<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-88373) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 21 [ ]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 23 [ ]
VANGUARD STAR FUND
(Exact Name of Registrant as Specified in Charter)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(Address of Principal Executive Office)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is requested that this filing become effective on April 23, 1998
pursuant to paragraph (b) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended December 31, 1997 on March 30, 1998.
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<PAGE> 2
This post-effective amendment No. 21 to the registration statement of the
Vanguard STAR Fund, File No. 2-88373, hereby incorporates by reference the
entire contents of post-effective amendment No. 20 to the same registration
statement (No. 2-88373), previously filed with the Commission on April 9, 1998.
<PAGE> 3
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[VANGUARD FLAG LOGO]
VANGUARD
INTERNATIONAL INDEX PORTFOLIOS
P R O S P E C T U S
APRIL 23, 1998
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EUROPEAN PORTFOLIO
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- PACIFIC PORTFOLIO
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EMERGING MARKETS PORTFOLIO
VANGUARD STAR FUND -- TOTAL INTERNATIONAL PORTFOLIO
[VANGUARD LOGO]
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<PAGE> 4
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PROSPECTUS -- APRIL 23, 1998 A Member of The Vanguard Group
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT OBJECTIVE AND POLICIES. Vanguard International Equity Index Fund is
an open-end diversified investment company that consists of three
Portfolios -- European, Pacific, and Emerging Markets. The Total International
Portfolio is part of Vanguard STAR Fund, which is an open-end non-diversified
investment company (information on STAR's other five Portfolios can be obtained
by calling Vanguard). The four Portfolios described in this prospectus are
designed as Index Funds.
The European Portfolio seeks investment results that parallel those of the
Morgan Stanley Capital International -- Europe Index, an index of companies in
15 European countries. The Pacific Portfolio seeks investment results that
parallel those of the Morgan Stanley Capital International -- Pacific (Free)
Index, an index of companies in Japan, Australia, New Zealand, Hong Kong,
Singapore and Malaysia. The Emerging Markets Portfolio seeks investment results
that parallel those of the Morgan Stanley Capital International -- Select
Emerging Markets (Free) Index, an index of companies located in 16 Asian, Latin
American, African, and European countries. These Portfolios use statistical
procedures to invest primarily in common stocks found in their indexes.
The Total International Portfolio seeks investment results that parallel
those of the Morgan Stanley Capital International Europe, Australia, and Far
East + Select Emerging Markets (Free) Index by investing in a combination of the
European, Pacific, and Emerging Markets Portfolios.
There is no assurance that any Portfolio will achieve its stated objective.
Shares of the Portfolios are neither insured nor guaranteed by any agency of the
U.S. Government, including the FDIC.
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OPENING AN ACCOUNT. To open a non-retirement account, complete and return an
Account Registration Form. For assistance, call the Investor Information
Department. To open an Individual Retirement Account (IRA), use a Vanguard IRA
Adoption Agreement. To obtain a copy, call 1-800-662-7447, Monday through
Friday, from 8:00 a.m. to 9:00 p.m., and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). To open an account by wire, call the Client Services Department
at 1-800-662-2739. The minimum initial investment for each Portfolio is $3,000
($1,000 for IRAs and Uniform Gifts/Transfers to Minors Act accounts). The
Portfolios are offered on a no-load basis (i.e., there are no sales commissions
or 12b-1 fees). However, the Portfolios incur expenses for investment advisory,
management, administrative and distribution services. Each Portfolio charges a
$10 annual account maintenance fee (waived for balances of $10,000 or more at
the time of the annual deduction). Each Portfolio charges a transaction fee on
purchases (1.0% for the Emerging Markets Portfolio, 0.5% for the European
Portfolio, 0.5% for the Pacific Portfolio, 0.5% for the Total International
Portfolio); the Emerging Markets Portfolio charges a 1% transaction fee on
redemptions. These fees are paid to the Portfolios to offset the costs of
trading international securities.
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ABOUT THIS PROSPECTUS. This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before you invest. It should be
retained for future reference. A "Statement of Additional Information"
containing additional information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated April 23, 1998 and
has been incorporated by reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund, calling the Investor Information
Department at 1-800-662-7447 or visiting the Securities and Exchange
Commission's website (www.sec.gov).
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Portfolio Expenses............. 2
Financial Highlights........... 5
Yield and Total Return......... 8
Investment Objective........... 9
Investment Policies............ 9
Investment Risks............... 11
Who Should Invest.............. 13
Implementation of Policies..... 14
Investment Limitations......... 17
Management of the Fund......... 17
Investment Adviser............. 18
Dividends, Capital Gains
and Taxes.................... 19
The Share Price of Each
Portfolio.................... 21
General Information............ 22
Opening an Account and
Purchasing Shares............ 24
When Your Account Will
Be Credited.................. 27
Selling Your Shares............ 28
Exchanging Your Shares......... 30
Transferring Registration...... 32
Statements and Reports......... 32
Other Vanguard Services........ 33
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<PAGE> 5
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of each
Portfolio. The expenses and fees set forth below are
for the 1997 fiscal year.
<TABLE>
<CAPTION>
EMERGING TOTAL
EUROPEAN PACIFIC MARKETS INTERNATIONAL
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
Sales Load Imposed on Purchases...... None * None * None * None *
Sales Load Imposed on Reinvested
Dividends........................... None None None None
Redemption Fees...................... None None 1% None
Exchange Fees........................ None None None None
</TABLE>
* Shareholders are charged a portfolio transaction
fee, payable directly to the Portfolio on each
purchase of shares.
<TABLE>
<CAPTION>
EMERGING TOTAL
EUROPEAN PACIFIC MARKETS INTERNATIONAL
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
Management & Administrative
Expenses**.......................... 0.22 0.25 0.28 0.24
Investment Advisory Fees............. None None None None
12b-1 Fees........................... None None None None
Other Expenses
Distribution Costs.................. 0.03 0.03 0.03 0.03
Miscellaneous Expenses.............. 0.06 0.07 0.26 0.08
------ ------ ------ --------
Total Other Expenses................. 0.09 0.10 0.29 0.11
------ ------ ------ --------
TOTAL OPERATING EXPENSES...... 0.31 0.35 0.57 0.35
======= ======= ======= =========
</TABLE>
** For accounts of less than $10,000, each Portfolio
assesses an annual account maintenance fee of $10.
This fee is in addition to the expenses set forth
above.
Because it invests in a combination of the European,
Pacific, and Emerging Markets Portfolios, the Total
International Portfolio does not have operating
expenses of its own. However, Total International
Portfolio shareholders bear indirectly the expenses of
the underlying Portfolios. The purpose of the above
table is to assist you in understanding the various
costs and expenses that you would bear directly or
indirectly as an investor in the Portfolios.
EACH PORTFOLIO
CHARGES A PURCHASE
TRANSACTION FEE Each Portfolio assesses a portfolio transaction fee on
share purchases. These fees are as follows: 0.5% of the
dollar amount invested for the European Portfolio, 0.5%
of the dollar amount invested for the Pacific
Portfolio, 1.0% of the dollar amount invested for the
Emerging Markets Portfolio and 0.5% of the dollar
amount invested for the Total International Portfolio.
In all four Portfolios, the portfolio transaction fee
is paid directly to the respective Portfolio, not to
Vanguard (except that the Total International
Portfolio's fee is passed through to the underlying
Portfolios in which it invests). It is not a sales
charge. The fee applies to an initial investment in the
Portfolio and all subsequent purchases (including
purchases made by exchange from another Vanguard Fund
or from other Portfolios of Vanguard International
Equity Index Fund), but not to reinvested dividend or
capital gains distributions. The Portfolio transaction
fee is deducted automatically from the amount invested;
it cannot be paid separately.
2
<PAGE> 6
EMERGING MARKETS
PORTFOLIO CHARGES
A 1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio also assesses a 1%
portfolio transaction fee on share redemptions. This 1%
charge applies to all redemptions or exchanges from the
Portfolio. The 1% fee is deducted from redemption or
exchange proceeds and is paid directly to the
Portfolio, not to Vanguard. It is not a contingent
deferred sales charge.
The purpose of the purchase and redemption transaction
fees is to allocate transaction costs associated with
purchases and redemptions to shareholders making those
transactions, thus insulating other shareholders from
those transaction costs. These costs include: (1)
brokerage costs; (2) market impact costs -- i.e., the
increase in market prices which may result when the
Portfolios purchase or sell thinly traded stocks; and
(3) the effect of the "bid-ask" spread in international
markets.
