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[PHOTO]
VANGUARD
STAR PORTFOLIO
Annual Report
December 31, 1996
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 (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); 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.
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Portfolio
Profile
6
Performance
Summary
8
Financial
Statements
9
Report Of
Independent
Accountants
14
Trustees And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
During the year ended December 31, 1996, Vanguard STAR Portfolio provided
a total return of +16.1%, reflecting the robust gains of the U.S. stock market
and the relatively meager returns on bonds during the year. Our policy of
holding a balanced portfolio of 62.5% stock funds, 25% bond funds, and 12.5% in
a money market fund obviously limited our participation in the continuing bull
market in stocks, yet our eleventh full year was an excellent one both on an
absolute basis and relative to competitive standards.
The table at right compares STAR's total return (capital change plus
reinvested dividends) for the year with that of an average of mutual funds
weighted in accordance with our asset-allocation guidelines. It also presents
the return of a comparably weighted composite of market indexes that represent
the three asset classes in which we invest: for stocks, the unmanaged Standard
& Poor's 500 Composite Stock Price Index; for bonds, the unmanaged Lehman
Brothers Aggregate Bond Index; and for cash reserves, the Salomon 90-Day U.S.
Treasury Bills. STAR's return far exceeded that of the composite fund average
and outperformed the composite market index too.
Our return is based on an increase in net asset value from $15.03 per
share on December 31, 1995, to $15.86 per share on December 31, 1996, with the
latter figure adjusted for dividends totaling $0.59 per share paid from net
investment income and distributions totaling $0.98 per share paid from net
realized capital gains. At year-end, our dividend yield was 3.9%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- ----------------------------------------------------------------------------
<S> <C>
Vanguard STAR Portfolio + 16.1%
- ----------------------------------------------------------------------------
Composite Fund Average + 13.6%
- ----------------------------------------------------------------------------
Composite Market Index + 15.7%
- ----------------------------------------------------------------------------
S&P 500 Index + 23.0%
Lehman Aggregate Bond Index + 3.6
Salomon 90-Day U.S. Treasury Bills + 5.3
- ----------------------------------------------------------------------------
</TABLE>
The Composite Fund Average is 62.5% average general equity mutual fund, 25%
average fixed-income fund, and 12.5% average money market fund. The Composite
Market Index is similarly weighted using the S&P 500 Index, the Lehman
Aggregate Bond Index, and the Salomon 90-Day U.S. Treasury Bills.
1996 PERFORMANCE OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December. The yield
on the benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the
price of the long bond down by nearly -8%. The yield on the U.S. Treasury bill
ended 1996 at 5.2%, up from 5.1% a year earlier.
In contrast, the price trend for common stocks was virtually one-way: up.
The S&P 500 Index provided positive returns in all but two months (July and
December), as both growth stocks and value stocks turned in strong
performances. Returns on these two
1
<PAGE> 4
groups are quite similar over long periods, but often diverge over shorter
periods. In 1996, the two groups had similar returns: the S&P/BARRA Growth
Index earned +24.0%, the S&P/BARRA Value Index +22.0%.
For the Vanguard Funds held by STAR, returns fell roughly in line with the
market segments in which they invest. Despite investors' slight preference for
growth stocks, our value funds performed exceptionally well: Both Windsor Fund
and Windsor II outdistanced the S&P 500 Index. (Windsor's return was more than
three percentage points better.) Among the growth-oriented funds held by STAR,
U.S. Growth Portfolio comfortably outpaced the Index, while Morgan Growth Fund
bested the Index by a slim margin. PRIMECAP Fund and Explorer Fund fell short
of the Index, largely as a result of the market's overwhelming bias toward
large-capitalization stocks in 1996.
Returns on STAR's bond segment were not nearly as generous. The Long-Term
Corporate Portfolio, hurt by rising interest rates, eked out a +1.2% return
(including income). The GNMA Portfolio, with an average maturity less than half
that of Long-Term Corporate, was impeded less by the climb in interest rates
and, including income, returned +5.2% for the year. The Prime Portfolio, as
we've grown accustomed to reporting, again outperformed the average money
market mutual fund. The adjacent table summarizes the twelve-month performance
of the Vanguard Funds held by STAR.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL RETURN
PERCENT OF YEAR ENDED
VANGUARD PORTFOLIO STAR ASSETS DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
Windsor II 27.3% +24.2%
Windsor 15.0 +26.4
PRIMECAP 5.1 +18.3
Explorer 5.0 +14.0
U.S. Growth 5.0 +26.0
Morgan Growth 4.9 +23.3
- -------------------------------------------------------------------------------
BOND FUNDS
GNMA 12.6% + 5.2%
Long-Term Corporate 12.5 + 1.2
- -------------------------------------------------------------------------------
MONEY MARKET FUND
Prime 12.6% + 5.3%
- -------------------------------------------------------------------------------
TOTAL 100.0% +16.1%
- -------------------------------------------------------------------------------
</TABLE>
During 1996, we completed our partial reallocation of STAR's stock fund
component, reducing Windsor II's weighting from more than 40% of net assets in
1995 to below 30% at the end of 1996. During the year, assets were taken from
Windsor II and moved to Windsor (now our second-largest holding at 15% of
assets), Morgan, Explorer, and PRIMECAP. The reallocation helped broaden our
equity diversification while also modestly increasing the Portfolio's exposure
to growth funds.
LONG-TERM PERFORMANCE OVERVIEW
Our solid 1996 performance allowed STAR to maintain its significant advantage
over our composite fund average. The table on page 3 summarizes returns for the
past decade for STAR and our comparative standards in both percentage terms and
dollar terms (assuming an initial investment of $10,000). The table reflects
the returns on balance, but does not show the ups and downs of the financial
markets from one year to next and, of course, tells us nothing about how the
markets may perform in the future. Following the completion of a two-year run
during which the U.S. stock market provided an average annual return of more
than +30%, it seems reasonable to caution that the financial markets will not
always provide such generous rewards. We emphasize that, over the past decade,
the total return on the composite stock/bond market index was well above its
long-term (since 1926) norm of about +9%. The divergence of the returns of
stocks and bonds
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<PAGE> 5
in 1996--coming as it did on the heels of a year when both stocks and bonds
enjoyed explosive rallies--serves as a reminder of both the variability of
returns and STAR's adherence to its traditional balanced investment philosophy.
Our edge of 1.2 percentage points annually over our balanced composite
fund average amounted over the decade to $3,322, nearly one-third of the
initial $10,000 investment. This advantage is the result of a combination of
skilled portfolio management, exceptionally low costs, and compound returns.
Our low costs account for a large part of our edge relative to the competition.
Although STAR incurs no direct operating expenses, the underlying Vanguard
Funds had an average weighted expense ratio (operating expenses as a percentage
of average net assets) of 0.37% during 1996. This was less than one-third the
1.18% average expense ratio for the funds in the composite benchmark.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED DECEMBER 31, 1996
----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ----------------------------------------------------------------
<S> <C> <C>
Vanguard STAR Portfolio +12.1% $31,425
- ----------------------------------------------------------------
Composite Fund Average +10.9% $28,103
- ----------------------------------------------------------------
Composite Market Index +12.6% $32,699
- ----------------------------------------------------------------
</TABLE>
This cost edge, of course, does not carry over to our comparison against
the composite market index, which is a theoretical construct that bears none of
the administrative, operating, and investment management expenses that all
mutual funds incur. STAR's imputed annual expense ratio accounts for nearly all
of our -0.5% average annual shortfall against the Index. Finally, we note that
while the composite index provides a fair comparative standard for STAR, it
does not precisely reflect the policies followed by STAR and our actively
managed counterparts. Even so, we will continue to strive to top this
formidable standard.
