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[PHOTO]
VANGUARD
STAR PORTFOLIO
Semiannual Report
June 30, 1997
[THE VANGUARD GROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future.
The montage includes a bronze medallion with a likeness of our namesake,
HMS Vanguard (Lord Nelson's flagship at The Battle of the Nile); a clock built
circa 1816 in Scotland, featuring a portrait of Nelson; and several views of
our recently completed campus, which is steeped in nautical imagery--from our
buildings named after Nelson's warships (Victory, Majestic, and Goliath are
three shown), to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Performance
Summary
5
Financial
Statements
6
Trustees And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
Vanguard STAR Portfolio provided a solid return of +10.8% during the first half
of 1997. This result was about midway between the remarkable returns on common
stocks and the modest returns provided by bonds and cash reserves.
The table below compares STAR's total return (capital change plus
reinvested dividends) for the period with those of the unmanaged benchmarks
representing the three asset classes in which we invest: for stocks, the
Standard & Poor's 500 Composite Stock Price Index; for bonds, the Lehman
Brothers Aggregate Bond Index; and for cash reserves, the Salomon Brothers
Three-Month U.S. Treasury Bill Index. STAR's total return trailed a composite
of these market indexes, weighted in line with STAR's asset allocation.
However, we outperformed the return of a comparably weighted average of mutual
funds.
<TABLE>
<CAPTION>
- --------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
JUNE 30, 1997
- --------------------------------------------------
<S> <C>
Vanguard STAR Portfolio +10.8%
- --------------------------------------------------
S&P 500 Index +20.6%
Lehman Aggregate Bond Index + 3.1
Salomon Three-Month Treasury
Bill Index + 2.6
- --------------------------------------------------
STAR Composite Index* +13.8%
- --------------------------------------------------
Composite Fund Average* + 9.2%
- --------------------------------------------------
</TABLE>
* The STAR Composite Index is weighted 62.5% S&P 500 Index, 25% Lehman
Aggregate Bond Index, and 12.5% Salomon Three-Month Treasury Index. The
Composite Fund Average is similarly weighted using the average general
equity mutual fund, average fixed-income fund, and average money market
fund, respectively.
STAR's total return is based on an increase in net asset value from $15.86
per share on December 31, 1996, to $17.33 per share on June 30, 1997, with the
latter figure adjusted for a dividend of $0.25 per share paid from net
investment income. On June 30, STAR's current dividend yield was 3.53%.
THE PERIOD IN REVIEW
A nearly perfect climate for common stocks--strong economic growth, rising
corporate profits, and decelerating inflation--prevailed during the first six
months of the fiscal year. The advance was interrupted by a decline of nearly
- -10% in the S&P 500 Index during the seven weeks following February 18. By
early May, however, the market had resumed its ascent into record territory.
The bond market lost ground early in the period, then recovered. The
Lehman Aggregate Bond Index, a good measure of the overall bond market, lost
- -0.6% during the three months ended March 31, but returned +3.7% during the
second quarter.
Our Portfolio's return trailed sharply the +20.6% advance of the S&P 500
Index, reflecting both the market's extreme tilt toward the
largest-capitalization stocks and our particular asset mix. STAR's underlying
funds invest in large-, mid-, and small-cap companies. Even within the Index,
there was a powerful bias toward big stocks: The 100 largest stocks in the
Index returned +23.4% while the 400 others returned +15.2%. STAR's underlying
funds have a smaller weighting in growth stocks and a bigger weighting in value
stocks than the Index, which hurt STAR's relative performance during the
period. The growth component of the Index outpaced the value component by a
wide margin (+24.6% versus +16.5%) in the first half of 1997.
1
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Among the Vanguard Funds held by STAR, the six equity Funds achieved
returns that were quite good on an absolute basis, though only PRIMECAP Fund
outpaced the S&P 500 Index. Windsor Fund, Windsor II, U.S. Growth Portfolio,
and Morgan Growth Fund also had double-digit returns. Explorer Fund, like most
other funds focused on small-cap growth stocks, lagged well behind large-cap
stock funds.
<TABLE>
<CAPTION>
- ----------------------------------------------------
TOTAL RETURN
PERCENT OF SIX MONTHS ENDED
VANGUARD PORTFOLIO STAR ASSETS JUNE 30, 1997
- ----------------------------------------------------
<S> <C> <C>
STOCK FUNDS
Windsor II 27.5% +16.5%
Windsor 14.7 +15.0
Explorer 5.2 +5.7
Morgan Growth 5.1 +14.9
U.S. Growth 5.0 +17.4
PRIMECAP 4.9 +21.1
- ----------------------------------------------------
BOND FUNDS
GNMA 12.6% +3.8%
Long-Term Corporate 12.5 +2.9
- ----------------------------------------------------
MONEY MARKET FUND
Prime 12.5% +2.6%
- ----------------------------------------------------
TOTAL 100.0% +10.8%
- ----------------------------------------------------
</TABLE>
Returns on the bond segment of STAR were positive. The GNMA Portfolio
outpaced the Lehman Aggregate Bond Index by 0.7 percentage point, while the
Long-Term Corporate Portfolio slightly lagged the bond-market benchmark. The
Prime Portfolio again outperformed the average money market fund. The table
above summarizes the six-month performance of STAR's underlying Funds.