The purchase and redemption transaction fees represent
Vanguard's estimate of the brokerage and other costs
incurred by the Portfolios in purchasing and selling
international stocks. Without the fees, each Portfolio
would incur these transaction costs directly, resulting
in reduced investment performance for all shareholders
of the Portfolio. With the fee, the transaction costs
of purchasing and selling international stocks are
borne not by all existing shareholders, but only by
those investors making transactions. Because the
purchaser, not the Portfolio, bears these costs, the
Portfolio is expected to track its benchmark index more
closely.
It is important to note that the transaction costs
incurred when purchasing or selling stocks of companies
in emerging market countries can be extremely high. The
three components of transaction costs -- brokerage
fees, market impact, and bid/ask spreads are often
significantly more expensive in emerging market
countries than in the United States, because of less
competition among brokers, lower utilization of
technology on the part of the exchanges and brokers,
the lack of derivative instruments and generally less
liquid markets. Consequently, brokerage commissions are
high, bid/ask spreads are wide, and market impact is
significant. In addition to these customary costs, most
foreign countries have exchange fees or stamp taxes.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance
fee of $10 for each shareholder account. The purpose of
the $10 fee is to allocate part of the costs of
maintaining shareholder accounts equally to all
accounts. This fee, which is paid directly by
shareholders, is deducted from the Fund's annual
dividend. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to
1.00% on a $1,000 investment in the Fund, and 0.33% on
a $3,000 investment. This fee will be waived for
shareholders with an account balance of $10,000 or more
at the time of the annual deduction.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various
periods, assuming (1) a 5% annual rate of return and
(2) redemption at the end of each period. The $10
annual
3
<PAGE> 7
fee payable on accounts with current balances of less
than $10,000 is not included.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
European Portfolio........ $ 8 $15 $22 $44
Pacific Portfolio......... $ 9 $16 $25 $49
Emerging Markets
Portfolio............... $26 $39 $54 $96
Total International
Portfolio............... $ 9 $16 $25 $49
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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4
<PAGE> 8
FINANCIAL
HIGHLIGHTS The following financial highlights of the Portfolios
for a share outstanding throughout each period have
been derived from financial statements which were
audited by Price Waterhouse LLP, independent
accountants, whose report on the financial statements
including this information was unqualified. This
information should be read in conjunction with the
Fund's financial statements and notes thereto, which,
together with the remaining portions of the Fund's 1997
Annual Report to Shareholders, are incorporated by
reference in the Statement of Additional Information
and in this Prospectus, and which appear, along with
the report of Price Waterhouse LLP, in the Fund's 1997
Annual Report to Shareholders. For a more complete
discussion of the Fund's performance, please see the
Fund's 1997 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
EUROPEAN PORTFOLIO
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
------------------------------------------------------------ DEC. 31,
1997 1996 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $16.57 $14.02 $11.76 $11.88 $9.33 $9.92 $9.06 $10.00
------ ------ ------ ------ ------ ----- ----- ---------
INVESTMENT OPERATIONS
Net Investment Income.... .38 .34 .32 .28 .17 .25 .26 .16
Net Realized and
Unrealized Gain (Loss)
on Investments......... 3.63 2.63 2.30 (.06) 2.55 (.58) .86 (.94)
------ ------ ------ ------ ------ ----- ----- --------
TOTAL FROM INVESTMENT
OPERATIONS........ 4.01 2.97 2.62 .22 2.72 (.33) 1.12 (.78)
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income...... (.37) (.36) (.32) (.28) (.17) (.26) (.26) (.16)
Distributions from
Realized Capital
Gains.................. (.08) (.06) (.04) (.06) -- -- -- --
------ ------ ------ ------ ------ ----- ----- --------
TOTAL
DISTRIBUTIONS..... (.45) (.42) (.36) (.34) (.17) (.26) (.26) (.16)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................... $20.13 $16.57 $14.02 $11.76 $11.88 $9.33 $9.92 $9.06
=========================================================================================================
TOTAL RETURN(1)............ 24.23% 21.26% 22.28% 1.88% 29.13% (3.32)% 12.40% (7.23)%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)............... $2,432 $1,595 $1,017 $715 $601 $256 $161 $96
Ratio of Total Expenses to
Average Net Assets....... 0.31% 0.35% 0.35% 0.32% 0.32% 0.32% 0.33% 0.40%*
Ratio of Net Investment
Income to Average Net
Assets................... 2.19% 2.45% 2.66% 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate.... 3% 4% 2% 6% 4% 1% 15%** 3%
Average Commission Rate
Paid..................... $.0396 $.0395 N/A N/A N/A N/A N/A N/A
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind
redemptions was 3% for the European Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the transaction fee on
purchases (.5% beginning 11/3/97, 1% from 1993 through
11/2/1997) or the annual account maintenance fee of $10.
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
PACIFIC PORTFOLIO
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
------------------------------------------------------------ DEC. 31,
1997 1996 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD..................... $10.51 $11.50 $11.31 $10.13 $7.56 $9.42 $8.56 $10.00
------ ------ ------ ------ ------ ----- ----- --------
INVESTMENT OPERATIONS
Net Investment Income...... .09 .10 .10 .08 .06 .05 .05 .05
Net Realized and Unrealized
Gain (Loss) on
Investments.............. (2.79) (1.00) .21 1.24 2.62 (1.76) .86 (1.44)
------ ------ ------ ------ ------ ----- ----- --------
TOTAL FROM INVESTMENT
OPERATIONS........... (2.70) (.90) .31 1.32 2.68 (1.71) .91 (1.39)
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income........ (.09) (.09) (.12) (.08) (.06) (.05) (.05) (.05)
Distributions from Realized
Capital Gains............ -- -- -- (.06) (.05) (.10) -- --
------ ------ ------ ------ ------ ----- ----- --------
TOTAL DISTRIBUTIONS.... (.09) (.09) (.12) (.14) (.11) (.15) (.05) (.05)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD..................... $7.72 $10.51 $11.50 $11.31 $10.13 $7.56 $9.42 $8.56
===========================================================================================================
TOTAL RETURN(1).............. (25.67)% (7.82)% 2.75% 13.04% 35.46% (18.17)% 10.65% (14.01)%
===========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................. $827 $978 $831 $697 $493 $207 $84 $31
Ratio of Total Expenses to
Average Net Assets......... 0.35% 0.35% 0.35% 0.32% 0.32% 0.32% 0.32% 0.35%*
Ratio of Net Investment
Income to Average Net
Assets..................... 1.03% 0.89% 0.97% 0.71% 0.75% 0.92% 0.70% 1.02%*
Portfolio Turnover Rate...... 8% 9% 1% 4% 7% 3% 21%** 2%
Average Commission Rate
Paid....................... $.0120 $.0156 N/A N/A N/A N/A N/A N/A
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind
redemptions was 1% for the Pacific Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the transaction fee on
purchases (.5% in 1997, 1% in 1993 through 1996) or the
annual account maintenance fee of $10.
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
--------------------------------------------------
EMERGING MARKETS PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------ MAY 4, 1994+,
1997 1996 1995 TO DEC. 31, 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........... $12.28 $10.75 $10.87 $10.00
------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income........................ .24 .18 .15 .06
Net Realized and Unrealized Gain (Loss) on
Investments................................ (2.31) 1.52 (.09) .92
------ ------ ------ -----------
TOTAL FROM INVESTMENT OPERATIONS......... (2.07) 1.70 .06 .98
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income......... (.23) (.17) (.18) (.07)
Distributions from Realized Capital Gains.... -- -- -- (.04)
------ ------ ------ -----------
TOTAL DISTRIBUTIONS...................... (.23) (.17) (.18) (.11)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................. $9.98 $12.28 $10.75 $10.87
===================================================================================================
TOTAL RETURN**................................. (16.82)% 15.83% 0.56% 9.81%
===================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........... $660 $637 $234 $83
Ratio of Total Expenses to Average Net
Assets....................................... 0.57% 0.60% 0.60% 0.60%*
Ratio of Net Investment Income to Average Net
Assets....................................... 1.96% 1.69% 2.00% 1.32%*
Portfolio Turnover Rate........................ 19% 1% 3% 6%
Average Commission Rate Paid................... $.0006 $.0004 N/A N/A
* Annualized.
** Total return does not reflect the transaction fee on
purchases (1% beginning 11/3/1997, 1.5% from 1/1/1997 to
11/2/1997, 2% in 1994 through 1996), the 1% transaction fee
on redemptions, or the annual account maintenance fee of
$10.
+ Commencement of operations.