IN SUMMARY
Most mutual fund investors understand that volatility risk is a measure of how
much an investment can fluctuate in value over a given period. But many equity
fund investors have experienced only "upside volatility." The U.S. stock market
has been rising--with only a few, brief setbacks--for nearly 15 years.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks will enjoy a repeat of the exceptional returns of this remarkable era.
Indeed, there are sure to be some rough seas ahead. Nonetheless, we believe
that maintaining a balanced portfolio of stock funds, bond funds, and money
market funds--the strategy STAR Portfolio always will pursue--will help
investors withstand the volatility of the financial markets and position them
for the rewards the markets may offer. "Stay the course" has proved wise
counsel in the past, and we see no reason why it should not continue to be in
the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 17, 1997
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- -----------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury
Bills 5.3 5.1 4.4
- -----------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- -----------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
4
<PAGE> 7
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the European
and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
5
<PAGE> 8
PORTFOLIO PROFILE: STAR PORTFOLIO
DECEMBER 31, 1996
This Profile presents key characteristics of the Portfolio, including its
allocations to various asset classes and to underlying Vanguard Funds.
Elements of this Profile are defined on page 7.
FINANCIAL ATTRIBUTES
<TABLE>
<S> <C>
- --------------------------------------------
Yield 3.9%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.37%
</TABLE>
*For underlying portfolios.
VOLATILITY MEASURES
<TABLE>
<CAPTION>
- ---------------------------------------------
STAR S&P 500
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 0.68 1.00
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
[FIGURE]
PORTFOLIO ALLOCATION BY ASSET CLASS
Stocks 62%
Bonds 25%
Cash Reserves 13%
PORTFOLIO ALLOCATION TO FUNDS
<TABLE>
<S> <C>
- ---------------------------------------------------------------
Vanguard/Windsor II 27.3%
Vanguard/Windsor Fund 15.0
Vanguard/PRIMECAP Fund 5.1
Vanguard Explorer Fund 5.0
Vanguard U.S. Growth Portfolio 5.0
Vanguard/Morgan Growth Fund 4.9
Vanguard Fixed Income Securities Fund-GNMA Portfolio 12.6
Long-Term Corporate Portfolio 12.5
Vanguard Money Market Reserves-Prime Portfolio 12.6
- ---------------------------------------------------------------
Total 100.0%
</TABLE>
EQUITY INVESTMENT FOCUS
[FIGURE]
6
<PAGE> 9
[PHOTO]
AVERAGE WEIGHTED EXPENSE RATIO. Portfolios that invest in other Vanguard funds
incur no direct expenses, but do bear their share of the operating,
administrative, and advisory expenses of the underlying funds. The average
weighted expense ratio is the average of these expense ratios, weighted in
proportion to the amount of the portfolio represented by each underlying fund.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a portfolio's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly
reduce returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
PORTFOLIO ALLOCATION BY ASSET CLASS. This chart shows the distribution, by
type of asset, of a portfolio's holdings.
Portfolio Allocation to Funds. This table shows the distribution of a
portfolio's assets in underlying Vanguard funds.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
7
<PAGE> 10
PERFORMANCE SUMMARY: STAR PORTFOLIO
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.
TOTAL INVESTMENT RETURNS: 3/29/85-12/31/96
<TABLE>
<CAPTION>
- -----------------------------------------------------
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
- -----------------------------------------------------
</TABLE>
*62.5% Lipper General Equity Funds Average, 25% Lipper Fixed Income Funds
Average, and 12.5% Lipper Money Market Instrument Funds Average.
See Financial Highlights table on page 12 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 12/31/86-12/31/96
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
STAR Portfolio STAR Lipper Composite STAR Market Composite
- -------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1986 12 10000 10000 10000
1987 03 11109 11293 11372
1987 06 11256 11374 11696
1987 09 11412 11680 12117
1987 12 10166 10314 10604
1988 03 10949 10931 11102
1988 06 11613 11358 11616
1988 09 11922 11380 11727
1988 12 12102 11535 12001
1989 03 12766 12073 12600
1989 06 13658 12827 13582
1989 09 14450 13617 14560
1989 12 14377 13606 14923
1990 03 14031 13394 14654
1990 06 14424 14026 15409
1990 09 12879 12670 14133
1990 12 13856 13388 15135
1991 03 15561 14999 16629
1991 06 15548 15031 16708
1991 09 16346 15947 17535
1991 12 17206 16993 18719
1992 03 17262 17016 18388
1992 06 17808 16899 18816
1992 09 18344 17381 19411
1992 12 19014 18368 20050
1993 03 19900 18949 20823
1993 06 20156 19237 21047
1993 09 20952 20000 21545
1993 12 21084 20322 21880
1994 03 20439 19809 21230
1994 06 20655 19434 21259
1994 09 21136 20226 21971
1994 12 21040 20082 22030
1995 03 22591 21212 23679
1995 06 24317 22664 25488
1995 09 25947 24055 26920
1995 12 27065 24760 28266
1996 03 28019 25598 29125
1996 06 28705 26436 30028
1996 09 29583 27070 30811
1996 12 31425 28103 32699
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STAR Portfolio 16.11% 12.80% 12.13% $31,425
Composite Fund Average* 13.65 10.59 10.89 28,103
Composite Market Index** 15.69 11.80 12.58 32,699
- -------------------------------------------------------------------------------
</TABLE>
*62.5% Lipper General Equity Funds Average, 25% Lipper Fixed Income Funds
Average, and 12.5% Lipper Money Market Instrument Funds Average.
**62.5% S&P 500 Index, 25% Lehman Aggregate Bond Index, and 12.5% Salomon
90-Day U.S. Treasury Bills.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STAR Portfolio 3/29/85 16.11% 12.80% 6.67% 5.46% 12.13%
- ------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
FINANCIAL STATEMENTS
DECEMBER 31, 1996
[PHOTO]
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, 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)*
- --------------------------------------------------------------------------------------------
INVESTMENTS (100.2%)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard/Windsor II 67,228,003 $1,602,043
Vanguard/Windsor Fund 53,215,790 882,850
Vanguard/PRIMECAP Fund 9,918,326 298,343
Vanguard Explorer Fund 5,504,338 296,299
Vanguard U.S. Growth Portfolio 12,320,463 292,488
Vanguard/Morgan Growth Fund 18,604,678 290,791
Vanguard Fixed Income Securities Fund-GNMA Portfolio 72,436,941 740,306
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 83,621,122 735,030
Vanguard Money Market Reserves-Prime Portfolio 738,000,301 738,000
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $4,838,142) 5,876,150
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.2%)
- --------------------------------------------------------------------------------------------
Other Assets 24,035
Liabilities (36,758)
----------
(12,723)
- --------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 369,685,423 shares of beneficial interest
(unlimited authorization--no par value) $5,863,427
============================================================================================
NET ASSET VALUE PER SHARE $15.86
============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,827,361 $13.06
Overdistributed Net Investment Income (2,615) (.01)
Accumulated Net Realized Gains 673 --
Unrealized Appreciation--Note D 1,038,008 2.81
- --------------------------------------------------------------------------------------------
NET ASSETS $5,863,427 $15.86
============================================================================================
</TABLE>
9
<PAGE> 12
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
YEAR ENDED DECEMBER 31, 1996
(000)
- -----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income Distributions Received $197,636
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 197,636
- -----------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received 216,157
Investment Securities Sold 120,662
- -----------------------------------------------------------------------------------------
REALIZED NET GAIN 336,819
- -----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 273,268
- -----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $807,723
=========================================================================================
</TABLE>
10
<PAGE> 13
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
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
(000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 197,636 $ 177,075
Realized Net Gain 336,819 170,349
Change in Unrealized Appreciation (Depreciation) 273,268 723,462
--------------------------
Net Increase in Net Assets Resulting from Operations 807,723 1,070,886
--------------------------
DISTRIBUTIONS
Net Investment Income (199,884) (177,410)
Realized Capital Gain (335,282) (171,592)
--------------------------
Total Distributions (535,166) (349,002)
--------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 801,072 526,221
Issued in Lieu of Cash Distributions 525,118 342,586
Redeemed (577,160) (515,076)
--------------------------
Net Increase from Capital Share Transactions 749,030 353,731
- ----------------------------------------------------------------------------------------
Total Increase 1,021,587 1,075,615
- ----------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 4,841,840 3,766,225
--------------------------
End of Year $ 5,863,427 $ 4,841,840
========================================================================================
(1)Shares Issued (Redeemed)
Issued 50,780 36,769
Issued in Lieu of Cash Distributions 33,115 23,182
Redeemed (36,430) (36,506)
--------------------------
Net Increase in Shares Outstanding 47,465 23,445
========================================================================================
</TABLE>
11
<PAGE> 14
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 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 THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.03 $12.61 $13.41 $12.89 $12.30
- ----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Income Distributions Received .58 .590 .53 .47 .51
Capital Gain Distributions Received .63 .435 .26 .36 .18
------------------------------------------------
Total Distributions Received 1.21 1.025 .79 .83 .69
Net Realized and Unrealized Gain (Loss)
on Investments 1.19 2.550 (.82) .56 .59
------------------------------------------------
Total from Investment Operations 2.40 3.575 (.03) 1.39 1.28
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.59) (.590) (.52) (.47) (.51)
Distributions from Realized Capital Gains (.98) (.565) (.25) (.40) (.18)
------------------------------------------------
Total Distributions (1.57) (1.155) (.77) (.87) (.69)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.86 $15.03 $12.61 $13.41 $12.89
==========================================================================================================
TOTAL RETURN 16.11% 28.64% -0.21% 10.88% 10.51%
==========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $5,863 $4,842 $3,766 $3,628 $2,489
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 3.71% 4.12% 4.01% 3.67% 4.36%
Portfolio Turnover Rate 18% 13% 9% 3% 3%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
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.
