<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-88373) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 20 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 22 [X]
VANGUARD STAR FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS REQUESTED THAT THIS FILING BECOME EFFECTIVE ON APRIL 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>
VANGUARD STAR FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <C> <S>
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Not Applicable
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Investment Objectives;
Investment Limitations;
Investment Policies;
General Information
Item 5. Management of the Fund................ Management of the
Portfolio STAR Fund;
Investment Management
Item 5A. Management's Discussion of Fund
Performance........................... Herein incorporated by
reference to Registrant's
Annual Report to
Shareholders dated
December 31, 1997 filed
with the Securities &
Exchange Commission's
EDGAR system on March 5,
1998
Item 6. Capital Stock and Other Securities.... Opening an Account and
Purchasing Shares; Selling
Shares; Share Price of the
Portfolio; Dividends,
Capital Gains,
Distributions and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.. Cover Page; Opening an
Account and Purchasing
Shares
Item 8. Redemption or Repurchase.............. Selling Your Shares
Item 9. Pending Legal Proceedings............. Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <C> <S>
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Cover Page
Item 12. General Information and History....... Management of Vanguard
STAR Fund; General
Information
Item 13. Investment Objective and Policies..... Investment Limitations
Item 14. Management of the Registrant.......... Management of Vanguard
STAR Fund; Investment
Management
Item 15. Control Persons and Principal Holders
of Securities......................... Management of Vanguard
STAR Fund; General
Information
Item 16. Investment Advisory and Other Management of Vanguard
Services.............................. STAR Fund; Investment
Advisory Services;
Termination of Advisory
Agreement
Item 17. Brokerage Allocation.................. Not Applicable
Item 18. Capital Stock and Other Securities.... General Information;
Financial Statements
Item 19. Purchase, Redemption and Pricing of Purchase of Shares;
Securities Being Offered.............. Redemption of Shares
Item 20. Tax Status............................ Appendix
Item 21. Underwriters.......................... Not Applicable
Item 22. Calculations of Performance Data ..... Not Applicable
Item 23. Financial Statements.................. Financial Statements
</TABLE>
<PAGE>
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[LOGO OF VANGUARD STAR PORTFOLIO APPEARS HERE]
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PROSPECTUS--APRIL 23, 1998
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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 Vanguard STAR Fund (the "Fund") is an open-end non-diver-
OBJECTIVE AND sified investment company which seeks to maximize total
POLICIES investment return (i.e., capital growth and income) sub-
ject to the investment restrictions and asset allocation
policies described in this Prospectus. The Fund consists
of six portfolios; however this prospectus relates only to
the STAR Portfolio. The STAR Portfolio invests in a diver-
sified portfolio of ten mutual funds (the "Vanguard
Funds"), all of which are members of The Vanguard Group of
Investment Companies. The STAR Portfolio will invest 60%
to 70% of its assets in seven Vanguard Funds which invest
primarily in equity securities, and 30% to 40% of its as-
sets in three Vanguard Portfolios which invest primarily
in fixed-income securities. There is no assurance that the
STAR Portfolio will achieve its stated objective. Shares
of the Fund are neither insured nor guaranteed by any
agency of the U.S. Government, including the FDIC.
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OPENING AN The STAR Portfolio is designed primarily for long-term in-
ACCOUNT vestment savings. To open an Individual Retirement Account
(IRA), please use a Vanguard IRA Adoption Agreement. To
obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). If you are es-
tablishing an investment account outside a Vanguard-
sponsored retirement plan, complete the Account Registra-
tion Form. If you need assistance in completing these
forms, please call the Investor Information Department.
The minimum initial investment is $1,000 for all accounts.
- -------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the in-
PROSPECTUS formation you should know about the STAR Portfolio before
you invest. It should be retained for future reference. A
"Statement of Additional Information" containing addi-
tional information about Vanguard STAR Fund has been filed
with the Securities and Exchange Commission. This State-
ment 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 In-
vestor Information Department at 1-800-662-7447, or visit-
ing the Securities and Exchange Commission's website
(www.sec.gov).
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TABLE OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Portfolio Expenses..... 2
Financial Highlights... 4
Yield and Total Return. 5
FUND INFORMATION
Investment Objective... 5
Investment Policies.... 6
Investment Risks....... 7
Who Should Invest...... 9
Implementation of Poli-
cies.................. 9
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Limita-
tions................ 17
Management of the
Portfolio............ 17
Investment Management. 19
Performance Record.... 25
Dividends, Capital
Gains
and Taxes............ 26
Share Price of the
Portfolio............ 28
General Information... 28
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and Purchasing
Shares................................. 29
When Your Account Will
Be Credited............................ 33
Selling Your Shares..................... 33
Exchanging Your Shares.................. 36
Important Information about Telephone
Transactions........................... 38
Transferring Registration............... 38
Other Vanguard Services................. 39
</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.
- -------------------------------------------------------------------------------
<PAGE>
PORTFOLIO The following table illustrates all expenses and fees that
EXPENSES you would incur as a shareholder of the STAR Portfolio.