</TABLE>
7
<PAGE> 11
<TABLE>
<CAPTION>
------------------------------
TOTAL INTERNATIONAL PORTFOLIO
------------------------------
APRIL 29+ TO
1997 DECEMBER 31, 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.14 $10.26
------ -------------
INVESTMENT OPERATIONS
Income Dividends Received................................. .18 .150
Capital Gain Distributions Received....................... .02 .015
Net Realized and Unrealized Gain (Loss) on Investments.... (.28) (.110)
------ ------------
TOTAL FROM INVESTMENT OPERATIONS...................... (.08) .055
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................... (.17) (.160)
Distributions from Realized Capital Gains................. (.02) (.015)
------ ------------
TOTAL DISTRIBUTIONS................................... (.19) (.175)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $9.87 $10.14
==============================================================================================
TOTAL RETURN**.............................................. (0.77)% 0.55%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $903 $280
Ratio of Total Expenses to Average Net Assets............... 0% 0%
Ratio of Net Investment Income to Average Net Assets........ 2.19% 1.51%*
Portfolio Turnover Rate..................................... 0% 0%
Average Commission Rate Paid................................ N/A N/A
* Annualized.
** Total return figures do not reflect the transaction fee on
purchases (.5% beginning 11/3/1997, .75% from 1/1/1997 to
11/2/1997, 1% in 1996) or the annual account maintenance fee
of $10.
+ Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time to time each Portfolio may advertise its
yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of a Portfolio refers to the average annual
compounded rates of return over one-, five- and
ten-year periods or for the life of the Portfolio (as
stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated
period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on a Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes
that the net investment income earned over 30 days is
compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds.
However, these methods differ from the accounting
methods used by the Portfolio to maintain its books and
records, and so the advertised 30-day yield may not
fully reflect the income paid to an investor's account.
- --------------------------------------------------------------------------------
8
<PAGE> 12
INVESTMENT The European Portfolio seeks to match the performance
OBJECTIVE of the Morgan Stanley Capital International
(MSCI) -- Europe Index, which is made up of common
EACH PORTFOLIO SEEKS stocks of companies located in 15 European countries
TO MATCH THE (Austria, Belgium, Denmark, Finland, France, Germany,
INVESTMENT Ireland, Italy, Netherlands, Norway, Portugal, Spain,
PERFORMANCE OF ITS Sweden, Switzerland, and United Kingdom).
RESPECTIVE INDEX
The Pacific Portfolio seeks to match the performance of
the Morgan Stanley Capital International
(MSCI) -- Pacific (Free) Index, which consists of
common stocks of companies located in Australia, Hong
Kong, Japan, Malaysia, New Zealand, and Singapore.
By combining the European and Pacific Portfolios in the
appropriate proportions, you can create a portfolio
that seeks to match the performance of another
international stock market index: the Morgan Stanley
Capital International (MSCI) -- Europe, Australasia,
and Far East (Free) Index, also known as the "EAFE"
Index. The EAFE Index is a broad-based benchmark made
up of more than 1,000 companies in Europe and the
Pacific Rim. As of December 31, 1997, the MSCI --
Pacific (Free) Index represented some 33% of the EAFE
Index, while the MSCI -- Europe Index represented the
remaining 67%.
The Emerging Markets Portfolio seeks to track the
performance of the Morgan Stanley Capital International
(MSCI) -- Select Emerging Markets (Free) Index, which
is made up of common stocks of companies located in 16
emerging markets of Europe, Asia, Africa and Latin
America (Argentina, Brazil, The Czech Republic, Greece,
Hong Kong, Hungary, Indonesia, Israel, Malaysia,
Mexico, Philippines, Poland, Singapore, South Africa,
Thailand, and Turkey).
The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe, Australasia, and Far East + Select
Emerging Markets (Free) Index (the MSCI --
EAFE + Select EMF Index) by investing in a combination
of the European, Pacific, and Emerging Markets
Portfolios.
The Portfolios are neither sponsored by nor affiliated
with Morgan Stanley Capital International.
- --------------------------------------------------------------------------------
INVESTMENT The Portfolios are not managed according to traditional
POLICIES methods of "active" investment management, which
involve the buying and selling of securities based upon
THE PORTFOLIOS USE A economic, financial and market analysis and investment
"PASSIVE" APPROACH TO judgment. Instead, the Portfolios, utilizing a
INVEST IN INTERNATIONAL "passive" or indexing investment approach, attempt to
STOCKS approximate the investment performance of their
respective indexes by holding a portfolio of stocks
selected through statistical procedures. The Portfolios
are managed without regard to tax ramifications.
The European Portfolio invests in a statistically
selected sample of more than 550 stocks included in the
MSCI -- Europe Index, an index of equity securities of
companies located in fifteen European countries. Three
countries, the United Kingdom, Germany and France,
dominate MSCI -- Europe, with 32%, 15%, and 12% of the
market capitalization of the Index, respectively, as of
December 31, 1997. The 12 other
9
<PAGE> 13
countries are individually much less significant to the
Index and, consequently, the Portfolio.
The Pacific Portfolio invests in a statistically
selected sample of the more than 500 stocks included in
the MSCI -- Pacific (Free) Index, an index of equity
securities of Pacific Basin companies. The MSCI --
Pacific (Free) Index is dominated by the Japanese stock
market, which represented 77% of the market
capitalization of the Index as of December 31, 1997.
The "Free" Index includes only shares that U.S.
investors are "free," or allowed by law, to purchase
and sell.
The Emerging Markets Portfolio invests in a
statistically selected sample of the approximately 600
stocks included in the MSCI -- Select Emerging Markets
Free Index, an index of equity securities of companies
located in the countries of 16 emerging markets. Four
countries, Brazil, Mexico, Hong Kong, and South Africa,
represent a majority of the MSCI -- Select Emerging
Markets Free Index, with 20%, 16%, 15%, and 13% of the
market capitalization of the Index, respectively, as of
December 31, 1997. The sixteen countries of the Index
and their percentage weightings as of December 31,
1997, were:
<TABLE>
<S> <C> <C> <C>
Greece................. 3.2% Hong Kong.............. 15.2%
The Czech Republic..... 1.2% Indonesia.............. 2.1%
Hungary................ 1.6% Malaysia............... 7.1%
Poland................. 0.6% Philippines (Free)..... 1.7%
Turkey................. 3.8% Singapore.............. 4.8%
----
EUROPE................. 10.4% Thailand............... 1.9%
Israel................. 3.2%
----
Argentina.............. 5.5%
Brazil................. 19.6% ASIA................... 36.0%
Mexico (Free).......... 15.6% South Africa........... 12.9%
----
LATIN AMERICA.......... 40.7%
</TABLE>
The Index includes only shares that U.S. investors are
"free," or allowed by law, to purchase and sell and
that have sufficient trading liquidity.
The Pacific, European and Emerging Markets Portfolios
are each expected to invest in approximately 500 stocks
or more. Stocks are selected for inclusion in each
Portfolio based on country, market capitalization,
industry weightings, and fundamental characteristics
such as return variability, earnings valuation, and
yield. Each Portfolio is constructed to have aggregate
investment characteristics similar to those of its
respective index. In order to parallel the performance
of its respective index, each Portfolio will invest in
each country in approximately the same percentage as
the country's weight in the index. The correlation
between the performance of each Portfolio and its
respective index is intended to be at least 0.95. (A
correlation of 1.00 would be perfect correlation).
The Total International Portfolio allocates its assets
among the European, Pacific and Emerging Markets
Portfolios based on each market segment's contribution
to the market capitalization of the MSCI -- EAFE + EMF
Index. As of December 31, 1997, the European and
Pacific markets
10
<PAGE> 14
contributed approximately 59% and 29%, and the Emerging
Markets contributed 12% to the Index's market
capitalization.
The policy of the Pacific and European Portfolios is to
remain fully invested in common stocks. The Emerging
Markets Portfolio normally invests 95% of its assets in
common stocks, with the remaining 5% invested in cash
reserves as a way of maintaining a higher degree of
liquidity to meet daily redemption requests. At least
80% of the assets of each Portfolio will be invested in
stocks that are included in its respective index. Since
the Total International Portfolio will invest primarily
in shares of the underlying Portfolios, at least 80% of
its equity exposure will be to stocks that are included
in the MSCI -- EAFE + Select EMF Index. Each Portfolio
may invest in certain short-term fixed income
securities such as cash reserves, although cash or cash
equivalents are normally expected to represent less
than 1% of each Portfolio's assets (with the exception
of Emerging Markets Portfolio, as noted above). Each
Portfolio may also invest up to 50% of its assets in
stock futures contracts, options, warrants, convertible
securities, and swap agreements in order to invest
uncommitted cash balances, maintain liquidity to meet
shareholder redemptions, or minimize trading costs. Any
investment in futures contracts, options, warrants,
convertible securities or swap agreements over 20% of
each Portfolio's assets would be made only in emergency
situations, for short-term purposes.