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. 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 year ended
December 31, 1996, were reimbursed by Vanguard. The Portfolio's trustees and
officers are also directors and officers of Vanguard.
C. During the year ended December 31, 1996, the Portfolio purchased
$1,334,885,000 of investment securities and sold $831,000,000 of investment
securities.
D. At December 31, 1996, unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,038,008,000,
consisting entirely of unrealized gains on securities that had risen in value
since their purchase.
13
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard STAR Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard STAR Portfolio (the "Portfolio") at December 31, 1996, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and, with respect to unsettled securities
transactions, the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
14
<PAGE> 17
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD STAR PORTFOLIO
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Portfolio designates $299,267,000 as capital gain dividends (from
net long-term capital gains), which were distributed in December 1996.
For corporate shareholders, 26.2% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
15
<PAGE> 18
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.; Director of Sun Company, Inc.
and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco
Standard Corp., Raytheon Co.,
Knight-Ridder, Inc., and Massa-
chusetts Mutual Life Insurance Co.
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.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD 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
[email protected] http://www.vanguard.com
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) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard 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/Trustees' Equity-International
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)
Q560-12/96
<PAGE> 20
[PHOTO]
VANGUARD
LIFESTRATEGY
PORTFOLIOS
Annual Report
December 31, 1996
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 (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); 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.
<PAGE> 21
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
ssessment of the Fund's performance relative to an appropriate unmanaged market
benchmark and a peer group of mutual funds with similar investment policies. It
also reviews the principal factors contributing to--and detracting from--the
returns earned by the Fund. To help you evaluate your Fund's current-year
performance, the Message includes a discussion of the Fund's long-term
investment results, as well as a look ahead to the prospects for the coming
year. A recap of the financial markets, which had been included as part of the
Chairman's letter, now appears in The Markets In Perspective. This overview
covers the world's financial markets, putting the results of the Fund's
strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
6
Performance
Summaries
8
Portfolio
Profiles
12
Financial
Statements
17
Report Of
Independent
Accountants
28
Trustees And
Officers
INSIDE BACK COVER
<PAGE> 22
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
The stock and bond markets, which soared together in 1995, took divergent
paths in 1996. Stocks turned in a second year of extraordinarily high returns,
while bonds, whose prices declined as interest rates increased, provided
relatively meager returns. In this environment, all four Vanguard LifeStrategy
Portfolios provided solid, positive returns ranging from +7.6% for our Income
Portfolio (which targets 80% of its assets to bonds and short-term reserves) to
+15.4% for our Growth Portfolio (which targets 80% of its assets to common
stocks).
The adjacent table presents our results for 1996, listing the total return
(capital change plus reinvested dividends) for each Portfolio. Also shown are
the results of the composite indexes against which we measure our Portfolios.
These composites are constructed from unmanaged indexes in proportions that
match the target asset-class weightings of the respective Portfolios. You will
note that, in each case, our Portfolio outpaced its target, albeit by amounts
that were modest to a fault.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- ---------------------------------------------------------
<S> <C>
LifeStrategy Income + 7.6%
Composite Index* + 7.4
- ---------------------------------------------------------
LifeStrategy Conservative Growth +10.4%
Composite Index* +10.1
- ---------------------------------------------------------
LifeStrategy Moderate Growth +12.7%
Composite Index* +12.5
- ---------------------------------------------------------
LifeStrategy Growth +15.4%
Composite Index* +15.3
- ---------------------------------------------------------
</TABLE>
*Total returns for the composite indexes are derived by applying the
Portfolio's target allocation to the results of the following benchmarks: for
U.S. stocks, the Wilshire 5000 Index; for international stocks, the
MSCI-Europe, Australasia, and Far East Index; for bonds, the Lehman Aggregate
Bond Index; and for cash reserves, Salomon 90-Day U.S. Treasury Bills.
Detailed per-share figures, including net asset values, income dividends,
and capital gains distributions, are presented along with each Portfolio's
yield as of December 31, 1996, in the table that follows this letter on page 5.
1996 PERFORMANCE OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December. The yield
on the benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the
price of the long bond down by nearly -8%. For the year, the Lehman Brothers
Aggregate Bond Index, a good benchmark for the U.S. bond market, provided a
return of +3.6%. The yield on 90-day U.S. Treasury bills ended 1996 at 5.2%,
up from 5.1% a year earlier.
In contrast, the price trend for domestic stocks was virtually one-way:
up. The Standard & Poor's 500 Composite Stock Price Index provided positive
returns in all but two months (July and December) en route to a total return of
+23.0% for the year. However, the equity market did not reward all stocks
equally. Wall Street's motto seemed to be
1
<PAGE> 23
"bigger is better," as investors favored familiar, large-capitalization stocks
over smaller companies. Because of this large-cap bias, broader measures of the
market lagged the S&P 500 Index. The Wilshire 5000 Equity Index, which
represents virtually the entire U.S. stock market, provided a return of +21.2%.
This Index is the benchmark for our Total Stock Market Portfolio, which
represents the U.S. stock portion of our LifeStrategy Portfolios.
Our international stock holdings did not do nearly so well. While the
Morgan Stanley Capital International-Europe, Australasia, Far East Index was
fairly strong in local currency terms (+11.6% return), the strengthening of the
U.S. dollar versus other currencies brought the total return earned by U.S.
investors down to +6.4%. Stock markets were generally buoyant in Europe,
returning +21.4% in dollar terms for the year, while those in the Pacific
region--dominated by the weak Japanese market--lost -8.2%.
As you would expect during a year when stocks were up strongly and bonds
and reserves were providing only modest returns, our Portfolios with heavier
allocations to U.S. equities were proportionately rewarded with higher returns.
