for future retirement through investments in
certain tax-advantaged accounts. Because of the risks
associated with common stock and bond investments, the
Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term stock and bond market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all of the
Portfolio's shareholders. In order to minimize such costs
the Portfolio has adopted the following policies. The
Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Portfolio has adopted
exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Portfolio
reserves the right to suspend the offering of its shares.
The Portfolio seeks to provide such individuals with a
diversified investment program consisting of Vanguard
Funds which may invest in equity and fixed-income
securities. As the Portfolio invests a significant portion
of its portfolio (60% to 70% of assets) in mutual funds
investing primarily in equity securities, which Vanguard's
management believes to offer the best potential for high
long-term rewards, investors should consider their
investment in the Portfolio as a long-term investment.
The STAR Portfolio may be especially suitable for
tax-advantaged retirement accounts, including: Individual
Retirement Accounts (IRAs), Simplified Employee Plans
(SEPs), 403(b)(7) tax-sheltered retirement plans for
employees of non-profit organizations, 401(k) savings
plans, profit-sharing and money-purchase pension plans,
and other corporate pension and savings plans. While the
Portfolio is specifically designed for tax-advantaged
retirement accounts, shares may also be purchased by
investors for other long-term investment savings purposes.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Vanguard Funds in which the STAR Portfolio may invest,
as well as certain other investment practices of the
Portfolio, are described below. Investors desiring more
information on a Vanguard Fund described below should call
Vanguard's Investor Information Department
(1-800-662-7447) for the Fund's prospectus.
THE PORTFOLIO INVESTS
IN THREE GROWTH AND
INCOME STOCK FUNDS Vanguard/Windsor Funds, consisting of Vanguard/Windsor
Fund and Vanguard/ Windsor II, and the 500 Portfolio are
growth and income mutual funds. All three Funds seek to
provide long-term growth of income and capital and, as a
secondary objective, to provide current income. The
Vanguard/Windsor Funds have different investment advisers
and advisory fee structures. Although Vanguard/Windsor
Fund and Vanguard/Windsor II invest primarily in common
stocks, either Fund may invest in fixed-income securities
and preferred stocks when, in the judgment of
the Fund's investment adviser, economic and market
conditions make such a course desirable.
8
<PAGE> 11
VANGUARD/WINDSOR FUND'S stocks are selected principally on
the basis of fundamental economic value. Key to the
valuation process is the relationship of a company's
earning power and dividend payout to the market price of
its stock. Vanguard/Windsor Fund's holdings are usually
characterized by relatively low price-earnings ratios and
above-average dividend payout yields, and are deemed by
the investment adviser at the time of purchase to be
overlooked or undervalued by the market in general.
VANGUARD/WINDSOR II emphasizes income-producing stocks
which the investment adviser believes to be undervalued by
the market at the time of purchase. Generally, these
securities are characterized by below-average
price-earnings ratios relative to the stock market, as
measured by the Standard & Poor's 500 Composite Stock
Price Index. Stocks are selected with greater emphasis on
statistical measures of current value (such as low
price-earnings and low price-to-book value ratios) than on
forecasts of future earnings. If a stock has reached a
fully valued position as determined by the adviser,
ordinarily the stock will be sold regardless of the time
it has been held and replaced with securities that are
considered undervalued.
The 500 PORTFOLIO is one of six Portfolios of Vanguard
Index Trust, an open-end diversified investment company.
The 500 Portfolio is an "index fund" which seeks to match
the investment performance of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"), an index
emphasizing large-capitalization stocks. The 500 Portfolio
attempts to duplicate the investment results of the S&P
500 by holding all 500 stocks in approximately the same
proportions as they are represented in the S&P 500.
The 500 Portfolio is not managed according to traditional
methods of "active" investment management, which involve
the buying and selling of securities based upon economic,
financial and market analysis and investment judgment.
Instead, the Portfolio, utilizing a "passive" or
"indexing" investment approach, attempts to duplicate the
investment performance of the S&P 500 through statistical
procedures. The 500 Portfolio pays no advisory fees. All
index matching services are provided to the 500 Portfolio
on an at-cost basis by the Core Management Group of The
Vanguard Group, Inc.
THE PORTFOLIO INVESTS
IN THREE GROWTH FUNDS
AND ONE AGGRESSIVE
GROWTH STOCK FUND Vanguard/Morgan Growth Fund, the Vanguard U.S. Growth
Portfolio and Vanguard/PRIMECAP Fund are growth stock
funds, and Vanguard Explorer Fund is an aggressive growth
stock fund. Each Fund seeks to provide long-term growth of
capital, with dividend income expected to be incidental to
this objective. Each Fund generally invests in a
diversified portfolio of common stocks but may also, from
time to time, hold securities that are convertible into
common stocks. (Vanguard Explorer Fund may also invest in
foreign and restricted securities to a limited extent,
although it has no present plans to do so.)
VANGUARD/MORGAN GROWTH FUND invests primarily in the
equity securities of growth companies. The Fund is
expected to invest a majority of its assets in
"established growth companies" -- i.e., larger
capitalization firms that have generally exhibited
above-average rates of growth in sales and earnings over
an
9
<PAGE> 12
extended period. Vanguard/Morgan Growth Fund may also
invest in "emerging growth companies," expanding firms
with generally smaller stock market capitalizations.
Finally, the Fund may hold investments in "cyclical growth
and other companies." These are firms which, while they
may not have a history of stable long-term growth, are
nonetheless expected to represent attractive investments.
Vanguard/Morgan Growth Fund's assets are managed by three
unaffiliated investment advisers and by Vanguard's Core
Management Group. Each adviser independently chooses
common stock investments for the Fund. Wellington
Management Company, which is currently responsible for
approximately 39% of Vanguard/ Morgan Growth Fund's equity
investments, utilizes traditional methods of securities
valuation, including fundamental company research and
relative valuation techniques, in selecting growth stocks
for the Fund. In contrast, Franklin Portfolio Associates
Trust and Husic Capital Management, which are each
responsible for approximately 33% and 13%, respectively,
of Vanguard/Morgan Growth Fund's equity investments, are
"quantitative" investment managers. They utilize
computerized techniques designed to track -- and, if
possible, outperform -- the returns of a specific
standard, the Growth Fund Stock Index. The Growth Fund
Stock Index, a benchmark calculated by Morningstar, Inc.
(an independent company which provides mutual fund
statistics), is a measure of the composite performance of
the common stock holdings of the 50 largest growth mutual
funds.
The VANGUARD U.S. GROWTH PORTFOLIO is one of two
Portfolios of Vanguard World Fund, an open-end diversified
investment company. The Vanguard U.S. Growth Portfolio,
which invests in equity securities of companies based in
the United States, seeks to provide long-term capital
appreciation. Dividend income is incidental to this
objective. The Vanguard U.S. Growth Portfolio seeks to
achieve this objective by investing chiefly in equity
securities, including common stocks and securities,
convertible into common stocks, which offer favorable
prospects for capital growth but little current income.
The Vanguard U.S. Growth Portfolio invests primarily in
equity securities of seasoned U.S. companies with
above-average prospects for growth. In selecting
securities for the Vanguard U.S. Growth Portfolio, Lincoln
Capital Management ("Lincoln") its investment adviser,
emphasizes common stocks of high-quality, established
growth companies. Such companies tend to have exceptional
growth records, strong market positions, reasonable
financial strength, and relatively low sensitivity to
changing economic conditions. Lincoln seeks to identify
common stocks that sell at attractive valuations and
companies that have the best prospects for continued
above-average growth.
VANGUARD/PRIMECAP FUND is an open-end diversified
investment company that seeks to provide long-term growth
of capital by investing principally in common stocks.
Dividend income is incidental to this objective.
Vanguard/PRIMECAP selects stocks primarily on the basis of
above-average earnings growth potential and quality of
management. Vanguard/PRIMECAP will invest primarily in
common stocks which offer favorable prospects for capital
growth but which generally provide little current income.
10
<PAGE> 13
Common stocks are selected for Vanguard/PRIMECAP on the
basis of several fundamental factors, including
above-average growth in corporate earnings, consistency of
earnings growth, and earnings quality. These factors for a
particular security are evaluated in relationship to
stocks in general (as measured, for example, by the
Standard & Poor's 500 Composite Stock Price Index) and to
the individual stock's current market price. Companies
with cyclically depressed earnings may also be considered
as investments for Vanguard/PRIMECAP if, in the opinion of
Vanguard/PRIMECAP's investment adviser, such securities
are likely to provide above-average growth in earnings in
the future.
Securities purchased by VANGUARD EXPLORER FUND may be
issued by small or unseasoned companies with speculative
risk characteristics. Such securities ordinarily pay
negligible dividends, if any, and trade in established
over-the-counter markets. The median market capitalization
of the companies included in Vanguard Explorer Fund is
expected to range from $100 million to $500 million. By
comparison, for companies included in the Russell 2000
Small Company Index, a benchmark of the market for small
company stocks, the average stock market capitalization is
approximately $430 million. Also, for companies in the
Standard & Poor's 500 Composite Stock Price Index, a
widely-used measure of the broad stock market, the average
capitalization is approximately $17.2 billion.
THE PORTFOLIO INVESTS
IN TWO BOND FUNDS Both the GNMA and Long-Term Corporate Portfolios of
Vanguard Fixed Income Securities Fund are bond funds,
which seek to provide a high and stable level of dividend
income by investing in fixed-income securities. The two
Portfolios have distinct investment policies.
Under normal circumstances, the GNMA PORTFOLIO invests at
least 80% of its assets in Government National Mortgage
Association ("GNMA") securities, which offer the combined
benefits of a U.S. Government guarantee of timely payment
of interest and principal and yields that usually exceed
those of comparable U.S. Treasury securities.
GNMA certificates are mortgage-backed securities
representing proportionate ownership of a pool of mortgage
loans. These loans -- issued by lenders such as mortgage
bankers, commercial banks and savings and loan
associations -- are either insured by the Federal Housing
Administration (FHA) or guaranteed by the Veterans
Administration (VA). A "pool" or group of such mortgages
is assembled and, after being approved by GNMA, is offered
to investors through securities dealers. Once approved by
GNMA, a government corporation within the U.S. Department
of Housing and Urban Development, the timely payment of
interest and principal on each mortgage is guaranteed by
the full faith and credit of the U.S. Government.
As mortgage-backed securities, GNMA certificates differ
from ordinary corporate or government bonds in that
principal is paid back by the borrower over the length of
the loan rather than returned in a lump sum at maturity.
GNMA certificates are called "pass through" securities
because both interest and principal payments (including
prepayments) are passed through to holders of the
certificates (such as the Portfolio). Upon receipt,
principal payments are used by the GNMA Portfolio to
purchase additional GNMA certificates or other U.S.
Government guaranteed securities.
11
<PAGE> 14
The GNMA Portfolio is exposed to prepayment risk.
Prepayment risk is the possibility that, as interest rates
fall, homeowners are likely to refinance their home
mortgages, which causes the principal on GNMA certificates
held by the GNMA Portfolio to be "prepaid" earlier than
expected. The GNMA must then reinvest the unanticipated
principal in new GNMA certificates, which reduces the
income earned by the GNMA Portfolio.
Besides investing in GNMA certificates, the GNMA Portfolio
may invest up to 15% of its net assets in restricted
securities (securities which are not freely marketable or
which are subject to restrictions on sale under the
Securities Act of 1933).
The LONG-TERM CORPORATE PORTFOLIO invests in a diversified
portfolio of investment grade corporate bonds. Investment
grade bonds are generally considered to be those bonds
having one of the four highest grades assigned by Moody's
Investors Service, Inc. (Aaa, Aa, A, or Baa) or by
Standard & Poor's Corporation (AAA, AA, A, or BBB). At
least 80% of the Portfolio's assets will be invested in
straight debt securities, and at least 70% of the
Portfolio's assets will be rated A or better by Moody's
Investors Service, Inc. or Standard & Poor's Corporation.
Securities rated Baa or BBB are considered as medium-grade
obligations. Interest payments and principal are regarded
as adequate for the present but certain protective
elements found in higher rated bonds may be lacking. Such
bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
THE PORTFOLIO INVESTS
IN ONE MONEY
MARKET FUND The PRIME PORTFOLIO of Vanguard Money Market Reserves is a
money market fund, and so seeks to provide the maximum
current income that is consistent with the preservation of
capital and liquidity. The Prime Portfolio also seeks to
maintain a constant net asset value (price) of $1.00 per
share. Although the Prime Portfolio invests in
high-quality instruments, an investment in the Portfolio
is neither insured nor guaranteed by the U.S. Government
and there can be no assurance that the Portfolio will be
able to maintain a constant net asset value of $1.00 per
share.
The Prime Portfolio invests in the following money market
instruments:
(a) Negotiable certificates of deposit and bankers'
acceptances of U.S. banks having total assets in
excess of $1 billion.
(b) Commercial paper (including variable amount master
demand notes) rated Prime-1 by Moody's Investors
Service, Inc. or A-1 by Standard & Poor's Corporation
or, if unrated, issued by a corporation having an
outstanding debt issue rated Aa3 or better by Moody's
or AA- or better by Standard & Poor's.
(c) Short-term corporate debt obligations rated Aa3 or
better by Moody's or AA- or better by Standard &
Poor's.
(d) Eurodollar and Yankee bank obligations.
(e) U.S. Treasury obligations, including bills, notes,
bonds and other debt obligations issued by the U.S.
Treasury, as well as securities issued or guaranteed
by agencies or instrumentalities of the U.S.
Government, state and municipal governments.
(f) Repurchase agreements that are collateralized by
securities described in (a) through (e) above.
12
<PAGE> 15
In addition, up to 10% of the Prime Portfolio's assets may
be invested in certain commercial paper, which is not
freely marketable or which is subject to restrictions on
sale under the Securities Act of 1933.
THE PORTFOLIO AND EACH
UNDERLYING FUND MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES The STAR Portfolio and each of its underlying Vanguard
Funds are authorized to invest temporarily in certain
short-term fixed income securities for defensive purposes.
Such securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. Each of the Portfolio's underlying Vanguard
Funds may also invest in such securities to take a
temporarily defensive position against potential stock or
bond market declines. These securities include:
obligations of the U.S. Government and its agencies and
instrumentalities; commercial paper, bank certificates of
deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
DERIVATIVE
INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
SOME OF THE VANGUARD
FUNDS MAY INVEST IN
FUTURES CONTRACTS AND
OPTIONS The Portfolio's underlying equity and bond mutual funds
(but not the Portfolio itself ) may invest in futures
contracts and options to a limited extent. Specifically,
the Portfolio's seven equity funds -- Vanguard/Windsor
Fund, Vanguard/Windsor II, the 500 Portfolio,
Vanguard/Morgan Growth Fund, the Vanguard U.S. Growth
Portfolio, Vanguard/PRIMECAP Fund and Vanguard Explorer
Fund -- may invest in equity futures contracts and
options, while the Portfolio's two fixed-income
funds -- the GNMA and Long-Term Corporate
Portfolios -- may invest in bond futures contracts and
options. The Portfolio's money market fund, the Prime
Portfolio, and the Portfolio itself are not permitted to
invest in futures contracts or options.
Futures contracts and options may be used for several
reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund
management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns
when a futures contract is priced more attractively than
the underlying equity security or index. While futures
contracts and options can be used as leveraged
instruments, a Fund may not use futures contracts or
options transactions to leverage its assets.
The underlying Vanguard Funds will not use futures
contracts or options for speculative purposes or to
leverage their net assets. Accordingly, the primary risks
associated with the use of futures contracts and options
by the underlying Funds are: (i) imperfect correlation
between the change in market value of securities held by a
Fund and the prices of futures contracts and options; and
(ii) possible lack of a liquid secondary market for a
futures contract resulting in an inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in contracts whose behavior is expected to resemble that
of a Fund's underlying securities. The risk that a Fund
will be unable to close out a futures position will be
minimized by entering into such transactions only on an
exchange with an active and liquid secondary market.
Additionally, investments
13
<PAGE> 16
in futures contracts and options involve the risk that an
investment adviser will incorrectly predict stock market
and interest rate trends.
The underlying Funds may enter into futures contracts
provided that not more than 5% of their respective assets
are required as a futures contract deposit. In addition
the underlying Funds may enter into futures contracts and
options transactions to the extent that not more than 20%
of their respective assets are committed to such contracts
or transactions.
EACH OF THE PORTFOLIO'S
FUNDS MAY LEND ITS
SECURITIES Each of the Portfolio's underlying Funds, except Prime,
(and not the Portfolio itself) may lend its investment
securities to qualified institutional investors for the
purpose of realizing additional net investment income.
Loans of securities by a Fund will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
PORTFOLIO TURNOVER
IS EXPECTED
TO BE LOW The Portfolio's turnover rate is not expected to exceed
25% annually. A portfolio turnover rate of 25% would occur
if one quarter of the Portfolio's investments were sold
within a year. The Fund's Officers will purchase or sell
securities: (i) to accommodate purchases and sales of
Portfolio shares; (ii) on those occasions when they deem
that market conditions warrant a change in the percentage
of the Portfolio's assets invested in each of the
underlying Vanguard Funds; and (iii) to maintain or modify
the allocation of the Portfolio's assets between the
underlying Vanguard Funds in which the Portfolio invests
within the percentage limits described under "Investment
Policies."
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Fund has adopted the following fundamental limitations
on its investment practices. Specifically, the STAR
Portfolio will not:
THE FUND HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS (a) borrow money except from banks for temporary or
emergency purposes, and then only in an amount not in
excess of 5% of the lower of the market value or cost
of its assets, in which case it may pledge, mortgage
or hypothecate any of its assets as security for such
borrowing, but not to an extent greater than 5% of the
market value of its assets; and
(b) invest more than 25% of its assets in any one
industry, except for investment companies which are
members of The Vanguard Group of Investment Companies.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
NOTICE TO OHIO INVESTORS. Vanguard STAR Fund does not meet
the requirements of Ohio Administrative Rule 1301:6-3-09G
in that it may invest more than 25% of its assets in a
single issuer. However, the Portfolio invests only in
Vanguard-sponsored mutual funds which, in turn, are
prohibited from investing more than 5% of their total
assets in the securities of any single issuer and may not
purchase more than 10% of the outstanding voting
securities of any issuer.
- --------------------------------------------------------------------------------
14
<PAGE> 17
MANAGEMENT
OF THE PORTFOLIO
THE OFFICERS MANAGE
THE PORTFOLIO'S
OPERATIONS The Officers of the Fund manage its day-to-day operations.
The Officers are directly responsible to the Fund's Board
of Trustees. The Trustees, who are elected by the Fund's
shareholders, determine how the assets of the Portfolio
should be invested among the Vanguard Funds, set general
policies for the Portfolio and choose its Officers. The
Officers of the Fund also serve as Officers of each of the
Vanguard Funds and of The Vanguard Group, Inc.
("Vanguard"). The Trustees each serve as Directors of The
Vanguard Group, Inc. and most of the Funds within the
Group. A list of Trustees and Officers of the Fund and a
statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
The business of the Fund will be conducted by its Officers
in accordance with policies and guidelines set up by the
Fund's Trustees which were included in an Application for
an Exemptive Order subsequently issued by the U.S.
Securities and Exchange Commission. As noted above, the
Officers and Trustees of the Fund also serve in similar
positions in the underlying Funds. If the interests of the
Fund and the underlying Funds were ever to become
divergent, a concern might arise that this could create a
potential conflict of interest which could affect how the
Officers or Trustees fulfill their fiduciary duties to
Vanguard STAR Fund and the Vanguard Funds. The Trustees
believe they have structured the Fund to avoid the
concerns which could arise. Conceivably, a situation could
occur where proper portfolio or other action for the Fund
could be adverse to the interests of an underlying
Vanguard Fund, or the reverse could occur. If such a
possibility appears likely, the Trustees and Officers will
carefully analyze the situation and take all steps they
believe reasonable to minimize and, where possible,
eliminate the potential conflict. Moreover, limitations on
aggregate investments in the underlying Vanguard Funds and
other restrictions have been adopted by the Fund to
minimize this possibility, and close and continuous
monitoring will be exercised to avoid, insofar as
possible, these concerns.
VANGUARD
ADMINISTERS AND
DISTRIBUTES THE
PORTFOLIO The Fund has entered into a Special Servicing Agreement
(the "Agreement") with The Vanguard Group, Inc.
("Vanguard") under which Vanguard will provide all
management, administrative and distribution services to
the Fund. Vanguard is a jointly-owned subsidiary of more
than 30 investment company members (the "Funds") of The
Vanguard Group of Investment Companies. The Vanguard Funds
offer more than 90 distinct investment portfolios with
total assets in excess of $190 billion. Vanguard provides
the Fund and other Funds in the Group with corporate
management, administrative and distribution services
(similar to those provided to Fund) on an at-cost basis.
As a result of Vanguard's unique corporate structure,
Vanguard Funds have costs substantially lower than those
of most competing mutual funds. In 1995, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard Funds
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Special Servicing Agreement provides that Vanguard
STAR Fund will pay for services to be rendered to the Fund
by Vanguard on an "out of pocket" basis. The Fund will
also bear the expenses of services provided by other
parties, including auditors, the custodian, and outside
legal counsel, as well as taxes and other direct expenses
of the Fund. However, the Agreement provides that the
expenses of the
15
<PAGE> 18
Fund will be offset, in whole or in part, by a
reimbursement from Vanguard for (a) contributions made by
the Fund to the cost of operating the underlying Vanguard
Funds the Fund invests in and (b) certain savings in
administrative and marketing costs that Vanguard is
expected to derive from the operation of the Fund. The
Fund's contributions to Vanguard represent revenues
Vanguard receives because the Fund bears its pro rata
share of the costs of operating the underlying Vanguard
Funds. The cost savings realized by Vanguard from the Fund
result primarily from the assumed reduction in the number
of accounts Vanguard has to maintain due to the existence
of the Fund (i.e., one account per investor as opposed to
one for each underlying Fund per investor if the investor
duplicated Portfolio's investment program by investing
directly in the underlying Funds).
Although such cost savings are not certain, the Trustees
believe that the reimbursements to be made by Vanguard to
the Fund should be sufficient to offset most, if not all,
of the expenses incurred by the Fund. Therefore, the Fund
is expected by the Trustees to operate at a very low, or
zero, expense ratio. Since its inception in May 1985, the
Fund has had an expense ratio of zero. Of course,
shareholders of the Portfolio will still bear their fair
and proportionate share of the costs of operating the
Vanguard Funds owned by the Portfolio. (See "Portfolio
Expenses.") In the event that the economic benefits of
operating the Portfolio exceed its actual costs, such
benefits will be shared by each of the Funds in The
Vanguard Group, including the underlying Funds in which
the Portfolio invests.
- --------------------------------------------------------------------------------
INVESTMENT
MANAGEMENT
THE PORTFOLIO DOES NOT
EMPLOY AN INVESTMENT
ADVISER The STAR Portfolio does not employ an investment adviser
and therefore pays no advisory fees. The Portfolio has no
portfolio manager. The determination of how the
Portfolio's assets will be invested in certain of the
Vanguard Funds is made by the Fund's Officers pursuant to
the investment objective and policies set forth in this
Prospectus and procedures and guidelines established by
the Trustees. However, the Portfolio, as a shareholder of
each of the underlying Vanguard Funds, benefits from the
investment advisory services of each of the underlying
Funds, and will indirectly bear its proportionate share of
any investment advisory fees paid by those Funds.
16
<PAGE> 19
The STAR Portfolio's underlying Funds are managed by the
following investment advisers:
<TABLE>
<CAPTION>
INVESTMENT ADVISER FUNDS MANAGED
<S> <C>
------------------------------------- -----------------------------------
Wellington Management Company Vanguard/Windsor Fund
Vanguard Explorer Fund
Vanguard/Morgan Growth Fund
GNMA and Long-Term Corporate
Portfolios of Vanguard Fixed Income
Securities Fund
Barrow, Hanley, Mewhinney & Vanguard/Windsor II
Strauss, Inc.
Equinox Capital Management, Inc. Vanguard/Windsor II
Tukman Capital Management, Inc. Vanguard/Windsor II
Granahan Investment Management, Inc. Vanguard Explorer Fund
Franklin Portfolio Associates Trust Vanguard/Morgan Growth Fund
Husic Capital Management Vanguard/Morgan Growth Fund
Lincoln Capital Management Vanguard U.S. Growth Portfolio of
Vanguard World Fund
PRIMECAP Management Company Vanguard/PRIMECAP Fund
The Vanguard Group, Inc. Prime Portfolio of Vanguard
Money Market Reserves
500 Portfolio of Vanguard Index
Trust
Vanguard/Windsor II
Vanguard/Morgan Growth Fund
--------------------------------------------------------------------------
</TABLE>
The investment advisory agreements between the underlying
Vanguard Funds and these advisers are described below.
WELLINGTON
MANAGEMENT
COMPANY Wellington Management Company ("WMC"), 75 State Street,
Boston, MA 02109, serves as sole investment adviser to
Vanguard/Windsor Fund and the GNMA and Long-Term Corporate
Portfolios of Vanguard Fixed Income Securities Fund. WMC
also serves as investment adviser for 44% of the assets of
Vanguard Explorer Fund, and 39% of the assets of
Vanguard/Morgan Growth Fund.
WMC is a professional investment advisory firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are more than 10 of the Vanguard Funds. As of
December 31, 1995, WMC held discretionary management
authority with respect to more than $108 billion of
assets. WMC and its predecessor organizations have
provided investment advisory services to investment
companies since 1933 and to investment clients since 1960.
VANGUARD/WINDSOR
FUND IS MANAGED
BY WMC Vanguard/Windsor Fund pays WMC an annual basic advisory
fee equal to 0.35 of 1% on the first $200 million of
Vanguard/Windsor Fund's assets; 0.275 of 1% on the next
$250 million of assets; 0.20 of 1% on the next $300
million of assets; and 0.15 of 1% on Vanguard/Windsor
Fund's assets in excess of $750 million. This basic
advisory fee may be increased or decreased (a maximum of
0.10 of 1%) by applying
17
<PAGE> 20
an adjustment formula based on the investment performance
of the Vanguard/Windsor Fund relative to the investment
record of the Standard & Poor's 500 Composite Stock Price
Index. During the fiscal year ended October 31, 1995,
Vanguard/Windsor Fund paid WMC total advisory fees
representing an annual effective fee rate of .16 of 1% of
Vanguard/Windsor Fund's average net assets, before an
increase of .06 of 1% based on performance.
VANGUARD/WINDSOR II
IS MANAGED BY
BHM&S Vanguard/Windsor II employs a "multi-manager" approach
utilizing four investment advisers to manage the Fund's
assets. Vanguard/Windsor II has investment advisory
contracts with: Barrow, Hanley, Mewhinney & Strauss, Inc.
("BHM&S"), One McKinney Plaza, 3232 McKinney Avenue, 15th
Floor, Dallas, TX 75204-2429; Equinox Capital Management,
Inc. ("Equinox"), 399 Park Avenue, New York, NY 10022; and
Tukman Capital Management, Inc. ("Tukman"), 60 East Sir
Francis Drake Boulevard, Larkspur, CA 94939. Additionally,
a portion of the Fund's assets are managed on an at-cost
basis by Vanguard's Core Management Group. BHM&S, Equinox
and Tukman are not affiliated in any way with Wellington
Management Company, the investment adviser to
Vanguard/Windsor Fund.
Vanguard/Windsor II has entered into an advisory agreement
with BHM&S, under which BHM&S manages approximately 72% of
the assets of Vanguard/Windsor II. BHM&S, a professional
investment counseling firm founded in 1979, provides
investment services to investment companies, institutions
and individuals. Vanguard/Windsor II pays BHM&S an annual
basic advisory fee equal to .30 of 1% for the first $200
million of assets. The rate decreases to .20 of 1% on the
next $300 million of assets; to .15 of 1% on the next $500
million of assets; and to .125 of 1% on assets in excess
of $1 billion. This basic advisory fee may be increased or
decreased (a maximum of 1.25 times the basic fee) by
applying an adjustment formula based on the investment
performance of the assets of Vanguard/ Windsor II managed
by BHM&S relative to the investment record of the Standard
& Poor's/BARRA Value Index.
EQUINOX CAPITAL
MANAGEMENT Equinox is a professional investment counseling firm
founded in 1989. As of December 31, 1995, Equinox provided
investment advisory services with respect to approximately
$5.1 billion of assets. Vanguard/Windsor II pays Equinox
an annual basic advisory fee equal to .30 of 1% on the
first $100 million of assets managed by Equinox; .20 of 1%
on the next $300 million of assets; and .15 of 1% on
assets greater than $400 million. This basic advisory fee
may be increased or decreased (a maximum of 1.50 times the
basic fee) by applying an adjustment formula based on the
investment performance of the assets of Vanguard/ Windsor
II managed by Equinox relative to the investment record of
the Standard & Poor's 500 Composite Stock Price Index
("S&P 500").
TUKMAN CAPITAL
MANAGEMENT Tukman is a professional counseling firm founded in 1980.
As of December 31, 1995, Tukman provided investment
advisory services with respect to assets of approximately
$2.9 billion. Vanguard/Windsor II pays Tukman an annual
basic advisory fee equal to .40 of 1% on the first $25
million of assets managed by Tukman; .35 of 1% on the next
$125 million of assets; .25 of 1% on the next $350 million
of assets; .20 of 1% on the next $500 million of assets,
and .15 of 1% on
18
<PAGE> 21
assets greater than $1 billion. This basic advisory fee
may be increased or decreased (a maximum of 1.50 times the
basic fee) by applying an adjustment formula based on the
investment record of the S&P 500.
Under SEC rules, to avoid a situation in which the change
in the performance of the index might unduly benefit
either adviser, the incentive/penalty fee for both Equinox
and Tukman was not fully operable until the quarter ending
October 31, 1994.
AND VANGUARD'S
CORE MANAGEMENT
GROUP Vanguard's Core Management Group provides investment
advisory services on an at-cost basis with respect to a
portion of Vanguard/Windsor II's assets (currently
approximately 8%). The Core Management Group also provides
investment advisory services to several Vanguard Funds,
including Vanguard Index Trust, several Portfolios of the
Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio
of Vanguard Horizon Fund, a portion of the Vanguard/Morgan
Growth Fund, Vanguard International Equity Index Fund,
Vanguard Institutional Index Fund, Vanguard Balanced Index
Fund and the Equity Index Portfolio of Vanguard Variable
Insurance Fund, as well as to several indexed separate
accounts. Total assets under management by the Core
Management Group were approximately $33 billion as of
December 31, 1995.
For the fiscal year ended October 31, 1995, the aggregate
investment advisory fees paid by the Fund to BHM&S,
Equinox Capital Management and Tukman Capital Management,
Inc., represented an effective annual rate of .14 of 1% of
average net assets before an increase of $86,000 based on
performance. The investment advisory fees paid by the Fund
for this period to BHM&S represented an effective annual
rate of .14 of 1% of the average net assets managed by
BHM&S. The investment advisory fees paid by the Fund for
this period to Equinox and Tukman represented an effective
annual rate of .20 of 1% and .24 of 1% of the average net
assets managed by Equinox and Tukman, respectively.
THE 500 PORTFOLIO
IS MANAGED BY
VANGUARD'S CORE
MANAGEMENT GROUP The 500 Portfolio receives all investment advisory
services on an at-cost basis from Vanguard's Core
Management Group. The Trust is not actively managed, but
is instead administered by the Core Management Group using
computerized, quantitative techniques. The Core Management
Group is supervised by the Officers of the Trust.
VANGUARD/MORGAN
GROWTH FUND IS
MANAGED BY WMC WMC is also responsible for approximately 39% of the
equity investments of Vanguard/Morgan Growth Fund
(formerly W.L. Morgan Growth Fund). Vanguard/Morgan Growth
Fund pays WMC a basic advisory fee equal to .175 of 1% of
the first $500 million of assets managed by WMC; .10 of 1%
on the next $500 million of assets; and .075 of 1% on
assets in excess of $1 billion. This basic advisory fee
may be increased or decreased by applying an adjustment
formula ("incentive/ penalty fee") based on WMC's
investment performance relative to the investment record
of the Growth Fund Stock Index. The Growth Fund Stock
Index represents the composite common stock portfolio of
the 50 largest growth mutual funds, as calculated by
Morningstar, Inc., an independent company which provides
mutual fund statistics. Under the incentive/penalty fee
schedule, the basic fee payable to WMC may be increased or
decreased by as much as 50% of the basic fee depending on
the investment performance of the equity investments
managed by WMC.
19
<PAGE> 22
FRANKLIN PORTFOLIO
ASSOCIATES Vanguard/Morgan Growth Fund has also entered into an
investment advisory agreement with Franklin Portfolio
Associates Trust ("FPA"), One Post Office Square 3660,
Boston, MA 02109, under which FPA manages approximately
33% of its equity investments. FPA is a professional
investment advisory firm which specializes in the
management of common stock portfolios through the use of
quantitative investment models. Vanguard/Morgan Growth
Fund pays FPA a basic advisory fee calculated by applying
varying percentage rates to the average net assets of the
Fund managed by FPA. The maximum annual rate is .25 of 1%
on the first $100 million in assets. The rate decreases to
.20 of 1% on the next $200 million in assets, and to .15
of 1% for assets over $300 million. This basic advisory
fee may be increased or decreased by applying an
incentive/penalty fee based on FPA's investment
performance relative to the investment record of the
Growth Fund Stock Index.
AND HUSIC CAPITAL
MANAGEMENT Vanguard/Morgan Growth Fund also employs Husic Capital
Management ("Husic"), 555 California Street, Suite 2900,
San Francisco, California 94104 as an investment adviser
for approximately 13% of its equity investments. Husic is
a professional investment advisory firm which specializes
in the management of common stock portfolios through the
use of quantitative investment models. Vanguard/Morgan
Growth Fund pays Husic a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund managed by Husic. The maximum annual
rate is .40 of 1% on the first $25 million in assets. The
rate decreases to .35 of 1% on the next $125 million in
assets, .25 of 1% on the next $350 million in assets, .20
of 1% on the next $500 million and .15 of 1% for assets
over $1 billion. The basic advisory fee may be increased
or decreased by as much as 75% of the basic fee depending
on the investment performance of the equity investments
managed by Husic.
Under the rules of the Securities and Exchange
Commissions, the incentive/penalty fee structure will not
be fully operable, with respect to each of Vanguard/Morgan
Growth Fund's investment advisers, until September 30,
1996, and, until that date will be calculated according to
certain transition rules. See the Statement of Additional
Information for a detailed description of the
incentive/penalty fee schedule for WMC, FPA and Husic, as
well as the applicable transition rules.
For the fiscal year ended December 31, 1995, the aggregate
investment advisory fees paid by Vanguard/Morgan Growth
Fund represented an effective annual base rate of .19 of
1% of average net assets, before a net decrease of .05 of
1% based on performance. The investment advisory fees paid
by the Fund for this period to WMC, FPA and Husic
represented an effective annual rate of .12, .22, and .11
of 1%, respectively, of the average net assets managed by
WMC, FPA and Husic.
THE VANGUARD
U.S. GROWTH PORTFOLIO
IS MANAGED BY
LINCOLN CAPITAL
MANAGEMENT The Vanguard U.S. Growth Portfolio employs Lincoln Capital
Management Company ("Lincoln"), 200 South Wacker Drive,
Chicago, IL 60606, as its investment adviser. Lincoln, an
investment advisory firm founded in 1967, currently
provides investment counseling services to a limited
number of clients, most of which are institutional
clients, such as pension funds. As of December 31, 1995,
Lincoln held discretionary management authority with
respect to approximately $37.7 billion in assets. The
Vanguard U.S. Growth Portfolio pays Lincoln an advisory
fee calculated
20
<PAGE> 23
by applying varying percentage rates to the average net
assets of the Portfolio. The maximum annual rate is .40 of
1% for the first $25 million of assets. The rate decreases
to .35 of 1% for the next $125 million; to .25 of 1% for
the next $350 million; to .20 of 1% for the next $500
million; to .15 of 1% for the next $1.5 billion; and to
.10 of 1% on assets in excess of $2.5 billion. For the
year ended August 31, 1995, the investment advisory fee
paid to Lincoln represented an effective annual rate of
.19 of 1% of the Portfolio's average month-end net assets.
VANGUARD/PRIMECAP
FUND IS MANAGED BY
PRIMECAP
MANAGEMENT
COMPANY Vanguard/PRIMECAP Fund employs PRIMECAP Management Company
("PRIME-CAP Management"), 225 South Lake Street, Pasadena,
CA 91101, to manage the investment and reinvestment of the
assets of Vanguard/PRIMECAP. PRIMECAP Management, a
professional investment advisory firm which provides
services to employee benefit plans, endowments funds,
foundations and other institutions, held discretionary
management authority with respect to over $5.7 billion of
assets as of December 31, 1995. Vanguard/PRIMECAP pays
PRIMECAP Management an advisory fee calculated by applying
varying percentage rates to the average net assets of the
Fund. The maximum annual rate is .750 of 1% for the first
$25 million of assets. The rate decreases to .500 of 1% on
the next $225 million; .375 of 1% on the next $250
million; and .250 of 1% on assets in excess of $500
million. For the year ended December 31, 1995, the
investment advisory fee paid by Vanguard/ PRIMECAP
represented an effective annual rate of .34 of 1% of
average net assets.