IN SUMMARY
The extraordinary bull market for U.S. stocks that began almost 15 years ago
has amply demonstrated the rewards of long-term investing. Risk, the
inseparable companion of reward, may not be so apparent after such a period.
Nevertheless, investors disregard risk at their peril. Thus, we hope that the
sizable, sudden fluctuations in the stock market during the first half of 1997
reinforced two key messages that we have repeatedly stressed in these Reports
to you.
The first message concerns the importance of holding a balanced portfolio
of stock funds, bond funds, and money market funds in proportions appropriate
to your financial situation, tolerance for risk, and investment objectives.
Such a balanced approach is, of course, what STAR Portfolio is all about. By
making it easier to ride out episodes of market volatility, a balanced
portfolio helps investors to adhere to our second message: Always "stay the
course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
July 16, 1997
2
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1997
U.S. EQUITY MARKETS
As the economy continued to grow while the rate of inflation did not, a robust
market provided solid gains to investors in U.S. common stocks during the
first half of 1997. The best performers were primarily larger-capitalization
issues, although the small-company indexes exhibited some strength in the final
two months of the period. Over the half-year, the Standard & Poor's 500
Composite Stock Price Index gained 20.6%, fueled by a 10.8% boost since the end
of April. Reflecting the gains among smaller companies, the Russell 2000 Index
posted a 10.2% increase for the six-month period, driven by an 11.1% jump in
May and a 4.3% rise in June. It was particularly noteworthy that the recent
small-cap gains were led by small growth stocks, the worst segment of the U.S.
market during the past 12 months. This group has surged 17.6% since the end of
March, although at the half-year's end it still lagged the S&P 500 Index by a
sizable margin (5.2% versus 20.6%).
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year, and from a widespread confidence reflected
in increased price/earnings ratios. The strength in earnings, the expectation
that income will continue to increase at an attractive pace, and the further
conviction that inflation is not a problem helped stocks to continue to produce
solid gains in the fiscal period. What's more, earnings have shown not only
good strength but remarkable consistency in beating the consensus forecasts of
Wall Street analysts.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997
---------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 20.6% 34.7% 19.8%
Russell 2000 Index 10.2 16.3 17.9
MSCI EAFE Index 11.4 13.2 13.2
- ---------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.1% 8.2% 7.1%
Lehman 10-Year Municipal
Bond Index 3.3 8.3 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.5
- ---------------------------------------------------------
OTHER
Consumer Price Index 1.1% 2.3% 2.7%
- ---------------------------------------------------------
</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the health-care sector (up 31.4%) and the consumer-staples sector (up
23.9%). By contrast, numerous uncertainties for utilities caused the issues in
that sector to lag the broad market, although, on an absolute basis, their 8.2%
return over six months is quite good.
U.S. FIXED-INCOME MARKETS
The modest rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased from
6.42% at the end of December to 6.97% by the middle of April. In the following
weeks, economic reports indicated a slowing in economic growth and further
reduced fears of an increase in inflation. This news helped interest rates fall
to 6.50% by the end of June.
3
<PAGE> 6
Fueled by robust consumer spending, the U.S. economy expanded at a
remarkable 5.8% rate in the first three months of 1997. Reflecting the vibrant
economy, the nation's unemployment rate stood at 5.0% in June. Strong economic
growth and tight labor markets have often led to rising inflation because of
increased demand for goods and services. With this in mind, the Federal Reserve
raised its federal funds interest rate target by 0.25% on March 25 in a
"preemptive" strike against mounting inflationary pressures. Observed price
increases have been subdued in recent months, however. Wholesale prices have
fallen in each of the first six months of 1997, and so far this year consumer
prices have risen at a slower pace than last year.
With interest rates very close to year-end levels, bond investors have
fared reasonably well during the past six months, as illustrated by the 3.1%
return of the Lehman Brothers Aggregate Bond Index. Investors who favored
shorter-maturity and lower-quality issues achieved somewhat better returns.
Mortgage-backed securities continued to perform well because refinancing
activity has been reduced to historically low levels as interest rates have
risen. Municipal issues also tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors received fairly good returns over the past six months.