Any investment by the Portfolios in cash reserves,
futures contracts, options or warrants are not intended
as "bets" or part of defensive strategies to protect
against potential stock market declines. The Portfolios
intend to remain fully invested, to the extent
practicable, in a pool of securities which will
approximate the investment characteristics of their
respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes (but not as part of a defensive strategy to
protect against fluctuations in exchange rates). See
"Implementation of Policies" for a description of these
and other investment practices of the Portfolios.
The investment objective and policies of the Portfolios
are not fundamental and so may be changed by the Board
of Directors or Board of Trustees without shareholder
approval. However, shareholders would be notified prior
to a material change in either.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS As mutual funds investing in common stocks, the
Portfolios are subject to MARKET RISK -- i.e., the
possibility that stock prices will decline over short
or even extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline.
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile
as, if not more volatile than, investments in U.S.
markets. To illustrate the volatility of foreign stock
market returns for the U.S. dollar-based investor, the
table below sets forth the extremes of foreign stock
market returns, as well as average annual returns, for
the period from 1969 to 1997, as
11
<PAGE> 15
measured by the MSCI -- Europe, Australasia, and Far
East Index and as calculated for a U.S. dollar
investor.
<TABLE>
<CAPTION>
AVERAGE INTERNATIONAL STOCK MARKET RETURNS (1969-1997)
-------------------------------------------------------
MSCI --
EAFE 1 YEAR 5 YEARS 10 YEARS
----------- ----------- ------------ -------------
<S> <C> <C> <C>
Best +69.9% +36.5% +22.8%
Worst -23.2 + 1.5 + 6.6
Average +14.5 +13.8 +15.3
</TABLE>
As shown, the MSCI -- EAFE Index has provided annual
total returns, averaging +15.3% for all 10-year periods
from 1969-1997. Note, however, that the period from
1969 to 1997 was a very favorable one for foreign stock
market investing. (The figures on total return and
stock market volatility are provided here only as a
guide to potential market risk, and should not be
viewed as a representation of future returns for
international stocks or the Portfolios of the Fund, as
historical performance may be a poor guide to future
returns. Also, the Indexes shown do not reflect "real
world" transaction costs and other expenses.)
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC (FREE) INDEX Investors should realize that Japanese securities
comprised 77% of the MSCI -- Pacific (Free) Index as of
December 31, 1997. Therefore stocks of Japanese
companies will represent a correspondingly large
component of the Pacific Portfolio's investment assets.
Such a large investment in the Japanese stock market
may entail a higher degree of risk than with more
diversified international portfolios.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE INDEX Stocks from the United Kingdom, Germany and France
comprised 32%, 14% and 12% of the MSCI -- Europe Index,
respectively, as of December 31, 1997. The remaining 12
countries in the MSCI -- Europe Index have much less
significant capitalization weightings in the Index and
will therefore have much less impact on the total
return of the Index and the European Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1997,
the average positive monthly return for the Wilshire
5000 Index, a broad measure of the U.S. equity market,
was +3.3%. The average negative monthly return for the
Wilshire 5000 Index was -2.6%. In contrast, from
1989-1997, the average positive monthly return of the
Morgan Stanley Capital International Emerging Markets
Free Index, a widely quoted emerging market benchmark,
was +4.9%; while the average negative monthly return
was -5.1%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the U.S. market. Small trading
volumes may result in investors being forced to
purchase securities at substantially higher prices than
the current market, or sell securities at much lower
prices than the current market.
12
<PAGE> 16
INTERNATIONAL STOCKS For U.S. investors, the returns of foreign investments,
ALSO EXPOSE INVESTORS such as those held by the Portfolios, are influenced by
TO CURRENCY AND not only the returns on foreign common stocks
OTHER RISKS themselves, but also by the returns on the currencies
in which the stocks are denominated. Currency risk is
the risk that changes in foreign exchange rates will
affect, favorably or unfavorably, the value of foreign
securities held by a Portfolio. In a period when the
U.S. dollar generally rises against foreign currencies,
the returns on foreign stocks for a U.S. investor will
be diminished. By contrast, in a period when the U.S.
dollar generally declines, the returns on foreign
stocks will be enhanced.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards; generally higher
transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater
price volatility; foreign withholding taxes payable on
a Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the
possibility of expropriation or confiscatory taxation;
adverse change in investment or exchange control
regulations; difficulty in obtaining a judgment from a
foreign court; political instability which could affect
U.S. investment in foreign countries; and potential
restriction on the flow of international capital.
- --------------------------------------------------------------------------------
WHO SHOULD The Portfolios are designed for investors who seek a
INVEST low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
LONG-TERM INVESTORS Unlike other actively-managed equity mutual funds,
SEEKING TO INVEST which generally seek to "beat" market averages with
IN INTERNATIONAL often unpredictable results, the Portfolios of the Fund
COMMON STOCKS seek to "match" their respective indexes and thus are
expected to provide returns that parallel those of
their respective benchmarks.
The share prices of the Portfolios are expected to be
volatile, and investors should be able to tolerate
sudden, sometimes substantial fluctuations in the value
of their investment. No assurance can be given that a
Portfolio will achieve its stated objective or that
shareholders will be protected from the risks inherent
in equity investing. Investors may wish to minimize the
timing risk of investing in a Portfolio by purchasing
shares on a periodic basis (dollar-cost averaging)
rather than investing in one lump sum.
Because of the risks associated with international
common stock investments, the Fund is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term market movements. Investors who engage in
excessive account activity generate additional costs
which are borne by all of the Portfolio's shareholders.
In order to minimize such costs the Portfolios have
adopted the following policies. The Portfolios reserve
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Portfolios have adopted
exchange privilege limitations as described
13
<PAGE> 17
in the section "Exchange Privilege Limitations."
Finally, the Portfolios reserve the right to suspend
the offering of their shares. Investors should not
consider the Portfolios a complete investment program,
but should maintain holdings of securities with
different risk characteristics -- including U.S. common
stocks, bonds and money market instruments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES
THE PORTFOLIOS INVEST
IN INTERNATIONAL The Portfolios utilize a number of investment practices
COMMON STOCKS USING in an effort to parallel the investment performance of
SAMPLING TECHNIQUES their respective indexes.
The MSCI -- Europe Index consists of more than 550
equity securities from Europe, the MSCI -- Pacific
(Free) Index consists of more than 500 equity
securities from Australia and the Far East, and the
MSCI -- Select Emerging Markets (Free) Index consists
of some 600 stocks from Asia, Latin America, Africa and
Europe. The stocks included in each index are chosen by
Morgan Stanley Capital International on a statistical
basis. Each stock in the MSCI -- Europe,
MSCI -- Pacific (Free), and MSCI -- Select Emerging
Markets (Free) Indexes is weighted according to its
market value as a percentage of the total market value
of all stocks in the respective index. (A stock's
market value equals the number of shares outstanding
times the most recent price of the security.) The
inclusion of a stock in the index in no way implies
that Morgan Stanley Capital International believes the
stock to be an attractive investment.
The European, Pacific, and Emerging Markets Portfolios
will be unable to hold all of the issues that comprise
their respective indexes because of the costs involved
and the illiquidity of many of the securities. Instead,
each Portfolio will attempt to hold a representative
sample of approximately 500 or more of the securities
in its respective Index, which will be selected
utilizing a mathematical technique known as "portfolio
optimization." Under this technique, each stock is
considered for inclusion in the Portfolio based on its
contribution to certain country, capitalization,
industry, and fundamental investment characteristics.
Each Portfolio is constructed so that, in the
aggregate, each Portfolio's country, capitalization,
industry, and fundamental investment characteristics
resemble those of its respective Index. Over time,
portfolio composition is altered (or "rebalanced") to
reflect changes in the characteristics of the Indexes.
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not
expected to track their benchmark indexes with the same
degree of accuracy as large capitalization domestic
index funds. Over time, the correlation between the
performance of each Portfolio and its respective index
is expected to be greater than 0.95. A correlation of
1.00 would indicate perfect correlation, which would be
achieved when the net asset value of each Portfolio,
including the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in its respective index.