VANGUARD EXPLORER
FUND IS MANAGED BY
WMC AND GRANAHAN The assets of Vanguard Explorer Fund are jointly managed
by WMC and Granahan Investment Management, Inc.
("Granahan"), 303 Wyman Street, Waltham, MA 02154. WMC is
responsible for managing 44% of the assets of Vanguard
Explorer Fund and Granahan is responsible for 43% of the
Fund's assets.
Vanguard Explorer Fund pays WMC an annual basic advisory
fee equal to .35 of 1% on the first $100 million of assets
managed by WMC; .30 of 1% on the next $250 million of
assets; and .25 of 1% on assets greater than $350 million.
This basic advisory fee may be increased or decreased (a
maximum of .075 of 1%) by applying an adjustment formula
based on the investment performance of the assets of
Vanguard Explorer Fund managed by WMC relative to the
investment record of the Russell 2000 Small Company Index.
Granahan is a professional counseling firm which offers
investment advisory services to employee benefit plans,
endowment funds, mutual funds and other institutions.
Vanguard Explorer Fund pays Granahan an advisory fee
calculated by applying varying percentage rates to the
average net assets of the Fund managed by Granahan. The
maximum annual rate is .45 of 1% for the first $50 million
of assets. The rate decreases to .40 of 1% on the next $50
million of assets; to .35 of 1% on the next $100 million
of assets; and to .25 of 1% on assets in excess of $200
million. This basic advisory fee may be increased or
decreased by applying an adjustment formula based on the
investment performance of the assets of Vanguard Explorer
Fund managed by Granahan relative to the investment record
of the Russell 2000 Small Company Index.
21
<PAGE> 24
For the fiscal year ended October 31, 1995, the aggregate
investment advisory fees paid by the Vanguard Explorer
Fund to WMC and Granahan represented an effective annual
base rate of .27 of 1% of average net assets before an
increase of $25,000 based on performance. The investment
advisory fees paid by the Fund for this period to WMC
represented an effective annual rate of .28 of 1% of the
average net assets managed by WMC and the investment
advisory fees paid to Granahan represented an effective
annual rate of .30 of 1% of the average net assets managed
by Granahan.
GNMA AND
LONG-TERM CORPORATE
PORTFOLIOS ARE
MANAGED BY WMC The GNMA, Long-Term Corporate, and High Yield Corporate
(not an underlying investment of STAR) Portfolios of
Vanguard Fixed Income Securities Fund pay WMC an annual
advisory fee equal to .125 of 1% on the first $2.5 billion
of the aggregate net assets of the three Portfolios; .100
of 1% on the next $2.5 billion of aggregate net assets;
.075 of 1% on the next $2.5 billion; and .050 of 1% on the
aggregate net assets of the three Portfolios greater than
$7.5 billion. The advisory fee is then allocated to each
Portfolio based on the relative net assets of each;
provided, however, that following such allocation, the fee
to be paid by the GNMA Portfolio is reduced by 75%, the
fee paid to the Long-Term Corporate Portfolio is reduced
by 50%, and the fee paid by the High Yield Corporate
Portfolio is reduced by 25%. During the fiscal year ended
January 31, 1996, the GNMA and Long-Term Corporate
Portfolios paid annual advisory fees equal to .02 of 1%
and .04 of 1% of average net assets, respectively.
THE PRIME PORTFOLIO
IS MANAGED BY
VANGUARD'S FIXED
INCOME GROUP The Prime Portfolio of Vanguard Money Market Reserves
receives all investment advisory services on an at-cost
basis from Vanguard's Fixed Income Group. The Fixed Income
Group also provides advisory services to more than 40
Vanguard fixed income portfolios, both taxable and
tax-exempt. The Fixed Income Group is supervised by the
Officers of STAR.
The Portfolio will purchase and sell the principal portion
of its portfolio securities (i.e., shares of certain of
the underlying Vanguard Funds) by dealing directly with
the issuer. There will be no sales charges or commissions
because the underlying Funds are offered on a no-load
basis, without sales charges. Investments in short-term
money market instruments and repurchase agreements usually
will be principal transactions and will generally involve
no brokerage commissions.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table in this section provides investment results for
the STAR Portfolio for several periods throughout its
lifetime. The results shown represent "total return"
investment performance, which assumes the reinvestment of
all capital gains and income dividends for the indicated
periods. Also included is comparative information with
respect to two indexes: a Composite Index, a performance
benchmark based upon the average performance of publicly
offered stock funds (62.5%), bond funds (25%), and money
market funds (12.5%), as reported by Lipper Analytical
Services; and the Consumer Price Index, a statistical
measure of changes in the prices of goods and services.
The table does not make any allowance for federal, state
or local income taxes, which shareholders who invest in
the Portfolio through regular investment accounts must pay
on a current basis.
22
<PAGE> 25
The results shown should not be considered a
representation of the total return from an investment made
in the Portfolio today. This information is provided to
help investors better understand the Portfolio and may not
provide a basis for comparison with other investments or
mutual funds which use a different method to calculate
performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS FOR THE STAR PORTFOLIO
-----------------------------------------------------
FISCAL PERIODS
ENDED 12/31/95
--------------- PORTFOLIO COMPOSITE CONSUMER
INDEX PRICE
--------- --------- INDEX
--------
<S> <C> <C> <C>
1 Year +28.6% +23.9% +2.6%
3 Years +12.5 +10.5 +2.6
5 Years +14.3 +13.2 +2.8
10 Years +11.9 +10.7 +3.5
Lifetime* +12.5 +11.3 +3.5
*March 29, 1985 to December 31, 1995.
</TABLE>
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DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE PORTFOLIO PAYS
SEMI-ANNUAL DIVIDENDS
AND ANY CAPITAL GAINS
ANNUALLY The STAR Portfolio expects to pay dividends semi-annually
from ordinary income. Capital gains distributions, if any,
will be made annually.
For tax-deferred retirement accounts (such as Individual
Retirement Accounts or other retirement plans sponsored by
Vanguard), dividend and capital gains distributions from
the Portfolio must be reinvested in additional shares. For
regular investment accounts, dividend and capital gains
distributions may be reinvested in additional shares or
received in cash. See "Choosing a Distribution Option" for
a description of these distribution methods for regular
investment accounts in the Portfolio.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Portfolio
may declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Portfolio and received by shareholders on
December 31 of the prior year.
The Portfolio intends to continue to qualify as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
The tax consequences of distributions from the Portfolio
will vary according to the type of account you open in the
Portfolio.
If you open an IRA or other tax-deferred retirement
account, dividend and capital gains distributions from the
Portfolio will generally be exempt from current taxation.
You are advised to consult with a tax professional on the
specific rules governing your own tax-deferred
arrangement. There are varying restrictions imposed by the
Internal Revenue Service on eligibility, contributions and
withdrawals, depending on the type of tax-deferred account
you have selected. The rules governing tax-deferred
retirement plans are complex, and failure to comply with
the IRS's rules and regulations governing your specific
type of plan may result in a substantial cost to you,
including the loss of tax advantages and the imposition of
additional taxes and penalties by the IRS.
23
<PAGE> 26
If you open an account in the Portfolio outside a
tax-deferred retirement account, the following tax rules
will generally apply. For regular investment accounts,
dividends paid by the Portfolio from net investment income
and net short-term capital gains, whether received in cash
or reinvested in additional shares, will be taxable as
ordinary income. Distributions paid by the Portfolio from
long-term capital gains, again whether received in cash or
reinvested in additional shares, will also be taxable as
long-term capital gains, regardless of the length of time
you have owned shares in the Portfolio.
Capital gains distributions are made when the Portfolio
realizes net capital gains on sales of portfolio
securities during the year. The Portfolio does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. In addition, the Portfolio reserves
realized net capital gains distributions from the
Portfolio's underlying Funds. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when the Portfolio realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Portfolio. In addition, keep in mind that if you
purchase shares of the Portfolio shortly before the record
date for a dividend or capital gains distribution, a
portion of your investment will be returned to you as a
taxable distribution, regardless of whether you are
reinvesting your distributions or receiving them in cash.
The Portfolio will notify you annually as to the tax
status of dividend and capital gains distributions paid.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Portfolio is a taxable event and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of shares
or an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Taxpayer
Identification number and by certifying that you are not
subject to backup withholding.
Vanguard STAR Fund is organized as a Pennsylvania business
trust and, in the opinion of counsel, is not liable for
any income or franchise tax in the Commonwealth of
Pennsylvania. The Portfolio will be subject to
Pennsylvania county personal property tax in the county
which is the site of its principal office. In the opinion
of counsel, shareholders who are Pennsylvania residents
will not be subject to county personal property taxes,
with the exception of non-exempt holders who are residents
of the City and School District of Pittsburgh.
24
<PAGE> 27
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Portfolio.
- --------------------------------------------------------------------------------
SHARE PRICE OF
THE PORTFOLIO The Portfolio's net asset value per share is determined as
of the regular close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. The net asset value per
share is determined by dividing the total market value of
the Portfolio's investments and other assets, less any
liabilities, by the total number of outstanding shares of
the Portfolio. This determination is made by appraising
the Portfolio's underlying investments (i.e., the
underlying Vanguard Funds) at the price of each such Fund
determined at the close of the Exchange.
The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard STAR Fund is a Pennsylvania business trust. The
Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest, without
par value, from an unlimited number of classes of shares.
Currently the Fund is offering six classes of shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the
Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------
25
<PAGE> 28
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES The Portfolio is designed primarily for tax-advantaged
retirement accounts. If you are establishing an Individual
Retirement Account ("IRA") or other qualified retirement
plan, you must complete the appropriate retirement plan
agreement, i.e., the Adoption Agreement. If you are
establishing a Portfolio account outside a tax-deferred
retirement plan, you may simply complete the Account
Registration Form. In either case, please indicate the
amount you wish to invest on the appropriate form. Your
purchase must be equal to or greater than the $1,000
minimum initial investment. (Please refer to the plan
agreement for information on the maximum amount you may
contribute or rollover to your retirement account.) If you
need assistance in completing any forms, please call the
Investor Information Department (1-800-662-7447). NOTE:
For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
The Portfolio's shares generally are purchased at the
next-determined net asset value after your investment has
been received. The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock and
bond investments, the Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term stock and bond market movements.
Consequently, the Portfolio reserves the right to
reject any specific purchase (and exchange purchase)
request. The Portfolio also reserves the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Portfolio. Please be sure your purchase
check is made payable to the Vanguard Group.
IMPORTANT NOTE:
IRA AND RETIREMENT
PLAN INVESTORS This Shareholder Guide describes many of the services
available to Vanguard Fund shareholders. Specific services
described in this Shareholder Guide may not be available
or may only be available in limited form for tax-deferred
retirement accounts. If you are investing in the Portfolio
through an IRA or other retirement plan, you should
consult the retirement plan agreement, disclosure
statement, and other Vanguard brochures for the services
and procedures which pertain to your account. Please call
our Investor Information Department (1-800-662-7447) if
you have any questions.
ADDITIONAL
INVESTMENTS Subsequent investments in the Portfolio may be made by
mail ($100 minimum), exchange from another Vanguard Fund
account ($100 minimum), or Vanguard Fund Express. For
regular (non-retirement) accounts, additional purchases
may also be made by wire ($1,000 minimum). (In limited
instances, contributions to retirement accounts may be
accepted by wire. Please call us for more information on
this option.)
- --------------------------------------------------------------------------------
26
<PAGE> 29
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Non-Retirement registration form, make your remittance form attached to your
Accounts, complete check payable to The Vanguard Portfolio confirmation
and sign the enclosed Group-56, and mail to: statements. Please make your
Account Registration check payable to The Vanguard
Form VANGUARD FINANCIAL CENTER Group-56, write your account
P.O. BOX 2600 number on your check and, using
VALLEY FORGE, PA 19482 the return envelope provided,
mail to the address indicated on
the Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
For IRAs or retirement Complete the appropriate retirement plan adoption agreement and any other
plans required documents. Make your check payable to Vanguard Fiduciary Trust
Company and send application and check to the address indicated on your
agreement.
---------------------------------------------------------------------------
</TABLE>
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD STAR FUND
STAR PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the name of the Portfolio, the account number
Vanguard has assigned to you and the eight digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail it
to the "New Account" address above after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Portfolio and the Custodian
Bank are open for business. IRAs and other tax-deferred
accounts cannot be opened by wire. Please see "Opening an
Account."
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account and purchase shares by making an
exchange from an existing Vanguard account. However, the
Portfolio reserves the right to refuse any exchange
purchase request. To exchange by telephone, call our
Client Services Department (1-800-662-2739). The new
account will have the same registration as the existing
account.
27
<PAGE> 30
PURCHASING BY
FUND EXPRESS
Special Purchase &
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options on regular investment accounts, please provide the
appropriate information on the Account Registration Form.
To establish Automatic Investment for an IRA or other
tax-deferred retirement plan (the Special Purchase option
is not available), contact our Investor Information
Department (1-800-662-7447) for an application. We will
send you a confirmation of your Fund Express enrollment;
please wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION If you invest in the Portfolio outside a tax-deferred
retirement account, you must select one of three
distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional shares of the Portfolio. This option will be
selected for you automatically unless you specify one
of the other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional shares of the Portfolio.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
If you invest in the Portfolio through a tax-deferred
retirement account, your dividend and capital gains
distributions will be automatically reinvested in
additional shares of the Portfolio. If you change this
automatic reinvestment option, you should be aware that
"cash" dividends or capital gains will be considered
taxable distributions from your account.
- --------------------------------------------------------------------------------
TAX CAUTION
NON-RETIREMENT
INVESTORS SHOULD
ASK ABOUT THE TIMING
OF CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Portfolio is required to
distribute net capital gains and dividend income to the
Portfolio shareholders. These distributions are made to
all shareholders who own shares of the Portfolio as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you
28
<PAGE> 31
owned the Portfolio shares for just a short period of
time. (Taxes are due on the distributions even if the
dividend or gain is reinvested in additional Portfolio
shares.) While the total value of your investment will be
the same after the distribution -- the amount of the
distribution will offset the drop in the net asset value
of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfolio's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
semi-annually in June and December. For additional
information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING
OPTIONAL SERVICES The easiest way to establish optional Vanguard services on
a regular investment account is to select the options you
desire when you complete your Account Registration Form.
IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED
TO PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND A
SIGNATURE GUARANTEE. PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request for regular
investment accounts. If a certificate is lost, you may
incur an expense to replace it. Share certificates will
not be issued for retirement accounts.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., purchase,
redemption or exchange) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the day of receipt. If your purchase is
received after the close of the Exchange, your trade date
is the next business day. Your shares are purchased at the
net asset value determined on your trade date.
29
<PAGE> 32
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. For a regular investment
account in the Portfolio, you generally may initiate a
request by writing or by telephoning. For an IRA or other
tax-deferred account, you must make your redemption
request in writing. Your redemption proceeds are normally
mailed within two business days after the receipt of the
request in Good Order.
If you invest in the Portfolio through an IRA or other
tax-deferred retirement plan, you should be aware that any
distributions prior to age 59 1/2 are generally subject to
a 10% penalty tax, as well as ordinary income taxes. To
avoid the 10% penalty, you must generally roll over your
distribution to another IRA or qualified plan within 60
days.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD STAR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard STAR Fund, 455 Devon
Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
- --------------------------------------------------------------------------------
30
<PAGE> 33
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option (not available for IRA's or other retirement
accounts) lets you move money from your Vanguard account
to your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange into another
Vanguard Fund account. Please see "Exchanging Your Shares"
for details.
- --------------------------------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day. Please note: the telephone redemption option
is available only for non-retirement accounts. Redemptions
from retirement accounts must be made in writing.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Trustees determines that it would be
detrimental to the best interests of the Portfolio's
remaining shareholders to make payment in cash, the
Portfolio may pay redemption proceeds in whole or in part
by a distribution in kind of readily marketable
securities.
- --------------------------------------------------------------------------------
31
<PAGE> 34
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW BALANCE FEE
AND MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Portfolio will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $500. This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, the Portfolio reserves the right to liquidate
any non-retirement account that is below the minimum
initial investment amount of $1,000. If at any time the
total investment does not have a value of at least $1,000,
you may be notified that the value of your account is
below the Portfolio's minimum account balance requirement.
You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds
would be promptly paid to the shareholder.
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange your
shares of the Portfolio for those of other available
Vanguard Funds.
When exchanging shares by telephone, please have ready the
Portfolio name, account number, Social Security Number or
Employer Identification number listed on the account, and
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. FOR REGULAR INVESTMENT ACCOUNTS, TELEPHONE EXCHANGES
ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED INDEX
FUND, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND, AND VANGUARD QUANTITATIVE PORTFOLIOS. If you
experience difficulty in making a telephone exchange, your
exchange request may be made by regular or express mail,
and it will be implemented at the closing net asset value
on the date received by Vanguard, provided the request is
received in Good Order.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD STAR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard STAR Fund, 455 Devon
Park Drive, Wayne, PA 19087.)
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32
<PAGE> 35
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange between non-retirement accounts is treated
as a redemption and a purchase. Therefore, you could
realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in the Vanguard/
Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Portfolio reserves the right to
revise or terminate its provisions, limit the amount of or
reject any exchange, as deemed necessary, at any time.
Shareholders would be notified prior to any material
change in the Portfolio's exchange policy.
The exchange privilege is only available in states in
which the shares of the Portfolio are registered for sale.
The Portfolio's shares are currently registered for sale
in all 50 states and the Portfolio intends to maintain
such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Portfolio's exchange privilege is not intended to
afford shareholders a way to speculate on short-term
movements in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Portfolio and
increase transaction costs, the Portfolio has established
a policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Portfolio during any twelve
month period. Notwithstanding these limitations, the
Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges is automatically established on
your non-retirement investment account unless you request
in writing that telephone transactions on your account not
be permitted. The telephone exchange option is
automatically established on retirement accounts.
33
<PAGE> 36
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.
Neither the Portfolio nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your
non-retirement account shares to another person by
completing a transfer form and sending it to: VANGUARD
FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482,
ATTENTION: TRANSFER DEPARTMENT. The request must be in
Good Order. To request a transfer form and full
instructions, please call our Client Services Department
(1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Fund Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES Many of these services are not available to (or
appropriate for) retirement account shareholders. For more
information about any of these services, please call our
Investor Information Department at 1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
34
<PAGE> 37
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
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<PAGE> 40
[This page intentionally left blank.]
<PAGE> 41
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<PAGE> 42
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<TABLE>
<S> <C> <C>
[VANGUARD STAR PORTFOLIO LOGO]
[VANGUARD STAR PORTFOLIO LOGO] [FLAG LOGO]
----------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT APRIL 29, 1996
COMPANIES [THE VANGUARD GROUP LOGO]
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>
P056
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<PAGE> 43
- --------------------------------------------------------------------------------
LOGO
LOGO
P R O S P E C T U S
APRIL 29, 1996
LOGO
Vanguard LIFEStrategy Funds are Portfolios of Vanguard STAR Fund
LOGO
- --------------------------------------------------------------------------------
<PAGE> 44
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 29, 1996
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES Vanguard STAR Fund is an open-end non-diversified investment
company which seeks to maximize total investment return
(i.e., capital growth and income) subject to the investment
restrictions and asset allocation policies described in this
Prospectus. The Fund consists of six portfolios; however,
this prospectus relates only to four portfolios, Income,
Conservative Growth, Moderate Growth, and Growth Portfolios
(the "Portfolios"). These four Portfolios invest in up to
nine Vanguard mutual funds, representing different
combinations of stocks, bonds and reserves and reflecting
varying degrees of potential investment risk and reward.
There is no assurance that the Portfolios will achieve their
stated objectives. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Portfolios are designed primarily for tax-advantaged
retirement accounts and other long-term investment savings.
To open an Individual Retirement Account (IRA), please use a
Vanguard IRA Adoption Agreement. To obtain a copy of this
form, call 1-800-662-7447, Monday through Friday, from 8:00
a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). If you are establishing an investment account
outside a Vanguard-sponsored retirement plan, complete the
Account Registration Form. If you need assistance in
completing these forms, please call the Investor Information
Department. The minimum initial investment is $3,000 ($1,000
for Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act Accounts).
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Vanguard STAR Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated April 29, 1996 and has been incorporated by reference
into this Prospectus. A copy may be obtained without charge
by writing to the Fund or by calling the Investor Information
Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights .................... 2 Management of the SHAREHOLDER GUIDE
Portfolio Expenses ............ 4 Portfolios ................. 18 Opening an Account and
Financial Highlights ............5 Investment Management ........ 19 Purchasing Shares ............ 25
Yield and Total Return ..........7 Dividends, Capital Gains When Your Account Will
PORTFOLIO INFORMATION and Taxes .................. 22 Be Credited .................. 29
Investment Objectives ...........7 The Share Price of Each Selling Your Shares ............ 29
Investment Policies .............9 Portfolio .................. 24 Exchanging Your Shares ......... 31
Investment Risks .............. 10 General Information .......... 24 Important Information about
Who Should Invest ............. 12 Telephone Transactions ....... 33
Implementation of Transferring Registration ...... 34
Policies .................... 13 Other Vanguard Services ........ 34
Investment Limitations ........ 17
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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1
<PAGE> 45
HIGHLIGHTS
OBJECTIVES AND
POLICIES Vanguard STAR Fund is an open-end non-diversified
investment company which seeks to maximize total
investment return subject to the investment restrictions
and asset allocation policies described in the
prospectus. The Fund consists of six portfolios; however
this prospectus relates only to the Income, Conservative
Growth, Moderate Growth, and Growth Portfolios. These
four Portfolios invest in up to nine Vanguard mutual
funds representing different combinations of stocks,
bonds, and reserves and reflecting varying degrees of
potential investment risk and reward. The Portfolios do
not invest directly in a portfolio of securities,
rather, in order to meet their objectives the Portfolios
invest in shares of other Vanguard Funds. PAGE 7
- --------------------------------------------------------------------------------
FOUR SEPARATE
PORTFOLIOS Investors may choose to invest in any of the four
Portfolios, collectively known as the Vanguard
LIFEStrategy Funds, based on personal objectives, time
horizons, risk tolerances, and financial circumstances:
Income Portfolio -- seeks to provide current income.
Conservative Growth Portfolio -- seeks to provide
current income and low to moderate growth of capital.
Moderate Growth Portfolio -- seeks to provide growth of
capital and a reasonable level of current income.
Growth Portfolio -- seeks to provide growth of
capital. PAGE 7
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RISK
CHARACTERISTICS The Portfolios differ in terms of stock market risk,
bond market risk, and inflation risk. STOCK MARKET RISK
is the possibility that stock prices in general will
decline over short or extended periods. Stock markets
tend to be cyclical with periods when stock prices
generally rise or fall. The Conservative Growth,
Moderate Growth and Growth Portfolios also will have
exposure to foreign stock markets, which are generally
thought to be riskier than domestic markets. BOND MARKET
RISK is the possibility that bond prices will decline
over short or long periods due primarily to changes in
market interest rates. INFLATION RISK is the possibility
that rising prices for goods and services will erode the
real return of an investment in stocks, bonds or
reserves.
Two of the Portfolios, Moderate Growth and Growth, will
have a higher exposure to stock market risk because of
the significant investment these Portfolios have in
stock funds. While the other two Portfolios, Income and
Conservative Growth, will have higher exposure to bond
market risk because of the significant investment
exposure these Portfolios have in bond funds. These two
Portfolios are also considered to have greater inflation
risk because of their significant exposure to bonds and
reserves. PAGE 10
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2
<PAGE> 46
THE VANGUARD
GROUP The Officers of the Fund manage the Portfolios'
day-to-day operations. The Officers are directly
responsible to the Fund's Board of Trustees. The
Officers of the Fund also serve as Officers of each of
the Vanguard Funds and of The Vanguard Group, Inc.
("Vanguard"). The Trustees each serve as Directors of
The Vanguard Group and most of the Funds within the
Group. For important information regarding the structure
of the Fund, please see "Management of the
Portfolios." PAGE 18
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INVESTMENT
MANAGEMENT The Portfolios do not currently employ investment
advisers and therefore do not pay advisory fees. The
Portfolios currently do not have portfolio managers. The
determination of how the Portfolios' assets will be
invested in certain Vanguard funds is made by the Fund's
Officers pursuant to the investment objectives and
policies. However, the Portfolios as shareholders of
each of the underlying Vanguard funds, benefit from the
investment advisory services of each of the underlying
funds and will indirectly bear their proportionate share
of any investment advisory fees paid by those
Funds. PAGE 19
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DIVIDENDS, CAPITAL
GAINS AND TAXES The Income and Conservative Growth Portfolios will make
quarterly dividend distributions; while the Moderate
Growth and Growth Portfolios will make semi-annual
dividend distributions. Capital gains distributions, if
any, will be made annually for each Portfolio. Also, a
sale of shares -- whether made by redemption or
exchange -- is a taxable event and may result in a
capital gain or loss. PAGE 22
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PURCHASING
SHARES You may purchase shares by mail, wire, or exchange from
another Vanguard Fund. The minimum initial investment is
$3,000 per Portfolio; the minimum for subsequent
investments is $100. There are no sales commissions or
12b-1 fees. PAGE 25
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SELLING SHARES You may redeem shares of the Portfolio by mail or by
telephone. Each Portfolio's share price is expected to
fluctuate, and at the time of redemption may be more or
less than at the time of initial purchase, resulting in
a gain or loss. PAGE 29
- --------------------------------------------------------------------------------
SERVICES TO
SHAREHOLDERS The Fund offers a number of special services including:
Fund Express, for electronic transfers between the Fund
and your bank account; Tele-Account, for round-the-clock
telephone access to your Fund account; Direct Deposit,
for automatic deposit of payroll checks; Average Cost
Statement, for determination of the average cost of
shares redeemed for tax purposes; and Dividend Express
for automatic transfer of dividends and/or capital gains
to a bank account. PAGE 34
- --------------------------------------------------------------------------------
3
<PAGE> 47
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of the Portfolios.
The expenses and fees set forth in the table are
estimates for each Portfolio's first full year of
operation.
<TABLE>
<CAPTION>
SHAREHOLDER CONSERVATIVE MODERATE GROWTH
TRANSACTION GROWTH GROWTH PORTFOLIO
EXPENSES PORTFOLIO PORTFOLIO --------
------------------------ INCOME ------------ --------
PORTFOLIO
--------
<S> <C> <C> <C> <C>
Sales Load Imposed
on Purchases.......... None None None None
Sales Load Imposed
on Reinvested
Dividends............. None None None None
Redemption Fees......... None None None None
Exchange Fees........... None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND CONSERVATIVE MODERATE GROWTH
OPERATING GROWTH GROWTH PORTFOLIO
EXPENSES PORTFOLIO PORTFOLIO --------
------------------------ INCOME ------------ --------
PORTFOLIO
--------
<S> <C> <C> <C> <C>
Management &
Administrative
Expenses.............. None None None None
Investment
Advisory Fees......... None None None None
12b-1 Fees.............. None None None None
Other Expenses
Distribution Costs.... None None None None
Miscellaneous
Expenses............ None None None
Total Other Expenses.... None None None None
------- --------- ------- -------
TOTAL
OPERATING
EXPENSES....... NONE NONE NONE NONE
------- --------- ------- -------
------- --------- ------- -------
</TABLE>
The purpose of these tables is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Portfolios.
The Portfolios did not incur any expenses in fiscal year
1995, and have not incurred any operating expenses since
their inception on September 30, 1994. However, while
the Portfolios are expected to operate without expenses,
shareholders in the Portfolios bear indirectly the
expenses of the underlying Vanguard Funds in which the
Portfolios invest.
The following chart illustrates the indirect expense
ratio that each Portfolio incurred, based on its
investments in the underlying Vanguard Funds, for the
year ended December 31, 1995:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
GROWTH GROWTH GROWTH
INCOME PORTFOLIO PORTFOLIO PORTFOLIO
PORTFOLIO ------------ -------- --------
--------
<S> <C> <C> <C> <C>
Indirect
Expense Ratio........... 0.33% 0.33% 0.33% 0.33%
</TABLE>
Using the above indirect expense ratios for the
Portfolios, the following example illustrates the
expenses that you would incur on a $1,000 investment
over various periods, assuming (1) a 5% annual rate of
return
4
<PAGE> 48
and (2) redemption at the end of each period. As noted
previously, the Portfolios charge no redemption fees of
any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Income Portfolio..... $ 3 $11 $19 $ 42
Conservative Growth
Portfolio.......... $ 3 $11 $19 $ 42
Moderate Growth
Portfolio.......... $ 3 $11 $19 $ 42
Growth Portfolio..... $ 3 $11 $19 $ 42
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights have been audited by
Price Waterhouse LLP, independent accountants, whose
report on the financial statements which contain this
information, was unqualified. This information should be
read in conjunction with the LIFEStrategy Fund's
financial statements and notes thereto, which, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1995 Annual Report
to Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1995 Annual
Report to Shareholders, which may be obtained without
charge by writing to the Fund or by calling our Investor
Information Department at 1-800-662-7447.
5
<PAGE> 49
<TABLE>
<CAPTION>
------------------------------------------------------------
INCOME CONSERVATIVE GROWTH PORTFOLIO
PORTFOLIO
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30+ YEAR ENDED SEPTEMBER 30+
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
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....... 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%
* Annualized.
+ Commencement of operations.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
MODERATE GROWTH PORTFOLIO GROWTH
PORTFOLIO
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30+ YEAR ENDED SEPTEMBER 30+
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
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....... 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%
* Annualized.
+ Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE> 50
YIELD AND
TOTAL RETURN From time to time the Portfolios may advertise their
yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of the Portfolios refers to the average annual
compounded rates of return over one-, five- and ten-
year periods or for the life of the Portfolios (as
stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated
period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on the Portfolio's
securities; it is net of all expenses and all recurring
and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods
differ from the accounting methods used by the
Portfolios to maintain its books and records, and so the
advertised 30-day yield may not fully reflect the income
paid to an investor's account.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES The objective of the Portfolios is to maximize total
investment return (i.e., capital growth and income)
subject to the investment restrictions and asset
allocation policies described in this Prospectus.
Specifically:
- The INCOME PORTFOLIO seeks to provide current income.
- The CONSERVATIVE GROWTH PORTFOLIO seeks to provide
current income and low to moderate growth of capital.
- The MODERATE GROWTH PORTFOLIO seeks to provide growth
of capital and a reasonable level of current income.
- The GROWTH PORTFOLIO seeks to provide growth of
capital.
The investment objectives of the Portfolios are
summarized below in a chart that illustrates the degree
to which each Portfolio seeks to obtain income, growth
of capital and risk of principal:
<TABLE>
<CAPTION>
INCOME GROWTH OF CAPITAL RISK OF PRINCIPAL
PORTFOLIO NAME ------- ----------------- -----------------
----------------
<S> <C> <C> <C> <C>
Income Portfolio.......... High Negligible Medium
Conservative Growth
Portfolio................. Medium Low Medium
Moderate Growth
Portfolio................. Medium Low to Medium Medium
Growth Portfolio.......... Low Medium to High High
</TABLE>
There is no assurance that the Portfolios will achieve
their stated objectives.
7
<PAGE> 51
This investment objective of each Portfolio is
fundamental and so cannot be changed without the
approval of a majority of each Portfolio's shareholders.
- --------------------------------------------------------------------------------
ASSET ALLOCATION
FRAMEWORK Asset allocation between stocks, bonds and reserves is
the most critical investment decision an investor makes.
Selecting the appropriate mix should be based on
personal objectives, time horizons and risk tolerances.
These Portfolios provide different types of investors
with a way to meet target asset allocations.
In order to achieve their investment objectives, the
Portfolios maintain different allocations of stocks,
bonds and reserves(1), reflecting varying degrees of
potential investment risk and reward. These asset class
allocations provide investors with four diversified,
distinct options that meet a wide array of investor
needs. The pie charts below, illustrate the expected
asset allocation for each Portfolio:
[PIE CHART] [PIE CHART]
[PIE CHART] [PIE CHART]
(1)"Reserves" will consist of the VFISF Short-Term
Corporate Portfolio and cash instruments held by
VAAF.
- --------------------------------------------------------------------------------
8
<PAGE> 52
INVESTMENT
POLICIES
THE PORTFOLIOS INVEST
IN A DIVERSIFIED
PORTFOLIO OF
VANGUARD FUNDS Each Portfolio seeks to achieve its objective by
investing in a different combination of other Vanguard
Funds. As investments for the Portfolios, the Trustees
have chosen Vanguard Index Trust ("VIT") -- Total Stock
Market Portfolio, Vanguard International Equity Index
Fund ("VIEIF") -- European and Pacific Portfolios,
Vanguard Asset Allocation Fund ("VAAF"), and Vanguard
Fixed Income Securities Fund ("VFISF") -- Short-Term
Corporate, Intermediate-Term Corporate, Long-Term
Corporate, and GNMA Portfolios to be the underlying
investments of the Portfolios. Each Portfolio invests in
these Funds using fixed formulas in order to provide
investors with the expected asset allocation. The table
on page 8 shows, by asset class, how the Portfolios will
invest in the selected Vanguard Funds.
<TABLE>
<CAPTION>
INVESTMENTS IN THE UNDERLYING VANGUARD FUNDS
INVESTMENT PERCENT OF PERCENT OF PERCENT OF PERCENT OF
CATEGORY INCOME CONSERVATIVE MODERATE GROWTH
PORTFOLIO GROWTH GROWTH PORTFOLIO
------------ --------- PORTFOLIO PORTFOLIO ---------
UNDERLYING ----------- ---------
VANGUARD
FUNDS
-------------
<S> <C> <C> <C> <C> <C>
Stocks VIT -- Total
- US Stock Market
Portfolio.... 5% 20% 35% 50%
- International VIEIF --
European and
Pacific
Portfolios(1). 0% 5% 10% 15%
Bonds VFISF --
STCorp,
ITCorp,
LTCorp,
GNMA
Portfolios(2). 50% 30% 30% 10%
Reserves VFISF --
STCorp
Portfolio(3). 20% 20% 0% 0%
Asset Vanguard
Allocation Asset
Component Allocation
Fund......... 25% 25% 25% 25%
-------- --------- -------- --------
Total........ 100% 100% 100% 100%
</TABLE>
1 The Portfolios will invest in the European and Pacific
Portfolios so that the combined weights parallel the
Morgan Stanley Capital International -- EAFE Index.
2 The Portfolios will divide their investments equally
(i.e. 25% each) between these four VFISF Portfolios.
3 "Reserves" are neither cash nor money market
instruments. The Short-Term Corporate Portfolio
invests in short-term corporate bonds and has
experienced fluctuations in its net asset value equal
to approximately 18% since its inception. Accordingly,
the Portfolios' indirect investment in "reserves" can
be expected to fluctuate within a similar range.
The allocation of each Portfolio's assets among the
Vanguard Funds was made by the Officers of the Fund
under the supervision of the Fund's Board of Trustees,
and was based on prudent asset allocation guidelines.
9
<PAGE> 53
The investment restrictions and asset allocation
policies set forth above are designed to assure that the
Portfolios maintain consistent investment approaches in
pursuit of their objectives.
From time to time, the Portfolios' investments in the
underlying Vanguard Funds may be limited by certain
factors. For example, the Board of Directors of any of
the underlying Vanguard Funds may impose limits on
additional investments in a particular Fund.
See "Implementation of Policies" for a description of
other investment practices of the Portfolios.
- --------------------------------------------------------------------------------
INVESTMENT RISKS Like any investment program, an investment in one or
more of the Portfolios entails certain risks. As mutual
funds investing in different combinations of stocks,
bonds and reserves, the Portfolios are subject to
different levels of stock market, bond market and
inflation risks.
MARKET RISK -- STOCKS Stock MARKET RISK is the possibility that stock prices
in general will decline over short or even extended
periods. The stock market tends to be cyclical, with
periods when stock prices generally rise and periods
when stock prices generally decline. Also, investments
in foreign stock markets can be volatile, if not more
volatile than investments in US markets.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for U.S. stock
market returns as well as the average return for the
period from 1926 to 1995, as measured by the Standard &
Poor's 500 Composite Stock Price Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
5 YEARS 10 YEARS 20 YEARS
1 YEAR ------- -------- --------
------
<S> <C> <C> <C> <C>
Best +53.9 % +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total
returns (capital appreciation plus dividend income)
averaging +10.7% for all 10-year periods from 1926 to
1995. The return in individual years has varied from a
low of -43.3% to a high of +53.9%, reflecting the
short-term volatility of stock prices. Average return
may not be useful for forecasting future returns in any
particular period, as stock returns are quite volatile
from year to year and interim losses are inevitable. For
example, after the "bear market" of 1973-1974, it took
four years for many investors to recover their losses
(assuming dividends were reinvested). And if you were
invested in stocks during the Great Crash of 1929, it
would have taken an average of eight years for your
investment to return to its original value.