So dramatic was the difference between the asset classes that our most
aggressive Portfolio provided double the return of our most conservative one,
as shown in the adjacent table. Of course, this kind of result should not be
expected regularly; a greater exposure to stocks brings with it a greater risk
of short-term price fluctuations, both up and down.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
TOTAL RETURNS
YEAR ENDED DECEMBER 31, 1996
----------------------------------
MUTUAL FUND
PORTFOLIO BENCHMARK* DIFFERENCE
- -----------------------------------------------------------------------
<S> <C> <C> <C>
LifeStrategy Income + 7.6% + 7.5% +0.1%
LifeStrategy Conservative Growth +10.4 +10.0 +0.4
LifeStrategy Moderate Growth +12.7 +12.5 +0.2
LifeStrategy Growth +15.4 +15.1 +0.3
- -----------------------------------------------------------------------
</TABLE>
*Total returns for the benchmarks are based on the results of a blended
composite, which weights the returns of the average comparable mutual fund for
each asset class in proportion with the target weighting of the appropriate
LifeStrategy Portfolio.
The table also shows each Portfolio's return versus that of its comparable
mutual fund benchmark. The results, while uniformly favorable, are hardly
dazzling, in large measure because of the lagging performance of our
international component. We continue to believe that some modest commitment to
the world's stock markets is a valuable enhancement to our diversification, and
that it will make a larger contribution to our returns in due course.
Vanguard LifeStrategy Portfolios, as you know, hold different targeted
proportions of the major asset classes to meet the needs of investors with
different goals, time horizons, and tolerances for risk. The Portfolios use
selected Vanguard mutual funds to meet their asset allocation targets. Each
Portfolio invests 25% of its assets in Vanguard Asset Allocation Fund. The
domestic equity portion is invested in Vanguard Index Trust-Total Stock Market
Portfolio, while the reserves portion is invested in the Short-Term Corporate
Portfolio of Vanguard Fixed Income Securities Fund. However, effective in 1997,
we are making marginal changes in the lineup of other funds we employ.
The bond portion of LifeStrategy Portfolios, which until January 1997 was
spread among four portfolios of Vanguard Fixed Income Securities Fund, has been
moved to the Total Bond Market Portfolio of Vanguard Bond Index Fund, which
includes all these maturity groups and mortgage-backed securities such as
GNMAs. Beginning in February 1997, new cash flows into LifeStrategy Portfolios'
foreign-stock component, which has been invested in the European and Pacific
Portfolios of Vanguard International Equity
2
<PAGE> 24
<TABLE>
<CAPTION>
TARGET AND ACTUAL ASSET ALLOCATIONS
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1996
----------------------------------------------------------
STOCKS* BONDS RESERVES
---------------- ------------------ -----------------
PORTFOLIO TARGET ACTUAL TARGET ACTUAL TARGET ACTUAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LifeStrategy Income 20.0% 22.5% 60.0% 57.5% 20.0% 20.0%
- ---------------------------------------------------------------------------------------------
LifeStrategy Conservative Growth 40.0 42.5 40.0 37.5 20.0 20.0
- ---------------------------------------------------------------------------------------------
LifeStrategy Moderate Growth 60.0 62.5 40.0 37.5 0 0
- ---------------------------------------------------------------------------------------------
LifeStrategy Growth 80.0 82.5 20.0 17.5 0 0
- ---------------------------------------------------------------------------------------------
</TABLE>
*International stock positions for the Income, Conservative Growth, Moderate
Growth, and Growth Portfolios equal, respectively, 0%, 5%, 10%, and 15% of
assets.
Index Fund, is being invested in our Total International Portfolio, which
comprises not only the European and Pacific Portfolios, but the Emerging
Markets Portfolio as well.
These changes will slightly reduce the already-low costs borne
(indirectly) by investors in our LifeStrategy Portfolios. (Although the
Portfolios incur no direct expenses, they do bear their share of the expenses
of the underlying Funds, which currently amount to approximately 0.32% of
average assets.) By consolidating the bond and international equity portions of
LifeStrategy Portfolios' assets, we expect to reduce the effective average
expense ratios by amounts ranging from less than 0.01% for the Growth Portfolio
to 0.04% for the Income Portfolio. Suffice it to say that the expense ratios
borne by LifeStrategy investors are by far the lowest among all asset
allocation funds, whose average expense ratio exceeds 1.30%. The table above
presents the target asset allocations of each Portfolio and the actual
allocations that were in place at year-end 1996.
Each Portfolio's 1996 performance benefited from the fact that (1) the
underlying Vanguard index funds closely tracked their benchmarks and (2) our
operating costs on those underlying funds were held to very low levels. Low
cost and performance that closely parallels our benchmark indexes should be
enduring attributes of our LifeStrategy Portfolios.
Our Portfolios were able to slightly exceed the returns on their composite
index benchmarks in 1996 because our holdings of common stocks were slightly
higher than in our target allocations. This was a result of our holding
one-quarter of the Portfolios' assets in Vanguard Asset Allocation Fund, whose
asset mix, on balance, was tilted toward stocks during 1996. This strategy
enhanced returns over a "market-neutral" stance. Although Vanguard LifeStrategy
Portfolios' position in Asset Allocation Fund has consistently been a positive
contributor to our relative performance since our inception, we emphasize that
there is no assurance that it will be so in every period.
Our policy of using short-term bonds for the reserves portion of the
Income and the Conservative Growth Portfolios was a slight drag on their
performance in 1996. The underlying Short-Term Corporate Portfolio returned
+4.8%, matching the average money market fund's return of +4.8%, but slightly
behind the +5.3% return on 90-day U.S. Treasury bills. While we expect
short-term bonds to provide higher returns than money market securities over
the long term, they clearly do not do so every year.
LIFETIME PERFORMANCE OVERVIEW
Vanguard LifeStrategy Portfolios have been in existence just 21/4 years, an
operating history too brief to justify sweeping conclusions as to their merits.
However, we are fairly
3
<PAGE> 25
pleased with their results so far. Of course, we have sailed with remarkably
favorable winds. The Portfolios have participated in one of the best two-year
runs for the U.S. stock market in the past seven decades, with the S&P 500
Index providing a cumulative return of nearly +70% since our inception, while
the bond market's return was +23%. The average annualized returns of +26.3% and
+9.7%, respectively, were both above long-term historical norms, hugely so in
the case of stocks (an average annual long-term return of +10.7%).
The following table presents the returns earned by our Portfolios since
their inception date of September 30, 1994, and shows how an initial investment
of $10,000 in each Portfolio would have grown, assuming reinvestment of income
dividends and capital gains distributions. It presents the same information for
our key comparative standards, the composite mutual fund benchmarks and
composite indexes appropriate to each LifeStrategy Portfolio. In a tough
competitive environment, we hope you will agree that the results have been
impressive.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURNS
SEP. 30, 1994, TO DEC. 31, 1996
---------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ----------------------------------------------------------------------
<S> <C> <C>
LifeStrategy Income +13.4% $13,266
Mutual Fund Benchmark +10.2 12,447
Composite Index +11.7 12,842
- ----------------------------------------------------------------------
LifeStrategy Conservative Growth +15.1% $13,736
Mutual Fund Benchmark +12.0 12,913
Composite Index +13.8 13,389
- ----------------------------------------------------------------------
LifeStrategy Moderate Growth +17.3% $14,320
Mutual Fund Benchmark +14.6 13,579
Composite Index +16.8 14,196
- ----------------------------------------------------------------------
LifeStrategy Growth +19.4% $14,901
Mutual Fund Benchmark +16.4 14,068
Composite Index +18.9 14,780
- ----------------------------------------------------------------------
</TABLE>
We reiterate our observation about the extraordinarily favorable
conditions in the financial markets since the creation of LifeStrategy
Portfolios and we emphasize that the markets will not always be so generous.
Long-term returns from financial assets are unlikely to be as high as those
prevailing over the past few years. The divergence of the returns of stocks and
bonds in 1996--coming as it did on the heels of a year when both asset types
enjoyed explosive rallies--serves as a reminder of both the variability of
market returns and the adherence to a balanced investment philosophy by the
Vanguard LifeStrategy Portfolios.