14
<PAGE> 18
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES Although each Portfolio's policy is to remain
substantially fully invested in common stocks, the
Portfolios may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper (rated Prime-1 by Moody's Investors
Services, Inc. or A-1 by Standard & Poor's
Corporation), bank certificates of deposit and bankers'
acceptances; and repurchase agreements collateralized
by these securities.
EACH PORTFOLIO MAY
INVEST IN DERIVATIVE
SECURITIES The Portfolios may utilize stock futures contracts,
options, warrants, convertible securities and swap
agreements to a limited extent. Such instruments are
commonly referred to as "derivatives," because their
value is based on (or "derived" from) a traditional
security or a market index. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets is
required as a margin deposit for futures contracts or
options. Additionally, the Fund's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges). Futures contracts, options,
warrants, convertible securities and swap agreements
may be used for several reasons: to simulate full
investment in the underlying Index while retaining a
cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to
seek higher investment returns when a futures contract,
option, warrant, convertible security or swap agreement
is priced more attractively than the underlying equity
security or index. While each of these securities can
be used as leveraged investments, the Portfolios may
not use them to leverage its net assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in
some strategies can be substantial due to the leverage
associated with low margin deposits. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or
gain. However, the Portfolios will not use futures
contracts, options, warrants, convertible securities
and swap agreements for speculative purposes or to
leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts,
options, warrants, convertible securities and swap
agreements by the Portfolios are: (i) imperfect
correlation between the change in market value of the
stocks held by a Portfolio and the prices of futures
contracts, options, warrants, convertible securities
and swap agreements; and (ii) possible lack of a liquid
secondary market for a futures contract and the
resulting inability to close a futures position prior
to its maturity date. The risk of imperfect correlation
will be minimized by investing only in those contracts
whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures
position will be minimized by entering into such
transactions on an exchange with an active and liquid
secondary market. However options, warrants,
convertible securities and swap agreements purchased or
sold over-the-counter may be less liquid than
15
<PAGE> 19
exchange traded securities. Illiquid securities, in
general, including swap agreements, may not represent
more than 15% of the net assets of a Portfolio.
Since there are no futures traded on the MSCI indexes,
it will be necessary for the Portfolios to utilize a
composite of other futures contracts to simulate the
performance of the Indexes. This process may magnify
the "tracking error" of a Portfolio's performance
compared to that of its Index, due to lower correlation
of the selected futures with its Index. The investment
adviser will attempt to reduce this tracking error by
investing in futures contracts whose behavior is
expected to resemble that of the underlying securities,
although there can be no assurance that these selected
futures will perfectly correlate with the performance
of any Index.
Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified
index or asset. In return, the other party agrees to
make payments to the first party based on the return of
a different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations thereunder, the Portfolios will
minimize this risk by entering into agreements that
mark to market no less frequently than quarterly. Swap
agreements also bear the risk that the Portfolios
will not be able to meet their obligation to the
counterparty. This risk will be mitigated by investing
the Portfolios in the specific asset for which it is
obligated to pay a return.
ALL FOUR PORTFOLIOS MAY Each Portfolio may enter into foreign currency forward
ENTER INTO FORWARD and foreign currency futures contracts in order to
CURRENCY CONTRACTS maintain the same currency exposure as its respective
index. A Portfolio may not enter into such contracts
for speculative purposes, or as a way of protecting
against anticipated adverse changes in exchange rates
between foreign currencies and the U.S. dollar. A
foreign currency forward contract is an obligation to
purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set
at the time of the contract.
THREE PORTFOLIOS MAY The European, Pacific and Emerging Markets Portfolios
LEND THEIR SECURITIES may lend their investment securities to qualified
institutional investors for either short-term or
long-term purposes of realizing additional income.
Loans of securities by the Portfolios will be
collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least
100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER Although the Portfolios generally seek to invest for
IS EXPECTED TO BE LOW the long term, the Portfolios retain the right to sell
securities irrespective of how long they have been
held. However, because of the "passive" investment
management approach of the Portfolios, the portfolio
turnover rate for each Portfolio is expected to be
under 50%, a generally lower turnover rate than for
most other mutual funds. A portfolio turnover rate of
50% would occur if one half of a Portfolio's securities
were sold within one year. Ordinarily, securities will
be sold from a Portfolio only to reflect
16
<PAGE> 20
certain administrative changes in an index (including
mergers or changes in the composition of an index) or
to accommodate cash flows out of the Portfolio while
maintaining the similarity of the Portfolio to its
benchmark index.
EACH PORTFOLIO MAY
BORROW MONEY Each Portfolio may borrow money from a bank up to a
limit of 15% of the market value of its assets, but
only for temporary or emergency purposes. A Portfolio
may borrow money only to meet redemption requests prior
to the settlement of securities already sold or in the
process of being sold by the Portfolio. To the extent
that a Portfolio borrows money prior to selling
securities, the Portfolio may be leveraged; at such
times, the Portfolio may appreciate or depreciate in
value more rapidly than its benchmark index. Each
Portfolio will repay any money borrowed in excess of 5%
of the market value of its total assets prior to
purchasing additional portfolio securities.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted limitations on some of its
investment policies. Some of these limitations are that
the Portfolio will not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the
Portfolio's assets would be invested in the
securities of such issuer, except for the Total
International Portfolio, which will normally invest
100% of its assets in the underlying Portfolios of
the International Equity Index Fund.
(b) with respect to 75% of its assets, purchase more
than 10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one
industry, except for the Total International
Portfolio which may invest more than 25% of its
assets in investment companies which are the
underlying Portfolios of the Fund; and
(d) borrow money except from banks for temporary or
emergency purposes and in no event in excess of 15%
of the market value of its total assets.
A complete list of each Portfolio's investment
limitations can be found in the Statement of Additional
Information. These limitations are fundamental and may
be changed only by approval of a majority of each
Portfolio's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE PORTFOLIOS Vanguard International Equity Index Fund is a member of
The Vanguard Group of Investment Companies, a family of
more than 30 investment companies with more than 95
distinct investment port-folios and total assets in
excess of $360 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost
basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard
funds have costs substantially lower than those of most
competing mutual funds. In 1997, the average expense
ratio (annual costs including advisory fees divided by
total net assets) for the Vanguard funds amounted to
approximately
17
<PAGE> 21
.28% compared to an average of 1.24% for the mutual
fund industry (data provided by Lipper Analytical
Services, Inc.).
Vanguard Total International Portfolio is an
independent series of Vanguard STAR Fund. The Portfolio
operates under a separate service agreement and, to the
extent that its assets are composed of shares of other
Vanguard funds, it will bear no direct expenses.
The Officers of the Funds manage their day-to-day
operations and are responsible to the Funds' Board of
Directors (Trustees). The Directors (Trustees) set
broad policies for the Funds and choose the Officers. A
list of the Directors (Trustees) and Officers of the
Funds and a statement of their present positions and
principal occupations during the past five years can be
found in the Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses, which
are allocated among the funds under methods approved by
the Board of Directors (Trustees) of each Fund. In
addition, each Fund bears its own direct expenses, such
as legal, auditing and custodian fees.
Vanguard provides distribution and marketing services
to the Funds. The Funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1
fees). However, each Fund bears its own share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The Vanguard International Equity Index Fund receives
ADVISER all investment advisory services on an at-cost basis
from Vanguard's Core Management Group, which also
VANGUARD MANAGES provides investment advisory services to Vanguard Index
THE FUNDS ON AN Trust, the equity portion of Vanguard Balanced Index
AT-COST BASIS Fund, Vanguard Institutional Index Fund, a portion of
the assets of Vanguard/Windsor II, Vanguard Explorer
Fund, and Vanguard/Morgan Growth Fund, the Equity Index
Portfolio of Vanguard Variable Insurance Fund, Vanguard
Tax-Managed Fund, the REIT Index Portfolio of Vanguard
Specialized Portfolios, the Total International
Portfolio of Vanguard STAR Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, and several indexed
separate accounts. Total indexed assets under
management as of December 31, 1997, were $97 billion.
The Portfolios of Vanguard International Equity Index
Fund are not actively managed, but are instead
administered by the Core Management Group using
computerized, quantitative techniques. The Group is
supervised by the Officers of the Funds.
The adviser is authorized to choose brokers or dealers
to handle the purchase and sale of the Fund's
securities, and is directed to get the best available
price and most favorable execution from these brokers
with respect to all transactions. At times, the adviser
may choose brokers who charge higher commissions in the
interests of obtaining better execution of a
transaction. If more than one broker can obtain the
best available price and favorable execution of a
transaction, then the adviser is authorized to choose a
broker who, in addition to
18
<PAGE> 22
executing the transaction, will provide research
services to the adviser or the Fund. However, the
adviser will not pay higher commissions specifically
for the purpose of obtaining research services. The
Fund may direct the adviser to use a particular broker
for certain transactions in exchange for commission
rebates or research services provided to the Fund.