MARKET RISK -- BONDS The bond market is typically less risky than the stock
market, although there have been times when some bonds
were just as risky as stocks. For example, bond prices
fell 48% from December 1976 to September 1981.
10
<PAGE> 54
The risk of bonds declining in value, however, may be
offset in whole or in part by the high level of income
that bonds provide. Bond prices are linked to prevailing
interest rates in the economy. The price volatility of a
bond depends on its maturity; the longer the maturity of
a bond, the greater its sensitivity to interest rates.
In general, when interest rates rise, the prices of
bonds fall; conversely, when interest rates fall, bond
prices generally rise.
From time to time, the stock and bond markets may
fluctuate independently of one another. In other words,
a decline in the stock market may in certain instances
be offset by a rise in the bond market, or vice versa.
As a result, each Portfolio, with its unique balance of
common stocks, bonds and reserves, is expected in the
long run to entail less investment risk (and potentially
less investment return) than a mutual fund investing
exclusively in common stocks.
INFLATION RISK Like market risk, inflation represents a significant
threat to even a well-diversified portfolio because
inflation erodes the real return of an investment in
stocks, bonds or reserves. Historically, inflation has
averaged 3.1%, offsetting most of the return from
reserves and bonds, but less than half of the return
from stocks. For this reason, stocks are referred to as
an "inflation hedge," a way to protect your money
against inflation.
FOREIGN
SECURITIES' RISK The Conservative Growth, Moderate Growth and Growth
Portfolios may invest in Foreign securities. For U.S.
investors, the returns of foreign investments are
influenced by not only the returns on foreign common
stocks themselves, but also by CURRENCY RISK -- i.e.,
changes in the value of the currencies in which the
stocks are denominated. In a period when the U.S. dollar
generally rises against foreign currencies, the returns
on foreign stocks for a U.S. investor may be diminished.
By contrast, in a period when the U.S. dollar generally
declines, the returns on foreign stocks may be enhanced.
Other risks and considerations of international
investing include the following: differences in
accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio
transactions; the smaller trading volumes and generally
lower liquidity of foreign stock markets, which may
result in greater price volatility; foreign withholding
taxes payable on a Portfolio's foreign securities, which
may reduce dividend income payable to shareholders; the
possibility of expropriation or confiscatory taxation;
adverse changes in investment or exchange control
regulations; difficulty in obtaining a judgment from a
foreign court; political instability which could affect
U.S. investment in foreign countries; and potential
restrictions on the flow of international capital.
The Portfolios are concentrated in investment companies
of The Vanguard Group, so investors should be aware that
each Portfolio's performance is directly related to the
investment performance of the Vanguard Funds in which it
invests and each Portfolio's allocation
11
<PAGE> 55
among the Funds. First, changes in the net asset values
of the underlying Vanguard Funds affect each Portfolio's
net asset value. Second, over the long-term, each
Portfolio's ability to meet its investment objective
depends on the underlying Vanguard Funds meeting their
investment objectives.
INVESTORS ARE
SUBJECT TO
MANAGER RISK While the Portfolios do not hold securities directly,
the Portfolios are subject to manager risk of the
underlying Funds, which is the possibility that the
underlying Funds' portfolio managers may fail to execute
the underlying Funds' investment strategies effectively.
As a result, the Portfolios may fail to meet their
stated objectives.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING
A BALANCED
RETIREMENT
INVESTMENT PROGRAM The Portfolios are designed for investors who are
planning for retirement or who are in retirement and
maintain investments in certain tax-advantaged accounts
and/or other long-term investment savings. Because of
the risks associated with common stock and bond
investments, the Portfolios are intended to be long-term
investment vehicles and are not designed to provide
investors with a means of speculating on market
movements. Specifically:
- The INCOME PORTFOLIO may be suitable for investors
seeking current income. Investors should have
sufficient time and tolerance for investment
volatility to accept periodic, though moderate,
declines. The Portfolio is most suitable for investors
with a lower tolerance for risk or with a shorter time
horizon (at least 3-5 years). Example: investors who
are investing during late retirement.
- The CONSERVATIVE GROWTH PORTFOLIO is suitable for
investors who are seeking current income and low to
moderate growth of capital. Investors should have both
sufficient time and tolerance for investment
volatility to accept periodic declines. The Portfolio
is most appropriate for investors with a reasonably
long time horizon. Example: investors who are
investing during early retirement.
- The MODERATE GROWTH PORTFOLIO is suitable for
investors who are still seeking reasonable stock
market exposure, but who are not willing to take the
substantial market risks of the Growth Portfolio.
Investors should have both the time and tolerance for
investment volatility to accept possibly large
declines. The Portfolio is most appropriate for
investors with a long time horizon. Example: investors
in their 50s who are saving on a regular basis for
retirement and who plan to retire in their early to
mid 60s.
- The GROWTH PORTFOLIO is suitable for investors seeking
the potential for capital growth that a fund investing
predominantly in common stocks may offer. Investors
should have both the time and tolerance for investment
volatility to accept substantial declines. The
Portfolio is most appropriate for investors with a
very long time horizon. Example: investors in their
20s, 30s, or 40s who are saving for retirement and who
plan to retire in their early to mid 60s.
12
<PAGE> 56
Investors can choose any of these four Portfolios,
depending on personal investment objectives, time
horizons and risk tolerances. For example: investors in
their 40s who are sensitive to market risk may choose
the Moderate Growth Portfolio; while investors in their
40s who are not as sensitive to market risk may choose
the Growth Portfolio.
The Portfolios may be especially suitable for
tax-advantaged retirement accounts, including:
Individual Retirement Accounts (IRAs), Simplified
Employee Plans (SEPs), 403(b)(7) tax-sheltered
retirement plans for employees of non-profit
organizations, 401(k) savings plans, profit-sharing and
money-purchase pension plans, and other corporate
pension and savings plans. While the Portfolios are
specifically designed for tax-advantaged retirement
accounts, shares may also be purchased by investors for
other long-term general retirement savings purposes.
Investors who engage in excessive account activity
generate additional costs which are borne by all of the
Portfolios' shareholders. In order to minimize such
costs the Portfolios have adopted the following
policies. The Portfolios reserve the right to reject any
purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the
Portfolios have adopted exchange privilege limitations
as described in the section "Exchange Privilege
Limitations." Finally, the Portfolios reserve the right
to suspend the offering of their shares.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Vanguard Funds in which the Portfolios invest, as
well as certain other investment practices of the
Portfolios, are described below. Investors desiring more
information on an underlying Vanguard Fund described
below should call Vanguard's Investor Information
Department (1-800-662-7447) for the underlying Fund's
prospectus.
THE PORTFOLIOS
INVEST IN UP
TO THREE
EQUITY FUNDS The TOTAL STOCK MARKET PORTFOLIO is one of six
Portfolios of Vanguard Index Trust, an open-end
diversified investment company. The Total Stock Market
Portfolio is an index fund which seeks to match the
investment performance of the Wilshire 5000 Index, an
index consisting of all regularly and publicly traded US
stocks. The Total Stock Market Portfolio attempts to
match the Wilshire 5000 Index by investing in a
statistically selected sample of the more than 6,000
stocks included in the Index.
The EUROPEAN AND PACIFIC PORTFOLIOS are two of three
Portfolios of Vanguard International Equity Index Fund,
an open-end diversified investment company. The European
Portfolio is an index fund which seeks to replicate the
aggregate price and yield performance of the MSCI-Europe
(Free) Index, a diversified, capitalization-weighted
index comprised of companies located in 14 European
countries. The Pacific Portfolio is an index fund which
seeks to replicate the aggregate price and yield
performance of the MSCI-Pacific Index, a diversified,
capitali-
13
<PAGE> 57
zation-weighted index comprised of companies located in
Australia, Japan, Hong Kong, New Zealand and Singapore.
Both the European and Pacific Portfolios attempt to
match their indexes by investing in statistically
selected samples of the stocks included in their
respective indexes.
All four Portfolios will invest a portion of their
assets in the Total Stock Market Portfolio. However,
only the Conservative Growth, Moderate Growth, and
Growth Portfolios will invest in the European and
Pacific Portfolios.
These three equity index funds are not managed according
to traditional methods of active investment management,
which involve the buying and selling of securities based
upon economic, financial, and market analyses and
investment judgment. Instead, the funds use a "passive"
or indexing investment approach to duplicate the results
of their respective indexes. The three index funds do
not pay advisory fees. All index matching services are
provided to the three funds on an at-cost basis by the
Core Management Group of The Vanguard Group.
THE PORTFOLIOS
INVEST IN FOUR
VANGUARD BOND
PORTFOLIOS The Short-Term Corporate, Intermediate-Term Corporate,
Long-Term Corporate and GNMA Portfolios of Vanguard
Fixed Income Securities Fund are bond funds, which seek
to provide current income by investing in fixed-income
securities. The four Portfolios have distinct investment
policies.
The SHORT-TERM CORPORATE PORTFOLIO invests in a
diversified portfolio of investment grade quality
corporate bonds with an expected dollar-weighted average
maturity of one to three years. The INTERMEDIATE-TERM
CORPORATE PORTFOLIO invests in a diversified portfolio
of investment grade quality corporate bonds with an
expected dollar-weighted average maturity of five to ten
years. The LONG-TERM CORPORATE PORTFOLIO invests in a
diversified portfolio of investment grade quality
corporate bonds with an expected dollar-weighted average
maturity of 15 to 25 years. Investment grade bonds are
generally considered to be those bonds having one of the
four highest grades assigned by Moody's Investors
Service, Inc. (Aaa, Aa, A, or Baa) or by Standard &
Poor's Corporation (AAA, AA, A, or BBB). At least 80% of
the Portfolios' assets will be invested in straight debt
securities and at least 70% of the Portfolio's assets
will be rated A or better by Moody's Investors Service,
Inc. or Standard & Poor's Corporation. Securities rated
Baa or BBB are considered as medium grade obligations.
Interest payments and principal are regarded as adequate
for the present but certain protective elements found in
higher rated bonds may be lacking. Such bonds lack
outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Under normal circumstances, the GNMA PORTFOLIO invests
at least 80% of its assets in Government National
Mortgage Association ("GNMA") securities, which offer
the combined benefits of a U.S. Government guarantee of
timely payment of interest and principal and yields that
usually exceed those of comparable U.S. Treasury
securities.
14
<PAGE> 58
GNMA certificates are mortgage-backed securities
representing proportionate ownership of a pool of
mortgage loans. These loans -- issued by lenders such as
mortgage bankers, commercial banks and savings and loan
associations -- are either insured by the Federal
Housing Administration (FHA) or guaranteed by the
Veterans Administration (VA). A "pool" or group of such
mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities
dealers. Once approved by GNMA, a government corporation
within the U.S. Department of Housing and Urban
Development, the timely payment of interest and
principal on each mortgage is guaranteed by the full
faith and credit of the U.S. Government.
As mortgage-backed securities, GNMA certificates differ
from ordinary corporate or government bonds in that
principal is paid back by the borrower over the length
of the loan rather than returned in a lump sum at
maturity. GNMA certificates are called "pass through"
securities because both interest and principal payments
(including prepayments) are passed through to holders
of the certificates (such as the GNMA Portfolio). Upon
receipt, principal payments are used by the GNMA
Portfolio to purchase additional GNMA certificates or
other U.S. Government guaranteed securities.
The GNMA Portfolio is exposed to prepayment risk.
Prepayment risk is the possibility that, as interest
rates fall, homeowners are likely to refinance their
home mortgages, which causes the principal on GNMA
certificates held by the GNMA Portfolio to be "prepaid"
earlier than expected. The GNMA Portfolio must then
reinvest the unanticipated principal in new GNMA
certificates, which reduces the income earned by the
GNMA Portfolio.
Besides investing in GNMA certificates, the GNMA
Portfolio may invest up to 15% of its net assets in
restricted securities (securities which are not freely
marketable or which are subject to restrictions on sale
under the Securities Act of 1933).
Each Portfolio will invest a portion of its assets in
the Short-Term Corporate, Intermediate-Term Corporate,
Long-Term Corporate and GNMA Portfolios.
ALL FOUR PORTFOLIOS
INVEST IN VANGUARD
ASSET ALLOCATION
FUND VANGUARD ASSET ALLOCATION FUND, an open-end diversified
investment company, which allocates its assets among a
common stock portfolio, a bond portfolio and money
market instruments. The investment adviser allocates the
Fund's assets among stocks, bonds, and money market
instruments in proportions which reflect the anticipated
returns and risks of each asset class. The estimates of
return and risk are developed based upon the adviser's
disciplined valuation methodology. There are no
limitations on the amount of the Fund's assets which may
be allocated to each of the three asset classes (stocks,
bonds, and money market instruments).
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<PAGE> 59
THE PORTFOLIOS AND
EACH UNDERLYING FUND
MAY INVEST IN
SHORT-TERM FIXED
INCOME SECURITIES The Portfolios and their underlying Vanguard Funds are
authorized to invest temporarily in certain short-term
fixed income securities for defensive purposes. Such
securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. Each of the Portfolio's underlying Vanguard
Funds may also invest in such securities to take a
temporarily defensive position against potential stock
or bond market declines. These securities include:
obligations of the U.S. Government and its agencies and
instrumentalities; commercial paper, bank certificates
of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
DERIVATIVE
INVESTING Derivatives are instruments whose values are linked to
or derived from an underlying security or index. The
most common and conventional types of derivative
securities are futures and options.
THE PORTFOLIOS AND
EACH UNDERLYING FUND
MAY INVEST IN FUTURES
CONTRACTS AND OPTIONS The Portfolios and their underlying Vanguard Funds may
invest in futures contracts and options to a limited
extent. Specifically, the Portfolios' underlying funds
including Total Stock Market Portfolio, European
Portfolio, Pacific Portfolio, Short-Term Corporate
Portfolio, Intermediate-Term Corporate Portfolio,
Long-Term Corporate Portfolio, GNMA Portfolio, and
Vanguard Asset Allocation Fund may invest in futures
contracts and options. The Portfolios have no present
intention of investing directly in futures contracts and
options, but if they were to do so, investment decisions
regarding such instruments would be made by Vanguard's
Core Management or Fixed Income Group.
Futures contracts and options may be used for several
reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund
management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns
when a futures contract is priced more attractively than
the underlying security or index. While futures
contracts and options can be used as leveraged
instruments, neither the Portfolios nor the underlying
Funds may use futures contracts or options transactions
to leverage their assets.
The Portfolios and their underlying Funds will not use
futures contracts or options for speculative purposes or
to leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts and
options by the underlying Funds are: (i) imperfect
correlation between the change in market value of
securities held by a Fund and the prices of futures
contracts and options; and (ii) possible lack of a
liquid secondary market for a futures contract resulting
in an inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be
minimized by investing only in contracts whose behavior
is expected to resemble that of a Fund's underlying
securities. The risk that a Fund will be unable to close
out a futures position will be minimized by entering
into such transactions only on an exchange with an
active and liquid secondary market. Additionally,
investments in futures contracts and options involve the
risk that an investment adviser will incorrectly predict
stock market and interest rate trends.
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<PAGE> 60
The Portfolios and their underlying Funds may enter into
futures contracts provided that not more than 5% of
their respective assets are required as a futures
contract deposit; in addition the Portfolios and their
underlying Funds may enter into futures contracts and
options transactions to the extent that not more than
20% of their respective assets (50% with respect to
Vanguard Asset Allocation Fund) are committed to such
contracts or transactions.
EACH OF THE
PORTFOLIOS' UNDERLYING
FUNDS MAY LEND ITS
SECURITIES Each of the Portfolios' underlying Funds may lend their
investment securities to qualified institutional
investors for the purpose of realizing additional net
investment income. Loans of securities by a Fund will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities.
PORTFOLIO TURNOVER
IS EXPECTED
TO BE LOW The portfolio turnover rate is not expected to exceed
25% annually. A portfolio turnover rate of 25% for a
Portfolio would occur if one quarter of a Portfolio's
investments were sold within a year. The Fund's Officers
will purchase or sell securities: (i) to accommodate
purchases and sales of Portfolio shares; and (ii) to
maintain or modify the allocation of the Portfolios'
assets between the underlying Vanguard Funds in which
the Portfolios invest within the percentage limits
described under "Investment Policies."
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Portfolios have adopted the following fundamental
limitations on its investment practices. Specifically,
the Portfolios will not:
THE PORTFOLIOS HAVE
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS (a) borrow money except from banks for temporary or
emergency purposes, and then only in an amount not
in excess of 5% of the lower of the market value or
cost of its assets, in which case it may pledge,
mortgage or hypothecate any of its assets as
security for such borrowing, but not to an extent
greater than 5% of the market value of its assets;
and
(b) invest more than 25% of its assets in any one
industry, except for investment companies which are
members of The Vanguard Group of Investment
Companies.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
NOTICE TO OHIO INVESTORS. Vanguard STAR Fund does not
meet the requirements of Ohio Administrative Rule
1301:6-3-09G in that it may invest more than 25% of its
assets in a single issuer. However, the Fund's
Portfolios invest only in Vanguard-sponsored mutual
funds which, in turn, are prohibited from investing more
than 5% of their total assets in the securities of any
single issuer and may not purchase more than 10% of the
outstanding voting securities of any issuer.
- --------------------------------------------------------------------------------
17
<PAGE> 61
MANAGEMENT OF
THE PORTFOLIOS
THE OFFICERS
MANAGE THE
PORTFOLIOS'
OPERATIONS The Officers of the Fund manage the day-to-day operation
of the Portfolios. The Officers are directly responsible
to the Fund's Board of Trustees. The Trustees, who are
elected by the Fund's shareholders, determine how the
assets of each Portfolio should be invested among the
Vanguard Funds, set general policies for the Fund and
choose its Officers. The Officers of the Fund also serve
as Officers of each of the Vanguard Funds and of The
Vanguard Group, Inc. ("Vanguard"). The Trustees each
serve as Directors of The Vanguard Group, Inc. and most
of the Vanguard Funds within the Group. A list of
Trustees and Officers of the Fund and a statement of
their present positions and principal occupations during
the past five years can be found in the Statement of
Additional Information.
The business of the Fund will be conducted by its
Officers in accordance with policies and guidelines set
up by the Fund's Trustees which were included in an
Application for an Exemptive Order subsequently issued
by the U.S. Securities and Exchange Commission. As noted
above, the Officers and Trustees of the Fund also serve
in similar positions in the underlying Funds. If the
interests of the Portfolios and the underlying Funds
were ever to become divergent, a concern might arise
that this could create a potential conflict of interest
which could affect how the Officers or Trustees fulfill
their fiduciary duties to the Portfolios and the
Vanguard Funds. The Trustees believe they have
structured the Fund to avoid the concerns which could
arise. Conceivably, a situation could occur where proper
portfolio or other action for the Portfolios could be
adverse to the interests of an underlying Vanguard Fund,
or the reverse could occur. If such a possibility
appears likely, the Trustees and Officers will carefully
analyze the situation and take all steps they believe
reasonable to minimize and, where possible, eliminate
the potential conflict. Moreover, limitations on
aggregate investments in the underlying Vanguard Funds
and other restrictions have been adopted by the Fund to
minimize this possibility, and close and continuous
monitoring will be exercised to avoid, insofar as
possible, these concerns.
VANGUARD
ADMINISTERS AND
DISTRIBUTES
THE PORTFOLIOS The Fund has entered into a Special Servicing Agreement
(the "Agreement") with Vanguard under which Vanguard
will provide all management, administrative and
distribution services to the Portfolios of the Fund.
Vanguard is a jointly-owned subsidiary of more than 30
investment company members (the "Funds") of The Vanguard
Group of Investment Companies. The Vanguard Funds offer
over 90 distinct investment portfolios with total assets
in excess of $190 billion. Vanguard provides the
Portfolios and other Funds in the Group with corporate
management, administrative and distribution services
(similar to those provided to the Portfolios) on an
at-cost basis. As a result of Vanguard's unique
corporate structure, Vanguard Funds have costs
substantially lower than those of most competing mutual
funds. In 1995, the average expense ratio (annual costs
including advisory fees divided by total net assets) for
the Vanguard Funds amounted to approximately .31% com-
18
<PAGE> 62
pared to an average of 1.11% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Special Servicing Agreement provides that the
Portfolios will pay for services to be rendered to the
Portfolios by Vanguard on an "out of pocket" basis. The
Portfolios will also bear the expenses of services
provided by other parties, including auditors, the
custodian, and outside legal counsel, as well as taxes
and other direct expenses of the Portfolios. However,
the Agreement provides that the expenses of the
Portfolios will be offset, in whole or in part, by a
reimbursement from Vanguard for (a) contributions made
by each Portfolio to the cost of operating the
underlying Vanguard Funds the Portfolios invest in and
(b) certain savings in administrative and marketing
costs that Vanguard is expected to derive from the
operation of the Portfolios. The Portfolios'
contributions to Vanguard represent revenues Vanguard
receives because the Portfolios bear their pro rata
share of the costs of operating the underlying Vanguard
Funds. The cost savings realized by Vanguard from the
Portfolios result primarily from the assumed reduction
in the number of accounts Vanguard has to maintain due
to the existence of the Portfolios (i.e., one account
per investor as opposed to one for each underlying Fund
per investor if the investor duplicated the Portfolio's
investment program by investing directly in the
underlying Funds).
Although such cost savings are not certain, the Trustees
believe that the reimbursements to be made by Vanguard
to the Portfolios should be sufficient to offset most,
if not all, of the expenses incurred by the Portfolios.
Therefore, the Portfolios are expected by the Trustees
to operate at a very low, or zero, expense ratio. In the
event that the economic benefits of operating the
Portfolios exceed their actual costs, such benefits will
be shared by each of the Funds in The Vanguard Group,
including the underlying Funds in which the Portfolios
invest.
- --------------------------------------------------------------------------------
INVESTMENT
MANAGEMENT
THE FUND DOES NOT
EMPLOY AN
INVESTMENT
ADVISER The Portfolios do not employ an investment adviser and
therefore do not pay advisory fees. The Portfolios do
not have portfolio managers at this time. The
determination of how the Portfolios' assets will be
invested in certain of the Vanguard Funds is made by the
Fund's Officers pursuant to the investment objective and
policies set forth in this Prospectus and procedures and
guidelines established by the Trustees. However, the
Portfolios, as shareholders of each of the underlying
Vanguard Funds, benefit from the investment advisory
services of each of the underlying Funds, and will
indirectly bear their proportionate share of any
investment advisory fees paid by those Funds.
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<PAGE> 63
The Portfolios' underlying Funds are managed by the
following investment advisers:
<TABLE>
<CAPTION>
INVESTMENT ADVISER PORTFOLIO'S UNDERLYING FUNDS
<S> <C>
--------------------------- -----------------------------------
The Vanguard Group, Inc. Short-Term Corporate Portfolio and
Intermediate-Term Corporate
Portfolio
of Vanguard Fixed Income
Securities Fund
Total Stock Market Portfolio
of Vanguard Index Trust
European and Pacific Portfolios
of Vanguard International
Equity Index Fund
Mellon Capital Management Vanguard Asset Allocation Fund
Wellington Management GNMA and Long-Term Corporate
Company Portfolio of Vanguard Fixed
Income Securities Fund
</TABLE>
VANGUARD'S
CORE MANAGEMENT
GROUP Vanguard's Core Management Group provides investment
advisory services on an at-cost basis with respect to
Vanguard Index Trust -- Total Stock Market Portfolio and
Vanguard International Equity Index Fund -- European and
Pacific Portfolios. The Core Management Group also
provides investment advisory services to other Vanguard
Funds, including the remaining five Portfolios of
Vanguard Index Trust, the third Portfolio of Vanguard
International Equity Index Fund, Vanguard Institutional
Index Fund, Vanguard Balanced Index Fund and the Equity
Index Portfolio of Vanguard Variable Insurance Fund,
several Portfolios of the Vanguard Tax-Managed Fund, the
Aggressive Growth Portfolio of Vanguard Horizon Fund, a
portion of Vanguard/Morgan Growth Fund, a portion of
Vanguard/Windsor II's assets, as well as to several
indexed separate accounts. Total assets under management
by the Core Management Group were approximately $33
billion as of December 31, 1995.
VANGUARD'S
FIXED INCOME
GROUP Vanguard's Fixed Income Group provides investment
advisory services on an at-cost basis with respect to
the Short-Term Corporate and Intermediate-Term Corporate
Portfolios of Vanguard Fixed Income Securities Fund. The
Fixed Income Group provides advisory services to more
than 40 Vanguard fixed-income portfolios, both taxable
and tax-exempt. Total assets under management by the
Fixed Income Group were approximately $66 billion as of
December 31, 1995.
MELLON CAPITAL
MANAGEMENT Mellon Capital Management is a professional counseling
firm which manages well-diversified stock and bond
portfolios for institutional clients. As of December 31,
1995 the adviser provided investment advisory services
to 189 clients and managed assets with an approximate
value of $44.1 billion. The adviser's asset allocation
strategy was developed by the adviser's Chairman,
William Fouse, in 1972, and is used by 78 of its clients
and accounts for approximately $12.2 billion of the
assets that it manages. For its asset allocation
clients, including the
20
<PAGE> 64
Fund, the adviser employs a proprietary asset allocation
model in managing client investment portfolios and an
indexing approach in selecting individual equity
securities. The Fund is one of the adviser's two
investment company clients.
Vanguard Asset Allocation Fund pays Mellon Capital
Management an annual basic fee equal to 0.20% on the
first $100 million of assets; .15 of 1% on the next $900
million of assets; .125 of 1% on the next $500 million
of assets; and .10% of 1% on assets greater than $1.5
billion. This fee may be increased or decreased by
applying an adjustment formula based on the performance
of the Fund relative to the investment record of the S&P
500 Index. The fee payment will be increased (decreased)
by an incentive (penalty) of 0.05% of average net assets
if the Fund's cumulative investment performance for the
thirty-six months preceding the end of the quarter is at
least six percentage points above (below) the cumulative
investment record of the S&P 500 Index for the same
period.
WELLINGTON
MANAGEMENT
COMPANY Wellington Management Company (WMC) is a professional
investment counseling firm which globally provides
investment services to investment companies,
institutions and individuals. Among the clients of WMC
are more than 10 of the Vanguard Funds. As of December
31, 1995, WMC held discretionary management authority
with respect to more than $108 billion of assets. WMC
and its predecessor organizations have provided
investment advisory services to investment companies
since 1933 and to investment counseling clients since
1960.
The GNMA and Long-Term Corporate Portfolios of Vanguard
Fixed Income Securities Fund pay WMC an annual advisory
fee equal to .125 of 1% on the first $2.5 billion of the
aggregate net assets of the three Portfolios; .100 of 1%
on the next $2.5 billion of aggregate net assets; .075
of 1% on the next $2.5 billion; and .050 of 1% on the
aggregate net assets of the three Portfolios greater
than $7.5 billion. The advisory fee is then allocated to
each Portfolio based on the relative net assets of each;
provided, however, that following such allocation, the
fee to be paid by the GNMA Portfolio is reduced by 75%
and the fee paid to the Long-Term Corporate Portfolio is
reduced by 50%. During the fiscal year ended January 31,
1996, the GNMA and Long-Term Corporate Portfolios paid
annual advisory fees equal to .02 of 1% and .04 of 1% of
average net assets, respectively.
Each Portfolio will purchase and sell the principal
portion of its portfolio securities (i.e., shares of
certain of the underlying Vanguard Funds) by dealing
directly with the issuer. There will be no sales charges
or commissions because the underlying Funds are offered
on a no-load basis, without sales charges. Investments
in short-term money market instruments and repurchase
agreements usually will be principal transactions and
will generally involve no brokerage commissions.
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21
<PAGE> 65
DIVIDENDS,
CAPITAL GAINS
AND TAXES The Income and Conservative Growth Portfolios expect to
pay dividends quarterly from ordinary income, while the
Moderate Growth and Growth Portfolios expect to pay
dividends semi-annually from ordinary income. Capital
gains distribution from the Portfolios, if any, will be
made annually.
For tax-deferred retirement accounts (such as Individual
Retirement Accounts or other retirement plans sponsored
by Vanguard), dividend and capital gains distributions
from the Portfolios must be reinvested in additional
shares. For regular investment accounts, dividend and
capital gains distributions may be reinvested in
additional shares or received in cash. See "Choosing a
Distribution Option" for a description of these
distribution methods for regular investment accounts in
the Portfolios.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the
Portfolios may declare special year-end dividend and
capital gains distributions during December. Such
distributions, if received by shareholders by January
31, are deemed to have been paid by the Portfolios and
received by shareholders on December 31 of the prior
year.
Each Portfolio intends to continue to qualify as a
"regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. The tax consequences of distributions from
the Portfolios will vary according to the type of
account you open.
If you open an IRA or other tax-deferred retirement
account, dividend and capital gains distributions from
the Portfolios will generally be exempt from current
taxation. You are advised to consult with a tax
professional on the specific rules governing your own
tax-deferred arrangement. There are varying restrictions
imposed by the Internal Revenue Service on eligibility,
contributions and withdrawals, depending on the type of
tax-deferred account you have selected. The rules
governing tax-deferred retirement plans are complex, and
failure to comply with the IRS's rules and regulations
governing your specific type of plan may result in a
substantial cost to you, including the loss of tax
advantages and the imposition of additional taxes and
penalties by the IRS.
If you open an account in one or more of the Portfolios
outside a tax-deferred retirement account, the following
tax rules will generally apply. For regular investment
accounts, dividends paid by the Portfolios from net
investment income and net short-term capital gains,
whether received in cash or reinvested in additional
shares, will be taxable as ordinary income.
Distributions paid by the Portfolios from long-term
capital gains, again whether received in cash or
reinvested in additional shares, will also be taxable as
long-term capital gains, regardless of the length of
time you have owned shares of the Portfolios.
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<PAGE> 66
Capital gains distributions are made when one or more of
the Portfolios realizes net capital gains on sales of
portfolio securities during the year. The Portfolios do
not seek to realize any particular amount of capital
gains during a year; rather, realized gains are a
by-product of portfolio management activities. In
addition, the Portfolios received realized net capital
gains distributions from the Portfolio's underlying
Funds. Consequently, capital gains distributions may be
expected to vary considerably from year to year; there
will be no capital gains distributions in years when a
Portfolio realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you
in the Portfolios. In addition, keep in mind that if you
purchase shares of a Portfolio shortly before the record
date for a dividend or capital gains distribution, a
portion of your investment will be returned to you as a
taxable distribution, regardless of whether you are
reinvesting your distributions or receiving them in
cash.
The Portfolios will notify you annually as to the tax
status of dividend and capital gains distributions paid
by the Portfolios.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds
(or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions,
and capital gains or losses from redemptions and
exchanges may be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or
Taxpayer Identification number and by certifying that
you are not subject to backup withholding.
Vanguard STAR Fund is organized as a Pennsylvania
business trust and, in the opinion of counsel, is not
liable for any income or franchise tax in the
Commonwealth of Pennsylvania. Each Portfolio will be
subject to Pennsylvania county personal property tax in
the county which is the site of its principal office. In
the opinion of counsel, shareholders who are
Pennsylvania residents will not be subject to county
personal property taxes, with the exception of
non-exempt holders who are residents of the City and
School District of Pittsburgh.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Portfolios.
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23
<PAGE> 67
THE SHARE PRICE
OF EACH
PORTFOLIO The net asset value per share for each Portfolio is
determined as of the regular close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on
each day that the Exchange is open for trading. The net
asset value per share is determined by dividing the
total market value of each Portfolio's investments and
other assets, less any liabilities, by the total number
of outstanding shares of each Portfolio. This
determination is made by appraising each Portfolio's
underlying investments (i.e., the underlying Vanguard
Funds) at the price of each such Fund determined at the
close of the Exchange.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
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GENERAL
INFORMATION Vanguard STAR Fund is a Pennsylvania business trust. The
Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest,
without par value, from an unlimited number of classes
of shares. Currently the Fund is offering six classes of
shares.
The shares of the Fund are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they so
choose.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Trustee or Trustees of the Fund
if requested in writing by the holders of not less than
10% of the outstanding shares of the Fund.
All securities and cash are held by Morgan Guaranty
Trust Company, New York, N.Y. CoreStates Bank, N.A.,
holds daily cash balances that are used by the Fund's
Portfolios to invest in repurchase agreements or
securities acquired in these transactions. The Vanguard
Group, Inc., Valley Forge, PA, serves as the Fund's
Transfer and Dividend Disbursing Agent. Price Waterhouse
LLP serves as independent accountants for the Fund and
will audit its financial statements annually. The Fund
is not involved in any litigation.
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24
<PAGE> 68
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES The Portfolios are designed primarily for tax-advantaged
retirement accounts as well as other long-term
investment savings plans. If you are establishing an
Individual Retirement Account ("IRA") or other qualified
retirement plan, you must complete the appropriate
retirement plan agreement, i.e., the Adoption Agreement.
If you are establishing a Portfolio account outside a
Vanguard tax-deferred retirement plan, you may simply
complete the Account Registration Form. In either case,
please indicate the amount you wish to invest on the
appropriate form. Your purchase must be equal to or
greater than the $3,000 minimum initial investment
($1,000 for IRAs). (Please refer to the plan agreement
for information on the maximum amount you may contribute
or rollover to your retirement account.) If you need
assistance in completing any forms, please call the
Investor Information Department (1-800-662-7447). NOTE:
For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or powers of attorney), please call us to determine
which additional forms you may need.
Portfolio shares generally are purchased at the
next-determined net asset value after your investment
has been received. The Portfolios are offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).
PURCHASE
RESTRICTIONS
1) Because of the risks associated with common stock and
bond investments, the Portfolios are intended to be
long-term investment vehicles and are not designed to
provide investors with means of speculating on
short-term stock and bond market movements.
Consequently, the Portfolios reserve the right to
reject any specific purchase (and exchange purchase)
request. The Portfolios also reserve the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Portfolios. Please be sure
your purchase check is made payable to the Vanguard
Group.
IMPORTANT NOTE:
IRA AND
RETIREMENT PLAN
INVESTORS This Shareholder Guide describes many of the services
available to Vanguard fund shareholders. Specific
services described in this Shareholder Guide may not be
available or may only be available in limited form for
tax-deferred retirement accounts. If you are investing
in a Portfolio through an IRA or other retirement plan,
you should consult the retirement plan agreement,
disclosure statement, and other Vanguard brochures for
the services and procedures which pertain to your
account. Please call our Investor Information Department
(1-800-662-7447) if you have any questions.
ADDITIONAL
INVESTMENTS Subsequent investments in the Portfolios may be made by
mail ($100 minimum), exchange from another Vanguard
Fund account ($100 minimum), or Vanguard Fund Express.
For regular (non-retirement) accounts, additional
purchases may also be made by wire ($1,000 minimum). In
limited instances, contributions to retirement accounts
25
<PAGE> 69
may be accepted by wire. Please call us for more
information on this option.
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Non-Retirement on the registration form, Invest-by-Mail remittance
Accounts, complete make your check payable to form attached to your
and sign the enclosed The Vanguard Portfolio confirmation
Account Registration Group-(Portfolio number), statements. Please make
Form see below for appropriate your check payable to The
number and mail to: Vanguard Group-(Portfolio
number), see below for
VANGUARD FINANCIAL CENTER appropriate number, write
P.O. BOX 2600 your account number on your
VALLEY FORGE, PA 19482 check and, using the re-
turn envelope provided,
mail to the address
indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail
to the post office box
address.
</TABLE>
For IRAs or retirement
plans Complete the appropriate retirement plan adoption
agreement and any other required documents. Make your
check payable to Vanguard Fiduciary Trust Company and
send application and check to the address indicated on
your agreement.
VANGUARD STAR FUND
Income Portfolio -- 723
Conservative Growth Portfolio -- 724
Moderate Growth Portfolio -- 914
Growth Portfolio -- 122
------------------------------------------------------------------------------
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD STAR FUND
NAME OF PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the name of the Fund, the account number
Vanguard has assigned to you and the
26
<PAGE> 70
eight digit CoreStates number. If you are opening a new
account, please complete the Account Registration Form
and mail it to the "New Account" address above after
completing your wire arrangement. NOTE: Federal Funds
wire purchase orders will be accepted only when the Fund
and the Custodian Bank are open for business. IRAs and
other tax-deferred accounts cannot be opened by wire.
Please see "Opening an Account."
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account and purchase shares by making an
exchange from an existing Vanguard account. However, the
Portfolios reserve the right to refuse any exchange
purchase request. To exchange by telephone, call our
Client Services Department (1-800-662-2739). The new
account will have the same registration as the existing
account.