The expenses and fees set forth in the table are for the
1997 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases......................... None
Sales Load Imposed on Reinvested Dividends.............. None
Redemption Fees......................................... None
Exchange Fees........................................... None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------
Management & Administrative Expenses.................... None
Investment Advisory Fees................................ None
12b-1 Fees.............................................. None
Other Expenses
Distribution Costs..................................... None
Miscellaneous Expenses................................. None
----
Total Other Expenses.................................... None
----
TOTAL OPERATING EXPENSES.............................. NONE
====
</TABLE>
The STAR Portfolio did not incur any expenses in fiscal
year 1997, and has not incurred any operating expenses
since its inception in 1985. However, while the STAR Port-
folio is expected to operate without expenses, sharehold-
ers in the STAR Portfolio bear indirectly the expenses of
the underlying Vanguard Funds in which the STAR Portfolio
invests. The following chart provides the expense ratio
for each of the underlying investments of the Portfolio
for its 1997 fiscal year, as well as the percentage of the
STAR Portfolio's net assets invested in each fund as of
December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE
EXPENSE OF PORTFOLIO'S
RATIO NET ASSETS
------- --------------
<S> <C> <C>
Vanguard/Windsor Fund....................... 0.27% 14.9%
Vanguard/Windsor II......................... 0.37 27.6
Vanguard Explorer Fund...................... 0.62 5.1
Vanguard/Morgan Growth Fund................. 0.48 5.1
GNMA Portfolio.............................. 0.31 12.4
Long-Term Corporate Portfolio............... 0.32 12.4
Prime Portfolio............................. 0.32 12.4
Vanguard/PRIMECAP Fund...................... 0.51 5.1
Vanguard U.S. Growth Portfolio.............. 0.42 5.0
----
100%
</TABLE>
Based on these figures, the average weighted expense ratio
for the STAR Portfolio's underlying investments on Decem-
ber 31, 1997 was .36 of 1%. This figure is only an approx-
imation of the Portfolio's underlying expense ratio, since
the assets of the Portfolio invested in each of the under-
lying Funds change daily.
2
<PAGE>
Using an expense ratio of .36% for the STAR Portfolio's un-
derlying funds, the following example illustrates the ex-
penses 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. As noted in
the table showing shareholder transaction expenses, the
Portfolio charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$4 $12 $20 $46
</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.
- --------------------------------------------------------------------------------
3
<PAGE>
FINANCIAL The following financial highlights, insofar as they relate
HIGHLIGHTS to each of the fiscal years ended December 31, 1997, have
been derived from financial statements which were audited
by Price Waterhouse LLP, independent accountants, whose
report on the financial statements which contain this in-
formation, was unqualified. This information should be
read in conjunction with the STAR Portfolio's financial
statements and notes thereto, which, together with the re-
maining portions of the Portfolio's 1997 Annual Report to
Shareholders, are incorporated by reference in the State-
ment of Additional Information and this Prospectus, and
which appear, along with the report of Price Waterhouse
LLP, in the Portfolio's 1997 Annual Report to Sharehold-
ers. For a more complete discussion of the Portfolio's
performance, please see the Portfolio'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>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $15.86 $15.03 $12.61 $13.41 $12.89 $12.30 $10.73 $12.05 $11.12 $ 9.98
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions
Received.............. .60 .58 .590 .53 .47 .51 .62 .73 .84 .64
Capital Gain
Distributions
Received.............. 1.06 .63 .435 .26 .36 .18 .35 .18 .34 .16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions
Received.............. 1.66 1.21 1.025 .79 .83 .69 .97 .91 1.18 .80
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.65 1.19 2.550 (.82) .56 .59 1.59 (1.34) .90 1.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS............ 3.31 2.40 3.575 (.03) 1.39 1.28 2.56 (.43) 2.08 1.86
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends From Net
Investment Income..... (.59) (.59) (.590) (.52) (.47) (.51) (.62) (.73) (.77) (.69)
Distributions From
Realized Capital
Gains................. (1.20) (.98) (.565) (.25) (.40) (.18) (.37) (.16) (.38) (.03)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.... (1.79) (1.57) (1.155) (.77) (.87) (.69) (.99) (.89) (1.15) (.72)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $17.38 $15.86 $15.03 $12.61 $13.41 $12.89 $12.30 $10.73 $12.05 $11.12
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN............ 21.15% 16.11% 28.64% (0.21)% 10.88% 10.51% 24.18% (3.62)% 18.80% 19.04%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $7,355 $5,863 $4,842 $3,766 $3,628 $2,489 $1,574 $1,038 $949 $681
Ratio of Total Expenses
to Average Net Assets.. 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment
Income to Average
Net Assets............. 3.46% 3.71% 4.12% 4.01% 3.67% 4.36% 5.48% 6.65% 6.42% 5.87%
Portfolio Turnover Rate. 15% 18% 13% 9% 3% 3% 11% 12% 7% 21%
</TABLE>
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4
<PAGE>
YIELD AND From time to time the STAR Portfolio may advertise its
TOTAL RETURN yield and total return. Both yield and total return fig-
ures are based on historical earnings and are not intended
to indicate future performance. The "total return" of the
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten- year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the begin-
ning of a stated period to the ending redeemable value of
the investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Portfolio is calculated by dividing net in-
vestment income per share earned during a 30-day period by
the net asset value per share on the last day of the peri-
od. Net investment income includes interest and dividend
income earned on the Portfolio's securities; it is net of
all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Portfolio to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to an investor's account.