The Total International Portfolio does not employ an
investment adviser.
- --------------------------------------------------------------------------------
DIVIDENDS, Each Portfolio intends to distribute substantially all
CAPITAL GAINS of its ordinary income in the form of dividends. The
AND TAXES Portfolios pay annual dividends. Capital gains
distributions, if any, are also made annually.
DIVIDENDS AND ANY
CAPITAL GAINS WILL BE Each Portfolio's dividend and capital gains
PAID ANNUALLY distributions may be reinvested in additional shares or
received in cash. See "Choosing a Distribution Option"
for a description of these distribution methods.
In order to satisfy certain distribution requirements
of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to
have been paid by each Portfolio and received by
shareholders on December 31 of the prior year.
EACH PORTFOLIO WILL Each Portfolio will automatically deduct a $10 annual
CHARGE A $10 ACCOUNT account maintenance fee from the dividend income of
MAINTENANCE FEE each Portfolio account on an annual basis. If the
dividend to be paid to an account is less than the fee
to be deducted, sufficient shares will be redeemed from
an account to make up the difference. The Board of
Directors (Trustees) reserves the right to change the
annual account maintenance fee to reflect the actual
cost of maintaining smaller shareholder accounts. For
federal tax purposes, the account maintenance fee does
not reduce dividend income and may be treated as an
investment expense by each shareholder (subject to
limitations). The account maintenance fee will be
waived for shareholders with an account balance of
$10,000 or more.
Each Portfolio intends to continue to qualify for
taxation as a "regulated investment company" under the
Internal Revenue Code so that it will not be subject to
federal income tax to the extent its income is
distributed to shareholders. Dividends paid by each
Portfolio from net investment income and net short-term
capital gains, whether received in cash or reinvested
in additional shares, will be taxable to shareholders
as ordinary income. For corporate investors, dividends
from net investment income will not generally qualify
for the intercorporate dividends-received deduction.
Distributions paid by a Portfolio from long-term
capital gains, whether received in cash or reinvested
in additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in a Portfolio. Long-term capital gains may be
taxed at different rates depending on how long the
Portfolio held the securities. Capital gains
distributions are made when a Portfolio realizes net
capital gains on sales of portfolio securities during
the year or when a Portfolio
19
<PAGE> 23
receives distributions of long-term capital gains from
investments in other regulated investment companies. A
Portfolio does not seek to realize any particular
amount of capital gains during a year; rather, realized
gains are a by-product of portfolio management
activities. Consequently, capital gains distributions
may be expected to vary considerably from year to year;
there will be no capital gains distributions in years
when a Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in
mind that if you purchase shares in a Portfolio shortly
before the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless
of whether you are reinvesting your distributions or
receiving them in cash.
The Funds will notify you annually as to the tax status
of dividend and capital gains distributions paid by
each Portfolio.
THREE PORTFOLIOS MAY
"PASS THROUGH"
FOREIGN TAXES The European, Pacific, and Emerging Markets Portfolios
may elect to "pass through" to their shareholders the
amount of foreign income taxes paid by a Portfolio. The
Portfolios will make such an election only if it is
deemed to be in the best interests of shareholders. If
this election is made, shareholders of a Portfolio will
be required to include in their gross income their pro
rata share of foreign taxes paid by the Portfolio.
However, shareholders will be able to treat their pro
rata share of foreign taxes as either an itemized
deduction or a foreign tax credit against U.S. income
taxes (but not both) on their federal income tax
return.
ANY FOREIGN TAX CREDITS
WOULD NOT "PASS
THROUGH" TO TOTAL
INTERNATIONAL PORTFOLIO
SHAREHOLDERS If the European, Pacific or Emerging Markets Portfolios
elect to pass through foreign taxes to their
shareholders, the foreign tax credit would not pass
through to Total International Portfolio shareholders.
Since the Total International Portfolio holds shares of
the European, Pacific and Emerging Markets Portfolios,
which are U.S. corporations, and does not hold shares
of foreign securities, it cannot pass through the
foreign tax credit to its investors. However, the Total
International Portfolio would claim a deduction for
foreign taxes paid by the underlying funds.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual
funds (or two portfolios of a mutual fund). You are
responsible for calculating any capital gains or losses
realized upon redemption or exchange of a Portfolio's
shares.
Dividend distributions, capital gains distributions,
and capital gains or losses from redemptions and
exchanges may be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may
20
<PAGE> 24
avoid this withholding requirement by certifying on
your Account Registration Form your proper Social
Security or employer identification number and by
certifying that you are not subject to backup
withholding.
Vanguard International Equity Index Fund has obtained a
certificate of authority to do business as a foreign
corporation in Pennsylvania and does business and
maintains an office in that state. In the opinion of
counsel, shares of the Fund will be exempt from
Pennsylvania personal property taxes.
Vanguard Total International Portfolio is part of a
Pennsylvania business trust and, in the opinion of
counsel, is not liable for any income or franchise tax
in the Commonwealth of Pennsylvania. The Portfolio will
be subject to Pennsylvania county personal property tax
in the county which is the site of its principal
office. In the opinion of counsel, shareholders who are
Pennsylvania residents will not be subject to county
personal property taxes, with the exception of non-
exempt holders who are residents of the City and School
District of Pittsburgh.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO Each Portfolio's share price, or "net asset value" per
share, is calculated by dividing the total assets of
the Portfolio, less all liabilities, by the total
number of shares outstanding. The net asset value is
determined as of the close of the New York Stock
Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time, on each day that the Exchange is open for
trading.
Portfolio securities for which market quotations are
readily available (includes those securities listed on
national securities exchanges, as well as those quoted
on the NASDAQ Stock Market) will be valued at the last
quoted sales price on the day the valuation is made.
Such securities which are not traded on the valuation
date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is
taken from the exchange where the security is primarily
traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are
believed to reflect the fair market value of such
securities.
Short term instruments (those acquired with remaining
maturities of 60 days or less) may be valued at cost,
plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued
on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair
market value of such securities. The prices provided by
a pricing service may be determined without regard to
bid or last sale prices of each security, but take into
account institutional-sized transactions in similar
groups of securities as well as any developments
related to specific securities.
21
<PAGE> 25
Foreign securities are valued at the last quoted sales
price, according to the broadest and most
representative market, available at the time a
Portfolio is valued. If events which materially affect
the value of a Portfolio's investments occur after the
close of the securities markets on which such
securities are primarily traded, those investments may
be valued by such methods as the Board of Directors
deems in good faith to reflect fair value.
In determining a Portfolio's net asset value per share,
all assets and liabilities initially expressed in
foreign currencies will be converted into U.S. dollars
using the officially quoted daily exchange rates used
by Morgan Stanley Capital International in calculating
various benchmarking indices. This officially quoted
exchange rate may be determined prior to or after the
close of a particular securities market. If such
quotations are not available, the rate of exchange will
be determined in accordance with policies established
in good faith by the Board of Directors.
Other assets and securities for which no quotations are
readily available or which are restricted as to sale
(or resale) are valued by such methods as the Board of
Directors deems in good faith to reflect fair value.
The share price for each Portfolio can be found daily
in the mutual fund listings of most major newspapers
under the heading of Vanguard Index Funds.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard International Equity Index Fund is organized
as a Maryland corporation. The Articles of
Incorporation permit the Directors to issue
1,500,000,000 shares of common stock with a $.001 par
value. The Board of Directors has the power to
designate one or more classes ("series") of shares of
common stock and to classify or reclassify any unissued
shares with respect to such series. Currently the Fund
is offering shares of three series.
The shares of each series are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors (Trustees) can elect 100% of the Directors
(Trustees) if they so choose. Annual meetings of
shareholders will not be held except as required by the
Investment Company Act of 1940 and other applicable
law. An annual meeting will be held to vote on the
removal of a Director (Trustee) or Directors (Trustees)
of the Fund if requested in writing by the holders of
not less than 10% of the outstanding shares of the
Fund.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
All securities and cash for the European, Pacific and
Emerging Markets Portfolios are held by Morgan Stanley
Trust Company. CoreStates Bank, N.A., holds the daily
cash balances that are used by these three Portfolios
to invest in repurchase agreements or securities
acquired in
22
<PAGE> 26
these transactions. Securities and cash for the Total
International Portfolio are held by CoreStates. The
Vanguard Group, Inc., Valley Forge, PA, serves as the
Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountant for
the Fund and will audit its financial statements
annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
23
<PAGE> 27
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either
by mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement for each Portfolio
($1,000 for Uniform Gifts/Transfers to Minors Act
accounts and Individual Retirement Accounts, $500
minimum for an Education IRA). To open a new account by
wire, you must call Client Services before initiating
the wire transfer. If you wish to establish a Vanguard
Individual Retirement Account, you must establish the
account by mail (IRAs may not be opened by wire) using
a Vanguard IRA Adoption Agreement. Your purchase must
be equal to or greater than $1,000, but no more than
$2,000 if you are making a regular IRA contribution.