PURCHASING BY
FUND EXPRESS
Special Purchase &
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically
from your bank account to your Vanguard account on the
schedule (monthly, bimonthly [every other month],
quarterly or yearly) you select. To establish these Fund
Express options on regular investment accounts, please
provide the appropriate information on the Account
Registration Form. To establish Automatic Investment for
an IRA or other tax-deferred retirement plan (the
Special Purchase option is not available), contact our
Investor Information Department (1-800-662-7447) for an
application. We will send you a confirmation of your
Fund Express enrollment; please wait three weeks before
using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION If you invest in a Portfolio outside a tax-deferred
retirement account, you must select one of three
distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional shares of the Portfolio. This option will
be selected for you automatically unless you specify
one of the other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional shares of the Portfolio.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
27
<PAGE> 71
If you invest in a Portfolio through a tax-deferred
retirement account, your dividend and capital gains
distributions will be automatically reinvested in
additional shares of the Portfolio. If you change this
automatic reinvestment option, you should be aware that
"cash" dividends or capital gains will be considered
taxable distributions from your account.
- --------------------------------------------------------------------------------
TAX CAUTION
NON-RETIREMENT
INVESTORS SHOULD
ASK ABOUT THE TIMING
OF CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Portfolios are required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own shares of the Portfolios as of
the distribution's record date, regardless of how long
the shares have been owned. Purchasing shares just prior
to the record date could have a significant impact on
your tax liability for the year. For example, if you
purchase shares immediately prior to the record date of
a sizable capital gain or income dividend distribution,
you will be assessed taxes on the amount of the capital
gain and/or dividend distribution later paid even though
you owned the Portfolio shares for just a short period
of time. (Taxes are due on the distributions even if the
dividend or gain is reinvested in additional Portfolio
shares.) While the total value of your investment will
be the same after the distribution -- the amount of the
distribution will offset the drop in the net asset value
of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The
Portfolios' annual capital gains distributions normally
occur in December, while income dividends are generally
paid quarterly in March, June, September, and December
for the Income and Conservative Growth Portfolio and
semi-annually in June and December for the Moderate
Growth and Growth Portfolios. For additional information
on distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING
OPTIONAL SERVICES The easiest way to establish optional Vanguard services
on a regular investment account is to select the options
you desire when you complete your Account Registration
Form. IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU
MAY NEED TO PROVIDE VANGUARD WITH ADDITIONAL INFORMATION
AND A SIGNATURE GUARANTEE. PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will not be available for the
Portfolios.
28
<PAGE> 72
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., purchase,
redemption or exchange) believed to be authentic,
received in writing or by telephone, once the trade
request has been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information.
If you elect to do so, you may also receive a paper copy
of the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal
Funds wire or exchange, and is received by the close of
the New York Stock Exchange (generally 4:00 p.m. Eastern
time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange,
your trade date is the next business day. Your shares
are purchased at the net asset value determined on your
trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. For a regular
investment account in the Portfolios, you generally may
initiate a request by writing or by telephoning. For an
IRA or other tax-deferred account, you must make your
redemption request in writing. Your redemption proceeds
are normally mailed within two business days after the
receipt of the request in Good Order.
If you invest in the Portfolios through an IRA or other
tax-deferred retirement plan, you should be aware that
any distributions prior to age 59 1/2 are generally
subject to a 10% penalty tax, as well as ordinary income
taxes. To avoid the 10% penalty, you must generally roll
over your distribution to another IRA or qualified plan
within 60 days.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD STAR FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard STAR
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be a Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
------------------------------------------------------------------------------
29
<PAGE> 73
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Fund and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. Signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations,
trusts, and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739).
------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. The proceeds will be sent to you by
mail. PLEASE NOTE: As a protection against fraud, your
telephone mail redemption privilege will be suspended
for 10 calendar days following any expedited address
change to your account. An expedited address change is
one that is made by telephone, by Vanguard Online or, in
writing, without the signatures of all account owners.
Please see "Important Information About Telephone
Transactions."
------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option (not available for IRA's or other retirement
accounts) lets you move money from your Vanguard account
to your bank account on an "as needed" basis. To
establish these Fund Express options, please provide the
appropriate information on the Account Registration
Form. We will send you a confirmation of your Fund
Express service; please wait three weeks before using
the service.
------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange into another
Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
------------------------------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be
redeemed at any time. However, your redemption proceeds
will not be paid until payment for the purchase is
collected, which may take up to ten calendar days.
------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day. Please note: the telephone
redemption option is available only for non-retirement
accounts. Redemptions from retirement accounts must be
made in writing.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
30
<PAGE> 74
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net asset
value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Trustees determines that it would be
detrimental to the best interests of the Portfolio's
remaining shareholders to make payment in cash, the
Portfolios may pay redemption proceeds in whole or in
part by a distribution in kind of readily marketable
securities.
------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
------------------------------------------------------------------------------
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Portfolio will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $2,500 ($1,000 for Uniform/transfers to
Minors Act accounts). This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, the Portfolios reserve the right to
liquidate any non-retirement account that is below the
minimum initial investment amount of $3,000. If at any
time your total investment does not have a value of at
least $3,000, you may be notified that the value of your
account is below the Fund's minimum account balance
requirement. You would then be allowed 60 days to make
an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange
your shares of a Portfolio for those of other available
Vanguard Funds.
When exchanging shares by telephone, please have ready
the Portfolio name, account number, Social Security
Number or Employer Identification number listed on the
account and exact name and address in which
31
<PAGE> 75
the account is registered. Only the registered
shareholder may complete such an exchange. Requests for
telephone exchanges received prior to the close of
trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) are processed at the close of
business that same day. Requests received after the
close of the Exchange are processed the next business
day. FOR REGULAR INVESTMENT ACCOUNTS, TELEPHONE
EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD
BALANCED INDEX FUND, VANGUARD INDEX TRUST, VANGUARD
INTERNATIONAL EQUITY INDEX FUND AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may
be made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard, provided the request is received
in Good Order.
------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name
of the Fund you wish to exchange into, the amount you
wish to exchange, and the signatures of all registered
account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD STAR FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard STAR
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange between non-retirement accounts is treated
as a redemption and a purchase. Therefore, you could
realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in the
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Portfolios reserve the right to
revise or terminate its provisions, limit the amount of
or reject any exchange, as deemed necessary, at any
time.
32
<PAGE> 76
Shareholders would be notified prior to any material
change in the Fund's exchange policy.
The exchange privilege is only available in states in
which the shares of the Portfolio are registered for
sale. The Portfolio's shares are currently registered
for sale in all 50 states and the Portfolio intends to
maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Portfolios' exchange privileges are not intended to
afford shareholders a way to speculate on short-term
movements in the market. Accordingly, in order to
prevent excessive use of the exchange privilege that may
potentially disrupt the management of the Portfolios and
increase transaction costs, the Portfolios have
established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Portfolios during any
twelve month period. Notwithstanding these limitations,
the Portfolios reserve the right to reject any purchase
request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges is automatically established
on your non-retirement investment account unless you
request in writing that telephone transactions on your
account not be permitted. The telephone exchange option
is automatically established on retirement accounts.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.
Neither the Portfolios nor Vanguard will be responsible
for the authenticity of transaction instructions
received by telephone, provided that reasonable security
procedures have been followed. Vanguard believes that
the security procedures described above are reasonable,
and that if such procedures are followed, you will bear
the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account. If
Vanguard fails to follow reasonable security procedures,
it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on
your account.
- --------------------------------------------------------------------------------
33
<PAGE> 77
TRANSFERRING
REGISTRATION You may transfer the registration of any of your
Portfolio non-retirement account shares to another
person by completing a transfer form and sending it to:
VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE,
PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To request a transfer form and
full instructions, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each
time you initiate a transaction in your account (except
for checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account,
using the average cost single category method. This
service is available for most taxable accounts opened
since January 1, 1986. In general, investors who
redeemed shares from a qualifying Vanguard account may
expect to receive their Average Cost Statement along
with their Portfolio Summary Statement. Please call our
Client Services Department (1-800-662-2739) for
information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES Many of these services are not available to (or
appropriate for) retirement account shareholders. For
more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other retirement
plan. Please contact our Client Services Department at
1-800-662-2739 for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
34
<PAGE> 78
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated
service that provides share price, price change and
yield quotations on Vanguard Funds through any
TouchTone(TM) telephone. This service also lets you
obtain information about your account balance, your last
transaction, and your most recent dividend or capital
gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A
brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- --------------------------------------------------------------------------------
35
<PAGE> 79
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<PAGE> 80
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<PAGE> 81
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 82
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
LOGO
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P088 042996
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
LOGO
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 29, 1996
- --------------------------------------------------------------------------------
PARTICIPANT SERVICES -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES Vanguard STAR Fund is an open-end non-diversified
investment company which seeks to maximize total
investment return (i.e., capital growth and income)
subject to the investment restrictions and asset
allocation policies described in this Prospectus. The Fund
consists of six portfolios; however, this prospectus
relates only to four Portfolios, Income, Conservative
Growth, Moderate Growth, and Growth Portfolios (the
"Portfolios"). These four Portfolios invest in up to nine
Vanguard mutual funds, representing different combinations
of stocks, bonds and reserves and reflecting varying
degrees of potential investment risk and reward. There is
no assurance that the Portfolios will achieve their stated
objectives. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Portfolios are investment options under a retirement
or savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect a
Portfolio as an investment option.
If you have any questions about these Portfolios, please
contact Participant Services at 1-800-523-1188. If you
have any questions about your plan account, contact your
plan administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before
you invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about Vanguard STAR Fund has been
filed with the Securities and Exchange Commission. This
Statement is dated April 29, 1996 and has been
incorporated by reference into this Prospectus. A copy may
be obtained without charge by writing to the Fund or by
calling Participant Services at 1-800-523-1188.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Investment Risks ................. 9 Dividends, Capital Gains
Portfolio Expenses ................ 4 Who Should Invest ................ 11 and Taxes ...................... 20
Financial Highlights ...............5 Implementation of The Share Price of Each
Yield and Total Return .............6 Policies ......... 12 Portfolio .... 21
PORTFOLIO INFORMATION Investment Limitations ............ 16 General Information ............... 21
Investment Objectives ..............7 Management of the SERVICE GUIDE
Investment Policies ................8 Portfolios ....... 17 Participating in Your
Investment Management ........... 18 Plan .......... 22
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 84
HIGHLIGHTS
OBJECTIVES AND
POLICIES Vanguard STAR Fund is an open-end non-diversified
investment company which seeks to maximize total
investment return subject to the investment restrictions
and asset allocation policies described in the prospectus.
The Fund consists of six portfolios; however this
prospectus relates to only the Income, Conservative
Growth, Moderate Growth, and Growth Portfolios. These four
Portfolios invest in up to nine Vanguard mutual funds,
representing different combinations of stocks, bonds,
and reserves and reflecting varying degrees of potential
investment risk and reward. In order to meet their
objectives the Portfolios invest in other
Vanguard Funds. PAGE 7
- --------------------------------------------------------------------------------
FOUR SEPARATE
PORTFOLIOS Investors may choose to invest in any of the four
Portfolios, collectively known as Vanguard LIFEStrategy
Funds, based on personal objectives, time horizons, risk
tolerances, and financial circumstances:
Income Portfolio -- seeks to provide current income.
Conservative Growth Portfolio -- seeks to provide current
income and low to moderate growth of capital.
Moderate Growth Portfolio -- seeks to provide growth of
capital and a reasonable level of current income.
Growth Portfolio -- seeks to provide growth of
capital. PAGE 7
- --------------------------------------------------------------------------------
RISK
CHARACTERISTICS The Portfolios differ in terms of stock market risk, bond
market risk, and inflation risk. STOCK MARKET RISK is the
possibility that stock prices in general will decline over
short or extended periods. Stock markets tend to be
cyclical with periods when stock prices generally rise or
fall. The Conservative Growth, Moderate Growth and Growth
Portfolios also will have exposure to foreign stock
markets, which are generally thought to be riskier than
domestic markets. BOND MARKET RISK is the possibility that
bond prices will decline over short or long periods due
primarily to changes in market interest rates. INFLATION
RISK is the possibility that rising prices for goods and
services will erode the real return of an investment in
stocks, bonds or reserves.
Two of the Portfolios, Moderate Growth and Growth, will
have a higher exposure to stock market risk because of the
significant investments these Portfolios have in stock
funds. While the other two Portfolios, Income and
Conservative Growth, will have higher exposure to bond
market risk because of the significant investment exposure
these Portfolios have in bond funds. These two Portfolios
are also considered to have greater inflation risk because
of their significant exposure to bonds and reserves.
PAGE 9
- --------------------------------------------------------------------------------
THE VANGUARD
GROUP The Officers of the Fund manage the Portfolios day-to-day
operations. The Officers are directly responsible to the
Fund's Board of Trustees. The Officers of the Fund also
serve as Officers of each of the Vanguard Funds and of The
Vanguard Group,
2
<PAGE> 85
Inc. ("Vanguard"). The Trustees each serve as Directors of
The Vanguard Group and most of the Funds within the
Group. PAGE 16
- --------------------------------------------------------------------------------
INVESTMENT
MANAGEMENT The Portfolios do not currently employ investment advisers
and therefore do not pay advisory fees. The Portfolios
currently do not have portfolio managers. The
determination of how the Portfolios' assets will be
invested in certain Vanguard funds is made by the Fund's
Officers pursuant to the investment objectives and
policies. However, the Portfolios as shareholders of each
of the underlying Vanguard funds, benefit from the
investment advisory services of each of the underlying
funds and will indirectly bear their proportionate share
of any investment advisory fees paid by those Funds.
PAGE 18
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL
GAINS AND TAXES The Income and Conservative Growth Portfolios will make
quarterly dividend distributions; while the Moderate
Growth and Growth Portfolios will make semi-annual
dividend distributions. Capital gains distributions, if
any, will be made annually for each Portfolio. PAGE 20
- --------------------------------------------------------------------------------
3
<PAGE> 86
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Portfolios. The
expenses and fees set forth in the table are estimates for
each Portfolio's first full year of operations.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION CONSERVATIVE MODERATE GROWTH
EXPENSES GROWTH GROWTH PORTFOLIO
-------------------------- PORTFOLIO PORTFOLIO --------
INCOME ------------ --------
PORTFOLIO
--------
<S> <C> <C> <C> <C>
Sales Load Imposed on
Purchases............... None None None None
Sales Load Imposed on
Reinvested Dividends.... None None None None
Redemption Fees........... None None None None
Exchange Fees............. None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND CONSERVATIVE MODERATE GROWTH
OPERATING EXPENSES GROWTH GROWTH PORTFOLIO
-------------------------- PORTFOLIO PORTFOLIO --------
INCOME ------------ --------
PORTFOLIO
--------
<S> <C> <C> <C> <C>
Management &
Administrative
Expenses................ None None None None
Investment Advisory
Fees.................... None None None None
12b-1 Fees................ None None None None
Other Expenses
Distribution Costs...... None None None None
Miscellaneous
Expenses.............. None None None None
Total Other Expenses...... None None None None
------- --------- ------- -------
TOTAL OPERATING
EXPENSES....... NONE NONE NONE NONE
------- --------- ------- -------
------- --------- ------- -------
</TABLE>
The purpose of these tables is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Portfolios.
The Portfolios did not incur any expenses in fiscal year
1995, and have not incurred any operating expenses since
their inception on September 30, 1994. However, while the
Portfolios are expected to operate without expenses,
shareholders in the Portfolios bear indirectly the
expenses of the underlying Vanguard Funds in which the
Portfolios invest.
The following chart provides the indirect expense ratio
for each Portfolio based on its investments in the
underlying Vanguard Funds, for the year ended December 31,
1995:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
GROWTH GROWTH GROWTH
INCOME PORTFOLIO PORTFOLIO PORTFOLIO
PORTFOLIO ------------ -------- --------
--------
<S> <C> <C> <C> <C>
Indirect Expense Ratio.... 0.33% 0.33% 0.33% 0.33%
</TABLE>
Using the above indirect expense ratios for the
Portfolios, the following example illustrates the expenses
that you would incur on a $1,000 investment over various
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of
4
<PAGE> 87
each period. As noted previously, the Portfolios charge no
redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Income Portfolio.............. $ 3 $11 $19 $ 42
Conservative Growth
Portfolio................... $ 3 $11 $19 $ 42
Moderate Growth Portfolio..... $ 3 $11 $19 $ 42
Growth Portfolio.............. $ 3 $11 $19 $ 42
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights have been audited by
Price Waterhouse LLP, independent accountants, whose
report on the financial statements which contain this
information was unqualified. This information should be
read in conjunction with the LIFEStrategy Fund's financial
statements and notes thereto, which are incorporated by
reference in the Statement of Additional Information and
this Prospectus, and which appear, along with the report
of Price Waterhouse LLP, in the Fund's 1995 Annual Report
to Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1995 Annual
Report to Shareholders, which may be obtained without
charge by writing to the Fund or by calling our Investor
Information Department at 1-800-662-7447.
<TABLE>
<CAPTION>
------------------------------------------------------------
INCOME CONSERVATIVE GROWTH PORTFOLIO
PORTFOLIO
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30+ YEAR ENDED SEPTEMBER 30+
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
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................... 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%
* Annualized.
+ Commencement of Operations.
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE> 88
<TABLE>
<CAPTION>
------------------------------------------------------------
MODERATE GROWTH PORTFOLIO GROWTH
PORTFOLIO
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30+ YEAR ENDED SEPTEMBER 30+
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
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................... 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%
* Annualized.
+ Commencement of Operations.
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Portfolios may advertise their yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Portfolios refers to the average annual compounded rates
of return over one-, five- and ten-year periods or for the
life of the Portfolios (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolios to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid an
investor's account.
- --------------------------------------------------------------------------------
6
<PAGE> 89
INVESTMENT
OBJECTIVES The objective of the Portfolios is to maximize total
investment return (i.e., capital growth and income)
subject to the investment restrictions and asset
allocation policies described in this Prospectus.
Specifically:
- The INCOME PORTFOLIO seeks to provide current income.
- The CONSERVATIVE GROWTH PORTFOLIO seeks to provide
current income and low to moderate growth of capital.
- The MODERATE GROWTH PORTFOLIO seeks to provide growth of
capital and a reasonable level of current income.
- The GROWTH PORTFOLIO seeks to provide growth of capital.
The investment objectives of the Portfolios are summarized
below in a chart that illustrates the degree to which each
Portfolio seeks to obtain income, growth of capital and
stability of principal:
<TABLE>
<CAPTION>
PORTFOLIO NAME INCOME GROWTH OF CAPITAL RISK OF PRINCIPAL
--------------- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
Income Portfolio.................... High Negligible Medium
Conservative Growth Portfolio....... Medium Low Low
Moderate Growth Portfolio........... Medium Low to Medium Low
Growth Portfolio.................... Low Medium to High Very Low
</TABLE>
There is no assurance that the Portfolios will achieve
their stated objectives.
This investment objective of each Portfolio is fundamental
and so cannot be changed without the approval of a
majority of shareholders.
- --------------------------------------------------------------------------------
ASSET ALLOCATION
FRAMEWORK Asset allocation between stocks, bonds and reserves is the
most critical investment decision an investor makes.
Selecting the appropriate mix should be based on personal
objectives, time horizons and risk tolerances. These
Portfolios provide different types of investors with a
simple way to meet target asset allocations.
7
<PAGE> 90
In order to achieve their investment objectives, the
Portfolios maintain different allocations of stocks, bonds
and reserves1, reflecting varying degrees of potential
investment risk and reward. These asset class allocations
provide investors with four diversified, distinct options
that meet a wide array of investor needs. The pie charts
below, illustrate the expected asset allocation for each
Portfolio:
[PIE CHART] [PIE CHART]
[PIE CHART] [PIE CHART]
1 "Reserves" will consist of the VFISF Short-Term
Corporate Portfolio and cash instruments held by VAAF.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE PORTFOLIOS INVEST
IN A DIVERSIFIED
PORTFOLIO OF
VANGUARD FUNDS Each Portfolio seeks to achieve its objective by investing
in a different combination of other Vanguard Funds. As
investments for the Portfolios, the Trustees have chosen
Vanguard Index Trust ("VIT") -- Total Stock Market
Portfolio, Vanguard International Equity Index Fund
("VIEIF") -- European and Pacific Portfolios, Vanguard
Asset Allocation Fund ("VAAF"), and Vanguard Fixed Income
Securities Fund ("VFISF") -- Short-Term Corporate,
Intermediate-Term Corporate, Long-Term Corporate, and GNMA
Portfolios to be the underlying investments of the
Portfolios. Each Portfolio invests in these Funds using
fixed formulas in order to provide
8
<PAGE> 91
investors with the targeted asset allocation. Below is a
table showing, by investment category, how the Portfolios
will invest in the selected Vanguard Funds.
<TABLE>
<CAPTION>
INVESTMENTS IN THE UNDERLYING VANGUARD FUNDS
INVESTMENT PERCENT OF PERCENT OF PERCENT OF
CATEGORY INCOME PERCENT OF MODERATE GROWTH
PORTFOLIO CONSERVATIVE GROWTH PORTFOLIO
---------------- GROWTH PORTFOLIO
UNDERLYING --------- PORTFOLIO --------- ---------
VANGUARD FUNDS -----------
---------------------
<S> <C> <C> <C> <C> <C>
Stocks VIT -- Total Stock
- US Market Portfolio..... 5% 20% 35% 50%
VIEIF -- European and
Pacific
- International Portfolios(1)........ 0% 5% 10% 15%
VFISF -- STCorp,
ITCorp, LTCorp,
Bonds GNMA Portfolios(2)... 50% 30% 30% 10%
VFISF -- STCorp
Reserves Portfolio............ 20% 20% 0% 0%
Asset Allocation Vanguard Asset
Component Allocation Fund...... 25% 25% 25% 25%
-------- --------- -------- --------
Total................ 100% 100% 100% 100%
1 The Portfolios will invest in the European and Pacific Portfolios so that the combined
weights parallel the Morgan Stanley Capital International -- EAFE Index.
2 The Portfolios will divide their investments equally (i.e. 25% each) between these four
VFISF Portfolios.
</TABLE>
The allocation of each Portfolio's assets among the
Vanguard Funds was made by the Officers of the Fund under
the supervision of the Fund's Board of Trustees, and was
based on prudent asset allocation guidelines.
The investment restrictions and asset allocation policies
set forth above are designed to assure that the Portfolios
maintain consistent investment approaches in pursuit of
their objectives.
From time to time, the Portfolios' investments in the
underlying Vanguard Funds may be limited by certain
factors. For example, the Board of Directors of any of the
underlying Vanguard Funds may impose limits on additional
investments in a particular Fund.
See "Implementation of Policies" for a description of
other investment practices of the Portfolios.
- --------------------------------------------------------------------------------
INVESTMENT RISKS Like any investment program, an investment in one or more
of the Portfolios entails certain risks. As mutual funds
investing in different combinations of stocks, bonds and
reserves, the Portfolios are subject to different levels
of stock market, bond market and inflation risks.
MARKET RISK --
STOCKS
Stock MARKET RISK IS the possibility that stock prices in
general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline.
9
<PAGE> 92
Also, investments in foreign stock markets can be
volatile, if not more volatile than investments in US
markets.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for U.S. stock
market returns as well as the average return for the
period from 1926 to 1995, as measured by the Standard &
Poor's 500 Composite Stock Price Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9 % +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1995. The
return in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices. Average return may not be useful for
forecasting future returns in any particular period, as
stock returns are quite volatile from year to year and
interim losses are inevitable. For example, after the
"bear market" of 1973-1974, it took four years for many
investors to recover their losses (assuming dividends were
reinvested). And if you invested in stocks during the
Great Crash of 1929, it would have taken an average of
eight years for your investment to return to its original
value.
MARKET RISK --
BONDS
The bond market is typically less risky than the stock
market, although there have been times when some bonds
were just as risky as stocks. For example, bond prices
fell 48% from December 1976 to September 1981. The risk of
bonds declining in value, however, may be offset in whole
or in part by the high level of income that bonds provide.
Bond prices are linked to prevailing interest rates in the
economy. The price volatility of a bond depends on its
maturity; the longer the maturity of a bond, the greater
its sensitivity to interest rates. In general, when
interest rates rise, the prices of bonds fall; conversely,
when interest rates fall, bond prices generally rise.
From time to time, the stock and bond markets may
fluctuate independently of one another. In other words, a
decline in the stock market may in certain instances be
offset by a rise in the bond market, or vice versa. As a
result, each Portfolio, with its unique balance of common
stocks, bonds and reserves, is expected in the long run to
entail less investment risk (and potentially less
investment return) than a mutual fund investing
exclusively in common stocks.
INFLATION RISK Like market risk, inflation represents a significant
threat to even a well-diversified portfolio because
inflation erodes the real return of an investment in
stocks, bonds or reserves. Historically, inflation has
averaged 3.1%, offsetting most of the return from reserves
and bonds, but less than half of the return from stocks.
For this reason, stocks are referred to as an "inflation
hedge," a way to protect your money against inflation.
10
<PAGE> 93
FOREIGN
SECURITIES' RISK The Conservative Growth, Moderate Growth and Growth
Portfolios may invest in Foreign securities. For U.S.
investors, the returns of foreign investments are
influenced by not only the returns on foreign common
stocks themselves, but also by CURRENCY RISK -- i.e.,
changes in the value of the currencies in which the stocks
are denominated. In a period when the U.S. dollar
generally rises against foreign currencies, the returns on
foreign stocks for a U.S. investor may be diminished. By
contrast, in a period when the U.S. dollar generally
declines, the returns on foreign stocks may be enhanced.
Other risks and considerations of international investing
include the following: differences in accounting, auditing
and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the
smaller trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on a
Portfolio's foreign securities, which may reduce dividend
income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations; difficulty in
obtaining a judgment from a foreign court; political
instability which could affect U.S. investment in foreign
countries; and potential restrictions on the flow of
international capital.
The Portfolios are concentrated in investment companies of
The Vanguard Group, so investors should be aware that each
Portfolio's performance is directly related to the
investment performance of the Vanguard Funds in which it
invests and each Portfolio's allocation among the Funds.
First, changes in the net asset values of the underlying
Vanguard Funds affect each Portfolio's net asset value.
Second, over the long-term, each Portfolio's ability to
meet its investment objective depends on the underlying
Vanguard Funds meeting their investment objectives.
INVESTORS ARE
SUBJECT TO
MANAGER RISK While the Portfolios do not directly hold securities, the
Portfolios are subject to manager risk of the underlying
Funds, which is the possibility that the underlying Funds'
portfolio managers may fail to execute the underlying
Funds' investment strategies effectively. As a result, the
Portfolios may fail to meet their stated objectives.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING
A BALANCED
RETIREMENT
INVESTMENT PROGRAM The Portfolios are designed for investors who are planning
for retirement or who are in retirement and maintain
investments in certain tax-advantaged accounts and/or
other long-term investment savings. Because of the risks
associated with common stock and bond investments, the
Portfolios are intended to be long-term investment
vehicles and are not designed to provide investors with a
means of speculating on market movements. Specifically:
- The INCOME PORTFOLIO may be suitable for investors
seeking current income. Investors should have sufficient
time and tolerance for investment volatility to accept
periodic, though moderate, declines. The Portfolio is
most suitable for investors with a lower tolerance for
risk or with a shorter time horizon (at least 3-5
years). Example: investors who are investing during late
retirement.
11
<PAGE> 94
- The CONSERVATIVE GROWTH PORTFOLIO is suitable for
investors who are seeking current income and low to
moderate growth of capital. Investors should have both
sufficient time and tolerance for investment volatility
to accept periodic declines. The Portfolio is most
appropriate for investors with a reasonably long time
horizon. Example: investors who are investing during
early retirement.
- The MODERATE GROWTH PORTFOLIO is suitable for investors
who are still seeking reasonable stock market exposure,
but who are not willing to take the substantial market
risks of the Growth Portfolio. Investors should have
both the time and tolerance for investment volatility to
accept possibly large declines. The Portfolio is most
appropriate for investors with a long time horizon.
Example: investors in their 50s who are saving on a
regular basis for retirement and who plan to retire in
their early to mid 60s.
- The GROWTH PORTFOLIO is suitable for investors seeking
the potential for capital growth that a fund investing
predominantly in common stocks may offer. Investors
should have both the time and tolerance for investment
volatility to accept substantial declines. The Portfolio
is most appropriate for investors with a very long time
horizon. Example: investors in their 20s, 30s, or 40s
who are saving for retirement and who plan to retire in
their early to mid 60s.
Investors can choose any of these four Portfolios,
depending on personal investment objectives, time horizons
and risk tolerances. For example: investors in their 40s
who are sensitive to market risk may choose the Moderate
Growth Portfolio; while investors in their 40s who are not
as sensitive to market risk may choose the Growth
Portfolio.
The Portfolios may be especially suitable for
tax-advantaged retirement accounts, including: Individual
Retirement Accounts (IRAs), Simplified Employee Plans
(SEPs), 403(b)(7) tax-sheltered retirement plans for
employees of non-profit organizations, 401(k) savings
plans, profit-sharing and money-purchase pension plans,
and other corporate pension and savings plans. While the
Portfolios are specifically designed for tax-advantaged
retirement accounts, shares may also be purchased by
investors for other long-term general retirement savings
purposes.
Investors who engage in excessive account activity
generate additional costs which are borne by all of the
Portfolios' shareholders. In order to minimize such costs
the Portfolios have adopted the following policies. The
Portfolios reserve the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Portfolios reserve the
right to suspend the offering of their shares.
- --------------------------------------------------------------------------------
12
<PAGE> 95
IMPLEMENTATION
OF POLICIES The Vanguard Funds in which the Portfolios invest, as well
as certain other investment practices of the Portfolios,
are described below. Investors desiring more information
on an underlying Vanguard Fund described below should call
Vanguard's Participant Services Department at
(1-800-523-1188) for the prospectus.
THE PORTFOLIOS
INVEST IN UP
TO THREE
EQUITY FUNDS
The TOTAL STOCK MARKET PORTFOLIO is one of six Portfolios
of Vanguard Index Trust, an open-end diversified
investment company. The Total Stock Market Portfolio is an
index fund which seeks to match the investment performance
of the Wilshire 5000 Index, an index consisting of all
regularly and publicly traded US stocks. The Total Stock
Market Portfolio attempts to match the Wilshire 5000 Index
by investing in a statistically selected sample of the
more than 6,000 stocks included in the Index.
The EUROPEAN AND PACIFIC PORTFOLIOS are two of three
Portfolios of Vanguard International Equity Index Fund, an
open-end diversified investment company. The European
Portfolio is an index fund which seeks to replicate the
aggregate price and yield performance of the MSCI-Europe
(Free) Index, a diversified, capitalization-weighted index
comprised of companies located in 14 European countries.
The Pacific Portfolio is an index fund which seeks to
replicate the aggregate price and yield performance of the
MSCI-Pacific Index, a diversified, capitalization-weighted
index comprised of companies located in Australia, Japan,
Hong Kong, New Zealand and Singapore. Both the European
and Pacific Portfolios attempt to match their indexes by
investing in statistically selected samples of the stocks
included in their respective indexes.
All four Portfolios will invest a portion of their assets
in the Total Stock Market Portfolio. However, only the
Conservative Growth, Moderate Growth, and Growth
Portfolios will invest in the European and Pacific
Portfolios.
These three equity index funds are not managed according
to traditional methods of active investment management,
which involve the buying and selling of securities based
upon economic, financial, and market analyses and
investment judgment. Instead, the funds use a "passive" or
indexing investment approach to duplicate the results of
their respective indexes. The three index funds do not pay
advisory fees. All index matching services are provided to
the three funds on an at-cost basis by the Core Management
Group of The Vanguard Group.
THE PORTFOLIOS
INVEST IN FOUR
VANGUARD BOND
PORTFOLIOS
The Short-Term Corporate, Intermediate-Term Corporate,
Long-Term Corporate and GNMA Portfolios of Vanguard Fixed
Income Securities Fund are bond funds, which seek to
provide current income by investing in fixed-income
securities. The four Portfolios have distinct investment
policies.
The SHORT-TERM CORPORATE PORTFOLIO invests in a
diversified portfolio of investment grade quality
corporate bonds with an expected dollar-weighted average
maturity of one to three years. The INTERMEDIATE-TERM
CORPORATE PORTFOLIO invests in a diversified portfolio of
investment grade quality corporate bonds with an expected
dollar-weighted average maturity of five to ten years. The
LONG-TERM CORPORATE
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<PAGE> 96
PORTFOLIO invests in a diversified portfolio of investment
grade quality corporate bonds with an expected
dollar-weighted average maturity of 15 to 25 years.
Investment grade bonds are generally considered to be
those bonds having one of the four highest grades assigned
by Moody's Investors Service, Inc. (Aaa, Aa, A, or Baa) or
by Standard & Poor's Corporation (AAA, AA, A, or BBB). At
least 80% of the Portfolios' assets will be invested in
straight debt securities and at least 70% of the
Portfolio's assets will be rated A or better by Moody's
Investors Service, Inc. or Standard & Poor's Corporation.
Securities rated Baa or BBB are considered as medium grade
obligations. Interest payments and principal are regarded
as adequate for the present but certain protective
elements found in higher rated bonds may be lacking. Such
bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Under normal circumstances, the GNMA PORTFOLIO invests at
least 80% of its assets in Government National Mortgage
Association ("GNMA") securities, which offer the combined
benefits of a U.S. Government guarantee of timely payment
of interest and principal and yields that usually exceed
those of comparable U.S. Treasury securities.
GNMA certificates are mortgage-backed securities
representing proportionate ownership of a pool of mortgage
loans. These loans -- issued by lenders such as mortgage
bankers, commercial banks and savings and loan
associations -- are either insured by the Federal Housing
Administration (FHA) or guaranteed by the Veterans
Administration (VA). A "pool" or group of such mortgages
is assembled and, after being approved by GNMA, is offered
to investors through securities dealers. Once approved by
GNMA, a government corporation within the U.S. Department
of Housing and Urban Development, the timely payment of
interest and principal on each mortgage is guaranteed by
the full faith and credit of the U.S. Government.
As mortgage-backed securities, GNMA certificates differ
from ordinary corporate or government bonds in that
principal is paid back by the borrower over the length of
the loan rather than returned in a lump sum at maturity.
GNMA certificates are called "pass through" securities
because both interest and principal payments (including
prepayments) are passed through to holders of the
certificates (such as the GNMA Portfolio). Upon receipt,
principal payments are used by the GNMA Portfolio to
purchase additional GNMA certificates or other U.S.
Government guaranteed securities.
The GNMA Portfolio is exposed to prepayment risk.
Prepayment risk is the possibility that, as interest rates
fall, homeowners are likely to refinance their home
mortgages, which causes the principal on GNMA certificates
held by the GNMA Portfolio to be "prepaid" earlier than
expected. The GNMA Portfolio must then reinvest the
unanticipated principal in new GNMA certificates, which
reduces the income earned by the GNMA Portfolio.
Besides investing in GNMA certificates, the GNMA Portfolio
may invest up to 15% of its net assets in restricted
securities (securities which are not freely marketable or
which are subject to restrictions on sale under the
Securities Act of 1933).
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<PAGE> 97
Each Portfolio will invest a portion of its assets in the
Short-Term Corporate, Intermediate-Term Corporate,
Long-Term Corporate and GNMA Portfolios.
ALL FOUR PORTFOLIOS
INVEST IN AN ASSET
ALLOCATION COMPONENT VANGUARD ASSET ALLOCATION FUND, an open-end diversified
investment company, allocates its assets among a common
stock portfolio, a bond portfolio and money market
instruments. The investment adviser allocates the Fund's
assets among stocks, bonds, and money market instruments
in proportions which reflect the anticipated returns and
risks of each asset class. The estimates of return and
risk are developed based upon the adviser's disciplined
valuation methodology. There are no limitations on the
amount of the Fund's assets which may be allocated to each
of the three asset classes (stocks, bonds, and money
market instruments).
THE PORTFOLIOS AND
EACH UNDERLYING FUND
MAY INVEST IN
SHORT-TERM FIXED
INCOME SECURITIES The Portfolios and their underlying Vanguard Funds are
authorized to invest temporarily in certain short-term
fixed income securities for defensive purposes. Such
securities may be used to invest uncommitted cash balances
or to maintain liquidity to meet shareholder redemptions.
Each of the Portfolio's underlying Vanguard Funds may also
invest in such securities to take a temporarily defensive
position against potential stock or bond market declines.
These securities include: obligations of the U.S.