Future returns from the financial markets are beyond the control of
investors and investment companies. Costs are a different matter. They have an
important influence in shaping relative investment returns, especially among
funds with conservative objectives, such as asset allocation funds. Our
allocation strategy made it possible, given our minimal operating costs, to
outpace our target indexes, which are "paper only" constructs that carry no
operating costs. But our real-world advantage over our mutual fund benchmarks
was substantially fostered by the fact that the annual expenses borne by
investors in LifeStrategy Portfolios are 0.32% of average assets, less than
one-third of the approximately 1.20% expense ratio for the average of mutual
funds that make up our composite benchmarks. The savings from our cost
advantage, which we believe are sustainable, have directly enhanced--and should
continue to enhance--the relative returns earned by our shareholders.
IN SUMMARY
Most mutual fund investors understand that volatility risk is a measure of how
much an investment may fluctuate in value over a given period of time. But many
equity fund
4
<PAGE> 26
investors today have experienced only "upside volatility." The U.S. stock
market has been rising--with only a few brief setbacks--for nearly 15 years.
The bond market over much of the same period has provided extraordinarily high
returns.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks will enjoy a repeat of the exceptional returns of this remarkable era.
Indeed, there are sure to be some rough seas ahead. Nonetheless, we believe
that investors who maintain a balanced portfolio of stock funds and bond
funds--the strategy that undergirds each of our LifeStrategy Portfolios--will
overcome the volatility of financial markets and be rewarded. "Stay the course"
has proved wise counsel in the past, and we see no reason why it should not
continue to be in the future.
/s/ JOHN C BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 22, 1997
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE 12 MONTHS
DECEMBER 31, ------------------------
------------------------- INCOME CAPITAL GAINS SEC
PORTFOLIO 1995 1996 DIVIDENDS DISTRIBUTIONS YIELD
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LifeStrategy Income $11.54 $11.55 $0.64 $0.21 6.10%
LifeStrategy Conservative Growth 11.68 12.14 0.53 0.20 4.98
LifeStrategy Moderate Growth 12.11 12.97 0.44 0.23 4.02
LifeStrategy Growth 12.36 13.68 0.35 0.23 2.92
- -----------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 27
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- --------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- --------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- --------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
6
<PAGE> 28
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the
European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
7
<PAGE> 29
PERFORMANCE SUMMARY: INCOME PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 9/30/94-12/31/96
- --------------------------------------------
INCOME PORTFOLIO MUTUAL FUND
BENCHMARK*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.2% 1.4% 0.2% -0.2%
1995 17.7 5.3 23.0 16.0
1996 1.9% 5.7% 7.6% 7.5%
- --------------------------------------------
</TABLE>
*60% Lipper Fixed Income Funds Average, 20% Lipper General Equity Funds
Average, and 20% Lipper Money Market Instrument Funds Average.
See Financial Highlights table on page 24 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 9/30/94-12/31/96
- --------------------------------------------------------------------------------------------------------------
Cumulative Performance 10 yr Graph - Portfolio/ Benchmark - Vanguard LifeStrategy Portfolios--Income Portfolio
Composite Composite
Life-Income Fund Average Market Index Lehman
<S> <C> <C> <C> <C> <C>
1994 09 10000 10000 10000 10000
1994 12 10020 9984 10034 10038
1995 03 10618 10393 10546 10544
1995 06 11354 10910 11157 11186
1995 09 11780 11249 11522 11405
1995 12 12324 11583 11961 11891
1996 03 12323 11676 11995 11681
1996 06 12476 11857 12173 11747
1996 09 12739 12098 12414 11965
1996 12 13266 12447 12842 12325
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME PORTFOLIO 7.65% 13.37% $13,266
MUTUAL FUND BENCHMARK* 7.46 10.21 12,447
COMPOSITE INDEX** 7.37 11.75 12,842
LEHMAN AGGREGATE BOND INDEX 3.63 9.73 12,325
- -----------------------------------------------------------------------------------
</TABLE>
* 60% Lipper Fixed Income Funds Average, 20% Lipper General Equity Funds
Average, and 20% Lipper Money Market Instrument Funds Average.
**60% Lehman Aggregate Bond Index, 20% Wilshire 5000 Index, and 20% Salomon
90-Day U.S. Treasury Bills.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Portfolio 9/30/94 7.65% 7.83% 5.54% 13.37%
- --------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 30
PERFORMANCE SUMMARY: CONSERVATIVE GROWTH PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 9/30/94-12/31/96
- ----------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO MUTUAL FUND
BENCHMARK*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.3% 1.4% 0.1% -0.5%
1995 19.3 5.0 24.3 18.0
1996 5.6% 4.8% 10.4% 10.0%
- ----------------------------------------------------
</TABLE>
*40% Lipper Fixed Income Funds Average, 35% Lipper General Equity Funds
Average, 20% Lipper Money Market Instrument Funds Average, and 5% Lipper
International Funds Average.
See Financial Highlights table on page 25 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 9/30/94-12/31/96
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Performance 10 yr Graph - Portfolio/ Benchmark - Vanguard LifeStrategy Portfolios--Conservative Growth Portfolio
Life-Conservative Composite Fund Composite
Growth Average Market Index Lehman Wilshire
<S> <C> <C> <C> <C> <C> <C>
1994 09 10000 10000 10000 10000 10000
1994 12 10010 9949 10011 10038 9923
1995 03 10618 10373 10567 10544 10819
1995 06 11371 10944 11202 11186 11829
1995 09 11897 11416 11702 11405 12910
1995 12 12447 11738 12159 11891 13540
1996 03 12617 11977 12357 11681 14300
1996 06 12854 12256 12618 11747 14930
1996 09 13137 12503 12877 11965 15353
1996 12 13736 12913 13389 12325 16412#
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSERVATIVE GROWTH PORTFOLIO 10.36% 15.14% $13,736
MUTUAL FUND BENCHMARK* 10.01 12.02 12,913
COMPOSITE INDEX** 10.11 13.83 13,389
LEHMAN AGGREGATE BOND INDEX 3.63 9.73 12,325
WILSHIRE 5000 INDEX 21.21 24.61 16,412
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Conservative Growth Portfolio 9/30/94 10.36% 10.18% 4.96% 15.14%
- --------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 31
PERFORMANCE SUMMARY: MODERATE GROWTH PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 9/30/94-12/31/96
- ----------------------------------------------------
MODERATE GROWTH PORTFOLIO MUTUAL FUND
BENCHMARK*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.1% 1.4% -0.7% -1.1%
1995 24.1 3.8 27.9 22.1
1996 9.0% 3.7% 12.7% 12.5%
- ----------------------------------------------------
</TABLE>
*50% Lipper General Equity Funds Average, 40% Lipper Fixed Income Funds
Average, and 10% Lipper International Funds Average.
See Financial Highlights table on page 25 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 9/30/94-12/31/96
- -----------------------------------------------------------------------------------------------------------------------
Cumulative Performance 10 yr Graph - Portfolio/ Benchmark - Vanguard LifeStrategy Portfolios--Moderate Growth Portfolio
Life-Moderate Composite Composite
Growth Fund Average Market Index Lehman Wilshire
<S> <C> <C> <C> <C> <C> <C>
1994 09 10000 10000 10000 10000 10000
1994 12 9930 9886 9969 10038 9923
1995 03 10605 10378 10641 10544 10819
1995 06 11441 11079 11405 11186 11829
1995 09 12123 11705 12064 11405 12910
1995 12 12705 12069 12616 11891 13540
1996 03 12999 12414 12913 11681 14300
1996 06 13315 12786 13250 11747 14930
1996 09 13612 13060 13543 11965 15353
1996 12 14320 13579 14196 12325 16412
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
MODERATE GROWTH PORTFOLIO 12.71% 17.28% $14,320
MUTUAL FUND BENCHMARK* 12.51 14.55 13,579
COMPOSITE INDEX** 12.53 16.83 14,196
LEHMAN AGGREGATE BOND INDEX 3.63 9.71 12,325
WILSHIRE 5000 INDEX 21.21 24.61 16,412
- --------------------------------------------------------------------------------------
</TABLE>
* 50% Lipper General Equity Funds Average, 40% Lipper Fixed Income Funds
Average, and 10% Lipper International Funds Average.