(Rollover IRA contributions may be made in greater
amounts). If you need assistance with the forms or have
any questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For
other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or powers of attorney), please call us to determine
which additional forms you may need.
The shares of each Portfolio are purchased at the
next-determined net asset value after your investment
has been received. The Portfolios are offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock
investments, the Portfolios are intended to be
long-term investment vehicles and are not designed
to provide investors with a means of speculating on
short-term market movements. Consequently, the
Portfolios reserve the right to reject any specific
purchase (and exchange purchase) request. The
Portfolios also reserve the right to suspend the
offering of shares for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Portfolios. Please be sure
your purchase check is made payable to The Vanguard
Group.
IMPORTANT NOTE
ON EXPENSES The Emerging Markets Portfolio assesses a 1%
transaction fee on redemptions. Each Portfolio assesses
a transaction fee on purchases (1.0% for the Emerging
Markets Portfolio, 0.5% for the European Portfolio,
0.5% for the Pacific Portfolio, and 0.5% for the Total
International Portfolio), as well as a $10 annual
account maintenance fee. The $10 annual account
maintenance fee will be waived for shareholders with an
account balance of $10,000 or more at the time of the
annual deduction. See "Portfolio Expenses."
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made
by mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be
made by mail ($100 minimum) or exchange from another
24
<PAGE> 28
Vanguard Fund account. In some instances, contributions
may be made by wire or Vanguard Fund Express. Please
call us for more information on these options.
-----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Complete and sign the on the registration form, Invest-by-Mail remittance
enclosed Account make your check payable to form attached to your Fund
Registration Form The Vanguard confirmation statements.
Group-(Portfolio Number), Please make your check
see below for appropriate payable to The Vanguard
Portfolio number, and mail Group-(Portfolio Number),
to: see below for the
appropriate Portfolio
THE VANGUARD GROUP number, write your account
P.O. BOX 2600 number on your check and,
VALLEY FORGE, PA 19482-2600 using the return envelope
provided, mail to the
address indicated on the
Invest-by-Mail Form.
For express or THE VANGUARD GROUP All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087-1815 addresses indicated for new
accounts. Do not send
registered or express mail
to the post office box
address.
European Portfolio -- 79
Emerging Markets Portfolio -- 533
Pacific Portfolio -- 72
Total International Portfolio -- 113
---------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN: VANGUARD
VANGUARD INTERNATIONAL EQUITY
BEFORE Wiring INDEX FUND
NAME OF PORTFOLIO
Please contact ACCOUNT NUMBER (or temporary reference number
Client Services for new accounts)
(1-800-662-2739) ACCOUNT REGISTRATION
</TABLE>
You should notify our Client Services Department of
your intended wire purchase by 12:00 noon (Eastern
time). To assure proper receipt, please be sure your
bank includes the Portfolio name, the account number
Vanguard has assigned to you and the eight-digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail
it to the "New Account" address above after completing
your wire arrangement. Note: Federal Funds wire
purchase orders will be accepted only when the Fund and
Custodian Bank are open for business. Funds must be
received at the Federal Reserve Bank by 4:00 p.m.
Eastern time in order to receive that day's trade date.
- -----------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) Telephone exchanges are not accepted for the Fund. You
may, however, open an account by exchange by providing
the appropriate information on the Account Registration
Form. The new account will have the same
25
<PAGE> 29
registration as the existing account. The Fund reserves
the right to refuse any exchange purchase request.
-----------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Automatic Investment The Fund Express Automatic Investment option lets you
move money automatically from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly, semiannually, or
annually) you select. To establish this option, please
provide the appropriate information on the Account
Registration Form. We will send you a confirmation of
your Fund Express enrollment; please wait two weeks
before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of four distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividend and
capital gains distributions will be reinvested in
additional shares. This option will be selected for
you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional shares.
3. CASH CAPITAL GAINS OPTION -- Your capital gains
distributions will be paid in cash and your
dividends will be reinvested in additional shares.
4. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
If a shareholder has chosen to receive dividend and/or
capital gains distributions in cash, and the postal or
other delivery service is unable to deliver checks to
the shareholder's address of record, we will change the
distribution option so that all dividends and other
distributions are automatically reinvested in
additional shares. We will not pay interest on uncashed
distribution checks.
In addition, an option to invest your cash dividend
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividend and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, each Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you
purchase shares immediately prior to the record date of
a sizable capital gain or income dividend distribution,
you will be assessed taxes on the amount of the capital
gain and/or dividend distribution later paid even
though you owned the Portfolio shares for just a short
period
26
<PAGE> 30
of time. (Taxes are due on the distributions even if
the dividend or capital gain is reinvested in
additional Portfolio shares.) While the total value of
your investment will be the same after the distribution
(assuming there is no market change) -- the amount of
the distribution will offset the drop in the net asset
value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The
Portfolios' annual dividend and capital gains
distributions normally occur in December. In addition,
the Portfolios may occasionally be required to make
supplemental dividend or capital gains distributions at
some other time during the year. For additional
information on distributions and taxes, see the section
titled "Dividends, Capital Gains and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION The easiest way to establish optional Vanguard services
on your account is to select the options you desire
when you complete your Account Registration Form.
ESTABLISHING OPTIONAL
SERVICES IF YOU WISH TO ADD OPTIONS LATER, YOU MAY NEED TO
PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND A
SIGNATURE GUARANTEE. PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates for the European and Pacific
Portfolios (but not for the Emerging Markets and Total
International Portfolios) will be issued upon request.
If a certificate is lost, you may incur an expense to
replace it.
BROKER/DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker/dealer or investment adviser, the
broker/dealer or adviser may charge a service fee.
CANCELLING TRADES The Portfolios will not cancel any trade (e.g.,
purchase, exchange or redemption) believed to be
authentic, once the trade request has been received in
writing or by telephone.
ELECTRONIC
PROSPECTUS
DELIVERY You may receive a prospectus for the Fund or any of the
Vanguard Funds in an electronic format through
Vanguard's website at www.vanguard.com. For additional
information please see "Other Vanguard
Services -- Computer Access."
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal
Funds wire or exchange, and is received by the close of
trading on the New York Stock Exchange (the "Exchange")
generally 4:00 p.m. Eastern time, your trade date is
the day of receipt. If your purchase is received after
the close of the Exchange, your trade date is the next
business day. All four Portfolios charge a transaction
fee on purchases (1.0% for the Emerging Markets
Portfolio, 0.5% for the
27
<PAGE> 31
European Portfolio, 0.5% for the Pacific Portfolio, and
0.5% for the Total International Portfolio). See
"Portfolio Expenses."
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. (Please see
"Important Redemption Information.") You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order. No interest will accrue on amounts represented
by uncashed redemption checks.
- -----------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to THE VANGUARD GROUP,
VANGUARD INTERNATIONAL INDEX PORTFOLIOS, P.O. BOX 1120,
VALLEY FORGE, PA 19482-1120. (For express or registered
mail, send your request to The Vanguard Group, Vanguard
International Index Portfolios, 455 Devon Park Drive,
Wayne, PA 19087-1815.)
The Emerging Markets Portfolio charges a 1% transaction
fee on all redemptions (including exchanges of shares).
The redemption price of shares will be the Portfolio's
net asset value next determined after Vanguard has
received all required documents in Good Order.
- -----------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that may be
required in the case of estates, corporations,
trusts and certain other accounts.
6. Any certificates that you are holding for the
account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739).
- -----------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. The proceeds will be sent to you by
mail. PLEASE NOTE: As a protection against fraud, your
telephone mail redemption privilege will be suspended
for 15 calendar days following any expedited address
change to your account. An expedited address change is
one that is made by telephone or in writing, without
the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
- -----------------------------------------------------------------------------
28
<PAGE> 32
SELLING BY FUND With the Fund Express Automatic Withdrawal option,
EXPRESS money will be automatically moved from your Vanguard
Fund account to your bank account according to the
Automatic schedule you have selected. You may elect Fund Express
Withdrawal on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund
Express Application.