Government and its agencies and instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
DERIVATIVE
INVESTING
Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE PORTFOLIOS AND
EACH UNDERLYING FUND
MAY INVEST IN FUTURES
CONTRACTS AND OPTIONS The Portfolios and their underlying Vanguard Funds may
invest in futures contracts and options to a limited
extent. Specifically, the Portfolios' underlying funds
including Total Stock Market Portfolio, European
Portfolio, Pacific Portfolio, Short-Term Corporate
Portfolio, Intermediate-Term Corporate Portfolio,
Long-Term Corporate Portfolio, GNMA Portfolio, and
Vanguard Asset Allocation Fund may invest in futures
contracts and options.
Futures contracts and options may be used for several
reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund
management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns
when a futures contract is priced more attractively than
the underlying security or index. While futures contracts
and options can be used as leveraged instruments, neither
the Portfolios nor the underlying Funds may use futures
contracts or options transactions to leverage their
assets.
The Portfolios and their underlying Funds will not use
futures contracts or options for speculative purposes or
to leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts and
options by the underlying Funds are: (i) imperfect
correlation between the change in market value of
securities held by a Fund and the prices of futures
contracts and options; and (ii) possible lack of a liquid
secondary market for a futures contract resulting in an
inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be
minimized by investing only in contracts whose behavior is
expected to resemble
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<PAGE> 98
that of a Fund's underlying securities. The risk that a
Fund will be unable to close out a futures position will
be minimized by entering into such transactions only on an
exchange with an active and liquid secondary market.
Additionally, investments in futures contracts and options
involve the risk that an investment adviser will
incorrectly predict stock market and interest rate trends.
The Portfolios and their underlying Funds may enter into
futures contracts provided that not more than 5% of their
respective assets are required as a futures contract
deposit. In addition the Portfolios and their underlying
Funds may enter into futures contracts and options
transactions to the extent that not more than 20% of their
respective assets (50% with respect to Vanguard Asset
Allocation Fund) are committed to such contracts or
transactions.
EACH OF THE
PORTFOLIOS' UNDERLYING
FUNDS MAY LEND ITS
SECURITIES
Each of the Portfolios' underlying Funds may lend their
investment securities to qualified institutional investors
for the purpose of realizing additional net investment
income. Loans of securities by a Fund will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities.
PORTFOLIO TURNOVER
IS EXPECTED
TO BE LOW
The portfolio turnover rate is not expected to exceed 25%
annually. A portfolio turnover rate of 25% for a Portfolio
would occur if one quarter of a Portfolio's investments
were sold within a year. The Fund's Officers will purchase
or sell securities: (i) to accommodate purchases and sales
of Portfolio shares; and (ii) to maintain or modify the
allocation of the Portfolios' assets between the
underlying Vanguard Funds in which the Portfolios invest
within the percentage limits described under "Investment
Policies."
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Portfolios have adopted the following fundamental
limitations on its investment practices. Specifically, the
Portfolios will not:
THE PORTFOLIOS HAVE
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS
(a) borrow money except from banks for temporary or
emergency purposes, and then only in an amount not in
excess of 5% of the lower of the market value or cost
of its assets, in which case it may pledge, mortgage
or hypothecate any of its assets as security for such
borrowing, but not to an extent greater than 5% of the
market value of its assets; and
(b) invest more than 25% of its assets in any one
industry, except for investment companies which are
members of The Vanguard Group of Investment Companies.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
NOTICE TO OHIO INVESTORS. Vanguard STAR Fund does not meet
the requirements of Ohio Administrative Rule 1301:6-3-09G
in that it may invest more than 25% of its assets in a
single issuer. However, the Fund's Portfolios invest only
in Vanguard-
16
<PAGE> 99
sponsored mutual funds which, in turn, are prohibited from
investing more than 5% of their total assets in the
securities of any single issuer and may not purchase more
than 10% of the outstanding voting securities of any
issuer.
- --------------------------------------------------------------------------------
MANAGEMENT
OF THE PORTFOLIOS
THE OFFICERS MANAGE
THE PORTFOLIOS'
OPERATIONS
The Officers of the Fund manage their day-to-day
operations. The Officers are directly responsible to the
Fund's Board of Trustees. The Trustees, who are elected by
the Fund's shareholders, determine how the assets of the
Portfolios should be invested among the Vanguard Funds,
set general policies for the Fund and choose its Officers.
The Officers of the Fund also serve as Officers of each of
the Vanguard Funds and of The Vanguard Group, Inc.
("Vanguard"). The Trustees each serve as Directors of The
Vanguard Group, Inc. and most of the Vanguard Funds within
the Group. A list of Trustees and Officers of the Fund and
a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
The business of Vanguard STAR Fund will be conducted by
its Officers in accordance with policies and guidelines
set up by the Fund's Trustees which were included in an
Application for an Exemptive Order subsequently issued by
the U.S. Securities and Exchange Commission. As noted
above, the Officers and Trustees of the Fund also serve in
similar positions in the underlying Funds. If the
interests of the Portfolios and the underlying Funds were
ever to become divergent, a concern might arise that this
could create a potential conflict of interest which could
affect how the Officers or Trustees fulfill their
fiduciary duties to the Portfolios and the Vanguard Funds.
The Trustees believe they have structured the Fund to
avoid the concerns which could arise. Conceivably, a
situation could occur where proper portfolio or other
action for the Portfolios could be adverse to the
interests of an underlying Vanguard Fund, or the reverse
could occur. If such a possibility appears likely, the
Trustees and Officers will carefully analyze the situation
and take all steps they believe reasonable to minimize
and, where possible, eliminate the potential conflict.
Moreover, limitations on aggregate investments in the
underlying Vanguard Funds and other restrictions have been
adopted by the Fund to minimize this possibility, and
close and continuous monitoring will be exercised to
avoid, insofar as possible, these concerns.
VANGUARD
ADMINISTERS AND
DISTRIBUTES
THE PORTFOLIOS Vanguard STAR Fund has entered into a Special Servicing
Agreement (the "Agreement") with Vanguard under which
Vanguard will provide all management, administrative and
distribution services to the Portfolios of the Fund.
Vanguard is a jointly-owned subsidiary of more than 30
investment company members (the "Funds") of The Vanguard
Group of Investment Companies. The Vanguard Funds offer
more than 90 distinct investment portfolios with total
assets in excess of $190 billion. Vanguard provides the
Portfolios and other Funds in the Group with corporate
management, administrative and distribution services
(similar to those provided to the Portfolios) on an
at-cost basis. As a result of Vanguard's unique corporate
structure, Vanguard Funds have costs substantially lower
than those of most competing mutual funds. In 1995, the
average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard Funds
17
<PAGE> 100
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Special Servicing Agreement provides that the
Portfolios will pay for services to be rendered to the
Portfolios by Vanguard on an "out of pocket" basis. The
Portfolios will also bear the expenses of services
provided by other parties, including auditors, the
custodian, and outside legal counsel, as well as taxes and
other direct expenses of the Portfolios. However, the
Agreement provides that the expenses of the Portfolios
will be offset, in whole or in part, by a reimbursement
from Vanguard for (a) contributions made by each Portfolio
to the cost of operating the underlying Vanguard Funds the
Portfolios invest in and (b) certain savings in
administrative and marketing costs that Vanguard is
expected to derive from the operation of the Portfolios.
The Portfolios' contributions to Vanguard represent
revenues Vanguard receives because the Portfolios bear
their pro rata share of the costs of operating the
underlying Vanguard Funds. The cost savings realized by
Vanguard from the Portfolios result primarily from the
assumed reduction in the number of accounts Vanguard has
to maintain due to the existence of the Portfolios (i.e.,
one account per investor as opposed to one for each
underlying Fund per investor if the investor duplicated
the Portfolio's investment program by investing directly
in the underlying Funds).
Although such cost savings are not certain, the Trustees
believe that the reimbursements to be made by Vanguard to
the Portfolios should be sufficient to offset most, if not
all, of the expenses incurred by the Portfolios.
Therefore, the Portfolios are expected by the Trustees to
operate at a very low, or zero, expense ratio. In the
event that the economic benefits of operating the
Portfolios exceed their actual costs, such benefits will
be shared by each of the Funds in The Vanguard Group,
including the underlying Funds in which the Portfolios
invest.
- --------------------------------------------------------------------------------
INVESTMENT
MANAGEMENT
THE FUND DOES
NOT EMPLOY AN
INVESTMENT
ADVISER
The Portfolios do not employ an investment adviser and
therefore do not pay advisory fees. The Portfolios do not
have portfolio managers at this time. The determination of
how the Portfolios' assets will be invested in certain of
the Vanguard Funds is made by the Fund's Officers pursuant
to the investment objective and policies set forth in this
Prospectus and procedures and guidelines established by
the Trustees. However, the Portfolios, as shareholders of
each of the underlying Vanguard Funds, benefit from the
investment advisory services of each of the underlying
Funds, and will indirectly bear their proportionate share
of any investment advisory fees paid by those Funds.
18
<PAGE> 101
The Portfolios' underlying Funds are managed by the
following investment advisers:
<TABLE>
<CAPTION>
INVESTMENT ADVISER PORTFOLIO'S UNDERLYING FUNDS
<S> <C>
------------------------------------- -----------------------------------
The Vanguard Group, Inc. Short-Term Corporate Portfolio and
Intermediate-Term Corporate
Portfolio
of Vanguard Fixed Income
Securities Fund
Total Stock Market Portfolio
of Vanguard Index Trust
European and Pacific Portfolios
of Vanguard International
Equity Index Fund
Mellon Capital Management Vanguard Asset Allocation Fund
Wellington Management Company GNMA and Long-Term
Corporate Portfolios
of Vanguard Fixed
Income Securities Fund
</TABLE>
VANGUARD'S
CORE MANAGEMENT
GROUP
Vanguard's Core Management Group provides investment
advisory services on an at-cost basis with respect to
Vanguard Index Trust -- Total Stock Market Portfolio and
Vanguard International Equity Index Fund -- European and
Pacific Portfolios. The Core Management Group also
provides investment advisory services to other Vanguard
Funds, including the remaining five Portfolios of Vanguard
Index Trust, the third Portfolio of Vanguard International
Equity Index Fund, Vanguard Institutional Index Fund,
Vanguard Balanced Index Fund and the Equity Index
Portfolio of Vanguard Variable Insurance Fund, several
Portfolios of the Vanguard Tax-Managed Fund, the
Aggressive Growth Portfolio of Vanguard Horizon Fund, a
portion of Vanguard/Morgan Growth Fund, a portion of
Vanguard/Windsor II's assets, as well as to several
indexed separate accounts. Total assets under management
by the Core Management Group were approximately $33
billion as of December 31, 1995.
VANGUARD'S
FIXED INCOME
GROUP Vanguard's Fixed Income Group provides investment advisory
services on an at-cost basis with respect to the
Short-Term Corporate and Intermediate-Term Corporate
Portfolios of Vanguard Fixed Income Securities Fund. The
Fixed Income Group provides advisory services to more than
40 Vanguard fixed-income portfolios, both taxable and
tax-exempt. Total assets under management by the Fixed
Income Group were approximately $66 billion as of December
31, 1995.
MELLON CAPITAL
MANAGEMENT Mellon Capital Management is a professional counseling
firm which manages well-diversified stock and bond
portfolios for institutional clients. As of December 31,
1995 the adviser provided investment advisory services to
189 clients and managed assets with an approximate value
of $44.1 billion. The adviser's asset allocation strategy
was developed by the adviser's Chairman, William Fouse, in
1972, and is used by 78 of its clients and accounts for
approximately $12.2 billion of the assets that it manages.
For its asset allocation clients, including the Fund, the
adviser employs a proprietary asset allocation model in
managing client investment
19
<PAGE> 102
portfolios and an indexing approach in selecting
individual equity securities. The Fund is one of the
adviser's two investment company clients.
Vanguard Asset Allocation Fund pays Mellon Capital
Management an annual basic fee equal to 0.20% on the first
$100 million of assets; .15% of 1% on the next $900
million of assets; .125 of 1% on the next $500 million of
assets; and .10 of 1% on assets greater than $1.5 billion.
This fee may be increased or decreased by applying an
adjustment formula based on the performance of the Fund
relative to the investment record of the S&P 500 Index.
The fee payment will be increased (decreased) by an
incentive (penalty) of 0.05% of average net assets if the
Fund's cumulative investment performance for the
thirty-six months preceding the end of the quarter is at
least six percentage points above (below) the cumulative
investment record of the S&P 500 Index for the same
period.
WELLINGTON
MANAGEMENT
COMPANY Wellington Management Company (WMC) is a professional
investment counseling firm which globally provides
investment services to investment companies, institutions
and individuals. Among the clients of WMC are more than 10
of the investment companies of The Vanguard Group. As of
December 31, 1995, WMC held discretionary management
authority with respect to more than $108 billion of
assets. WMC and its predecessor organizations have
provided investment advisory services to investment
companies since 1933 and to investment counseling clients
since 1960.
The GNMA and Long-Term Corporate Portfolios of Vanguard
Fixed Income Securities Fund pay WMC an annual advisory
fee equal to .125 of 1% on the first $2.5 billion of the
aggregate net assets of the three Portfolios; .100 of 1%
on the next $2.5 billion of aggregate net assets; .075 of
1% on the next $2.5 billion; and .050 of 1% on the
aggregate net assets of the three Portfolios greater than
$7.5 billion. The advisory fee is then allocated to each
Portfolio based on the relative net assets of each;
provided, however, that following such allocation, the fee
to be paid by the GNMA Portfolio is reduced by 75% and the
fee paid to the Long-Term Corporate Portfolio is reduced
by 50%. During the fiscal year ended January 31, 1996, the
GNMA and Long-Term Corporate Portfolios paid annual
advisory fees equal to .02 of 1% and .04 of 1% of average
net assets, respectively.
Each Portfolio will purchase and sell the principal
portion of its portfolio securities (i.e., shares of
certain of the underlying Vanguard Funds) by dealing
directly with the issuer. There will be no sales charges
or commissions because the underlying Funds are offered on
a no-load basis, without sales charges. Investments in
short-term money market instruments and repurchase
agreements usually will be principal transactions and will
generally involve no brokerage commissions.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES The Income and Conservative Growth Portfolios expect to
pay dividends quarterly from ordinary income, while the
Moderate Growth and Growth Portfolios expect to pay
dividends semi-annually from ordinary income. Capital gain
distributions from the Portfolios, if any, will be made
annually. Each Portfolio intends to qualify as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to
20
<PAGE> 103
shareholders. The tax consequences of distributions from
the Portfolios will vary according to the type of account
you open.
If you utilize the Portfolios as investment options in an
employer-sponsored retirement savings plan, dividend and
capital gain distributions from the Portfolios ordinarily
will not be subject to current taxation, but will
accumulate on a tax-deferred basis. In general,
employer-sponsored retirement and savings plans are
governed by complex tax rules. If you participate in such
a plan, consult your plan administrator, your plan's
Summary Plan Description, or a professional tax adviser
regarding the tax consequences of your participation in
the plan and of any plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF EACH
PORTFOLIO The net asset value per share for each Portfolio is
determined as of the regular close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for trading. The net asset value
per share is determined by dividing the total market value
of each Portfolio's investments and other assets, less any
liabilities, by the total number of outstanding shares of
each Portfolio. This determination is made by appraising
each Portfolio's underlying investments (i.e., the
underlying Vanguard Funds) at the price of each such Fund
determined at the close of the Exchange.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard STAR Fund is a Pennsylvania business trust. The
Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest, without
par value, from an unlimited number of classes of shares.
Currently the Fund is offering six classes of shares.
The shares of Vanguard STAR Fund are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of Vanguard STAR Fund
if requested in writing by the holders of not less than
10% of the outstanding shares of the Fund.
All securities and cash are held by Morgan Guaranty Trust
Company, New York, N.Y. CoreStates Bank, N.A., holds daily
cash balances that are used by the Fund's Portfolios to
invest in repurchase agreements or securities acquired in
these transactions. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse LLP serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
21
<PAGE> 104
SERVICE GUIDE
PARTICIPATING IN
YOUR PLAN The Portfolios of the Fund are available as investment
options in your retirement or savings plan. The
administrator of your plan or your employee benefits
office can provide you with detailed information on how to
participate in your plan and how to elect a Portfolio of
the Trust as an investment option.
If you have any questions about a Portfolio, including a
Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have any questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- --------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Contributions, exchanges or redemptions of a Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the contribution, exchange or redemption and the
appropriate monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. Check with your plan
administrator for details on the rules governing exchanges
in your plan. Certain investment options, particularly
company stock or investment contracts, may be subject to
unique restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services at 1-800-523-1188 for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
22
<PAGE> 105
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<PAGE> 106
LOGO
--------------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
LOGO
LOGO
I N S T I T U T I O N A L
P R O S P E C T U S
APRIL 29, 1996
LOGO
I088
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<PAGE> 107
LOGO
P R O S P E C T U S
APRIL 29, 1996
LOGO
<PAGE> 108
- --------------------------------------------------------------------------------
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A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 29, 1996
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE AND
POLICIES Vanguard International Equity Index Fund, Inc. and Vanguard
Total International Portfolio (the "Funds") are open-end
diversified investment companies designed as "index" funds.
Vanguard International Equity Index Fund consists of three
portfolios, European, Pacific, and Emerging Markets, each of
which invests in common stocks in order to match the
performance of a distinct international market index. Vanguard
STAR Fund consists of six portfolios; only the Total
International Portfolio is discussed in this prospectus.
Information on the other five portfolios offered by the STAR
Fund can be obtained by calling Vanguard. The European
Portfolio seeks to provide investment results, using
statistical procedures, that parallel the Morgan Stanley
Capital International -- Europe (Free) Index, a broad-based
index consisting of companies located in fourteen European
countries. The Pacific Portfolio seeks to provide investment
results, using statistical procedures, that parallel the Morgan
Stanley Capital International -- Pacific (Free) Index, a
broad-based index consisting of companies located in Japan,
Australia, New Zealand, Hong Kong, Singapore and Malaysia. The
Emerging Markets Portfolio seeks to provide investment results,
using statistical procedures, that parallel the Morgan Stanley
Capital International -- Select Emerging Markets Free Index, a
broad-based index consisting of companies in fourteen countries
in Asia, Latin America, Africa and Europe. The Total
International Portfolio seeks to provide investment results
that parallel the Morgan Stanley Capital International Europe,
Australia, and Far East + Select Emerging Markets Free Index by
investing in a combination of the European, Pacific, and
Emerging Markets Portfolios. The European, Pacific and Emerging
Markets Portfolios invest primarily in common stocks included
in their respective indexes. Shares of these three Portfolios
may be acquired either directly or through an investment in the
Total International Portfolio. There is no assurance that each
Portfolio will achieve its stated objective. Shares of the
Funds are neither insured nor guaranteed by any agency of the
U.S. Government, including the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please complete and
return the Account Registration Form. If you need assistance in
completing this Form, please call our Investor Information
Department. To open an Individual Retirement Account (IRA),
please use a Vanguard IRA Adoption Agreement. To obtain a copy
of this form, call 1-800-662-7447, Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). To open an account by wire, please call
Client Services at 1-800-662-2739. The minimum initial
investment is $3,000 for each Portfolio or $1,000 for Uniform
Gifts/Transfers to Minors Act accounts. The Fund is offered on
a no-load basis (i.e., there are no sales commissions or 12b-1
fees). However, the Fund incurs expenses for investment
advisory, management, administrative and distribution services.
A 2% portfolio transaction fee is deducted from purchases of
the Emerging Markets Portfolio; a 1% portfolio transaction fee
is deducted from purchases of the European, Pacific and Total
International Portfolios. A 1% portfolio transaction fee is
deducted from redemptions of the Emerging Markets Portfolio.
These fees are paid to the Portfolios to offset transaction
costs of buying and selling securities of international
companies. Shareholders in each Portfolio will also incur a $10
annual account maintenance fee.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the Securities
and Exchange Commission. This Statement is dated April 29, 1996
and has been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Fund or
by calling the Investor Information Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Portfolio Expenses............... 2 Investment Limitations........... 16 SHAREHOLDER GUIDE
Financial Highlights............. 5 Management of the Fund........... 16 Opening an Account and
Yield and Total Return........... 7 Investment Adviser............... 17 Purchasing Shares.............. 22
PORTFOLIO INFORMATION Dividends, Capital Gains When Your Account Will
Investment Objective............. 7 and Taxes...................... 17 Be Credited.................... 25
Investment Policies.............. 8 The Share Price of Each Selling Your Shares.............. 25
Investment Risks................. 10 Portfolio...................... 20 Exchanging Your Shares........... 28
Who Should Invest................ 12 General Information.............. 20 Transferring Registration........ 29
Implementation of Policies....... 12 Other Vanguard Services.......... 30
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE> 109
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of each
Portfolio. The expenses and fees set forth below are
for the 1995 fiscal year.
<TABLE>
<CAPTION>
EMERGING TOTAL
SHAREHOLDER TRANSACTION EUROPEAN PACIFIC MARKETS INTERNATIONAL
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO+
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases....................... None * None * None * None *
Sales Load Imposed on Reinvested
Dividends....................... None None None None
Redemption Fees.................. None None 1% --
Exchange Fees.................... None None None None
</TABLE>
* Shareholders are charged a portfolio transaction
fee, payable directly to the Portfolio on each
purchase of shares.
<TABLE>
<CAPTION>
EMERGING TOTAL
ANNUAL FUND OPERATING EUROPEAN PACIFIC MARKETS INTERNATIONAL
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
Management & Administrative
Expenses**................ 0.26% 0.25% 0.09% 0.24%
Investment Advisory Fees... 0.01 0.01 0.03 0.01
12b-1 Fees................. None None None None
Other Expenses
Distribution Costs........ 0.02% 0.02% 0.02% 0.02%
Miscellaneous Expenses.... 0.06 0.07 0.46 0.11
------- -------- ------- ----------
Total Other Expenses....... 0.08 0.09 0.48 0.13
------- -------- ------- ----------
TOTAL OPERATING
EXPENSES........... 0.35% 0.35% 0.60% .38%
======= ======== ======= ==========
</TABLE>
** In addition to these costs, shareholders in each
Portfolio incur an annual account maintenance fee of
$10. This fee will be waived for shareholders with
an account balance of $10,000 or more.
+ The Total International Equity Portfolio is a series
of Vanguard STAR Fund. To the extent that its assets
consist of shares of the other Portfolios, it will
incur no expenses. Operating expenses shown are based
on an assumed allocation of 45% of the Portfolio's
assets in each of the European and Pacific Portfolios
and 10% of its assets in the Emerging Markets
Portfolio.
Because it invests in a combination of the European,
Pacific, and Emerging Markets Portfolios, the Total
International Portfolio does not have operating
expenses of its own. However, Total International
Portfolio shareholders bear indirectly the expenses of
the underlying Portfolios. The expenses set forth in
the table above represent an estimate of these expenses
for the Portfolio's first full year of operations. The
purpose of this table is to assist you in understanding
the various costs and expenses that you would bear
directly or indirectly as an investor in the
Portfolios.
EACH PORTFOLIO
CHARGES A
TRANSACTION FEE The Emerging Markets Portfolio assesses a portfolio
transaction fee on purchases of Portfolio shares equal
to 2% of the dollar amount invested; the Total
International Equity Portfolio assesses a portfolio
transaction fee on purchases of Portfolio shares equal
to 1.0% of the dollar amount invested which is passed
directly through to the underlying Portfolios to pay
for the transaction expenses incurred by those
Portfolios; the European and Pacific Portfolios assess
a portfolio transaction fee on purchases of Portfolio
shares equal to 1% of the dollar amount invested. In
all four Portfolios, the Portfolio transaction fee is
paid to the respective Portfolio, not to Vanguard. It
is not a sales charge. The fee applies to an initial
investment in the Portfolio and all subsequent
purchases (including purchases made by exchange from
another Vanguard Fund or from other Portfolios of the
Vanguard
2
<PAGE> 110
International Equity Index Fund), but not to reinvested
dividend or capital gains distributions. The Portfolio
transaction fee is deducted automatically from the
amount invested; it cannot be paid separately.
EMERGING MARKETS
PORTFOLIO CHARGES
A 1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio also assesses a 1%
redemption transaction fee. This 1% charge applies to
redemptions or exchanges from the Portfolio. The 1% fee
is deducted from redemption or exchange proceeds and is
paid directly to the Portfolio, not to Vanguard. It is
not a contingent deferred sales charge.
The purpose of the purchase and redemption transaction
fees is to allocate transaction costs associated with
purchases and redemptions to investors making those
transactions, thus insulating existing shareholders
from those transaction costs. These costs include: (1)
brokerage costs; (2) market impact costs -- i.e., the
increase in market prices which may result when the
Portfolios purchase or sell thinly traded stocks; and
(3) the effect of the "bid-ask" spread in international
markets.
The fees represent Vanguard's estimate of the brokerage
and other transaction costs incurred by the Portfolios
in purchasing and selling international stocks. Without
the fee, each Portfolio would incur these costs
directly, resulting in reduced investment performance
for all shareholders of the Portfolio. With the fee,
the transaction costs of purchasing and selling
international stocks are borne not by all existing
shareholders, but only by those investors making
transactions. Because the purchaser, not the Portfolio,
bears these costs, the Portfolio is expected to track
its benchmark index more closely.
Transaction costs incurred when purchasing or selling
stocks of companies in emerging market countries are
extremely high. There are three components of
transaction costs -- brokerage fees, the difference
between the bid/asked spread and market impact. Each
one of these factors is significantly more expensive in
emerging market countries than in the United States,
because of less competition among brokers, lower
utilization of technology on the part of the exchanges
and brokers, the lack of derivative instruments and
generally less liquid markets. Consequently, brokerage
commissions are high, bid/asked spreads are wide and
market impact is significant. In addition to these
customary costs, many of the countries have exchange
fees or stamp taxes.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance
fee of $10 for each shareholder account. The purpose of
the $10 fee is to allocate part of the costs of
maintaining shareholder accounts equally to all
accounts. This fee, which is paid directly by
shareholders, is deducted from the Fund's annual
dividend. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to
1.00% on a $1,000 investment in the Fund, and 0.33% on
a $3,000 investment. This fee will be waived for
shareholders with an account balance of $10,000 or
more.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various
periods, assuming (1) a 5% annual rate of
3
<PAGE> 111
return and (2) redemption at the end of each period.
The expenses include portfolio transaction fees.
<TABLE>
<CAPTION>
3 YEARS 5 YEARS 10 YEARS
1 YEAR ------- ------- --------
-------
<S> <C> <C> <C> <C>
European Portfolio....... $24 $51 $ 79 $152
Pacific Portfolio........ $24 $51 $ 79 $152
Emerging Markets
Portfolio.............. $46 $79 $ 114 $204
Total International
Equity Portfolio....... $24 $52 $ 81 $155
</TABLE>
Included in these estimates are account maintenance
fees of $10, $30, $50 and $100, respectively, for the
periods shown. Accordingly, for investments larger than
$1,000, your total expenses will be substantially lower
in percentage terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
4
<PAGE> 112
FINANCIAL
HIGHLIGHTS The following financial highlights of the Portfolios
for a share outstanding throughout each period have
been audited by Price Waterhouse LLP, independent
accountants, whose report on the financial statement
including this information was unqualified. This
information should be read in conjunction with the
Fund's financial statements and notes thereto, which,
together with the remaining portions of the Fund's 1995
Annual Report to Shareholders, are incorporated by
reference in the Statement of Additional Information
and in this Prospectus, and which appear, along with
the report of Price Waterhouse LLP, in the Fund's 1995
Annual Report to Shareholders. For a more complete
discussion of the Fund's performance, please see the
Fund's 1995 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447. No information is reported for the
Total International Portfolio since it did not commence
operations until April, 1996.
<TABLE>
<CAPTION>
------------------------------------------------------
EUROPEAN PORTFOLIO
------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
------------------------------------------- DEC. 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD..... $11.76 $11.88 $9.33 $9.92 $9.06 $10.00
------- ------ ----- ----- ----- --------
INVESTMENT OPERATIONS
Net Investment Income.................. .32 .28 .17 .25 .26 .16
Net Realized and Unrealized Gain (Loss)
on Investments....................... 2.30 (.06) 2.55 (.58) .86 (.94)
------ ------ ----- ----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS... 2.62 .22 2.72 (.33) 1.12 (.78)
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income... (.32) (.28) (.17) (.26) (.26) (.16)
Distributions from Realized Capital
Gains................................ (.04) (.06) -- -- -- --
------ ------ ----- ----- ----- -------
TOTAL DISTRIBUTIONS................ (.36) (.34) (.17) (.26) (.26) (.16)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........... $14.02 $11.76 $11.88 $9.33 $9.92 $9.06
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(1).......................... 22.28% 1.88% 29.13% (3.32)% 12.40% (7.23)%
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)..... $1,017 $715 $601 $256 $161 $96
Ratio of Expenses to Average Net
Assets................................. .35% .32% .32% .32% .33% .40%*
Ratio of Net Investment Income to Average
Net Assets............................. 2.66% 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate.................. 2% 6% 4% 1% 15%** 3%
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind redemptions was 3% for the European
Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual
account maintenance fee of $10. Subscription period for Portfolio was May 1, 1990, to June
17, 1990, during which time all assets were held in money market instruments. Performance
measurement begins on June 18, 1990.
</TABLE>
5
<PAGE> 113
<TABLE>
<CAPTION>
--------------------------------------------------------
PACIFIC PORTFOLIO
--------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
--------------------------------------------- DEC. 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.... $11.31 $10.13 $7.56 $9.42 $8.56 $10.00
------ ------ ----- ----- ----- --------
INVESTMENT OPERATIONS
Net Investment Income................. .10 .08 .06 .05 .05 .05
Net Realized and Unrealized Gain
(Loss)
on Investments...................... .21 1.24 2.62 (1.76) .86 (1.44)
------ ------ ----- ----- ----- ------
TOTAL FROM INVESTMENT
OPERATIONS..................... .31 1.32 2.68 (1.71) .91 (1.39)
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.............................. (.12) (.08) (.06) (.05) (.05) (.05)
Distributions from Realized Capital
Gains............................... -- (.06) (.05) (.10) -- --
------ ------ ----- ----- ----- -------
TOTAL DISTRIBUTIONS............... (.12) (.14) (.11) (.15) (.05) (.05)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $11.50 $11.31 $10.13 $7.56 $9.42 $8.56
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)......................... (2.75)% 13.04% 35.46% (18.17)% 10.65% (14.01)%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).... $831 $697 $493 $207 $84 $31
Ratio of Expenses to Average Net
Assets................................ .35% .32% .32% .32% .32% .35%*
Ratio of Net Investment Income to
Average
Net Assets............................ .97% .71% .75% .92% .70% 1.02%*
Portfolio Turnover Rate................. 1% 4% 7% 3% 21%** 2%
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind redemptions was 1% for the Pacific
Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual
account maintenance fee of $10. Subscription period for Portfolio was May 1, 1990, to June
17, 1990, during which time all assets were held in money market instruments. Performance
measurement begins on June 18, 1990.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
EMERGING MARKETS PORTFOLIO
----------------------------------
YEAR ENDED MAY 4, 1994+,
DECEMBER 31, 1995 TO DEC. 31, 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.87 $10.00
INVESTMENT OPERATIONS
Net Investment Income....................................... .15 .06
Net Realized and Unrealized Gain (Loss) on Investments...... (.09) .92
----------- -----------
TOTAL FROM INVESTMENT OPERATIONS........................ .06 .98
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................ (.18) (.07)
Distributions from Realized Capital Gains................... -- (.04)
----------- -----------
TOTAL DISTRIBUTIONS..................................... (.18) (.11)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................ $ 10.75 $10.87
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN**................................................ .56% 9.81%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......................... $234 $83
Ratio of Expenses to Average Net Assets....................... .60% .60%*
Ratio of Net Investment Income to Average Net Assets.......... 2.00% 1.32%*
Portfolio Turnover Rate....................................... 3% 6%
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total return does not reflect the 2% transaction fee on purchases, the 1% transaction fee on
redemptions, or the annual account maintenance fee of $10. Subscription period for Portfolio
was April 18, 1994, to May 3, 1994, during which time all assets were held in money market
instruments. Performance measurement begins on May 4, 1994.
+ Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE> 114
YIELD AND TOTAL
RETURN From time to time each Portfolio may advertise its
yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of a Portfolio refers to the average annual
compounded rates of return over one-, five- and
ten-year periods or for the life of the Portfolio (as
stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated
period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on a Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes
that the net investment income earned over 30 days is
compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds.
However, these methods differ from the accounting
methods used by the Portfolio to maintain its books and
records, and so the advertised 30-day yield may not
fully reflect the income paid to an investor's account.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The European Portfolio attempts to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe Index, which is made up of common
stocks of companies located in 14 European countries
(the United Kingdom, Germany, France, Switzerland,
Netherlands, Italy, Sweden, Spain, Belgium, Denmark,
Finland, Austria, Ireland, and Norway).
The Pacific Portfolio tries to parallel the performance
of the Morgan Stanley Capital International
(MSCI) -- Pacific (Free) Index, which consists of
common stocks of companies located in Australia, Hong
Kong, Japan, Malaysia, New Zealand, and Singapore.
By combining the European and Pacific Portfolios in the
right proportions, you can create a portfolio that
seeks to match the performance of another international
stock market index. The Morgan Stanley Capital
International (MSCI) Europe, Australia, and Far East
(Free) Index,
also known as the "EAFE" Index, is a broad-based
benchmark made
up of more 1,000 companies located outside the United
States.
As of December 31, 1995, the MSCI -- Pacific Index
represented some 51% of the EAFE, while the
MSCI -- Europe Index represented the
remaining 49%.
The Emerging Markets Portfolio seeks to track the
performance of the Morgan Stanley Capital International
(MSCI) -- Select Emerging Markets (Free) Index, which
is made up of common stocks of companies located in 14
emerging markets of Europe, Asia, Africa and Latin
America (Malaysia, Brazil, Hong Kong, Thailand, Mexico,
Indonesia,
7
<PAGE> 115
Singapore, Argentina, Philippines, Greece, Turkey,
Portugal, South Africa and Israel).
The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe, Australia, and Far East + Select
Emerging Markets (Free) Index (also known as the
MSCI -- EAFE + Select EMF Index) -- by investing the
Portfolio's assets in a combination of Vanguard
European, Pacific, and Emerging Markets Portfolios.
The Portfolios are neither sponsored by nor affiliated
with Morgan Stanley Capital International.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE PORTFOLIOS USE A
"PASSIVE" APPROACH TO
INVEST IN INTERNATIONAL
STOCKS The Portfolios are not managed according to traditional
methods of "active" investment management, which
involve the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Portfolios, utilizing a
"passive" or indexing investment approach, attempt to
approximate the investment performance of their
respective indexes through statistical procedures. The
Fund is managed without regard to tax ramifications.
The European Portfolio invests in a statistically
selected sample of approximately 600 stocks included in
the MSCI -- Europe (Free) Index, an index of equity
securities of companies located in fourteen European
countries. Three countries, the United Kingdom, Germany
and France, dominate MSCI -- Europe (Free), with 34%,
14%, and 13% of the market capitalization of the Index,
respectively, as of December 31, 1995. The 11 other
countries are individually much less significant to the
Index and, consequently, the Portfolio. The "Free"
Index includes only shares that U.S. investors are
"free" to purchase.
The Pacific Portfolio invests in a statistically
selected sample of the more than 500 stocks included in
the MSCI -- Pacific (Free) Index, an index of equity
securities of Pacific Basin companies. The MSCI --
Pacific (Free) Index is dominated by the Japanese stock
market, which represented 81% of the market
capitalization of the Index as of December 31, 1995.
The Emerging Markets Portfolio invests in a
statistically selected sample of approximately 400
stocks included in the MSCI -- Select Emerging Markets
Free Index, an index of equity securities of companies
located in the countries of 14 emerging markets. Three
countries, Malaysia, Brazil and Hong Kong, represent a
majority of the MSCI -- Select Emerging Markets Free
Index, with 20%, 15% and 13% of the market
capitalization of the index, respectively, as of
December 31,
8
<PAGE> 116
1995. The fourteen countries of the Index and their
percentage weightings as of December 31, 1995 were:
<TABLE>
<S> <C> <C> <C>
Greece................. 1.7% Hong Kong.............. 13.5%
Portugal............... 2.6% Indonesia.............. 7.0%
Turkey................. 1.7% Malaysia............... 20.0%
EUROPE................. 6.0% Philippines (Free)..... 3.9%
Singapore.............. 6.6%
Argentina.............. 4.9% Thailand............... 12.8%
Brazil................. 14.5% Israel................. 0.0%*
Mexico (Free).......... 10.8% ASIA................... 63.8%
LATIN AMERICA.......... 30.2% South Africa........... 0.0%*
</TABLE>
* Israel and South Africa were not included in the
Index as of December 31, 1995.
The Index includes only shares that U.S. investors are
"free" or allowed by law, to purchase and sell and
that have sufficient trading liquidity.