** 50% Wilshire 5000 Index, 40% Lehman Aggregate Bond Index, and
10% MSCI-EAFE Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Moderate Growth Portfolio 9/30/94 12.71% 13.30% 3.98% 17.28%
- --------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 32
PERFORMANCE SUMMARY: GROWTH PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 9/30/94-12/31/96
- -----------------------------------------------
GROWTH PORTFOLIO MUTUAL FUND
BENCHMARK*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.5% 1.4% -0.1% -1.5%
1995 26.0 3.2 29.2 24.1
1996 12.5% 2.9% 15.4% 15.1%
- -----------------------------------------------
</TABLE>
*65% Lipper General Equity Funds Average, 20% Lipper Fixed Income Funds
Average, and 15% Lipper International Funds Average.
See Financial Highlights table on page 26 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 9/30/94-12/31/96
- --------------------------------------------------------------------------------------------------------------
Cumulative Performance 10 yr Graph - Portfolio/ Benchmark - Vanguard LifeStrategy Portfolios--Growth Portfolio
Composite Composite
Life-Growth Fund Average Market Index Wilshire
<S> <C> <C> <C> <C> <C>
1994 09 10000 10000 10000 10000
1994 12 9990 9850 9945 9923
1995 03 10684 10356 10659 10819
1995 06 11539 11111 11448 11829
1995 09 12311 11874 12246 12910
1995 12 12911 12224 12817 13540
1996 03 13381 12725 13293 14300
1996 06 13789 13205 13724 14930
1996 09 14105 13481 14032 15353
1996 12 14901 14068 14780 16412
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH PORTFOLIO 15.41% 19.37% $14,901
MUTUAL FUND BENCHMARK* 15.09 16.36 14,068
COMPOSITE INDEX** 15.32 18.95 14,780
WILSHIRE 5000 INDEX 21.21 24.61 16,412
- ---------------------------------------------------------------------
</TABLE>
* 65% Lipper General Equity Funds Average, 20% Lipper Fixed Income Funds
Average, and 15% Lipper International Funds Average.
**65% Wilshire 5000 Index, 20% Lehman Aggregate Bond Index, and 15% MSCI-EAFE
Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio 9/30/94 15.41% 15.99% 3.38% 19.37%
- --------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 33
PORTFOLIO PROFILE: INCOME PORTFOLIO
DECEMBER 31, 1996
This Profile presents key characteristics of the Portfolio, including its
allocations to various asset classes and to underlying Vanguard Funds. Elements
of this Profile are defined on page 13.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------
<S> <C>
Yield 6.1%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.31%
</TABLE>
*For underlying portfolios.
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY ASSET CLASS
- -----------------------------------
<S> <C>
Stocks 22.5
Bonds 57.5
Reserves 20.0
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION TO FUNDS
- -----------------------------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25%
Vanguard Fixed Income Securities Fund--
Short-Term Corporate Portfolio 33
Intermediate-Term Corporate
Portfolio 12
Long-Term Corporate Portfolio 12
GNMA Portfolio 13
Vanguard Index Trust--
Total Stock Market Portfolio 5
- -----------------------------------------------------------------------------
Total 100%
- -----------------------------------------------------------------------------
</TABLE>
EQUITY INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[FIGURE]
FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[FIGURE]
12
<PAGE> 34
[PHOTO]
AVERAGE WEIGHTED EXPENSE RATIO. Portfolios that invest in other Vanguard funds
incur no direct expenses, but do bear their share of the operating,
administrative, and advisory expenses of the underlying funds. The average
weighted expense ratio is the average of these expense ratios, weighted in
proportion to the amount of the portfolio represented by each underlying fund.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a portfolio's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
PORTFOLIO ALLOCATION BY ASSET CLASS. This chart shows the distribution, by type
of asset, of a portfolio's holdings.
PORTFOLIO ALLOCATION TO FUNDS. This table shows the distribution of a
portfolio's assets in underlying Vanguard funds.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
13
<PAGE> 35
PORTFOLIO PROFILE: CONSERVATIVE GROWTH PORTFOLIO
DECEMBER 31, 1996
This Profile presents key characteristics of the Portfolio, including its
allocations to various asset classes and to underlying Vanguard Funds. Elements
of this Profile are defined on page 13.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------
<S> <C>
Yield 5.0%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.31%
</TABLE>
*For underlying portfolios.
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY ASSET CLASS
- -----------------------------------
<S> <C>
Stocks 42.5
Bonds 37.5
Reserves 20.0
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION TO FUNDS
- ----------------------------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25%
Vanguard Fixed Income Securities Fund--
Short-Term Corporate Portfolio 28
Intermediate-Term Corporate
Portfolio 7
Long-Term Corporate Portfolio 7
GNMA Portfolio 8
Vanguard Index Trust--Total Stock Market Portfolio 20
Vanguard International Equity
Index Fund--European Portfolio 3
Pacific Portfolio 2
- ----------------------------------------------------------------------------
Total 100%
- ----------------------------------------------------------------------------
</TABLE>
EQUITY INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[FIGURE]
FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[FIGURE]
14
<PAGE> 36
PORTFOLIO PROFILE: MODERATE GROWTH PORTFOLIO
DECEMBER 31, 1996
This Profile presents key characteristics of the Portfolio, including its
allocations to various asset classes and to underlying Vanguard Funds. Elements
of this Profile are defined on page 13.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------
<S> <C>
Yield 4.0%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.32%
</TABLE>
*For underlying portfolios.
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY ASSET CLASS
- -----------------------------------
<S> <C>
Stocks 62.5
Bonds 37.5
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION TO FUNDS
- --------------------------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25%
Vanguard Fixed Income Securities Fund--
Short-Term Corporate Portfolio 8
Intermediate-Term Corporate
Portfolio 8
Long-Term Corporate Portfolio 7
GNMA Portfolio 7
Vanguard Index Trust--Total Stock Market Portfolio 35
Vanguard International Equity
Index Fund--European Portfolio 5
Pacific Portfolio 5
- --------------------------------------------------------------------------
Total 100%
- --------------------------------------------------------------------------
</TABLE>
EQUITY INVESTMENT FOCUS
- --------------------------------------------------------------------------
[FIGURE]
FIXED-INCOME INVESTMENT FOCUS
- --------------------------------------------------------------------------
[FIGURE]
15
<PAGE> 37
PORTFOLIO PROFILE: GROWTH PORTFOLIO
DECEMBER 31, 1996
This Profile presents key characteristics of the Portfolio, including its
allocations to various asset classes and to underlying Vanguard Funds. Elements
of this Profile are defined on page 13.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------
<S> <C>
Yield 2.9%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.32%
</TABLE>
*For underlying portfolios.