- -----------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange to another
Vanguard Fund account. Exchanges to or from the
Portfolios may be made only by mail. Please see
"Exchanging Your Shares" for details.
- -----------------------------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be
redeemed at any time. However, your redemption proceeds
will not be paid until payment for the purchase is
collected, which may take up to ten calendar days.
- -----------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of trading on the Exchange are processed on the
day of receipt and the redemption proceeds are normally
sent on the following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order, except
as described in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net
asset value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
Each Portfolio may suspend the redemption right or
postpone payment at times when the New York Stock
Exchange is closed or under any emergency circumstances
as determined by the United States Securities and
Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of a Portfolio's
remaining shareholders to make payment in cash, a
Portfolio may pay redemption proceeds in whole or in
part by a distribution in kind of readily marketable
securities.
- -----------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- -----------------------------------------------------------------------------
29
<PAGE> 33
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Portfolio will automatically deduct a
$10 annual fee in either June or December from
non-retirement accounts with balances falling below
$2,500 ($500 for Uniform Gifts/Transfers to Minors Act
accounts). The fee generally will be waived for
investors whose aggregate Vanguard assets exceed
$50,000.
In addition, each Portfolio reserves the right to
liquidate any non-retirement account that is below the
minimum initial investment amount of $3,000. If at any
time your total investment does not have a value of at
least $3,000, you may be notified that your account is
below the Fund's minimum account balance requirement.
You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds
would be promptly paid to the registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange
your shares of a Portfolio for those of other available
Vanguard Funds. Exchanges to or from a Portfolio may be
made only by mail. TELEPHONE EXCHANGES BETWEEN
NON-RETIREMENT ACCOUNTS ARE NOT ACCEPTED FOR THE FUND.
Note, too, that the Emerging Markets Portfolio charges
a 1% transaction fee on all redemptions (including the
exchange of shares).
- -----------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to THE
VANGUARD GROUP, VANGUARD INTERNATIONAL INDEX
PORTFOLIOS, P.O. BOX 1120, VALLEY FORGE, PA 19482-1120.
(For express or registered mail, send your request to
The Vanguard Group, Vanguard International Index
Portfolios, 455 Devon Park Drive, Wayne, PA
19087-1815.)
- -----------------------------------------------------------------------------
EXCHANGING ONLINE You may use your personal computer to exchange shares
of most Vanguard funds by accessing our website
(www.vanguard.com). To establish this service for your
account, you must first register through the website.
We will then send to you, by mail, an account access
password that will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or sell
through online exchange are VANGUARD INDEX TRUST,
VANGUARD BALANCED INDEX FUND, VANGUARD INTERNATIONAL
EQUITY INDEX FUND, VANGUARD REIT INDEX PORTFOLIO,
VANGUARD TOTAL INTERNATIONAL PORTFOLIO, and VANGUARD
GROWTH AND INCOME PORTFOLIO (formerly known as Vanguard
Quantitative Portfolios). These funds do permit online
exchanges within IRAs and other retirement accounts.
- -----------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For an additional copy and for answers to
any questions you may have, call our Investor
Information Department (1-800-662-7447).
30
<PAGE> 34
- An exchange is treated as a redemption and a
purchase. Therefore, you could realize a taxable gain
or loss on the transaction.
- Exchanges by telephone are accepted only if the
registrations and the taxpayer identification numbers
of the two accounts are identical.
- To exchange into an account with a different
registration (including a different name, address, or
taxpayer identification number), you must provide
Vanguard with written instructions that include the
guaranteed signatures of all current account owners
on your written instructions.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange
is the net asset value next determined after Vanguard
has received all required documentation in Good
Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount
of, or reject any exchange as deemed necessary, at any
time.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements
in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed
excessive if limited to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (AT LEAST 30 DAYS APART) from a Portfolio
during any twelve-month period. "Substantive" means
either a dollar amount or a series of movements between
Vanguard funds that Vanguard determines, in its sole
discretion, could have an adverse impact on the
management of the Fund. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from
other Vanguard port-folios) that is reasonably deemed
to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire or
Fund Express redemptions) by telephone is automatically
established on your account unless you request in
writing that telephone transactions on your account not
be permitted.
31
<PAGE> 35
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or employer
identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received
by telephone, provided that reasonable security
procedures have been followed. Vanguard believes that
the security procedures described above are reasonable,
and that if such procedures are followed, you will bear
the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form
and sending it to: THE VANGUARD GROUP, ATTENTION:
TRANSFER DEPARTMENT, P.O. BOX 1110, VALLEY FORGE, PA
19482-1110. The request must be in Good Order. To
obtain a transfer form and full instructions, please
call our Client Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each
time you initiate a transaction in your account except
for checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire
calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account
during the calendar year, using the average cost single
category method. This service is available for most
taxable accounts opened since January 1, 1986. In
general, investors who redeemed shares from a
qualifying Vanguard account during the most recent
quarter may expect to receive an Average Cost Statement
along with their quarterly Portfolio Summary State-
ment. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end.
To keep the Fund's costs as low as possible (so that
you and other shareholders can keep more of the Fund's
investment earnings), Vanguard attempts to eliminate
duplicate mailings to the same address. When we find
that two or more Fund shareholders have the same last
name and address, we send just one Fund report to that
address -- instead of mailing separate reports to each
shareholder. If you want us to send separate reports,
32
<PAGE> 36
however, you may notify our Investor Information
Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services,
please call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar-cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other
retirement plan. Please contact our Client Services
Department at 1-800-662-2739 for additional
information.
VANGUARD FUND
EXPRESS Vanguard Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard Dividend Express allows you to transfer your
dividend and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
VANGUARD
TELE-ACCOUNT(R) Vanguard Tele-Account is a convenient, automated
service that provides share price, price change and
yield quotations on Vanguard Funds through any
TouchTone(TM) telephone. This service also lets you
obtain information about your account balance, your
last transaction, and your most recent dividend or
capital gains payment. In addition, you may perform
investment exchanges of Vanguard Fund shares and
redemptions by check using Tele-Account. To contact
Vanguard Tele-Account service, dial 1-800-ON-BOARD
(1-800-662-6273). A brochure offering detailed
operating instructions is available from our Investor
Information Department (1-800-662-7447).
33
<PAGE> 37
COMPUTER ACCESS
VANGUARD ONLINE
www.vanguard.com
Use your personal computer to learn more about
Vanguard's funds and services; keep in touch with your
Vanguard accounts; map out a long-term investment
strategy; initiate certain transactions; and ask
questions, make suggestions, and send messages to
Vanguard.
Our education-oriented website provides timely news and
information about Vanguard's funds and services; an
online "university" that offers a variety of mutual
fund classes; and easy-to-use, interactive tools to
help you create your own investment and retirement
strategies.
- --------------------------------------------------------------------------------
34
<PAGE> 38
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
THE VANGUARD GROUP
P.O. BOX 2600
VALLEY FORGE, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
P.O. Box 2600
Valley Forge, PA 19482
P072 0498
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 16th day of April, 1998.
VANGUARD STAR FUND
By: RAYMOND J. KLAPINSKY
-----------------------------------------
John J. Brennan*,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
By: RAYMOND J. KLAPINSKY Senior Chairman of the April 16, 1998
---------------------------- Board and Trustee
John C. Bogle*
By: RAYMOND J. KLAPINSKY Chairman, Trustee and April 16, 1998
---------------------------- Chief Executive Officer
John J. Brennan*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
Robert E. Cawthorn*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
Barbara B. Hauptfuhrer*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
Bruce K. MacLaury*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
Burton G. Malkiel, Jr.*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
Alfred M. Rankin, Jr.*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
John C. Sawhill*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
James O. Welch, Jr.*
By: RAYMOND J. KLAPINSKY Trustee April 16, 1998
----------------------------
J. Lawrence Wilson*
By: RAYMOND J. KLAPINSKY Treasurer and Principal April 16, 1998
---------------------------- Financial Officer and
Richard F. Hyland* Accounting Officer
</TABLE>
* By Power of Attorney. See File Number 2-14336, January 23, 1990, Incorporated
by Reference.
C-1
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Post Effective Amendment No. 21 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 6, 1998, relating to the financial statements and financial highlights
appearing in the December 31, 1997 Annual Report to Shareholders of Vanguard
STAR - Total International Portfolio. We also consent to references to us under
the headings "Financial Highlights" and "General Information" in the
Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 15, 1998