The Pacific, European and Emerging Markets Portfolios
are each expected to invest in approximately 250 stocks
or more. Stocks are selected for inclusion in each
Portfolio based on country, market capitalization,
industry weightings, and fundamental characteristics
such as return variability, earnings valuation, and
yield. Each Portfolio is constructed to have aggregate
investment characteristics similar to those of its
respective index. In order to parallel the performance
of its respective index, each Portfolio will invest in
each country in approximately the same percentage as
the country's weight in the index. The correlation
between the performance of each Portfolio and its
respective index is expected to be at 0.95. (A
correlation of 1.00 would be perfect correlation).
The Total International Portfolio allocates its assets
among the European, Pacific and Emerging Markets
Portfolios based on each market segment's contribution
to the market capitalization of the MSCI-EAFE + Select
EMF Index. As of December 31, 1995, the European and
Pacific markets each contributed 45%, and the Emerging
Markets contributed 10% to the Index's market
capitalization. The Total International Portfolio will
invest only in these three Portfolios.
The Pacific, European and Emerging Markets policy is to
remain fully invested in common stocks. At least 80% of
the assets of each Portfolio will be invested in stocks
that are included in its respective index. Although the
Total International Portfolio will invest exclusively
in shares of the underlying Portfolios, at least 80% of
its equity exposure, under normal circumstances, will
be to stocks that are included in the MSCI-EAFE +
Select EMF Index. Each Portfolio may invest in certain
short-term fixed income securities such as cash
reserves, although cash or cash equivalents are
normally expected to represent less than 1% of each
Portfolio's assets. Each Portfolio may also invest up
to 50% of its assets in stock futures contracts,
options, and warrants in order to invest uncommitted
cash balances, maintain liquidity to meet shareholder
redemptions, or minimize trading costs. Any investment
in futures contracts, options, warrants, convertible
securities or swap
9
<PAGE> 117
agreements over 20% of each Portfolio's assets would be
made in emergency situations, for short-term purposes.
These Portfolios will not invest in cash reserves,
futures contracts, options or warrants as part of a
temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks, to protect
against potential stock market declines. The Portfolios
intend to remain fully invested, to the extent
practicable, in a pool of securities which will
approximate the investment characteristics of their
respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to
protect against fluctuations in exchange rates. See
"Implementation of
Policies" for a description of these and other
investment practices
of the Portfolios.
The Fund is responsible for voting the shares of all
securities it holds.
The investment objective and policies of the Fund are
not fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material
change in either.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS As mutual funds investing in common stocks, the
Portfolios are subject to MARKET RISK -- i.e., the
possibility that stock prices will decline over short
or even extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline.
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as
volatile, if not more volatile, than investments in
U.S. markets. To illustrate the volatility of foreign
stock market returns for the U.S. dollar-based
investor, the table below sets forth the extremes of
foreign stock market returns, as well as average annual
returns, for the period from 1970 to 1995, as measured
by the MSCI -- Europe, Australia, and Far East Index
and as calculated for a U.S. dollar investor.
<TABLE>
<CAPTION>
AVERAGE INTERNATIONAL STOCK MARKET RETURNS
(1970-1995)
------------------------------------------
MSCI --
EAFE 1 YEAR 5 YEARS 10 YEARS
------- ------ ------- --------
<S> <C> <C> <C>
Best +69.9% +36.5% +22.8%
Worst -23.2 + 1.5 + 7.0
Average +15.3 +14.2 +16.2
</TABLE>
As shown, the MSCI -- EAFE Index has provided annual
total returns, averaging +16.2% for all 10-year periods
from 1970-1995. Note, however, that the period from
1970 to 1995 was a very favorable one for foreign stock
market investing. The figures on total return and stock
market volatility are provided here only as a guide to
potential market risk, and may not be useful for
forecasting future returns in any particular period.
10
<PAGE> 118
This table on international stock market returns should
not be viewed as a representation of future returns for
international stocks or the Portfolios of the Fund, as
historical performance may be a poor guide to future
returns, and the Indexes shown do not reflect "real
world" transaction costs and other expenses.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities
comprised 81% of the MSCI -- Pacific (Free) Index as of
December 31, 1995, and that therefore stocks of
Japanese companies will represent a correspondingly
large component of the Pacific Portfolio's investment
assets. Such a large investment in the Japanese stock
market may entail a higher degree of risk than with
more diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and
low dividend yields, the Japanese market as a whole may
appear expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE (FREE)
INDEX Stocks from the United Kingdom, Germany and France
comprised 34%, 14% and 13% of the MSCI -- Europe (Free)
Index, respectively, as of December 31, 1995. The
remaining 11 countries in the MSCI -- Europe (Free)
Index have much less significant capitalization
weightings in the Index and will therefore have much
less impact on the total return of the Index and the
European Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1995,
the average positive monthly return for the Wilshire
5000 Index, a broad measure of the US equity market was
+3.1%. The average negative monthly return for the
Wilshire 5000 Index was -2.6%. In contrast, from
1989-1995, the average positive monthly return of the
Morgan Stanley Capital International Emerging Markets
Free Index, a widely quoted emerging market benchmark,
was +5.5%; while the average negative monthly return
was -4.9%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the US market. Small trading
volumes may result in investors being forced to
purchase securities at substantially higher prices than
the current market, or sell securities at much lower
prices than the current market.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND
OTHER RISKS For U.S. investors, the returns of foreign investments,
such as those held by the Portfolios, are influenced by
not only the returns on foreign common stocks
themselves, but also by the returns on the currencies
in which the stocks are denominated. Currency risk is
the risk that changes in foreign exchange rates will
affect, favorably or unfavorably, the value of foreign
securities held by a Portfolio. In a period when the
U.S. dollar generally rises against foreign currencies,
the returns on foreign stocks for a U.S. investor will
be diminished. By contrast, in a period when the U.S.
dollar generally declines, the returns on foreign
stocks will be enhanced.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards;
11
<PAGE> 119
generally higher transaction costs on foreign portfolio
transactions; small trading volumes and generally lower
liquidity of foreign stock markets, which may result in
greater price volatility; foreign withholding taxes
payable on a Portfolio's foreign securities, which may
reduce dividend income payable to shareholders; the
possibility of expropriation or confiscatory taxation;
adverse change in investment or
exchange control regulations; difficulty in obtaining a
judgement
from a foreign court; political instability which could
affect U.S. invest-
ment in foreign countries; and potential restriction on
the flow of international capital.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other equity mutual funds, which generally seek
to "beat" market averages with often unpredictable
results, the Portfolios of the Fund seek to "match"
their respective indexes and thus are expected to
provide returns that parallel those of their respective
benchmarks.
The share prices of the Portfolios are expected to be
volatile, and investors should be able to tolerate
sudden, sometimes substantial fluctuations in the value
of their investment. No assurance can be given that a
Portfolio will achieve its stated objective or that
shareholders will be protected from the risks inherent
in equity investing. Investors may wish to minimize the
timing risk of investing in a Portfolio by purchasing
shares on a periodic basis (dollar-cost averaging)
rather than investing in one lump sum.
Because of the risks associated with international
common stock investments, the Fund is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term market movements. Investors who engage in
excessive account activity generate additional costs
which are borne by all of the Portfolio's shareholders.
In order to minimize such costs the Portfolios have
adopted the following policies. The Portfolios reserve
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Portfolios have adopted
exchange privilege limitations as described in the
section "Exchange Privilege Limitations." Finally, the
Portfolios reserve the right to suspend the offering of
its shares. Investors should not consider the
Portfolios a complete investment program, but should
maintain holdings of securities with different risk
characteristics -- including U.S. common stocks, bonds
and money market instruments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES The Portfolios utilize a number of investment practices
in an effort to parallel the investment performance of
their respective indexes.
The MSCI -- Europe (Free) Index consists of
approximately 590 equity securities from Europe, the
MSCI -- Pacific (Free) Index consists of more than 520
equity securities from Australia and the Far East, and
the MSCI -- Select Emerging Markets (Free) Index
consists of some 500
12
<PAGE> 120
stocks from Asia, Latin America, Africa and Europe. The
stocks included in each index are chosen by Morgan
Stanley Capital International on a statistical basis.
Each stock in MSCI -- Europe (Free), MSCI -- Pacific
(Free), and MSCI Select Emerging Markets is weighted
according to its market value as a percentage of the
total market value of all stocks in the index. (A
stock's market value equals the number of shares
outstanding times the most recent price of the
security.) The inclusion of a stock in the index in no
way implies that Morgan Stanley Capital International
believes the stock to be an attractive investment.
The European, Pacific, and Emerging Markets Portfolios
will be unable to hold all of the issues that comprise
their respective indexes because of the costs involved
and the illiquidity of many of the securities. Instead,
each Portfolio will attempt to hold a representative
sample of approximately 400 or more of the securities
in its respective Index, which will be selected
utilizing a statistical technique known as "portfolio
optimization." Under this technique, each stock is
considered for inclusion in the Portfolio based on its
contribution to certain country, capitalization,
industry, and fundamental investment characteristics.
Each Portfolio is constructed so that, in the
aggregate, each Portfolio's country, capitalization,
industry, and fundamental investment characteristics
resemble those of its respective Index. Over time,
portfolio composition is altered (or "rebalanced") to
reflect changes in the characteristics of the Indexes.
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not
expected to track their benchmark indexes with the same
degree of accuracy as large capitalization domestic
index funds. Over time, the correlation between the
performance of each Portfolio and its respective index
is expected to be greater than 0.95. A correlation of
1.00 would indicate perfect correlation, which would be
achieved when the net asset value of each Portfolio,
including the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in its respective index.
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES Although each Portfolio's policy is to remain
substantially fully invested in common stocks, the
Portfolios may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper (rated Prime-1 by Moody's Investors
Services, Inc. or A-1 by Standard & Poor's
Corporation), bank certificates of deposit and bankers'
acceptances; and repurchase agreements collateralized
by these securities.
DERIVATIVE
INVESTING
Derivatives are instruments whose values are linked to
or derived from an underlying security or index. The
most common and conventional types of derivative
securities are futures and options.
13
<PAGE> 121
EACH PORTFOLIO MAY
USE FUTURES CONTRACTS,
OPTIONS AND WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS The Portfolios may utilize stock futures contracts,
options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options. Additionally, the Fund's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges). Futures contracts, options,
warrants, convertible securities and swap agreements
may be used for several reasons: to simulate full
investment in the underlying Index while retaining a
cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to
seek higher investment returns when a futures contract,
option, warrant, convertible security or swap agreement
is priced more attractively than the underlying equity
security or index. While each of these securities can
be used as leveraged investments, the Portfolios may
not use them to leverage its net assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in
some strategies can be substantial due both to the low
margin deposits required and the extremely high degree
of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or
gain. However, the Portfolios will not use futures
contracts, options, warrants, convertible securities
and swap agreements for speculative purposes or to
leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts,
options, warrants, convertible securities and swap
agreements by the Portfolios are: (i) imperfect
correlation between the change in market value of the
stocks held by a Portfolio and the prices of futures
contracts, options, warrants, convertible securities
and swap agreements; and (ii) possible lack of a liquid
secondary market for a futures contract and the
resulting inability to close a futures position prior
to its maturity date. The risk of imperfect correlation
will be minimized by investing only in those contracts
whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures
position will be minimized by entering into such
transactions on an exchange with an active and liquid
secondary market. However options, warrants,
convertible securities and swap agreements purchased or
sold over-the-counter may be less liquid than exchange
traded securities. Illiquid securities, in general,
including swap agreements, may not represent more than
15% of the net assets of a Portfolio of the Fund.
Since there are no futures traded on the MSCI indexes,
it will be necessary for the Portfolios to utilize a
composite of other futures contracts to simulate the
performance of the Indexes. This process may magnify
the "tracking error" of a Portfolio's performance
compared to that of its Index, due to lower correlation
of the selected futures with its Index. The investment
adviser will attempt to reduce this tracking error by
investing in futures contracts whose behavior is
expected to resemble that of the underlying securities,
although there can be no assurance that these selected
futures will perfectly correlate with the performance
of any Index.
14
<PAGE> 122
Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified
index or asset. In return, the other party agrees to
make payments to the first party based on the return of
a different specified index or asset. Although swap
agreements entail
the risk that a party will default on its payment
obligations thereunder,
the portfolios will minimize this risk by entering into
agreements
that mark to market no less frequently than quarterly.
Swap agree-
ments also bear the risk that the Portfolios will not
be able to
meet its obligation to the counterparty. This risk will
be mitigated by
investing the Portfolios in the specific asset for
which it is obligated to pay a return.
THREE PORTFOLIOS MAY
ENTER INTO FORWARD
CURRENCY CONTRACTS The European, Pacific and Emerging Markets Portfolios
may enter into foreign currency forward and foreign
currency futures contracts in order to maintain the
same currency exposure as their respective indexes. A
Portfolio may not enter into such contracts for
speculative purposes, or as a way of protecting against
anticipated adverse changes in exchange rates between
foreign currencies and the U.S. dollar. A foreign
currency forward contract is an obligation to purchase
or sell a specific currency at a future date, which may
be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at
the time of the contract.
THREE PORTFOLIOS MAY
LEND ITS SECURITIES The European, Pacific and Emerging Markets Portfolios
may lend its investment securities to qualified
institutional investors for either short-term or
long-term purposes of realizing additional income.
Loans of securities by the Portfolios will be
collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least
100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER
IS EXPECTED TO BE LOW Although the Portfolios generally seek to invest for
the long term, the Portfolios retain the right to sell
securities irrespective of how long they have been
held. However, because of the "passive" investment
management approach of the Fund, the portfolio turnover
rate for each Portfolio is expected to be under 50%, a
generally lower turnover rate than for most other
investment companies. A portfolio turnover rate of 50%
would occur if one half of a Portfolio's securities
were sold within one year. Ordinarily, securities will
be sold from a Portfolio only to reflect certain
administrative changes in an index (including mergers
or changes in the composition of an index) or to
accommodate cash flows out of the Portfolio while
maintaining the similarity of the Portfolio to its
benchmark index.
EACH PORTFOLIO MAY
BORROW MONEY Each Portfolio may borrow money from a bank up to a
limit of 15% of the market value of its assets, but
only for temporary or emergency purposes. A Portfolio
may borrow money only to meet redemption requests prior
to the settlement of securities already sold or in the
process of being sold
by the Portfolio. To the extent that a Portfolio
borrows money prior to
selling securities, the Portfolio may be leveraged; at
such times, the
Portfolio may appreciate or depreciate in value more
rapidly than its
benchmark index. Each Portfolio will repay any money
borrowed in
15
<PAGE> 123
excess of 5% of the market value of its total assets
prior to purchasing
additional portfolio securities.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted certain limitations on its
investment practices. Specifically, each Portfolio will
not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the
Portfolio's assets would be invested in the
securities of such issuer;
(b) purchase more than 10% of the voting securities of
any issuer;
(c) invest more than 25% of its assets in any one
industry, except for the Total International
Portfolio which may invest more than 25% of its
assets in investment companies which are the
underlying portfolios of the Vanguard International
Equity Index Fund; and
(d) borrow money except from banks for temporary or
emergency purposes and in no event in excess of 15%
of the market value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information for each Fund may be changed only with the
approval of a majority of a Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND Vanguard International Equity Index Fund is a member of
The
Vanguard Group of Investment Companies, a family of
more than
30 investment companies with more than 90 distinct
investment port-
folios and total assets in excess of $190 billion.
Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other funds
in the Group obtain at cost virtually all of their
corporate management, administrative and distribution
services.
Vanguard also provides investment advisory services on
an at-cost basis to certain Vanguard funds. As a result
of Vanguard's unique corporate structure, the Vanguard
funds have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense
ratio (annual costs including advisory fees divided by
total net assets) for the Vanguard funds amounted to
approximately .31% compared to an average of 1.11% for
the mutual fund industry (data provided by Lipper
Analytical Services).
Vanguard Total International Portfolio is an
independent series of Vanguard STAR Fund. The Portfolio
operates under a separate service agreement and, to the
extent that its assets are composed of shares of other
Vanguard Funds, it will bear no expenses.
The Officers of the Funds manage their day-to-day
operations and are responsible to the Funds' Board of
Directors (Trustees). The Directors (Trustees) set
broad policies for the Funds and choose the Officers. A
list of the Directors (Trustees) and Officers of the
Funds and a statement of their present positions and
principal occupations during the past five years can be
found in the Statement of Additional Information.
16
<PAGE> 124
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which
are allocated among the funds under methods approved by
the Board of Directors (Trustees) of each fund. In
addition, each fund bears its own direct expenses, such
as legal, auditing and custodian fees.
Vanguard provides distribution and marketing services
to the funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1
fees). However, each fund bears its own share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUNDS ON AN
AT-COST BASIS The Vanguard International Equity Fund receives all
investment advisory services on an at-cost basis from
Vanguard Core Management Group, which also provides
investment advisory services to Vanguard Index Trust,
Vanguard Balanced Index Fund, Vanguard Institutional
Index Fund, a portion of the assets of Vanguard/Windsor
II and Vanguard Morgan Growth Fund, the Equity Index
Portfolio of Vanguard Variable Insurance Fund, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of
Vanguard Horizon Fund, and several indexed separate
accounts. Total indexed assets under management as of
December 31, 1995, were $33 billion. The Portfolios of
the Fund are not actively managed, but are instead
administered by the Core Management Group using
computerized, quantitative techniques. The Group is
supervised by the Officers of the Funds.
In placing portfolio transactions, Vanguard Core
Management Group uses its best judgment to choose the
broker most capable of providing the brokerage services
necessary to obtain the best available price and most
favorable execution at the lowest commission rate. The
full range and quality of brokerage services available
are considered in making these determinations. In those
instances where it is reasonably determined that more
than one broker can offer the services needed to obtain
the best available price and most favorable execution,
consideration may be given to those brokers which
supply statistical information and provide other
services in addition to execution services to the Fund.
The Total International Portfolio does not employ an
investment adviser.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
DIVIDENDS AND ANY
CAPITAL GAINS WILL BE
PAID ANNUALLY Each Portfolio intends to distribute substantially all
of its ordinary income in the form of dividends. The
Portfolios pay annual dividends. Capital gains
distributions, if any, are also made annually.
Each Portfolio's dividend and capital gains
distributions may be reinvested in additional shares or
received in cash. See "Choosing a Distribution Option"
for a description of these distribution methods.
In order to satisfy certain distribution requirements
of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gain
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to
have been paid
17
<PAGE> 125
by each Portfolio and received by shareholders on
December 31 of the prior year.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio will automatically deduct a $10 annual
account maintenance fee from the dividend income of
each Portfolio account on an annual basis. If the
dividend to be paid to an account is less than the fee
to be deducted, sufficient shares will be redeemed from
an account to make up the difference. The Board of
Directors reserves the right to change the annual
account maintenance fee to reflect the actual cost of
maintaining smaller shareholder accounts. For federal
tax purposes, the account maintenance fee does not
reduce dividend income and is treated as an investment
expense by each shareholder (deductible as a
miscellaneous itemized deduction in the case of
individual investors). This fee will be waived for
shareholders with an account balance of $10,000 or
more.
Each Portfolio intends to continue to qualify for
taxation as a "regulated investment company" under the
Internal Revenue Code so that it will not be subject to
federal income tax to the extent its income is
distributed to shareholders. Dividends paid by each
Portfolio from net investment income and net short-term
capital gains, whether received in cash or reinvested
in additional shares, will be taxable to shareholders
as ordinary income. For corporate investors, dividends
from net investment income will not generally qualify
for the intercorporate dividends-received deduction.
Distributions paid by a Portfolio from long-term
capital gains, whether received in cash or reinvested
in additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in a Portfolio. Capital gains distributions are
made when a Portfolio realizes net capital gains on
sales of portfolio securities during the year. A
Portfolio does not seek to realize any particular
amount of capital gains during a year; rather, realized
gains are a by-product of portfolio management
activities. Consequently, capital gains distributions
may be expected to vary considerably from year to year;
there will be no capital gains distributions in years
when a Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in
mind that if you purchase shares in a Portfolio shortly
before the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless
of whether you are reinvesting your distributions or
receiving them in cash.
The Fund will notify you annually as to the tax status
of dividend and capital gains distributions paid by
each Portfolio.
18
<PAGE> 126
THREE PORTFOLIOS MAY
"PASS THROUGH"
FOREIGN TAXES The European, Pacific, and Emerging Markets Portfolios
may elect to "pass through" to its shareholders the
amount of foreign income taxes paid by a Portfolio. The
Portfolios will make such an election only if it is
deemed to be in the best interests of the shareholders.
If this election is made, shareholders of a Portfolio
will be required to include in their gross income their
pro rata share of foreign taxes paid by the Portfolio.
However, shareholders will be able to treat their pro
rata share of foreign taxes as either an itemized
deduction or a foreign tax credit against U.S. income
taxes (but not both) on their federal income tax
return.
ANY FOREIGN TAX
CREDITS WOULD NOT
"PASS THROUGH" TO
TOTAL INTERNATIONAL
PORTFOLIO
SHAREHOLDERS. If the European, Pacific or Emerging Markets Portfolios
elect to pass through foreign taxes to their
shareholders, the foreign tax credit would not pass
through to Total International Portfolio shareholders.
Since the Total International Portfolio holds shares of
the European, Pacific and Emerging Markets Portfolios,
which are U.S. companies, and does not hold shares of
foreign securities, it cannot pass through the foreign
tax credit to its investors. However, the Total
International Portfolio would claim a deduction for
foreign taxes paid by the underlying funds.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual
funds (or two portfolios of a mutual fund). You are
responsible for calculating any capital gains or losses
realized upon redemption or exchange of a Portfolio's
shares.
Dividend distributions, capital gains distributions,
and capital gains or losses from redemptions and
exchanges may be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or
Employer Identification number and by certifying that
you are not subject to backup withholding.
Vanguard International Equity Index Fund has obtained a
certificate of authority to do business as a foreign
corporation in Pennsylvania and does business and
maintains an office in that state. In the opinion of
counsel, shares of the Fund will be exempt from
Pennsylvania personal property taxes.
Vanguard Total International Portfolio is part of a
Pennsylvania business trust and, in the opinion of
counsel, is not liable for any income or franchise tax
in the Commonwealth of Pennsylvania. The Portfolio will
be subject to Pennsylvania county personal property tax
in the county which is the site of its principal
office. In the opinion of counsel, shareholders who are
Pennsylvania residents will not be subject to county
personal property taxes, with the exception of non-
19
<PAGE> 127
exempt holders who are residents of the City and School
District of Pittsburgh.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO The share price or "net asset value per share" of each
Portfolio is determined by dividing the total market
value of the Portfolio's investments and other assets,
less any liabilities, by the number of outstanding
shares of the Portfolio. "Net asset value" per share is
determined as of the regular close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the exchange is open for trading. Portfolio
securities are valued at the last quoted sales price
available, according to the broadest and most
representative market, at the time the Portfolio's
assets are valued. Price information on listed
securities is taken from the exchange where the
security is primarily traded. Securities regularly
traded in the over-the-counter market are valued at the
latest quoted bid price. Other assets and securities
for which no quotations are readily available are
valued at fair value as determined in good faith by the
Directors. Securities may be valued on the basis of
prices provided by a pricing service when such prices
are believed to reflect the fair market value of such
securities. The prices provided by a pricing service
may be determined without regard to bid or last sale
prices of each security but take into account
institutional-size transactions in similar groups of
securities as well as any developments related to
specific securities. All assets and liabilities
initially expressed in foreign currencies will be
converted into U.S. dollars using the officially quoted
daily exchange rates determined by Morgan Stanley
Capital International (MSCI) in the calculation of
their Europe, Australia and Far East Index. This
officially quoted daily exchange rate may be determined
by MSCI prior to or after the close of a particular
foreign securities market. If such quotations are not
available, the rate of exchange will be determined in
accordance with policies established by the Board of
Directors.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Vanguard International Equity Index Fund is
organized as a Maryland corporation. The Articles of
Incorporation permit the Directors to issue
1,500,000,000 shares of common stock with a $.001 par
value. The Board of Directors has the power to
designate one or more classes ("series") of shares of
common stock and to classify or reclassify any unissued
shares with respect to such series. Currently the Fund
is offering shares of three series.
The shares of each series are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose. Annual meetings of shareholders will not be
held except as required by the Investment Company Act
of 1940 and other applicable law. An annual meeting
will be held to vote on the
20
<PAGE> 128
removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than
10% of the outstanding shares of the Fund.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
All securities and cash for the European, Pacific and
Emerging Markets Portfolios are held by Morgan Stanley
Trust Company. CoreStates Bank, N.A., holds the daily
cash balances that are used by these three Portfolios
to invest in repurchase agreements or securities
acquired in these transactions. Securities and cash for
the Total International Portfolio are held by
CoreStates. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Funds Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP, serves as independent
accountant for the Funds and will audit their financial
statements annually. The Funds are not involved in any
litigation.
- --------------------------------------------------------------------------------
21
<PAGE> 129
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either
by mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement for each Portfolio
($1,000 for Uniform Gifts/Transfers to Minors Act
accounts). To open a new account by wire, you must call
Client Services before initiating the wire transfer.
You must open a new Individual Retirement Account by
mail (IRAs may not be opened by wire) using a Vanguard
IRA Adoption Agreement. Your purchase must be equal to
or greater than the $1,000 minimum initial investment
requirement, but no more than $2,000 if you are making
a regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the
past 60 days from an IRA or other qualified Retirement
Plan. If you need assistance with the forms or have any
questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For
other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or powers of attorney), please call us to determine
which additional forms you may need.
The shares of each Portfolio generally are purchased at
the next-determined net asset value after your
investment has been received. The Fund is offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
market movements. Consequently, the Fund reserves
the right to reject any specific purchase (and
exchange purchase) request. The Fund also reserves
the right to suspend the offering of shares for a
period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Fund. Please be sure your
purchase check is made payable to The Vanguard
Group.
IMPORTANT NOTE
ON EXPENSES The Emerging Markets Portfolio assesses a 1%
transaction fee on redemptions. Each Portfolio assesses
a transaction fee (2% for the Emerging Markets
Portfolio, 1.1% for the Total International Portfolio,
and 1% for the European and Pacific Portfolios) as well
as a $10 annual account maintenance fee. The $10 annual
account maintenance fee will be waived for shareholders
with an account balance of $10,000 or more. See
"Portfolio Expenses."
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made
by mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be
made by mail ($100 minimum) or exchange from another
Vanguard Fund account. In some instances, contributions
may be
22
<PAGE> 130
made by wire or Vanguard Fund Express. Please call us
for more information on these options.
-----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Complete and sign the on the registration form, Invest-by-Mail remittance
enclosed Account make your check payable to form attached to your Fund
Registration Form The Vanguard confirmation statements.
Group-(Portfolio Number), Please make your check
see below for appropriate payable to The Vanguard
Portfolio number, and mail Group-(Portfolio Number),
to: see below for the
appropriate Portfolio
VANGUARD FINANCIAL CENTER number, write your account
P.O. BOX 2600 number on your check and,
VALLEY FORGE, PA 19482 using the return envelope
provided, mail to the
address indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail
to the post office box
address.
VANGUARD INTERNATIONAL EQUITY INDEX FUND PORTFOLIOS:
European Portfolio -- 79
Emerging Markets Portfolio -- 533
Pacific Portfolio -- 72
Total International Equity Portfolio -- 113
---------------------------
CORESTATES BANK, N.A.
PURCHASING BY WIRE ABA 031000011
CORESTATES NO 01019897
Money should be ATTN VANGUARD
wired to: VANGUARD INTERNATIONAL EQUITY
INDEX FUND
BEFORE Wiring NAME OF PORTFOLIO
ACCOUNT NUMBER (or temporary reference
Please contact number
Client Services for new accounts)
(1-800-662-2739) ACCOUNT REGISTRATION
</TABLE>
You should notify our Client Services Department of
your intended wire purchase by 12:00 noon (Eastern
time). To assure proper receipt, please be sure your
bank includes the Portfolio name, the account number
Vanguard has assigned to you and the eight-digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail
it to the "New Account" address above after completing
your wire arrangement. Note: Federal Funds wire
purchase orders will be accepted only when the Fund and
Custodian Bank are open for business. Funds must be
received at the Federal Reserve Bank by 4:00 p.m.
Eastern time in order to receive that day's trade date.
-----------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) Telephone exchanges are not accepted for the Fund. You
may, however, open an account by exchange by providing
the appropriate information on the Account Registration
Form. The new account will have the same
23
<PAGE> 131
registration as the existing account. The Fund reserves
the right to refuse any exchange purchase request.
-----------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Automatic Investment The Fund Express Automatic Investment option lets you
move money automatically from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select.
To establish this option, please provide the
appropriate information on the Account Registration
Form. We will send you a confirmation of your Fund
Express enrollment; please wait three weeks before
using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional shares. This option will be selected for
you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, each Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you
purchase shares immediately prior to the record date of
a sizable capital gain or income dividend distribution,
you will be assessed taxes on the amount of the capital
gain and/or dividend distribution later paid even
though you owned the Portfolio shares for just a short
period of time. (Taxes are due on the distributions
even if the dividend or gain is reinvested in
additional Portfolio shares.) While the total value of
your investment will be the same after the
distribution -- the amount of the distribution will
offset the drop in the net asset value of the
shares -- you should be aware of the tax implications
the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The
Portfolio's annual dividend and capital gains
distributions normally occur in December. For
additional infor-
24
<PAGE> 132
mation on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services
on your account is to select the options you desire
when you complete your Account Registration Form. IF
YOU WISH TO ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to
replace it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Portfolios will not cancel any trade (e.g.,
purchase, exchange or redemption) believed to be
authentic, received in writing or by telephone, once
the trade request has been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the
Fund or any of the Vanguard Funds in an electronic
format, please call 1-800-231-7870 for additional
information. If you elect to do so, you may also
receive a paper copy of the prospectus, by calling
1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal
Funds wire or exchange, and is received by the close of
the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt.
If your purchase is received after the close of the
Exchange, your trade date is the next business day. All
four Portfolios charge a transaction fee on purchases
(2% for the Emerging Markets Portfolio, 1.1% for the
Total International Equity Portfolio, and 1% for the
European and Pacific Portfolios). See "Portfolio
Expenses."
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. You generally
may initiate a request by writing or by telephoning.
Your redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
-----------------------------------------------------------------------------
25
<PAGE> 133
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, P.O. BOX
1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard
Financial Center, Vanguard International Equity Index
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The Emerging Markets Portfolio charges a 1% transaction
fee on all redemptions (including the sale of shares).
The redemption price of shares will be the Portfolio's
net asset value next determined after Vanguard has
received all required documents in Good Order.
-----------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations,
trusts and certain other accounts.
6. Any certificates that you are holding for the
account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739).
-----------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. The proceeds will be sent to you by
mail. PLEASE NOTE: As a protection against fraud, your
telephone mail redemption privilege will be suspended
for 10 calendar days following any expedited address
change to your account. An expedited address change is
one that is made by telephone, by Vanguard Online or,
in writing, without the signatures of all account
owners. Please see "Important Information About
Telephone Transactions."
-----------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic
Withdrawal With the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard
Fund account to your bank account according to the
schedule you have selected. You may elect Fund Express
on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund
Express Application.
-----------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange to another
Vanguard Fund account. Exchanges to or from Vanguard
International Equity Index Fund may be made only by
mail. Please see "Exchanging Your Shares" for details.
-----------------------------------------------------------------------------
26
<PAGE> 134
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be
redeemed at any time. However, your redemption proceeds
will not be paid until payment for the purchase is
collected, which may take up to ten calendar days.
-----------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order, except
as described in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net
asset value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
Each Portfolio may suspend the redemption right or
postpone payment at times when the New York Stock
Exchange is closed or under any emergency circumstances
as determined by the United States Securities and
Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of a Portfolio's
remaining shareholders to make payment in cash, a
Portfolio may pay redemption proceeds in whole or in
part by a distribution in kind of readily marketable
securities.
-----------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
-----------------------------------------------------------------------------
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Portfolio will automatically deduct a
$10 annual fee from non-retirement accounts with
balances falling below $2,500 ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). This fee
deduction will occur mid-year, beginning in 1996. The
fee generally will be waived for investors whose
aggregate Vanguard assets exceed $50,000.
In addition, each Portfolio reserves the right to
liquidate any non-retirement account that is below the
minimum initial investment amount of $3,000. If at any
time your total investment does not have a value of at
least $3,000, you may be notified that your account is
below the Fund's minimum account balance requirement.
You would then be allowed
27
<PAGE> 135
60 days to make an additional investment before the
account is liquidated. Proceeds would be promptly paid
to the registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange
your shares of a Portfolio for those of other available
Vanguard Funds. Exchanges to or from a Portfolio may be
made only by mail. TELEPHONE EXCHANGES BETWEEN
NON-RETIREMENT ACCOUNTS ARE NOT ACCEPTED FOR THE FUND.
Note, too, that the Emerging Markets Portfolio charges
a 1% transaction fee on all redemptions (including the
exchange of shares).
-----------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD INTERNATIONAL
EQUITY INDEX FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard
International Equity Index Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
-----------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For an additional copy and for answers to
any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption and a
purchase. Therefore, you could realize a taxable gain
or loss on the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange
is the net asset value next determined after Vanguard
has received all required documentation in Good
Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange as deemed necessary, at any
time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale.
The Fund's shares are currently
28
<PAGE> 136
registered for sale in all 50 states and the Fund
intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements
in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed
excessive if limited to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (AT LEAST 30 DAYS APART) from a Portfolio
during any twelve-month period. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from
other Vanguard port-folios) that is reasonably deemed
to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) by telephone is automatically established
on your account unless you request in writing that
telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received
by telephone, provided that reasonable security
procedures have been followed. Vanguard believes that
the security procedures described above are reasonable,
and that if such procedures are followed, you will bear
the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account. If
Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting
from unauthorized or fraudulent telephone transactions
on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482 ATTENTION: TRANSFER
DEPARTMENT. The request must be in Good Order. To
obtain a transfer form and full instructions, please
call our Client Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
29
<PAGE> 137
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each
time you initiate a transaction in your account except
for checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire
calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account,
using the average cost single category method. This
service is available for most taxable accounts opened
since January 1, 1986. In general, investors who
redeemed shares from a qualifying Vanguard account may
expect to receive their Average Cost Statement along
with their Portfolio Summary Statement, in February of
the following year. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services,
please call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to
move money automatically among your Vanguard Fund
accounts. For instance, the service can be used to
"dollar cost average" from a money market portfolio
into a stock or bond fund or to contribute to an IRA or
other retirement plan. Please contact our Client
Services Department at 1-800-662-2739 for additional
information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
30
<PAGE> 138
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated
service that provides share price, price change and
yield quotations on Vanguard Funds through any
TouchToneTM telephone. This service also lets you
obtain information about your account balance, your
last transaction, and your most recent dividend or
capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD
(1-800-662-6273). A brochure offering detailed
operating instructions is available from our Investor
Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
31
<PAGE> 139
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<PAGE> 140
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<PAGE> 141
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P072
<PAGE> 142
PART B
VANGUARD STAR FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 29, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectuses (dated April 29, 1996). To obtain the
Prospectuses please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Limitations.................................................................... 1
Management of the Fund.................................................................... 3
Investment Advisory Services.............................................................. 5
Purchase of Shares........................................................................ 22
Redemption of Shares...................................................................... 23
Yield and Total Return.................................................................... 23
Comparative Indexes....................................................................... 24
General Information....................................................................... 25
Financial Statements...................................................................... 26
</TABLE>
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment objective, policies
and limitations set forth in the Prospectuses. These policies are fundamental
and may not be changed without the approval of at least a majority of the Fund's
outstanding shares (a term which means the lesser of (i) 67% or more of the
shares present at the meeting if the holders of more than 50% of the shares of
the Fund are present or represented by proxy or (ii) more than 50% of the total
outstanding shares of the Fund). Each Portfolio of the Fund may not:
1) Issue senior securities;
2) Purchase any securities on margin, make short sales of securities or
purchase or sell puts and calls, or combinations thereof;
3) Borrow money, except from banks for temporary or emergency purposes and
then only in an amount not in excess of 5% of the lower of the market
value or costs of its assets, in which case it may pledge, mortgage or
hypothecate any of its assets as security for such borrowing, but not
to an extent greater than 5% of the market value of its assets;
4) Underwrite the securities of other issuers or invest more than 15% of
its assets in securities subject to legal or contractual restrictions
on resale or for which there are no readily available market
quotations, or repurchase agreements having maturities of more than
seven days;
5) Purchase real estate or real estate mortgage loans, although the
underlying mutual funds in which the Fund will invest may purchase
marketable securities of companies which deal in real estate, real
estate mortgage loans or interests therein;
6) Purchase or sell commodities or commodity contracts, except that the
Growth, Conservative Growth, Moderate Growth and Income Portfolios may
enter into futures contracts and options transactions as described in
the prospectus;
7) Invest directly in oil, gas, or other mineral exploration or
development programs; provided, however, that the underlying funds in
which the Fund's Portfolios will invest may purchase the securities of
companies engaged in such activities;
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<PAGE> 143
8) Invest more than 5% of its assets, at the time of investment, in the
securities of any issuers which have records of less than three years'
continuous operation, including the operation of any predecessor (other
than obligations issued or guaranteed as to interest and principal by
the U.S. Government or its agencies or instrumentalities or open-end
investment companies which are member Funds of The Vanguard Group of
Investment Companies);
9) Purchase or retain any security other than shares of the underlying
Vanguard Funds if (i) one or more officers or Trustees of the Fund
individually own or would own, directly or beneficially, more than 1/2
of 1 per cent of the securities of such issuer and (ii) in the
aggregate such persons own or would own more than 5% of such
securities;
10) Make loans except by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (4) above) which are either publicly distributed or
customarily purchased by institutional investors;
11) Invest in companies for the purpose of exercising control of
management.