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY ASSET CLASS
- -----------------------------------
<S> <C>
Stocks 82.5
Bonds 17.5
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION TO FUNDS
- -------------------------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25%
Vanguard Fixed Income Securities Fund--
Short-Term Corporate Portfolio 3
Intermediate-Term Corporate
Portfolio 2
Long-Term Corporate Portfolio 2
GNMA Portfolio 3
Vanguard Index Trust--Total Stock Market Portfolio 50
Vanguard International Equity
Index Fund--European Portfolio 8
Pacific Portfolio 7
- -------------------------------------------------------------------------
Total 100%
- -------------------------------------------------------------------------
</TABLE>
EQUITY INVESTMENT FOCUS
- -------------------------------------------------------------------------
[FIGURE]
FIXED-INCOME INVESTMENT FOCUS
- -------------------------------------------------------------------------
[FIGURE]
16
<PAGE> 38
FINANCIAL STATEMENTS
DECEMBER 31, 1996
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each LifeStrategy 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*
INCOME PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (100.1%)
- -----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund 2,096,783 $ 37,616
Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio 4,624,019 49,708
Vanguard Fixed Income Securities Fund-Intermediate-Term Corporate Portfolio 1,939,833 18,914
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 2,144,836 18,853
Vanguard Fixed Income Securities Fund-GNMA Portfolio 1,854,740 18,956
Vanguard Index Trust-Total Stock Market Portfolio 425,790 7,566
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $147,224) 151,613
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- -----------------------------------------------------------------------------------------------------
Other Assets 1,916
Liabilities (2,047)
------------
(131)
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 13,113,477 shares of beneficial interest
(unlimited authorization--no par value) $151,482
=====================================================================================================
NET ASSET VALUE PER SHARE $11.55
=====================================================================================================
*See Note A in Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $147,205 $11.23
Overdistributed Net Investment Income (22) --
Overdistributed Net Realized Gains (90) (.01)
Unrealized Appreciation--Note D 4,389 .33
- -----------------------------------------------------------------------------------------------------
NET ASSETS $151,482 $11.55
=====================================================================================================
</TABLE>
17
<PAGE> 39
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MARKET
VALUE*
CONSERVATIVE GROWTH PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.8%)
- -----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund 6,363,141 $114,155
Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio 11,880,017 127,710
Vanguard Fixed Income Securities Fund-Intermediate-Term Corporate Portfolio 3,566,877 34,777
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 3,946,376 34,689
Vanguard Fixed Income Securities Fund-GNMA Portfolio 3,408,162 34,831
Vanguard Index Trust-Total Stock Market Portfolio 5,174,817 91,957
Vanguard International Equity Index Fund-European Portfolio 771,643 12,786
Vanguard International Equity Index Fund-Pacific Portfolio 1,008,828 10,603
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $431,784) 461,508
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- -----------------------------------------------------------------------------------------------------
Other Assets 6,698
Liabilities (5,711)
------------
987
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 38,107,755 shares of beneficial interest
(unlimited authorization--no par value) $462,495
=====================================================================================================
NET ASSET VALUE PER SHARE $12.14
=====================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $433,015 $11.36
Undistributed Net Investment Income 21 --
Overdistributed Net Realized Gains (265) --
Unrealized Appreciation--Note D 29,724 .78
- -----------------------------------------------------------------------------------------------------
NET ASSETS $462,495 $12.14
=====================================================================================================
</TABLE>
18
<PAGE> 40
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MARKET
VALUE*
MODERATE GROWTH PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (100%)
- -----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund 11,387,963 $204,300
Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio 5,824,581 62,614
Vanguard Fixed Income Securities Fund-Intermediate-Term Corporate Portfolio 6,419,193 62,587
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 7,071,184 62,156
Vanguard Fixed Income Securities Fund-GNMA Portfolio 6,113,413 62,479
Vanguard Index Trust-Total Stock Market Portfolio 16,158,922 287,144
Vanguard International Equity Index Fund-European Portfolio 2,760,607 45,744
Vanguard International Equity Index Fund-Pacific Portfolio 3,652,637 38,389
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $773,991) 825,413
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
Receivables for Portfolio Shares Issued 150,101
Other Assets 1,145
Payables for Investment Securities Purchased (146,145)
Other Liabilities (4,796)
------------
305
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 63,664,531 shares of beneficial interest
(unlimited authorization--no par value) $825,718
=====================================================================================================
NET ASSET VALUE PER SHARE $12.97
=====================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $774,755 $12.17
Undistributed Net Investment Income -- --
Overdistributed Net Realized Gains (459) (.01)
Unrealized Appreciation--Note D 51,422 .81
- -----------------------------------------------------------------------------------------------------
NET ASSETS $825,718 $12.97
=====================================================================================================
</TABLE>
19
<PAGE> 41
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (99.9%)
- -----------------------------------------------------------------------------------------------------
Vanguard Asset Allocation Fund 8,659,275 $155,347
Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio 1,489,086 16,008
Vanguard Fixed Income Securities Fund-Intermediate-Term Corporate Portfolio 1,625,585 15,850
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 1,804,815 15,864
Vanguard Fixed Income Securities Fund-GNMA Portfolio 1,577,730 16,124
Vanguard Index Trust-Total Stock Market Portfolio 17,600,442 312,760
Vanguard International Equity Index Fund-European Portfolio 3,163,595 52,421
Vanguard International Equity Index Fund-Pacific Portfolio 4,167,372 43,799
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $565,691) 628,173
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- -----------------------------------------------------------------------------------------------------
Other Assets 5,729
Liabilities (5,231)
------------
498
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 45,965,292 shares of beneficial interest
(unlimited authorization--no par value) $628,671
=====================================================================================================
NET ASSET VALUE PER SHARE $13.68
=====================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $566,558 $12.33
Overdistributed Net Investment Income (351) (.01)
Overdistributed Net Realized Gains (18) --
Unrealized Appreciation--Note D 62,482 1.36
- -----------------------------------------------------------------------------------------------------
NET ASSETS $628,671 $13.68
=====================================================================================================
</TABLE>
20
<PAGE> 42
STATEMENT OF OPERATIONS
This Statement shows each 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>
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income Distributions Received $ 7,881 $16,809 $19,999 $13,739
- -----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 7,881 16,809 19,999 13,739
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received 2,396 7,158 11,128 10,306
Investment Securities Sold 219 29 -- --
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN 2,615 7,187 11,128 10,306
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES 110 12,584 31,082 40,378
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $10,606 $36,580 $62,209 $64,423
=====================================================================================================
</TABLE>
21
<PAGE> 43
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each 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>
- -----------------------------------------------------------------------------------------------------
INCOME CONSERVATIVE
PORTFOLIO GROWTH PORTFOLIO
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1996 1995
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 7,881 $ 2,367 $ 16,809 $ 6,545
Realized Net Gain 2,615 696 7,187 2,063
Change in Unrealized Appreciation
(Depreciation) 110 4,345 12,584 17,567
----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 10,606 7,408 36,580 26,175
----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (7,907) (2,360) (16,731) (6,597)
Realized Capital Gain (2,654) (748) (7,326) (2,176)
----------------------------------------------------------
Total Distributions (10,561) (3,108) (24,057) (8,773)
----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 90,016 111,817 297,016 172,504
Issued in Lieu of Cash Distributions 9,108 2,568 22,450 8,031
Redeemed (68,426) (9,440) (88,762) (19,942)
----------------------------------------------------------
Net Increase from Capital
Share Transactions 30,698 104,945 230,704 160,593
- -----------------------------------------------------------------------------------------------------
Total Increase 30,743 109,245 243,227 177,995
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 120,739 11,494 219,268 41,273
----------------------------------------------------------
End of Year $151,482 $120,739 $462,495 $219,268
=====================================================================================================
(1) Shares Issued (Redeemed)
Issued 7,797 9,932 24,891 15,673
Issued in Lieu of Cash Distributions 790 226 1,858 701
Redeemed (5,937) (857) (7,409) (1,779)
----------------------------------------------------------
Net Increase in Shares Outstanding 2,650 9,301 19,340 14,595
=====================================================================================================