As measured by the broad Morgan Stanley Capital International Europe,
Australasia, Far East Index, foreign markets gained 11.4%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, returning 11.1% in May and 7.5% in June to
U.S. investors. Better tone in the economy, plus strong earnings reported by
export-oriented companies benefiting from the weak yen, gave Japan a
long-awaited boost. For the six months, the Japanese market is up 9.2%. The
competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 17.0% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. For the six months, Europe gained 24.8%
in local currencies, which a strong dollar trimmed to 14.4% for U.S. investors.
4
<PAGE> 7
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
STAR PORTFOLIO
TOTAL INVESTMENT RETURNS: MARCH 29, 1985-JUNE 30, 1997
- -------------------------------------------
STAR PORTFOLIO COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------
<S> <C> <C> <C> <C>
1985 14.5% 0.5% 15.0% 15.1%
1986 5.5 8.4 13.9 12.6
1987 -5.5 7.2 1.7 3.1
1988 11.7 7.3 19.0 11.8
1989 11.8 7.0 18.8 18.0
1990 -9.6 6.0 -3.6 -1.6
1991 18.1 6.1 24.2 26.9
1992 6.3 4.2 10.5 8.0
1993 7.1 3.8 10.9 10.6
1994 -4.1 3.9 -0.2 -1.2
1995 23.7 4.9 28.6 23.3
1996 12.0 4.1 16.1 13.6
1997** 9.3 1.5 10.8 9.2
- -------------------------------------------
</TABLE>
*62.5% Lipper General Equity Funds Average, 25% Lipper Fixed Income Funds
Average, and 12.5% Lipper Money Market Instrument Funds Average.
**Six months ended June 30, 1997.
See Financial Highlights table on page 10 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STAR Portfolio 3/29/85 21.35% 14.36% 6.69% 5.27% 11.96%
- --------------------------------------------------------------------------------------
</TABLE>
5
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[PHOTO]
FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Portfolio's investments in
shares of each Vanguard portfolio, along with the value of each investment on
the last day of the reporting period. Other assets are added to, and
liabilities are subtracted from, the value of Total Investments to calculate
the Portfolio's Net Assets. Finally, Net Assets are divided by the outstanding
shares of the Portfolio to arrive at its share price, or Net Asset Value (NAV)
Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Portfolio's net assets on both a dollar and per-share
basis. Because all income and any realized gains must be distributed to
shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the Portfolio's
investments and their cost, and reflects the gains (losses) that would be
realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
MARKET
VALUE*
STAR PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES (100.0%)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard/Windsor II 66,372,920 $1,829,902
Vanguard/Windsor Fund 52,002,221 981,803
Vanguard Explorer Fund 6,059,085 344,701
Vanguard/Morgan Growth Fund 19,442,068 338,875
Vanguard U.S. Growth Portfolio 11,967,470 333,533
Vanguard/PRIMECAP Fund 9,064,876 328,511
Vanguard Fixed Income Securities Fund-GNMA Portfolio 81,719,411 836,807
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 95,599,914 834,587
Vanguard Money Market Reserves-Prime Portfolio 835,473,669 835,474
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $5,106,022) 6,664,193
- --------------------------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- --------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a Pooled Cash Account
5.93%, 7/1/97
(COST $3,117) $3,117 3,117
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $5,109,139) 6,667,310
- --------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- --------------------------------------------------------------------------------------------------
Other Assets 19,702
Liabilities (26,082)
---------
(6,380)
- --------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------
Applicable to 384,305,293 shares of beneficial interest
(unlimited authorization--no par value) $6,660,930
==================================================================================================
NET ASSET VALUE PER SHARE $17.33
==================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
6
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $5,072,276 $13.20
Undistributed Net Investment Income 1,321 --
Accumulated Net Realized Gains 29,162 .08
Unrealized Appreciation--Note D 1,558,171 4.05
- ---------------------------------------------------------------------------------------------------
NET ASSETS $6,660,930 $17.33
===================================================================================================
</TABLE>
7
<PAGE> 10
STATEMENT OF OPERATIONS
This Statement shows the Portfolio's Income Distributions Received from the
other Vanguard portfolios in which it invests. This Statement also shows any
Capital Gain Distributions Received from the other Portfolios' realized net
gains, Net Gain (Loss) realized on the sale of investments, and the increase or
decrease in the Unrealized Appreciation (Depreciation) on investments during
the period.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
STAR PORTFOLIO
SIX MONTHS ENDED JUNE 30, 1997
(000)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Income Distributions Received $ 98,676
Interest 21
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 98,697
- ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received 11,091
Investment Securities Sold 17,398
- ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 28,489
- ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 520,163
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $647,349
==========================================================================================================
</TABLE>
8
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts shown
as Distributions to shareholders from the Portfolio's net income and capital
gains may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Portfolio, either by purchasing
shares or by reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
STAR PORTFOLIO