These investment limitations are considered at the time investment
securities are purchased.
Because of its investment objective and policies, the Fund will concentrate
more than 25% of its assets in the mutual fund industry. However, each of the
underlying mutual funds in which STAR will invest will not concentrate 25% or
more of its total assets in any one industry.
REPURCHASE AGREEMENTS
Each Portfolio of the Fund (and each of the underlying Vanguard Funds) may
invest in repurchase agreements with commercial banks, brokers or dealers to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which a Portfolio acquires a money market instrument (generally
a security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by a Portfolio and
is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a Portfolio (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by a Portfolio's custodian bank until repurchased. In
addition, the Fund's Trustees will monitor each Portfolio's repurchase agreement
transactions generally and will establish guidelines and standards for review of
the creditworthiness of any bank, broker or dealer party to a repurchase
agreement with a Portfolio. No more than an aggregate of 15% of each Portfolio's
assets, at the time of investment, will be invested in repurchase agreements
having maturities longer than seven days and securities subject to legal or
contractual restrictions on resale for which there are no readily available
market quotations. From time to time, the Fund's Board of Directors may
determine that certain restricted securities known as Rule 144A securities are
liquid and not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by a Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that a Portfolio
may not be able to substantiate its interest in the underlying security and may
be deemed an unsecured creditor of the other party to the agreement. While the
Fund's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
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<PAGE> 144
MANAGEMENT OF VANGUARD STAR FUND
OFFICERS AND TRUSTEES
The Fund's officers, under the supervision of the Board of Trustees, manage
its day-to-day operations and are responsible for determining what portion of
the Fund's assets will be invested in each of the available Vanguard Funds
pursuant to the Fund's investment objective and policies. The Trustees, which
will be elected by shareholders, set broad policies for the Fund and choose its
officers.
A list of the Trustees and officers of the Fund and a brief statement of
their present positions and principal occupations during the past five years is
set forth below.
The mailing address of the Trustees and officers of the Fund is Post Office
Box 876, Valley Forge, PA 19482.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, and Trustee ALFRED M. RANKIN, JR., Trustee
Chairman, and Director of The Vanguard Chairman, President and Chief Executive
Group, Inc., and each of the investment Officer of NACCO Industries, Inc.; Director of
companies in The Vanguard Group; Director of The BFGoodrich Company, The Standard
The Mead Corporation, and General Accident Products Company and The Reliance Electric
Insurance. Company.
JOHN J. BRENNAN, President, Chief Executive JOHN C. SAWHILL, Trustee
Officer & Trustee* President and Chief Executive Officer, The
President, Chief Executive Officer and Nature Conservancy; formerly, Director and
Director of The Vanguard Group, Inc., and of Senior Partner, McKinsey & Co.; President,
each of the investment companies in The New York University; Director of Pacific Gas
Vanguard Group. and Electric Company and NACCO Industries.
ROBERT E. CAWTHORN, Trustee JAMES O. WELCH, JR., Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Retired Chairman of Nabisco Brands, Inc.,
Director of Sun Company, Inc. retired Vice Chairman and Director of RJR
BARBARA BARNES HAUPTFUHRER, Trustee Nabisco; Director of TECO Energy, Inc.
Director of The Great Atlantic and Pacific J. LAWRENCE WILSON, Trustee
Tea Company, ALCO Standard Corp., Raytheon Chairman and Chief Executive Officer of Rohm &
Company, Knight-Ridder, Inc., and Haas Company; Director of Cummins Engine
Massachusetts Mutual Life Insurance Co. and Company, Inc. and Trustee of Vanderbilt
Trustee Emerita of Wellesley College. University and of the Culver Educational
BRUCE K. MACLAURY, Trustee Foundation.
President, The Brookings Institution; RAYMOND J. KLAPINSKY, Secretary*
Director of American Express Bank, Ltd., The Senior Vice President and Secretary of The
St. Paul Companies, Inc. and Scott Paper Vanguard Group, Inc.; Secretary of each of the
Company. investment companies in The Vanguard Group.
BURTON G. MALKIEL, Trustee RICHARD F. HYLAND, Treasurer*
Chemical Bank Chairman's Professor of Treasurer of The Vanguard Group, Inc. and of
Economics, Princeton University; Director of each of the investment companies in The
Prudential Insurance Co. of America, Amdahl Vanguard Group.
Corporation, Baker Fentress & Co., The
Jeffrey Co., and Southern New England KAREN E. WEST, Controller*
Communications Company. Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies
in The Vanguard Group.
---------------
*Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
1940.
</TABLE>
The Trustees and officers of the Fund will receive no remuneration from the
Fund. However, the Trustees are also Directors (Trustees) of The Vanguard Group,
Inc. ("Vanguard") and of the Fund's underlying investment companies in The
Vanguard Group (the "Vanguard Funds"). Each Vanguard Fund pays its unaffiliated
Directors (Trustees) an annual fee plus a proportionate share of travel and
other expenses incurred in attending Board meetings. The officers are paid by
Vanguard which, in turn, is reimbursed by each Vanguard Fund for its
proportionate share of officers' salaries and benefits.
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<PAGE> 145
THE VANGUARD GROUP
Through their jointly-owned subsidiary, Vanguard, the Vanguard Funds obtain
at cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard Funds.
Vanguard employs a supporting staff of management personnel needed to
provide the requisite services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund pays its share of
Vanguard's net expenses which are allocated among the funds under procedures
approved by the Directors (Trustees) of each fund. In addition, each fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Trustees of the Fund also are Directors of Vanguard. The officers of
the Fund and the Vanguard Funds are also officers and employees of Vanguard. No
officer or employee is permitted to own any securities of any external adviser
for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group, Inc. was established and operates under a Funds'
Service Agreement which was approved by the shareholders of each of the Vanguard
funds. The amounts which each of the Funds have invested are adjusted from time
to time in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. The Fund's
Service Agreement for all Funds provides as follows: (a) each Vanguard Fund may
invest up to 0.40% of its current net assets in Vanguard and (b) there is no
other limitation on the amount that each Vanguard Fund may contribute to
Vanguard's Capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard Funds by third parties.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors and officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Fund, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard funds based
upon each Fund's sales for the preceding 24 months relative to the total sales
of the Funds as a Group. Provided, however, that no fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard provides investment advisory services to Vanguard
Money Market Reserves, Vanguard Institutional Money Market Portfolio, Vanguard
Municipal Bond Fund, several Portfolios of Vanguard Fixed Income Securities
Fund, Vanguard Institutional Index Fund, Vanguard International Equity Index
Fund, Vanguard Balanced Index Fund, Vanguard Bond Index Fund, several Portfolios
of Vanguard Variable Insurance Fund, Vanguard Admiral Funds, Vanguard California
Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-
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<PAGE> 146
Free Fund; Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund, Vanguard Index Trust, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, Vanguard Tax-Managed Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts. The compensation and other expenses of this staff are
paid by the Portfolios and Funds utilizing these services.
SPECIAL SERVICING AGREEMENT The Fund has entered into a Special Servicing
Agreement with Vanguard under which Vanguard will provide management,
administrative, distribution and other services and will act as the Fund's
Dividend Disbursing, Shareholder Servicing and Transfer Agent. The Fund will not
be a party to the Funds' Service Agreement described above, and therefore will
not become a member of The Vanguard Group of Investment Companies. The Special
Servicing Agreement gives authority to the Fund to utilize the Vanguard name so
long as (1) the Special Servicing Agreement is in effect, and (2) the assets of
each Portfolio are invested pursuant to the Fund's objective and policies in
shares of the various Vanguard Funds (except for such cash or cash items as the
Trustees may determine to maintain from time to time to meet redemptions). The
Special Servicing Agreement provides that Vanguard will utilize assets deposited
with the custodian of each Portfolio from the sale of the Portfolio's shares to
promptly purchase shares of the specified Vanguard Funds, and will undertake
redemption or exchange of such shares of the Vanguard Funds in the manner
provided by the objective and policies of the Portfolio.
The allocation of the assets of each Portfolio will be made by officers of
the Fund pursuant to the instructions of the Fund's Board of Trustees and as set
forth in the Fund's investment objective, policies and restrictions. The
Declaration of Trust authorizes the Trustees to retain an investment adviser if
they determine that such action is in the best interests of the shareholders of
each Portfolio, and that the compensation called for under the investment
advisory agreement is reasonable when considered in connection with the advisory
fees, if any, paid by the Vanguard Funds in which the Fund has invested its
assets. However, the Trustees have no present intention to retain an investment
adviser. In accordance with the provisions of the Investment Company Act of
1940, approval of the shareholders would be required for such an advisory
agreement.
The Special Servicing Agreement provides that the Fund will pay, on an
"out-of-pocket" basis, for services to be rendered by Vanguard. The Fund will
also bear the expenses of services provided by outside parties, including
auditors, the custodian and outside legal counsel, as well as taxes and other
direct expenses of the Fund. However, the Agreement provides that the expenses
of the Fund will be offset in whole, or in part, by reimbursement from Vanguard
for (a) contributions made by the Fund to the cost of operating the Vanguard
Funds in which the Fund invests in, and (b) certain savings in administrative
and marketing costs that Vanguard is expected to derive from the operation of
the Fund. The Trustees believe that the reimbursements to be made by Vanguard to
STAR should be sufficient to offset most, if not all, the expenses incurred by
each Portfolio. Therefore, the Portfolios are expected to operate at a very low,
or zero, expense ratio. For the fiscal year ended December 31, 1995, the STAR
Portfolio had an expense ratio of zero, and the same is expected to be the case
for the other four Portfolios of the Fund.
While the Fund's shareholders will not pay duplicate capital contribution
charges to Vanguard (the Fund will not be a member of The Vanguard Group of
Investment Companies), the shareholders of each Portfolio will indirectly bear
their fair share of the costs of maintaining and operating Vanguard since the
Portfolios, as shareholders of the selected Vanguard Funds, will be subject to
the proportionate contributions of those underlying Funds. Since the Fund will
not be a member fund of The Vanguard Group of Investment Companies it will
benefit, as a shareholder of the selected Vanguard funds, only from such
cost-sharing reductions in proportion to its interest in such Vanguard Funds.
INVESTMENT ADVISORY SERVICES
Vanguard STAR Fund will not employ an investment adviser and therefore, it
will pay no advisory fees. As a shareholder of an underlying Fund, the
Portfolios will bear their proportionate share of the investment advisory fees
paid by those Funds. The following is a description of the investment advisory
agreements for each underlying Vanguard Fund.
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<PAGE> 147
VANGUARD/WINDSOR FUND
Wellington Management Company ("WMC") serves as investment adviser to
Vanguard/Windsor Fund. Vanguard/Windsor Fund pays WMC a Basic Fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to Vanguard/Windsor Fund's average month-end
net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $200 million.................................. .350%
Next $250 million................................... .275%
Next $300 million................................... .200%
Over $750 million................................... .150%
</TABLE>
The Basic Fee may be increased or decreased by applying an adjustment
formula based on Vanguard/Windsor Fund's investment performance. Such formula
provides for an increase or decrease of the Basic Fee in an amount equal to .10%
per annum (.025% per quarter) of the average month-end net assets of
Vanguard/Windsor Fund if Vanguard/Windsor Fund's investment performance for the
thirty-six months preceding the end of the quarter is twelve percentage points
or more above or below, respectively, the investment record of the Standard &
Poor's Daily Stock Index of 500 Common Stocks (the "S&P Index") for the same
period; or by an amount equal to .05% per annum (.0125% per quarter) if
Vanguard/Windsor Fund's investment performance for such thirty-six months is six
or more but less than twelve percentage points above or below, respectively, the
investment record of the S&P Index for the same period.
During the fiscal years ended October 31, 1993, 1994 and 1995,
Vanguard/Windsor Fund paid the following advisory fees:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Basic Fee....................................... $15,547,000 $17,236,000 $19,022,000
Increase (Decrease) for Performance
Adjustment.................................... 4,136,000 9,213,000 7,752,000
----------- ----------- -----------
Total........................................... $19,683,000 $26,449,000 $26,774,000
=========== =========== ===========
</TABLE>
VANGUARD/MORGAN GROWTH FUND
Vanguard/Morgan Growth Fund ("Morgan") employs three separate investment
advisers each of whom manages the investment and reinvestment of a portion of
the Fund's assets. Additionally, Vanguard's Core Management Group manages
approximately 10% of Morgan's assets on an at-cost basis.
WELLINGTON MANAGEMENT COMPANY
Morgan employs Wellington Management Company ("WMC") under an investment
advisory agreement dated as of April 1, 1996 to manage the investment and
reinvestment of approximately 39% of the assets of the Fund and to continuously
review, supervise and administer the Fund's investment program. WMC discharges
its responsibilities subject to the control of the officers and Directors of the
Fund.
Morgan pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $500 million.................................. .175%
Next $500 million................................... .100%
Over $1 billion..................................... .075%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of
Morgan managed by WMC relative to the investment record of The Growth Fund Stock
Index (the "Index") which is described in the Prospectus.
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<PAGE> 148
The following table sets forth the incentive/penalty fee rates payable by
the Fund to WMC under the proposed investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE GROWTH FUND STOCK INDEX ADJUSTMENT*
--------------------------------------------------------------- ------------------
<S> <C>
Less than -12% -0.50 X Basic Fee
Between -12% and -6% -0.25 X Basic Fee
Between -6% and 6% 0.00 X Basic Fee
Between 6% and 12% +0.25 X Basic Fee
More than 12% +0.50 X Basic Fee
</TABLE>
- ---------------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
RELATED INFORMATION CONCERNING WMC
WMC is a professional investment counseling firm which provides investment
services to investment companies, other institutions and individuals. Among the
clients of WMC are more than 10 of the other investment companies of The
Vanguard Group. As of December 31, 1995, WMC held discretionary management
authority with respect to more than $108 billion of assets. WMC and its
predecessor organizations have provided investment advisory services to
investment companies since 1933 and to investment counseling clients since 1960.
WMC is a Massachusetts general partnership of which the following persons are
managing partners: Messrs. Robert W. Doran, Duncan M. McFarland and John R.
Ryan.
During the last three fiscal years, the Fund paid the following advisory
fees to WMC:
<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ---------
<S> <C> <C> <C>
Basic Fee............................................ $1,198,679 $ 861,873 $ 892,794
Increase (Decrease) for Performance Adjustment....... (235,201) (351,876) (321,731)
---------- --------- ---------
Total................................................ $ 963,478 $ 509,997 $ 571,063
========== ========= =========
</TABLE>
These fees were paid pursuant to the terms of a previous investment
advisory agreement, which called for a higher rate of fees.
FRANKLIN PORTFOLIO ASSOCIATES TRUST
Morgan employs Franklin Portfolio Associates Trust ("FPA") under an
investment advisory agreement dated as of April 1, 1996 to manage the investment
and reinvestment of approximately 33% of Morgan's assets. FPA discharges its
responsibilities subject to the control of the Officers and Directors of Morgan.
Morgan pays FPA an advisory fee by applying various percentage rates to the
average net assets of Morgan managed by FPA. The fee schedule is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------- -----
<S> <C>
First $100 million................................. 0.25%
Next $200 million.................................. 0.20%
Next $200 million 0.15%
Over $500 million.................................. 0.10%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the Fund relative
to the investment record of the Index. Such incentive/penalty fee provides for
an increase or decrease in FPA's basic fee in an amount equal to .100% per annum
(.025% per quarter) of the average month-end net assets of the portion of Morgan
managed by FPA if the investment performance of that portion of Morgan for the
thirty-six months preceding the end of the quarter is six percentage points or
more above or below, respectively, the investment record of the Index for the
same period.
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<PAGE> 149
The following table sets forth the incentive/penalty fee rates payable by
Morgan to FPA under the proposed investment advisory agreement:
<TABLE>
<CAPTION>
THREE YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. THE PENALTY (-) FEE
INDEX RATE
------------------------------------------------------------- ---------------------
<S> <C>
+6% or more above............................................ +.100%
Between +6% and -6%.......................................... -0-
-6% or more below............................................ -.100%
</TABLE>
During the fiscal years ended December 31, 1993, 1994 and 1995, Morgan paid
FPA the following advisory fees:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Basic Fee............................................... $470,526 $708,874 $848,530
Increase (Decrease) for Performance Adjustment.......... -- -- 74,545
-------- -------- --------
Total................................................... $470,526 $708,874 $923,075
========= ========= =========
</TABLE>
These fees were paid pursuant to the terms of a previous investment
advisory agreement, which called for a higher rate of fees.
RELATED INFORMATION CONCERNING FPA
FPA is a Massachusetts business Trust. The shares of FPA are owned by
Mellon Financial Service Corporation, a holding company of Mellon Bank
Corporation. FPA is managed by a Board of Trustees consisting of Messrs. John J.
Nagorniak, Chairman, Donald A. McMullen, Jr. and G. Christian Lantzsch.
FPA is a professional investment counseling firm which specializes in the
management of common stock portfolios through the use of quantitative investment
models. As of December 31, 1995, FPA provided investment advisory services with
respect to approximately $8.34 billion of clients assets, including
approximately $909 million for Vanguard Quantitative Portfolios, Inc., another
mutual fund member of The Vanguard Group. During the year ended December 31,
1995, Vanguard Quantitative Portfolios, Inc. paid FPA an annual advisory fee
equal to .17 of 1% before an increase of .01 of 1% based on performance.
HUSIC CAPITAL MANAGEMENT
Morgan also employs Husic Capital Management ("Husic") under an investment
advisory agreement dated as of September 24, 1993 to manage the investment and
reinvestment of approximately 13% of Morgan's assets. Husic discharges its
responsibilities subject to the control of the Officers and Directors of Morgan.
For the services provided by Husic under the investment advisory agreement
Morgan will pay Husic a basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the average month-end net assets of the Husic Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $25 million................................... 0.40%
Next $125 million................................... 0.35%
Next $350 million................................... 0.25%
Next $500 million................................... 0.20%
Over $1 billion..................................... 0.15%
</TABLE>
Effective with the quarter ending September 30, 1994, the basic fee paid to
Husic, as provided above, may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the Husic Portfolio
relative to the investment record of the Growth Fund Stock Index ("Growth
Index"). Under the
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<PAGE> 150
incentive/penalty fee schedule, the basic fee payable to Husic may be increased
or decreased by as much as 75% of the basic fee depending on the investment
performance of the equity investment managed by Husic.
The incentive/penalty fee rates will be determined by measuring the
investment performance of the Husic Portfolio relative to the investment record
of the Index in accordance with the following table:
<TABLE>
<CAPTION>
ANNUAL INCENTIVE (+)/PENALTY (-)
FEE RATE
--------------------------------
THREE YEAR PERFORMANCE FIRST ASSETS
DIFFERENTIAL VS. THE $200 MILLION IN EXCESS
GROWTH INDEX OF ASSETS OF $200 MILLION
- ------------------------------------------------------------------ ------------ ---------------
<S> <C> <C>
+12% points or more above......................................... 175.0% 150.0%
Between +6% points and +12% points above.......................... 137.5% 125.0%
Between +6% points and -6% points................................. 100.0% 100.0%
Between -6% points and -12% points................................ 62.5% 75.0%
- -12% points or more below......................................... 25.0% 50.0%
</TABLE>
Until the Quarter ending September 30, 1996, the incentive/penalty fee for
Husic will be calculated according to the following transition rules:
(a) Through September 30, 1996. Until the quarter ending September 30,
1996, the incentive/penalty fee will be computed based upon a comparison of the
investment performance of the Husic Portfolio and that of the Growth Index over
the number of months that have elapsed between October 1, 1993 and the end of
the quarter for which the fee is computed. The number of percentage points by
which the investment performance of the Husic Portfolio must exceed or fall
below the investment record of the Growth Index for the quarters ending during
this period are as follows:
<TABLE>
<CAPTION>
NUMBER OF
QUARTER ENDING PERCENTAGE POINTS
----------------------------------------- -----------------
<S> <C>
March 31, 1995........................... 6
June 30, 1995............................ 7
September 30, 1995....................... 8
December 31, 1995........................ 9
March 31, 1996........................... 10
June 30, 1996............................ 11
September 30, 1996....................... 12
</TABLE>
(b) On and After September 30, 1996. For the quarter ending September 30,
1996 and thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the fee is
being computed and the number of percentage points used shall be 12.
The "investment performance of the Husic Portfolio," the "Husic Portfolio
unit value" and the "investment record of the Index" will be calculated in the
same manner as set forth under the discussion of the WMC Agreement on page 6.
For the purposes of determining the incentive/penalty fee, the net assets
of the Husic Portfolio will be averaged over the same period as the investment
performance of the Husic Portfolio and the investment record of the Growth Index
are computed.
The formula used to determine the performance adjustments differs from the
view taken by the staff of the Securities and Exchange Commission. For a more
detailed discussion, see page 7. The Board of Directors of the Fund believes
that the performance adjustments, as included in the proposed agreement with R&R
are appropriate although not within the +/-10 percentage point per year range
suggested in SEC Release No. 7113. Under the proposed agreement, the maximum
performance adjustment is made at a difference of approximately +/-2 percentage
points per year.
The agreement with Husic dated September 24, 1993, will continue until
September 23, 1995. After this date the agreement is renewable for successive
one year periods, as described on page 11.
9
<PAGE> 151
During the fiscal years ending December 31, 1993, 1994 and 1995, Morgan
Fund paid Husic the following advisory fees:
<TABLE>
<CAPTION>
1993 1994 1995
-------- --------- ---------
<S> <C> <C> <C>
Basic Fee............................................. $140,254 $ 495,619 $ 550,247
Increase (Decrease) for Performance Adjustment........ -- (181,969) (373,636)
-------- --------- ---------
Total................................................. $140,254 $ 313,650 $ 176,611
========= ========= =========
</TABLE>
The Fund also paid an investment advisory fee to Roll and Ross Asset
Management Corporation ("R&R"), 585 Skippack Pike, Blue Bell, PA 19422, for the
period January 1, 1993 to June 30, 1993 when R&R resigned as investment adviser
to the Fund. The Fund paid R&R an advisory fee of $113,678 after a decrease of
$86,664 based on performance.
RELATED INFORMATION CONCERNING HUSIC
Husic Capital Management, 555 California Street, Suite 2900, San Francisco,
California 94104, a California limited partnership founded in 1986, provides
investment advisory services to investment companies, other institutions, and
individuals. Frank J. Husic, managing partner, is a controlling person of Husic.
Husic's general partner is Frank J. Husic & Co., a California corporation that
is wholly owned by Frank J. Husic. As of December 31, 1995, Husic provided
investment advisory services to clients having assets with an approximate value
of $3.2 billion.
The agreements with WMC, FPA and Husic continue until September 23, 1995.
The agreements are renewable for successive one-year periods, only if each
renewal is specifically approved by a vote of the Fund's Board of Directors,
including the affirmative votes of a majority of the Directors who are not
parties to the contract or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party, cast in person at a meeting called for
the purpose of considering such approval. In addition, the question of
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. The agreements are
automatically terminated if assigned, and may be terminated without penalty at
any time (1) either by vote of the Board of Directors of the Fund or by vote of
its outstanding voting securities on 60 days' written notice to the Adviser, or
(2) by the Advisers upon 90 days' written notice to the Fund.
VANGUARD FIXED INCOME SECURITIES FUND
Wellington Management Company serves as investment adviser to the GNMA
Portfolio, the Long-Term Corporate Portfolio and the High Yield Bond Portfolio
of Vanguard Fixed Income Securities Fund. The Portfolios of the Fund will invest
a portion of their assets only in the GNMA and Long-Term Corporate Portfolios.
Under the investment advisory agreement between WMC and Vanguard Fixed
Income Securities Fund, the three Portfolios pay WMC an aggregate fee at the end
of each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the aggregate average month-end net assets
of the three Portfolios for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------- -----
<S> <C>
First $2.5 billion................................. .125%
Next $2.5 billion.................................. .100%
Next $2.5 billion.................................. .075%
Over $7.5 billion.................................. .050%
</TABLE>
The advisory fee is based on the total assets of the three Portfolios and
is allocated to each Portfolio based on the relative net assets of each.
Provided, however, that following such allocation: (a) the fee paid by the
Long-Term Corporate Portfolio is then reduced by 50%; and (b) the fee paid by
the GNMA Portfolio is then reduced by 75%.
10
<PAGE> 152
During the fiscal years ended January 31, 1994, 1995 and 1996 the GNMA and
Long-Term Corporate Portfolios paid WMC the following advisory fees:
<TABLE>
<CAPTION>
PORTFOLIO 1994 1995 1996
--------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
GNMA............................................... $1,454,000 $1,286,000 $1,181,000
========== ========== ==========
Long-Term Corporate................................ $1,252,000 $1,131,000 $1,118,000
========== ========== ==========
</TABLE>
SHORT-TERM CORPORATE AND INTERMEDIATE-TERM CORPORATE PORTFOLIOS
The Short-Term Corporate and Intermediate-Term Corporate Portfolios (as
well as four U.S. Treasury Portfolios that are not utilized by the Fund) receive
all investment advisory services on an "internalized," at-cost, basis from an
experienced investment management staff employed directly by Vanguard. This
staff also provides investment advisory services to Vanguard Money Market
Reserves, Vanguard Bond Market Fund, Vanguard Municipal Bond Fund, Vanguard
California Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New
Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard New York Insured
Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund and the Money Market and
High-Grade Bond Portfolios of Vanguard Variable Insurance Fund. The compensation
and other expenses of the staff are allocated among the Portfolios of each of
the Funds listed above. During the fiscal years ended January 31, 1994, 1995 and
1996, the Short-Term Corporate Portfolio's share of these expenses totaled
approximately $298,000, $391,000 and $408,000, respectively. During the fiscal
year ended January 31, 1995 and 1996 the Intermediate-Term Corporate Portfolio's
share of these expenses totaled approximately $10,000 and $28,000.
The investment management staff is supervised by the senior officers of the
Fund. The senior officers, who are also officers of Vanguard, Vanguard Money
Market Reserves, Vanguard Institutional Portfolios, Vanguard Bond Index Fund,
Vanguard Municipal Bond Fund, Vanguard State Tax-Exempt Funds, and Vanguard
Variable Insurance Fund, are directly responsible to the Board of Directors of
the Fund. The Board of Directors, elected annually by shareholders, sets broad
policies for the Fund and chooses its officers.
VANGUARD/WINDSOR II
Vanguard/Windsor II has entered into an investment advisory agreement with
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage approximately 72%
of the assets of Vanguard/Windsor II. Under this agreement BHM&S manages the
investment and reinvestment of the assets of Vanguard/Windsor II assigned to it
and continuously reviews, supervises and administers the investment program of
Vanguard/Windsor II. BHM&S discharges its responsibilities subject to the
control of the officers and Trustees of that Company.
Vanguard/Windsor II pay BHM&S a fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the aggregate average month-end net assets of
Vanguard/Windsor II managed by BHM&S for the quarter:
<TABLE>
<CAPTION>
NET RATE RATE
--------------------------------------------------- -----
<S> <C>
First $200 million................................. .300%
Next $300 million.................................. .200%
Next $500 million.................................. .150%
Over $1 billion.................................... .125%
</TABLE>
INCENTIVE/PENALTY FEE. Effective with the quarter ending April 30, 1996,
the basic fee paid to BHM&S, as provided above, will be increased or decreased
by applying an incentive/penalty fee based on the investment performance of the
assets of Vanguard/Windsor II managed by BHM&S (the "BHM&S Portfolio") over a
trailing 36-month period relative to that of the Standard & Poor's/ BARRA Value
Index (the "BARRA Value Index"). Such incentive/penalty fee provides for (1) a
25% increase or decrease in the basic advisory fee if the investment performance
of the BHM&S Portfolio for the 36 months preceding the end of the quarter is
11
<PAGE> 153
9 percentage points or more above or below, respectively, the investment record
of the BARRA Value Index for the same period; or (2) a 15% increase or decrease
in the basic advisory fee if the investment performance of the BHM&S Portfolio
for such 36 months is 6 or more but less than 9 percentage points above or
below, respectively, the investment record of the BARRA Value Index for the same
period.
The following table illustrates the incentive/penalty fee payable by
Vanguard/Windsor II to BHM&S under the new agreement:
<TABLE>
<CAPTION>
CUMULATIVE
THREE YEAR PERFORMANCE ANNUAL INCENTIVE/
DIFFERENTIAL VS THE BARRA VALUE INDEX PENALTY FEE ADJUSTMENT
------------------------------------------------------------------ ------------------------
<S> <C>
Less than or equal to -9% points.................................. 0.75% X Basic Fee
Less than or equal to -6% points but greater than -9% points...... 0.85% X Basic Fee
Less than +6% points but greater than -6% points (the
"Benchmark").................................................... Basic Fee
Greater than or equal to +6% points but less than +9% points...... 1.15% X Basic Fee
Greater than or equal to +9% points............................... 1.25% X Basic Fee
</TABLE>
Until the quarter ending April 30, 1996, the incentive/penalty fee will be
calculated based on a comparison of the investment performance of the BHM&S
Portfolio and that of the BARRA Value Index over the number of months that have
elapsed between May 1, 1993 and the end of the quarter for which the fee is
computed. The number of percentage points by which the investment performance of
the BHM&S Portfolio must exceed or fall below that of the BARRA Value Index will
increase proportionately from 3 percentage points and 2 percentage points,
respectively, for the twelve months ended April 30, 1994 to 9 percentage points
and 6 percentage points, respectively for the thirty-six months ended April 30,
1996.
The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite Stock Price Index with lower than average ratios of market price to
book value. These types of stocks are often referred to as "value" stocks.
The investment performance of the BHM&S Portfolio, for any period,
expressed as a percentage of the "BHM&S Portfolio Unit Value" at the beginning
of such period, will be the sum of: (i) the change in the BHM&S Portfolio unit
value during such period; (ii) the unit value of the Fund's cash distributions
from the BHM&S Portfolio's net investment income and realized net capital gains
(whether long-term or short-term) having an ex-dividend date occurring within
such period; and (iii) the unit value of capital gains taxes paid or accrued
during such period by Vanguard/Windsor II for undistributed realized long-term
capital gains realized from the BHM&S Portfolio.
The "BHM&S Portfolio Unit Value" will be determined by dividing the total
net assets of the BHM&S Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the BHM&S Portfolio will equal the
total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the BHM&S Portfolio, the number of units
of the BHM&S Portfolio will be adjusted based on the unit value of the BHM&S
Portfolio on the day such changes are executed.
The investment record of the BARRA Value Index will be calculated quarterly
by (i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i). For any period, therefore, the investment record of the
BARRA Value Index will be the compounded quarterly returns of the BARRA Value
Index.
For the purposes of determining the incentive/penalty fee adjustment, the
net assets of the BHM&S Portfolio will be averaged over the same period as the
investment performance of the BHM&S Portfolio and the investment record of the
BARRA Value Index are computed.
During the fiscal years ended October 31, 1993, 1994 and 1995
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $6,488,000,
$7,518,000 and $8,514,842, respectively.
On November 1, 1991, Vanguard/Windsor II upon shareholder approval, added
Equinox Capital Management ("Equinox") and Tukman Capital Management ("Tukman")
to manage the investment and reinvestment
12
<PAGE> 154
of a portion of its assets (approximately 10% each). Additionally Vanguard's
Core Management Group was added to manage approximately 8% of the
Vanguard/Windsor II's assets as of that date. Tukman, Equinox and Vanguard's
Core Management Group discharge their respective responsibilities subject to the
control of the Directors and Officers of the Fund.
Equinox is a professional investment counseling firm founded in 1989. As of
December 31, 1995, Equinox provided investment advisory services with respect to
approximately assets of $5.1 billion. Ronald J. Ulrich, Director and President,
Edward E. Murphy and David Connor are the principal investment officers of
Equinox. Equinox has had no experience in serving as an investment adviser to an
investment company.
Under the terms of an investment advisory agreement dated November 1, 1991
Windsor II pays Equinox an advisory fee by applying an annual percentage rate to
the portion of Vanguard/Windsor II's average month-end net assets managed by
Equinox. The fee schedule is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------- -----
<S> <C>
First $100 million................................. 0.300%
Next $300 million.................................. 0.200%
Over $400 million.................................. 0.150%
</TABLE>
Effective with the quarter ending October 31, 1994, the basic fee paid to
Equinox, as provided above, may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Equinox relative to the investment
record of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500").
Such incentive/penalty fee provides for (i) a 50% increase or decrease in the
basic advisory fee if the investment performance of the Equinox Portfolio for
the 36 months preceding the end of the quarter is 9 percentage points or more
above or below, respectively, the investment record of the S&P 500 for the same
period; or (ii) a 25% increase or decrease in the basic advisory fee if the
investment performance of the Equinox (the "Equinox Portfolio") for such 36
months is 4.5 or more but less than 9 percentage points above or below,
respectively, the investment record of the S&P 500 for the same period.
The following table sets forth the incentive/penalty fee payable by
Vanguard/Windsor II to Equinox under the new investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE
THREE YEAR PERFORMANCE ANNUAL INCENTIVE
DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT
------------------------------------------------------------------- ----------------------
<S> <C>
Less than or equal to -9% points................................... 0.50 X Basic Fee
Less than or equal to -4.5% points but greater than -9% points..... 0.75 X Basic Fee
Less than +4.5% points but greater than -4.5% points............... Basic Fee
Greater than or equal to +4.5% points but less than +9% points..... 1.25 X Basic Fee
Greater than or equal to +9% points................................ 1.50 X Basic Fee
</TABLE>
The investment performance of the Equinox Portfolio, for any period,
expressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning
of such period, will be the sum of: (i) the change in the Equinox Portfolio unit
value during such period; (ii) the unit value of the Vanguard/Windsor II's cash
distributions from the Equinox Portfolio net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard/Windsor II for undistributed
realized long-term capital gains realized from the Equinox Portfolio.
The "Equinox Portfolio Unit Value" will be determined by dividing the total
net assets of the Equinox Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Equinox Portfolio will equal
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the Equinox Portfolio, the number of units
of the Equinox Portfolio will be adjusted based on the unit value of the Equinox
Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in
13
<PAGE> 155
the S&P 500 at the beginning of the quarter, and (ii) adding the values
discussed in (i). For any period, therefore, the investment record of the S&P
500 will be the compounded quarterly returns of the S&P too.
For the purposes of determining the incentive/penalty fee, the net assets
of the Equinox Portfolio will be averaged over the same period as the investment
performance of the Equinox Portfolio and the investment record of the S&P 500
are computed.
During the fiscal years ending October 31, 1993, 1994, and 1995
Vanguard/Windsor II paid advisory fees to Equinox of approximately $1,171,000,
$1,424,000 and $1,681,435, respectively.
Tukman is a professional investment counseling firm founded in 1980. As of
December 31, 1995 Tukman provided investment advisory services with respect to
assets of approximately $2.9 billion. Melvin T. Tukman, President and Director,
and Daniel L. Grossman, Vice President serve as the firm's principal investment
professionals. Tukman has had no experience in serving as an investment adviser
to an investment company.
Under the terms of an investment advisory agreement dated November 1, 1991
the Fund pays Tukman an investment advisory fee by applying a quarterly rate,
based on the following annual percentage rates, to the average month-end assets
of the portion of the Vanguard/Windsor II's assets managed by Tukman:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------- ----
<S> <C>
First $25 million.................................... .40 %
Next $125 million.................................... .35 %
Next $350 million.................................... .25 %
Next $500 million.................................... .20 %
Over $1 billion...................................... .15 %
</TABLE>
The basic fee paid to Tukman, as provided above, may be increased or
decreased by applying an incentive/penalty fee based on the investment
performance of the portion of Vanguard/Windsor II's assets managed by Tukman
(the "Tukman Portfolio") relative to the investment record of the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"). Such incentive/penalty fee
provides for (i) a 50% increase or decrease in the basic advisory fee if the
investment performance of the Tukman Portfolio for the 36 months preceding the
end of the quarter is 12 percentage points or more above or below, respectively,
the investment record of the S&P 500 for the same period; or (ii) a 25% increase
or decrease in the basic advisory fee if the investment performance of the
Tukman Portfolio for such 36 months is 6 or more but less than 12 percentage
points above or below, respectively, the investment record of the S&P 500 for
the same period.