</TABLE>
22
<PAGE> 44
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MODERATE GROWTH
GROWTH PORTFOLIO PORTFOLIO
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1996 1995
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 19,999 $ 5,483 $ 13,739 $ 4,455
Realized Net Gain 11,128 2,401 10,306 2,410
Change in Unrealized Appreciation
(Depreciation) 31,082 20,764 40,378 22,691
----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 62,209 28,648 64,423 29,556
----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (19,971) (5,489) (14,036) (4,485)
Realized Capital Gain (11,572) (2,428) (10,183) (2,543)
----------------------------------------------------------
Total Distributions (31,543) (7,917) (24,219) (7,028)
----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 651,410 192,871 420,869 166,422
Issued in Lieu of Cash Distributions 28,857 7,545 23,804 6,906
Redeemed (119,901) (21,265) (73,627) (16,192)
----------------------------------------------------------
Net Increase from Capital
Share Transactions 560,366 179,151 371,046 157,136
- -----------------------------------------------------------------------------------------------------
Total Increase 591,032 199,882 411,250 179,664
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 234,686 34,804 217,421 37,757
----------------------------------------------------------
End of Year $825,718 $234,686 $628,671 $217,421
=====================================================================================================
(1) Shares Issued (Redeemed)
Issued 51,569 17,069 32,215 14,626
Issued in Lieu of Cash Distributions 2,225 631 1,737 567
Redeemed (9,501) (1,859) (5,575) (1,406)
----------------------------------------------------------
Net Increase in Shares Outstanding 44,293 15,841 28,377 13,787
=====================================================================================================
</TABLE>
23
<PAGE> 45
FINANCIAL HIGHLIGHTS
This table summarizes each 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; its share of the expenses of the other portfolios in which it
invests 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>
- -------------------------------------------------------------------------------------------
INCOME PORTFOLIO
YEAR ENDED
DECEMBER 31,
---------------- SEP. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.54 $ 9.88 $10.00
- -------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Income Distributions Received .64 .49 .14
Capital Gain Distributions Received .19 .09 --
---------------------------------
Total Distributions Received .83 .58 .14
Net Realized and Unrealized Gain (Loss) on Investments .03 1.66 (.12)
---------------------------------
Total from Investment Operations .86 2.24 .02
---------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.64) (.49) (.14)
Distributions from Realized Capital Gains (.21) (.09) --
---------------------------------
Total Distributions (.85) (.58) (.14)
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.55 $11.54 $ 9.88
===========================================================================================
TOTAL RETURN 7.65% 22.99% 0.20%
===========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $151 $121 $11
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 5.66% 5.76% 7.31%**
Portfolio Turnover Rate 22% 4% 1%
- -------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
24
<PAGE> 46
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO
YEAR ENDED
DECEMBER 31,
---------------- SEP. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.68 $ 9.89 $10.03
- -------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Income Distributions Received .53 .47 .14
Capital Gain Distributions Received .20 .11 .01
---------------------------------
Total Distributions Received .73 .58 .15
Net Realized and Unrealized Gain (Loss) on Investments .46 1.80 (.14)
---------------------------------
Total from Investment Operations 1.19 2.38 .01
---------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.53) (.47) (.14)
Distributions from Realized Capital Gains (.20) (.12) (.01)
---------------------------------
Total Distributions (.73) (.59) (.15)
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.14 $11.68 $ 9.89
===========================================================================================
TOTAL RETURN 10.36% 24.35% 0.10%
===========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $462 $219 $41
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 4.86% 5.14% 7.07%**
Portfolio Turnover Rate 2% 1% 0%
- -------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
MODERATE GROWTH PORTFOLIO
YEAR ENDED
DECEMBER 31,
---------------- SEP. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.11 $ 9.86 $10.08
- -------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Income Distributions Received .44 .36 .14
Capital Gain Distributions Received .22 .13 .01
---------------------------------
Total Distributions Received .66 .49 .15
Net Realized and Unrealized Gain (Loss) on Investments .87 2.25 (.22)
---------------------------------
Total from Investment Operations 1.53 2.74 (.07)
---------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.44) (.36) (.14)
Distributions from Realized Capital Gains (.23) (.13) (.01)
---------------------------------
Total Distributions (.67) (.49) (.15)
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.97 $12.11 $ 9.86
===========================================================================================
TOTAL RETURN 12.71% 27.94% -0.70%
===========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $826 $235 $35
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 3.98% 4.42% 7.10%**
Portfolio Turnover Rate 3% 1% 0%
- -------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
25
<PAGE> 47
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
YEAR ENDED
DECEMBER 31,
---------------- SEP. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.36 $ 9.93 $10.10
- -------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Income Distributions Received .34 .32 .13
Capital Gain Distributions Received .24 .14 .02
---------------------------------
Total Distributions Received .58 .46 .15
Net Realized and Unrealized Gain (Loss) on Investments 1.32 2.43 (.16)
---------------------------------
Total from Investment Operations 1.90 2.89 (.01)
---------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.35) (.31) (.14)
Distributions from Realized Capital Gains (.23) (.15) (.02)
---------------------------------
Total Distributions (.58) (.46) (.16)
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.68 $12.36 $ 9.93
===========================================================================================
TOTAL RETURN 15.41% 29.24% -0.10%
===========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $629 $217 $38
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 3.18% 3.67% 7.06%**
Portfolio Turnover Rate 0% 1% 1%
- -------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
26
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS
Vanguard LifeStrategy Portfolios comprises the Income, Conservative Growth,
Moderate Growth, and Growth Portfolios of Vanguard STAR Fund. Each Portfolio is
registered under the Investment Company Act of 1940 as an open-end investment
company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Portfolios consistently
follow such policies in preparing their 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.
2. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify
as a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
4. 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 Portfolios. The special service agreement provides that Vanguard will
reimburse the Portfolios' expenses to the extent of savings in administrative
and marketing costs realized by Vanguard in the operation of the Portfolios.
Accordingly, all expenses incurred by the Portfolios during the year ended
December 31, 1996, were reimbursed by Vanguard. The Portfolios' trustees and
officers are also directors and officers of Vanguard.
C. During the year ended December 31, 1996, purchases and sales of
investment securities were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
(000)
----------------------------
PORTFOLIO PURCHASES SALES
--------------------------------------------------------------------
<S> <C> <C>
Income $ 60,900 $30,007
Conservative Growth 235,949 5,749
Moderate Growth 575,316 13,911
Growth 372,549 1,028
--------------------------------------------------------------------
</TABLE>
D. At December 31, 1996, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
(000)
--------------------------------------------
NET
APPRECIATED DEPRECIATED UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
--------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 4,969 $ (580) $ 4,389
Conservative Growth 30,557 (833) 29,724
Moderate Growth 54,632 (3,210) 51,422
Growth 66,109 (3,627) 62,482
--------------------------------------------------------------------
</TABLE>
27
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard STAR Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Income, Conservative Growth, Moderate Growth and Growth Portfolios (separate
portfolios of Vanguard STAR Fund, hereafter referred to as the "Fund") at
December 31, 1996, and the results of each of their operations, the changes in
each of their net assets and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1996 by correspondence with the custodian and, with
respect to unsettled securities transactions, the application of alternative
auditing procedures, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD LIFESTRATEGY PORTFOLIOS
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Income, Conservative Growth, Moderate Growth, and Growth
Portfolios designate $1,505,000, $4,426,000, $6,960,000, and $6,373,000,
respectively, as capital gain dividends (from net long-term capital gains),
which were distributed in December 1996.
For corporate shareholders, the percentage of investment income
(dividend income plus short-term gains, if any) that qualifies for the
dividends-received deduction is as follows:
<TABLE>
<S> <C>
Income Portfolio 4.6%
Conservative Growth Portfolio 10.4%
Moderate Growth Portfolio 17.5%
Growth Portfolio 28.0%
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
28
<PAGE> 50
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.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
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.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGURAD 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
[email protected] http://www.vanguard.com
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) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 51
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard 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/Trustees' Equity-International
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)
Q880-12/96