-------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1997 DEC. 31, 1996
(000) (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 98,697 $ 197,636
Realized Net Gain 28,489 336,819
Change in Unrealized Appreciation (Depreciation) 520,163 273,268
-----------------------------
Net Increase in Net Assets Resulting from Operations 647,349 807,723
-----------------------------
DISTRIBUTIONS
Net Investment Income (94,761) (199,884)
Realized Capital Gain -- (335,282)
-----------------------------
Total Distributions (94,761) (535,166)
-----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 514,489 801,072
Issued in Lieu of Cash Distributions 92,405 525,118
Redeemed (361,979) (577,160)
-----------------------------
Net Increase from Capital Share Transactions 244,915 749,030
- -----------------------------------------------------------------------------------------
Total Increase 797,503 1,021,587
- -----------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 5,863,427 4,841,840
-----------------------------
End of Period $6,660,930 $ 5,863,427
=========================================================================================
(1)Shares Issued (Redeemed)
Issued 31,222 50,780
Issued in Lieu of Cash Distributions 5,329 33,115
Redeemed (21,931) (36,430)
-----------------------------
Net Increase in Shares Outstanding 14,620 47,465
=========================================================================================
</TABLE>
9
<PAGE> 12
FINANCIAL HIGHLIGHTS
This table summarizes the Portfolio's investment results and distributions to
shareholders on a per-share basis. The table also presents the Portfolio's
Total Return and shows net investment income and expenses as percentages of
average net assets. The expense ratio is zero because the Portfolio pays no
direct expenses; the Portfolio's share of the expenses of the other portfolios
in which it invests indirectly reduces the income received from them. The data
in the table will help you assess: the variability of the Portfolio's net
income and total returns from year to year; the relative contributions of net
income and capital gains to the Portfolio's total return; the extent to which
the Portfolio tends to distribute capital gains; and the portion of capital
gains distributions representing the "pass-through" of capital gains
distributions received from other Vanguard portfolios. The table also shows the
Portfolio Turnover Rate, a measure of trading activity. A turnover rate of 100%
means that the average security is held in the Portfolio for one year.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STAR PORTFOLIO
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.86 $15.03 $12.61 $13.41 $12.89 $12.30
- ---------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Income Distributions Received .26 .58 .590 .53 .47 .51
Capital Gain Distributions Received .03 .63 .435 .26 .36 .18
-------------------------------------------------------
Total Distributions Received .29 1.21 1.025 .79 .83 .69
Net Realized and Unrealized Gain (Loss)
on Investments 1.43 1.19 2.550 (.82) .56 .59
-------------------------------------------------------
Total from Investment Operations 1.72 2.40 3.575 (.03) 1.39 1.28
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.25) (.59) (.590) (.52) (.47) (.51)
Distributions from Realized Capital Gains -- (.98) (.565) (.25) (.40) (.18)
-------------------------------------------------------
Total Distributions (.25) (1.57) (1.155) (.77) (.87) (.69)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.33 $15.86 $15.03 $12.61 $13.41 $12.89
===================================================================================================
TOTAL RETURN 10.84% 16.11% 28.64% -0.21% 10.88% 10.51%
===================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $6,661 $5,863 $ 4,842 $ 3,766 $ 3,628 $ 2,489
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 3.18%* 3.71% 4.12% 4.01% 3.67% 4.36%
Portfolio Turnover Rate 11%* 18% 13% 9% 3% 3%
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
10
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
Vanguard STAR Portfolio is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Portfolio consistently follows such
policies in preparing its financial statements.
1. VALUATION: Investments are valued at the net asset value of each
Vanguard portfolio determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date. Temporary cash
investments are valued at cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
4. REPURCHASE AGREEMENTS: The Portfolio, along with members of The Vanguard
Group, transfers uninvested cash balances to a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
5. OTHER: Income and capital gain distributions received are recorded on
the ex-dividend date. Security transactions are accounted for on the date
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
B. Under a special service agreement, The Vanguard Group furnishes corporate
management, administrative, marketing, and distribution services to the
Portfolio. The special service agreement provides that Vanguard will reimburse
the Portfolio's expenses to the extent of savings in administrative and
marketing costs realized by Vanguard in the operation of the Portfolio.
Accordingly, all expenses incurred by the Portfolio during the six months ended
June 30, 1997, were reimbursed by Vanguard. The Portfolio's trustees and
officers are also directors and officers of Vanguard.
C. During the six months ended June 30, 1997, the Portfolio purchased
$439,014,000 of investment securities and sold $286,563,000 of investment
securities.
D. At June 30, 1997, unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,558,171,000,
consisting entirely of unrealized gains on securities that had risen in value
since their purchase.
11
<PAGE> 14
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies
in The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional Investor Group.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGAURD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 15
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q562-6/97