The following table sets forth the incentive/penalty fee payable by
Vanguard/Windsor II to Tukman under the new investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE
THREE YEAR PERFORMANCE ANNUAL INCENTIVE
DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT
------------------------------------------------------------------- ----------------------
<S> <C>
Less than or equal to -12% points.................................. 0.50 X Basic Fee
Less than or equal to -6% points but greater than -12% points...... 0.75 X Basic Fee
Less than +6% points but greater than -6% points................... Basic Fee
Greater than or equal to +6% points but less than +12% points...... 1.25 X Basic Fee
Greater than or equal to +12% points............................... 1.50 X Basic Fee
</TABLE>
The investment performance of the Tukman Portfolio, for any period,
expressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning
of such period, will be the sum of: (i) the change in the Tukman Portfolio unit
value during such period; (ii) the unit value of Vanguard/Windsor II's cash
distributions from the Tukman Portfolio net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard/Windsor II for undistributed
realized long-term capital gains realized from the Tukman Portfolio.
The "Tukman Portfolio Unit Value" will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman
14
<PAGE> 156
Portfolio will equal the total shares outstanding of Vanguard/Windsor II. After
such initial date, as assets are added to or withdrawn from the Tukman
Portfolio, the number of units of the Tukman Portfolio will be adjusted based on
the unit value of the Tukman Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.
For the purposes of determining the incentive/penalty fee, the net assets
of the Tukman Portfolio will be averaged over the same period as the investment
performance of the Tukman Portfolio and the investment record of the S&P 500 are
computed.
During the fiscal year ended October 31, 1993, 1994 and 1995
Vanguard/Windsor II paid advisory fees to Tukman of approximately $1,503,000,
$1,825,000 and $2,184,838, respectively.
In April 1972, the Securities and Exchange Commission ("SEC") issued
Release No. 7113 under the Investment Company Act of 1940 to call attention of
directors and investment advisers to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a "rule of thumb"
the performance difference should be at least +/- 10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made". The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Directors of Windsor II has fully
considered the SEC Release and believes that the performance adjustments as
included in the proposed agreements with Equinox and Tukman are entirely
appropriate although not within the +/- 10 percentage points per year range
suggested in the Release. Under the Fund's investment advisory agreements, the
maximum performance adjustments are made at a difference of +/- 12 and +/- 9
percentage points from the performance of the index over a thirty-six month
period, which would effectively be the equivalent of approximately +/- 4 and +/-
3 percentage points difference per year.
The investment advisory agreements with Equinox and Tukman will continue
until October 31, 1995. The investment advisory agreement with BHM&S continues
until April 30, 1996. The agreements will be renewable thereafter for successive
one-year periods, only if each renewal is specifically approved by a vote of
Vanguard/Windsor II's Board of Directors, including the affirmative votes of a
majority of the Directors who are not parties to the contracts or "interested
persons" (as defined in the Investment Company Act of 1940) of any such party,
cast in person at a meeting called for the purpose of considering such approval.
In addition, the question of the continuance of the agreements may be presented
to the shareholders of Vanguard/Windsor II. In such event, such continuance
shall be effected, only if approved by the affirmative vote of a majority of the
outstanding voting securities of Vanguard/Windsor II.
Vanguard's Core Management Group provides investment advisory services on
an at-cost basis with respect to a portion of the Vanguard/Windsor II's assets
(currently approximately 8%). The Core Management Group also provides investment
advisory services to several Vanguard Funds, including Vanguard Index Trust,
Vanguard Balanced Index Fund, Vanguard International Equity Index Fund and
Vanguard Institutional Index Fund, as well as to several indexed separate
accounts. Total assets under management by the Core Management Group were
approximately $33 billion as of December 31, 1995. The portion of
Vanguard/Windsor II managed by the Core Management Group is not actively
managed, but is instead administered by the Core Management Group using
computerized, quantitative techniques based on a value index constructed to
approximate the aggregate fundamental characteristics of a typical large
capitalization-value fund such as Vanguard/Windsor II. The index is composed of
approximately two hundred and fifty stocks that are chosen through quantitative
analysis of market capitalization, price/earnings ratios and yield
characteristics which
15
<PAGE> 157
are similar to the stocks that would normally be held in the actively-managed
portions of Vanguard/ Windsor II's portfolio. The Core Management Group is
supervised by the Officers of the Trust.
VANGUARD EXPLORER FUND
Vanguard Explorer Fund, Inc. ("Explorer") currently employs two investment
advisers: Wellington Management Company ("WMC"), 75 State Street, Boston, MA
02109; and Granahan Investment Management, Inc. ("Granahan"), 275 Wyman Street,
Waltham, MA 02154. Until February 28, 1990, when Explorer acquired the assets of
Explorer II, WMC was sole investment adviser to Explorer (then known simply as
Explorer Fund), and Granahan served as sole investment adviser to Explorer II,
the acquired fund.
The proportion of the net assets of Explorer managed by each adviser is
established by the Board of Directors of Explorer, and may be changed in the
future by the Board of Directors as circumstances warrant. Investors will be
advised of any substantive change in the proportions managed by each adviser.
WELLINGTON MANAGEMENT COMPANY
Explorer has entered into an advisory agreement with WMC under which WMC
manages the investment and reinvestment of a portion of the Explorer's assets
(the "WMC Portfolio") and continuously reviews, supervises and administers the
Explorer's investment program with respect to those assets. As of October 31,
1995, WMC managed approximately 44% of the Fund's net assets. Prior to February
25, 1994, WMC managed approximately 75% of Explorer Fund's assets. WMC
discharges its responsibilities subject to the control of the officers and
Directors of Explorer.
Explorer pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the average month-end net assets of the WMC Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $100 million.................................. 0.35%
Next $250 million................................... 0.30%
Over $350 million................................... 0.25%
</TABLE>
The Basic Fee paid to WMC may be increased or decreased by applying an
adjustment formula based on the investment performance of the net assets of the
WMC Portfolio. Such formula provides for an increase or decrease in WMC's Basic
Fee in an amount equal to .075% per annum (.01875 of 1% per quarter) of the
average month-end net assets of the WMC Portfolio if the investment performance
of the WMC Portfolio for the thirty-six months preceding the end of the quarter
is twelve percentage points or more above or below, respectively, the investment
record of the Russell 2000 Small Company Index (the "Russell 2000") for the same
period; or by an amount equal to .0375% per annum (.009375 of 1% per quarter) if
the investment performance of the WMC Portfolio for such thirty-six months is
six or more but less than twelve percentage points above or below, respectively,
the investment record of the Russell 2000 for the same period. The incentive
portion of the fee may be earned even if the performance of the WMC Portfolio
for the period is negative provided that the Portfolio's performance exceeds the
Russell 2000 by the required percentage.
The investment performance of the WMC Portfolio for any period, expressed
as a percentage of the "WMC Portfolio unit value" at the beginning of such
period, is the sum of: (i) the change in the WMC Portfolio unit value during
such period; (ii) the unit value of the Fund's cash distributions from the WMC
Portfolio net investment income and realized net capital gains (whether
long-term or short-term) having an ex-dividend date occurring within such
period; and (iii) the unit value of capital gains taxes paid or accrued during
such period by the Fund for undistributed realized long-term capital gains
realized from the WMC Portfolio.
The "WMC Portfolio unit value" is determined by dividing the total net
assets of the WMC Portfolio by a given number of units. On the initial date of
the agreement, the number of units in the WMC Portfolio will equal the total
shares outstanding of the Fund. After such initial date, as assets are added to
or are withdrawn from the WMC Portfolio, the number of units of the WMC
Portfolio is adjusted based on the unit value of the
16
<PAGE> 158
WMC Portfolio on the day such changes are executed. For periods prior to March
1, 1990, when WMC served as sole adviser to the Fund, the unit value of the WMC
Portfolio is determined based upon the investment performance of the entire Fund
during those periods.
The investment record of the Russell 2000 for any period, expressed as a
percentage of the Russell 2000 at the beginning of such period, is the sum of
(i) the change in the level of the Russell 2000 during such period and (ii) the
value, computed consistently with the Russell 2000, of cash distributions having
an ex-dividend date occurring within such period made by companies whose
securities comprise the Russell 2000. For this purpose cash distributions on the
securities which comprise the Russell 2000 shall be treated as reinvested in the
Russell 2000 at least as frequently as the end of each calendar quarter
following the payment of the dividend.
For the purposes of determining the fee adjustment for investment
performance, the net assets of the WMC Portfolio are averaged over the same
period as the investment performance of the WMC Portfolio and the investment
record of the Russell 2000 are computed.
Any computation of the investment performance of the WMC Portfolio and the
investment record of the Russell 2000 shall be subject to and in accordance with
any then applicable rules of the Securities and Exchange Commission.
During the fiscal years ended October 31, 1993, 1994 and 1995 Vanguard
Explorer Fund paid WMC approximately the following advisory fees:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee.......................................... $1,181,674 $1,362,455 $1,698,254
Increase (Decrease) for Performance Adjustment..... (79,280) (61,905) (44,661)
---------- ---------- ----------
Total.............................................. $1,102,394 $1,300,550 $1,653,593
========== ========== ==========
</TABLE>
The agreement with WMC continues until February 27, 1996. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
contract or "interested persons" (as defined in the Investment Company Act of
1940) of any such party, cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund.
GRANAHAN INVESTMENT MANAGEMENT, INC.
Granahan Investment Management, Inc. ("Granahan") serves as a second
investment adviser to Explorer. Under its advisory agreement with the Fund,
Granahan manages the investment and reinvestment of a portion of the Fund's
assets (the "Granahan Portfolio") and continuously reviews, supervises and
administers the Fund's investment program with respect to those assets. As of
October 31, 1995, Granahan managed approximately 43% of the Fund's net assets.
Prior to February 10, 1994, Granahan managed approximately 25% of the Explorer
Fund's assets. Granahan discharges its responsibilities subject to the control
of the officers and Directors of Explorer.
The Fund pays Granahan a Basic Fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Granahan Portfolio
for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $50 million................................... 0.45%
Next $50 million.................................... 0.40%
Next $100 million................................... 0.35%
Over $200 million................................... 0.25%
</TABLE>
The Basic Fee paid to Granahan may be increased or decreased by applying an
adjustment formula based on the investment performance of the net assets of the
Granahan Portfolio. Such formula provides for an increase
17
<PAGE> 159
or decrease in Granahan's Basic Fee in an amount equal to .075% per annum
(.01875 of 1% per quarter) of the average month-end net assets of the Granahan
Portfolio if the investment performance of the Granahan Portfolio for the
thirty-six months preceding the end of the quarter is twelve percentage points
or more above or below, respectively, the investment record of the Russell 2000
Small Company Index (the "Russell 2000") for the same period; or by an amount
equal to .0375% per annum (.009375 of 1% per quarter) if the investment
performance of the Granahan Portfolio for such thirty-six months is six or more
but less than twelve percentage points above or below, respectively, the
investment record of the Russell 2000 for the same period. The incentive portion
of the fee may be earned even if the performance of the Granahan Portfolio for
the period is negative provided that the Portfolio's performance exceeds the
Russell 2000 by the required percentage.
The investment performance of the Granahan Portfolio for any period,
expressed as a percentage of the "Granahan Portfolio unit value" at the
beginning of such period, is the sum of: (i) the change in the Granahan
Portfolio unit value during such period; (ii) the unit value of the Fund's cash
distributions from the Granahan Portfolio net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by the Fund for undistributed realized
long-term capital gains realized from the Granahan Portfolio.
The "Granahan Portfolio unit value" is determined by dividing the total net
assets of the Granahan Portfolio by a given number of units. On the initial date
of the agreement, the number of units in the Granahan Portfolio equalled the
total shares outstanding of the Fund. After such initial date, as assets are
added to or are withdrawn from the Granahan Portfolio, the number of units of
the Granahan Portfolio is adjusted based on the unit value of the Granahan
Portfolio on the day such changes are executed. For periods prior to March 1,
1990, when Granahan served as adviser to Explorer II, the unit value of the
Granahan Portfolio will be determined based upon the actual investment
performance of Explorer II during those periods.
The investment record of the Russell 2000 for any period, expressed as a
percentage of the Russell 2000 at the beginning of such period, is the sum of
(i) the change in the level of the Russell 2000 during such period and (ii) the
value, computed consistently with the Russell 2000, of cash distributions having
an ex-dividend date occurring within such period made by companies whose
securities comprise the Russell 2000. For this purpose cash distributions on the
securities which comprise the Russell 2000 shall be treated as reinvested in the
Russell 2000 at least as frequently as the end of each calendar quarter
following the payment of the dividend.
For the purposes of determining the fee adjustment for investment
performance, the net assets of the Granahan Portfolio are averaged over the same
period as the investment performance of the Granahan Portfolio and the
investment record of the Russell 2000 are computed.
Any computation of the investment performance of the Granahan Portfolio and
the investment record of the Russell 2000 shall be subject to and in accordance
with any then applicable rules of the Securities and Exchange Commission.
The agreement with Granahan continues until February 27, 1996. The
agreement is renewable thereafter for successive one-year periods, only if each
renewal is specifically approved by a vote of the Fund's Board of Directors,
including the affirmative votes of a majority of the Directors who are not
parties to the contract or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party, cast in person at a meeting called for
the purpose of considering such approval. In addition, the question of
continuance of the agreement may be presented to the shareholders of the Fund;
in such event, such continuance shall be effected only if approved by the
affirmative vote of a majority of the outstanding voting securities of the Fund.
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee.......................................... $ 936,872 $1,397,812 $1,799,069
Increase (Decrease) for Performance Adjustment..... 116,432 40,525 69,595
---------- ---------- ----------
Total.............................................. $1,053,304 $1,438,337 $1,868,664
========== ========== ==========
</TABLE>
The factors discussed with respect to SEC Release No. 7113 on page 16 also
apply to the above-referenced agreement.
18
<PAGE> 160
VANGUARD U.S. GROWTH PORTFOLIO
LINCOLN CAPITAL MANAGEMENT COMPANY
The Vanguard U.S. Growth Portfolio entered into an investment advisory
agreement with Lincoln Capital Management Company (Lincoln) on April 1, 1993,
under which Lincoln manages the investment and reinvestment of the assets
included in the Vanguard U.S. Growth Portfolio and continuously reviews,
supervises and administers the Portfolio. Lincoln will invest or reinvest such
assets only in U.S. securities. Lincoln discharges its responsibilities subject
to the control of the Officers and Directors of the Fund. Under this agreement
the Fund pays Lincoln an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Portfolio's average month-end net assets for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------- ----
<S> <C>
First $25 million.................................... .40 %
Next $125 million.................................... .35 %
Next $350 million.................................... .25 %
Next $500 million.................................... .20 %
Next $1.5 billion.................................... .15 %
Over $2.5 billion.................................... .10 %
</TABLE>
For the fiscal years ended August 31, 1993, 1994 and 1995 the Fund paid
advisory fees of $3,655,000, $3,688,000 and $4,523,000 respectively, to Lincoln.
The fees for 1993 fiscal year included a fee waiver of $578,000.
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: John W. Croghan, Chairman; J. Parker Hall III,
President; Kenneth R. Meyer, Executive Vice President; and Timothy H. Ubben,
Executive Vice President.
Because Lincoln provides only investment advisory services to the Fund and
has no control over the Fund's expenses, Lincoln has not undertaken to guarantee
expenses of the Fund. The Officers of the Fund have worked out alternative
arrangements with the state authorities which do not require an expense
guarantee.
The agreement with Lincoln continues until March 31, 1996. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party, cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Vanguard U.S. Growth
Portfolio; In such event continuance shall be effected only if approved by the
affirmative vote of a majority of the outstanding voting securities of the
Vanguard U.S. Growth Portfolio.
VANGUARD/PRIMECAP FUND
PRIMECAP MANAGEMENT COMPANY
Vanguard/PRIMECAP Fund ("PRIMECAP") employs PRIMECAP Management Company
(the "Adviser") under an investment advisory agreement dated as of May 1, 1993
to manage the investment and reinvestment of the assets of the Fund and to
continuously review, supervise and administer the Fund's investment program. The
Adviser discharges its responsibilities subject to the control of the Officers
and Directors of the Fund.
19
<PAGE> 161
PRIMECAP pays the Adviser an advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $25 million................................... .750%
Next $225 million................................... .500%
Next $250 million................................... .375%
Over $500 million................................... .250%
</TABLE>
During the fiscal years ended December 31, 1993, 1994, and 1995 PRIMECAP
paid investment advisory fees of approximately $2,854,000, $3,882,000 and
$7,700,000 respectively.
The agreement with the Adviser is renewable for successive one-year
periods, only if each renewal is specifically approved by a vote of the
PRIMECAP's Board of Directors, including the affirmative votes of a majority of
the Directors who are not parties to the contract or "interested persons" (as
defined in the Investment Company Act of 1940) of any such party, cast in person
at a meeting called for the purpose of considering such approval. In addition,
the question of continuance of the Agreement may be presented to the
shareholders of the Fund; in such event, such continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund.
The Adviser is a California corporation whose outstanding shares are owned
by its directors and officers. The directors of the corporation and the offices
they currently hold are: Howard Bernard Schow, Chairman, Mitchell John Milias,
Vice Chairman and Treasurer, Theofanis Anastasios Kolokotrones, President and
Secretary, and Joel P. Freid, Senior Vice President.
THE PRIME PORTFOLIO
Vanguard's Fixed Income Group provides investment advisory services on an
at-cost basis to the Prime Portfolio of Vanguard Money Market Trust (see page 10
for a more complete description of the Fixed Income Group).
VANGUARD ASSET ALLOCATION FUND
Vanguard Asset Allocation Fund, Inc. ("VAAF") employs Mellon Capital
Management Corporation ("MCM"), 595 Market St., 30th Floor, San Francisco,
California, 94105, under an investment advisory agreement dated as of January
15, 1996 to manage the investment and reinvestment of the assets of VAAF and to
continuously review, supervise and administer the VAAF's investment program. MCM
discharges its responsibilities subject to the control of the officers and
Directors of VAAF.
VAAF pays MCM a Basic fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the VAAF's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $100 million.................................. .200%
Next $900 million................................... .150%
Next $500 million................................... .125%
Over $1.5 billion................................... .100%
</TABLE>
This fee may be increased or decreased by applying an adjustment formula
based on the performance of the Fund's portfolio relative to the investment
record of the S&P 500 Index. The fee payment will be increased (decreased) by an
incentive (penalty) of 0.05% of average net assets, if the Fund's cumulative
investment performance for the thirty-six months preceding the end of the
quarter is at least six percentage points above (below) the cumulative
investment record of the S&P 500 Index for the same period.
20
<PAGE> 162
For the fiscal years ended September 30, 1993, 1994 and 1995, Vanguard
Asset Allocation Fund paid MCM approximately $1,224,000 ($1,176,000 basic fee
increased by $48,000 for performance adjustment), $1,785,000 and $1,954,000
(before a decrease of $131,000 based on performance), respectively.
The agreement will continue until January 14, 1998 and will be renewable
thereafter for successive one-year periods, only if each renewal is specifically
approved by a vote of the Fund's Board of Directors, including the affirmative
votes of a majority of the Trustees who are not parties to the contract or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party, cast in person at a meeting called for the purpose of considering
such approval. In addition, the question of continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund.
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO AND
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EUROPEAN, PACIFIC AND
EMERGING MARKETS PORTFOLIOS
The above-referenced Funds receive all investment advisory services on an
at-cost basis from Vanguard's Core Management Group.
The Core Management Group also provides investment advisory services to
several other Vanguard Funds, including the remaining 5 Portfolios in Vanguard
Index Trust, the Emerging Markets Portfolio of Vanguard International Equity
Index Fund, Vanguard Institutional Index Fund, Vanguard Balanced Index Fund,
Vanguard Variable Insurance Fund--Equity Index Portfolio, several Portfolios of
Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon
Fund, a portion of Vanguard/Morgan Growth Fund and a portion of Vanguard/Windsor
II, as well as to several indexed separate accounts. Total assets under
management by the Core Management Group were $33 billion as of December 31,
1995. The Funds are not actively managed, but is instead administered by the
Core Management Group using computerized, quantitative techniques. The Core
Management Group is supervised by the Officers of the respective funds.
PORTFOLIO TRANSACTIONS
Each of the investment advisory agreements discussed on pages 5-22
authorizes the respective Adviser (with the approval of the respective Fund's
Board of Directors) to select the brokers or dealers that will execute the
purchases and sales of portfolio securities for the respective Fund and directs
the Adviser to use its best efforts to obtain the best available price and most
favorable execution as to all transactions for the respective Fund. Each Adviser
undertakes to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, each Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the respective Fund
and/or each Adviser, provided that each Adviser considers such information
useful in the performance of its obligations under the agreement, but is unable
to determine the amount by which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the respective Fund's Board of Directors, the Adviser may cause the
respective Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction; provided that such commission
is deemed reasonable in terms of either that particular transaction or the
overall responsibilities of the Adviser to the Fund.
21
<PAGE> 163
Currently, it is each Fund's policy that each Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. Each Adviser will only pay such higher
commissions if it believes this to be in the best interest of the respective
Fund. Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities
transactions are also providers of research information to the Adviser and/or
the Fund. However, each Adviser has informed the respective Fund that it will
not pay higher commission rates specifically for the purpose of obtaining
research services.
Since each Fund does not market its shares through intermediary brokers or
dealers, it is not the Funds' practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, each Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients, and may, when a number of brokers and dealers
can provide comparable best price and execution on a particular transaction,
consider the sale of Fund shares by a broker or dealer in selecting among
qualified broker-dealers. Although the Funds managed by Vanguard's Core
Management Group and Vanguard's Fixed Income Group do not operate pursuant to a
formal investment advisory agreements, the aforementioned requirements and
policies also apply to them.
TERMINATION OF ADVISORY AGREEMENTS
Each of the investment advisory agreements described on pages 5-22 are
automatically terminated if assigned, and may be terminated without penalty at
any time (1) by either a vote of the respective Fund's Board of Directors
(Trustees) or by vote of a majority of the outstanding voting securities of the
respective Fund, upon 60 days' written notice to the investment advisor, or (2)
by the investment adviser upon 90 days' written notice to the respective Fund.
PURCHASE OF SHARES
The purchase price of shares of the Fund's Portfolios is the net asset
value next determined after the order is received. The net asset value is
calculated as of the close of the New York Stock Exchange on each day the
Exchange is open for business and on any other day on which there is sufficient
trading in each Portfolio's underlying securities to materially affect its net
asset value per share. An order received prior to the close of the Exchange will
be executed at the price computed on the date of receipt; and an order received
after the close of the Exchange will be executed at the price computed on the
next day the Exchange is open.
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of Portfolios' shares.
To assure that the Fund continues to operate in the manner set forth in
this Prospectus, including the desired composition of shareholder investments in
the Fund, the officers of the Fund will monitor and report to the Trustees the
composition of the Fund's shareholder base. The Fund's shares will be marketed
to tax-advantaged and other retirement accounts. The officers will recommend to
the Trustees any action they deem necessary to assure that investments in the
Fund do not become inconsistent with the policies applicable to the Fund. This
could include recommendations to limit sales to specific categories of investors
or to revise the suitability standards for investors.
A 1% portfolio transaction fee is deducted from purchases of the European
and Pacific Portfolios, and a 2% portfolio transaction fee is deducted from
purchases of the Emerging Markets Portfolio, including purchases made by each of
the Portfolios of Vanguard STAR Fund. Portfolio transaction fees are paid
directly to these Portfolios in order to offset transaction costs of buying
international securities in the European, Pacific and Emerging Markets
Portfolios. A portfolio transaction fee of 1% is assessed on redemptions from
the Emerging Markets Portfolio. The fees are not sales charges. The Portfolios
of Vanguard STAR Fund, who invest in these
22
<PAGE> 164
Portfolios, will also incur a $10 annual account maintenance fee. This fee will
be waived for shareholders with an account balance of $10,000 or more.
STOCK CERTIFICATES
Your purchase will be made in full and fractional shares of STAR calculated
to three decimal places. Shares are normally held on deposit for shareholders by
STAR, which will send to shareholders a statement of shares owned at the time of
each transaction. This saves the shareholders the trouble of safekeeping the
certificates, and saves STAR the cost of issuing certificates. Share
certificates are, of course, available at any time upon written request at no
additional cost to shareholders. No certificates will be issued for fractional
shares. Share certificates will not be offered for the Income, Conservative
Growth, Moderate Growth and Growth Portfolios.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for STAR to dispose of securities owned by it, or fairly
to determine the value of its assets, and (iii) for such other periods as the
Commission may permit. Any redemptions may be more or less than the
shareholder's cost depending on the market value of the Fund's underlying
securities.
SIGNATURE GUARANTEES
To protect your account, the Fund and Vanguard from fraud, signature
guarantees are required for certain redemptions. Signature guarantees enable the
Fund to verify the authenticity of a signature. Signature guarantees are
required in connection with: (1) all redemptions, regardless of the amount
involved, when the proceeds are to be paid to someone other than the registered
owner(s); and (2) share transfer requests.
These requirements are not applicable to redemptions in Vanguard's
prototype retirement plans, except in connection with: (1) distributions made
when the proceeds are to be paid to someone other than the plan participant; (2)
certain authorizations to effect exchanges by telephone; and (3) when proceeds
are to be wired. These requirements may be waived by the Fund in certain
instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
YIELD AND TOTAL RETURN
The yield of the STAR Portfolio for the 30-day period ended December 31,
1995 was 3.96%. The yield of the Income, Conservative Growth, Moderate Growth
and Growth Portfolios of the LifeStrategy Funds for the 30-day period ended
December 31, 1995 were 5.73%, 4.75%, 3.82% and 2.81%.
The average annual total return of the STAR Portfolio for the one- and
five-year periods ended December 31, 1995 and, since its inception on March 29,
1985 was +28.64%, +14.33% and +11.92%, respectively. Total return is computed by
finding the average compounded rates of return over the one-year and since
inception periods set forth above that would equate an initial amount invested
at the beginning of the periods to the ending redeemable value of the
investment.
23
<PAGE> 165
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard STAR Fund, may from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
MSCI EMF INDEX --
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,000 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered, fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index.)
24
<PAGE> 166
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
RUSSELL 2000 STOCK INDEX -- consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
IBBOTSON ASSOCIATES YEARBOOK -- various mutual fund performance data.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Trust was established as a "business trust" under Pennsylvania law
under a Declaration of Trust dated July 19, 1983. The Declaration of Trust
permits the Trustees to issue an unlimited number of shares of beneficial
interest, without par value, from an unlimited number of separate classes
("Portfolios") of shares. Currently, the Trust is offering shares of six
Portfolios.
The shares of the Fund are fully paid and non-assessable, except as set
forth under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares have
no pre-emptive rights. The shares have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if
25
<PAGE> 167
they choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of
shareholders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not affect any
interest of a particular class, then only shareholders of the affected class or
classes shall be entitled to vote thereon.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio
outstanding, the Trustees may sell or convert the assets of such
Portfolio to another investment company in exchange for shares of such
investment company, and distribute such shares, ratably among the
shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio outstanding, the
Trustees may sell and convert into money the assets of such Portfolio
and distribute such assets ratably among the shareholders of such
Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless
otherwise required by law, the Trustees may combine the assets of any
two or more Portfolios into a single Portfolio so long as such
combination will not have a material adverse effect upon the
shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1), 2) and 3) above,
the Fund shall terminate as to that Portfolio and the Trustees shall be
discharged of any and all further liabilities and duties hereunder and the
right, title and interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Pennsylvania law, shareholders of a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. Therefore, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification out of the Trust property of any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations. The Trustees
and officers of the Trust believe that, in view of the above, the risk of
personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
FINANCIAL STATEMENTS
Vanguard STAR Fund's financial statements for the year ended December 31,
1995, including the financial highlights for each of the five fiscal years in
the period ended December 31, 1995, appearing in Vanguard STAR Fund 1995 Annual
Report to Shareholders, and the report thereon of Price Waterhouse LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Fund's 1995 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
26
<PAGE> 168
PART C
VANGUARD STAR FUND
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The audited financial statements for the Registrant's Star Fund, for the
year ended December 31, 1995, including Price Waterhouse LLP's report thereon,
are incorporated by reference, in the Statement of Additional Information, from
the Registrant's 1995 Annual Report which has been filed with the Commission.
The financial statements included in the Annual Report are:
1. Statement of Net Assets as of December 31, 1995.
2. Statement of Operations for the year ended December 31, 1995.
3. Statement of Changes in Net Assets for the years ended December 31,
1994 and 1995.
4. Financial Highlights for each of the five years in the period ended
December 31, 1995 for the STAR Portfolio, and for the year ended
December 31, 1995 and the period September 30, 1994 to December 31,
1994 for the Income, Growth, Conservative Growth, Moderate Growth
Portfolios (also appearing in the Prospectus along with prior years).
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(B) EXHIBITS
11. Consent of Independent Accountants*
12 Financial Statements -- reference is made to (a) above
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
- ------------------------
*Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of STAR" in the Prospectus constituting Part A
and "Management of STAR" in the Statement of Additional Information constituting
Part B of this Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1995 there were 294,057 shareholders of the STAR
Portfolio; 2,375 shareholders of
the Income Portfolio; 7,545 shareholders of the Conservative Growth Portfolio;
9,499 shareholders of the Moderate Growth Portfolio; and 16,908 shareholders of
the Growth Portfolio.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
<PAGE> 169
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Fund has no Investment Adviser.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodian, CoreStates Bank, N.A.,
Philadelphia, Pa. 19103.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of STAR;" the Registrant is not a party of any
management-related service contract.
ITEM 32. UNDERTAKINGS
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 ("1940 Act") or other applicable law. Registrant
undertakes to comply with the provisions of Section 16(c) of the 1940 Act in
regard to shareholders' rights to call a meeting of shareholders for the purpose
of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law. The Income
Growth, Conservative Growth and Moderate Growth Portfolios hereby undertake to
hold an annual shareholders' meeting for the purpose of electing Trustees and
appointing independent accountants within 4-6 months of the effective date of
this registration statement.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 23rd day of April, 1996.
VANGUARD STAR FUND
BY: (Raymond J. Klapinsky) John C. Bogle*, Chairman and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board and Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
John J. Brennan*, President, Trustee
and Chief Executive Officer
April 23, 1996
BY: (Raymond J. Klapinsky)
Robert E. Cawthorn*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
Burton G. Malkiel, Jr.*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Trustee
April 23, 1996
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
April 23, 1996
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 171
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.................................................. EX-99.B11
Schedule for Computation of Performance Quotations.................................. EX-99.B16
Financial Data Schedule............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses for
the Vanguard STAR Fund and the Statement of Additional Information, constituting
parts of this amended Registration Statement on Form N-1A, of our reports dated
January 31, 1996, relating to the financial statements and financial highlights
appearing in the December 31, 1995 Annual Report to Shareholders of Vanguard
STAR Fund. We also consent to the references to us under the headings "Financial
Highlights" and "General Information" in the Prospectuses and "Financial
Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 22, 1996
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD STAR FUND -- STAR PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
P = $1,000
T = +28.64%
N = 1
ERV = $1,286.37
Five Year
P = $1,000
T = +14.33%
N = 5
ERV = $1,953.23
Ten Year
P = $1,000
T = +11.92
N = 10
ERV = $3,083.58
</TABLE>
- ---------------
*Since the Fund's inception on March 29, 1985.
2. YIELD (30 Days Ended December 31, 1995)
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( c X d + 1)(6) - 1]
</TABLE>
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $15,271,915.51
b = $0.00
c = 310,958,789.802
d = $15.02
Yield = 3.96%
</TABLE>
<PAGE> 2
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD STAR FUND -- INCOME PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
P = $1,000
T = +22.99%
N = 1
ERV = $1,229.93
Five Year
P = $1,000
T = +18.16
N = *
ERV = $1,232.35*
</TABLE>
- ---------------
*Since the Portfolio's inception on September 30, 1994.
2. YIELD (30 Days Ended December 31, 1995)
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( c X d + 1)(6) - 1]
</TABLE>
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $417,508.15
b = $0.00
c = 7,662,904.986
d = $11.54
Yield = 5.73%
</TABLE>
<PAGE> 3
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD STAR FUND -- CONSERVATIVE GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
P = $1,000
T = +24.35%
N = 1
ERV = $1,243.46
Five Year
P = $1,000
T = +19.10
N = *
ERV = $1,244.68
</TABLE>
- ---------------
*Since the Portfolio's inception on September 30, 1994.
2. YIELD (30 Days Ended December 31, 1995)
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( c X d + 1)(6) - 1]
</TABLE>
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $822,727.63
b = $0.00
c = 17,960,483.675
d = $11.68
Yield = 4.75%
</TABLE>
<PAGE> 4
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD STAR FUND -- MODERATE GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
P = $1,000
T = +27.94
N = 1
ERV = $1,279.38
Five Year
P = $1,000
T = +21.07
N = *
ERV = $1,270.48
</TABLE>
- ---------------
*Since the Portfolio's inception on September 30, 1994.
2. YIELD (30 Days Ended December 31, 1995)
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( c X d + 1)(6) - 1]
</TABLE>
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $704,221.54
b = $0.00
c = 18,394,590.461
d = $12.11
Yield = 3.82%
</TABLE>
<PAGE> 5
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD STAR FUND -- GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
P = $1,000
T = +29.24%
N = 1
ERV = $1,292.39
Five Year
P = $1,000
T = +22.64
N = *
ERV = $1,291.09
</TABLE>
- ---------------
*Since the Portfolio's inception on September 30, 1994.
2. YIELD (30 Days Ended December 31, 1995)
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( c X d + 1)(6) - 1]
</TABLE>
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $477,354.52
b = $0.00
c = 16,606,658.290
d = $12.36
Yield = 2.81%
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000736054
<NAME> VANGUARD STAR FUND
<SERIES>
<NUMBER> 001
<NAME> STAR PORTFOLIO
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE RATE> 1
<INVESTMENTS-AT-COST> 4080034
<INVESTMENTS-AT-VALUE> 4844774
<RECEIVABLES> 15953
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4860727
<PAYABLE-FOR-SECURITIES> 9734
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9153
<TOTAL-LIABILITIES> 18887
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4078331
<SHARES-COMMON-STOCK> 322220
<SHARES-COMMON-PRIOR> 298775
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 367
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 864
<ACCUM-APPREC-OR-DEPREC> 764740
<NET-ASSETS> 4841840
<DIVIDEND-INCOME> 177075
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 177075
<REALIZED-GAINS-CURRENT> 170349
<APPREC-INCREASE-CURRENT> 723462
<NET-CHANGE-FROM-OPS> 1070886
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 177410
<DISTRIBUTIONS-OF-GAINS> 171592
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36769
<NUMBER-OF-SHARES-REDEEMED> 36506
<SHARES-REINVESTED> 23182
<NET-CHANGE-IN-ASSETS> 1075615
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 379
<OVERDISTRIB-NII-PRIOR> 32
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 4296469
<PER-SHARE-NAV-BEGIN> 12.61
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 2.985
<PER-SHARE-DIVIDEND> 0.590
<PER-SHARE-DISTRIBUTIONS> 0.565
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.03
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000736054
<NAME> VANGUARD STAR FUND
<SERIES>
<NUMBER> 002
<NAME> INCOME PORTFOLIO
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE RATE> 1
<INVESTMENTS-AT-COST> 116111
<INVESTMENTS-AT-VALUE> 120390
<RECEIVABLES> 972
<ASSETS-OTHER> 573
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 121935
<PAYABLE-FOR-SECURITIES> 631
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 565
<TOTAL-LIABILITIES> 1196
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 116507
<SHARES-COMMON-STOCK> 10464
<SHARES-COMMON-PRIOR> 1163
<ACCUMULATED-NII-CURRENT> 4
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 51
<ACCUM-APPREC-OR-DEPREC> 4279
<NET-ASSETS> 120739
<DIVIDEND-INCOME> 2367
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 2367
<REALIZED-GAINS-CURRENT> 696
<APPREC-INCREASE-CURRENT> 4345
<NET-CHANGE-FROM-OPS> 7408
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2360
<DISTRIBUTIONS-OF-GAINS> 748
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9932
<NUMBER-OF-SHARES-REDEEMED> 857
<SHARES-REINVESTED> 226
<NET-CHANGE-IN-ASSETS> 109245
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1
<OVERDISTRIB-NII-PRIOR> 3
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 41080
<PER-SHARE-NAV-BEGIN> 9.88
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 1.75
<PER-SHARE-DIVIDEND> 0.49
<PER-SHARE-DISTRIBUTIONS> 0.09
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.54
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000736054
<NAME> VANGUARD STAR FUND
<SERIES>
<NUMBER> 003
<NAME> CONSERVATIVE GROWTH PORTFOLIO
<MULTIPLIER> 1000
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