- -------------------------------------------------------------------------------
INVESTMENT The objective of the STAR Portfolio is to maximize total
OBJECTIVE investment return (i.e., capital growth and income) sub-
ject to the investment restrictions and asset allocation
THE STAR policies described in this Prospectus. The Portfolio in-
PORTFOLIO SEEKS vests in a diversified portfolio of ten mutual funds (the
TO MAXIMIZE "Vanguard Funds"), all of which are members of The Van-
TOTAL INVESTMENT guard Group. There is no assurance that the Portfolio will
RETURN achieve its stated objective.
This investment objective is fundamental and so cannot be
changed without the approval of a majority of the Fund's
shareholders.
- -------------------------------------------------------------------------------
5
<PAGE>
INVESTMENT The Portfolio will invest 60% to 70% of its assets in
POLICIES seven Vanguard Funds which invest primarily in equity se-
curities and 30% to 40% of its assets in three Vanguard
THE STAR Funds which invest primarily in fixed-income securities.
PORTFOLIO The following table shows how the Portfolio's assets are
INVESTS IN A divided among the ten Vanguard Funds:
DIVERSIFIED
PORTFOLIO
OF VANGUARD
FUNDS
<TABLE>
<CAPTION>
PERCENTAGE
INVESTMENT OF STAR'S VANGUARD
CATEGORY NET ASSETS FUNDS
----------------- ---------- ------------------------------
<S> <C> <C>
Equity Funds 60-70% Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Explorer Fund
Vanguard/Morgan Growth Fund
Vanguard U.S. Growth Portfolio
Vanguard/PRIMECAP Fund
500 Portfolio
Bond Funds 20-30% GNMA Portfolio
Long-Term Corporate Portfolio
Money Market Fund 10-20% Prime Portfolio
</TABLE>
As investments for the Portfolio, the Fund's Trustees have
chosen Vanguard/ Windsor Fund, Vanguard/Windsor II, Van-
guard Explorer Fund, Vanguard/Morgan Growth Fund, the Van-
guard U.S. Growth Portfolio of Vanguard World Fund,
Inc. ("Vanguard U.S. Growth Portfolio"), Vanguard/PRIMECAP
Fund, Inc. ("Vanguard/PRIMECAP"), the 500 Portfolio of
Vanguard Index Trust ("500 Portfolio"), the GNMA and Long-
Term Corporate Portfolios of Vanguard Fixed Income Securi-
ties Fund, and the Prime Portfolio of Vanguard Money Mar-
ket Reserves. The 500 Portfolio, although approved as an
additional investment by the Fund's Trustees, is not cur-
rently being purchased by the STAR Portfolio. The selec-
tion of the Vanguard Funds in which the Portfolio will in-
vest, as well as the maximum and minimum amounts of the
Portfolio's assets which can be invested in each invest-
ment category, are fundamental policies and so cannot be
changed without the approval of a majority of the Portfo-
lio's shareholders. See "Implementation of Policies" for a
description of the ten Vanguard Funds in which the Portfo-
lio invests.
THE PORTFOLIO The allocation of the Portfolio's assets among the Van-
HOLDS A STEADY guard Funds will be made by the Officers of the Fund under
BALANCE OF the supervision of the Fund's Board of Trustees, within
STOCKS, BONDS the percentage ranges set forth in the table above. The
AND CASH ranges specified for the Portfolio's investments in the
RESERVES underlying Funds are narrow and permit little variation in
the Portfolio's investment program. It is expected that
the Portfolio's allocation of investments between the "in-
vestment categories" listed above will be quite constant.
Since inception on March 29, 1985, the STAR Portfolio has
maintained fixed allocation targets for its investments in
equity (stock), bond and money market funds. The Portfo-
lio's investment in equity funds has been targeted at
62.5% of assets, the Portfolio's investment in bond funds
has been targeted at 25% of
6
<PAGE>
assets, and the Portfolio's investment in the money market
fund at 12.5% of assets. This policy reflects the Board of
Trustees' belief that holding relatively steady propor-
tions of stocks, bonds and money market instruments is
more likely to provide favorable long-term investment re-
turns, with moderate risk, than frequently rebalancing the
Portfolio's investment holdings based on short-term
events.
The investment restrictions and asset allocation policies
set forth above are designed to assure that the Portfolio
maintains a consistent investment approach in pursuit of
its objective. Of course, due to the limits set on the
Fund's investments, the STAR Portfolio does not have the
same flexibility to maximize total return as a mutual fund
that is not so constrained in periods when a greater com-
mitment to stocks or to fixed-income securities would pro-
vide a higher total investment return.
From time to time, the Portfolio's investments in the un-
derlying Vanguard Funds may be limited by certain factors.
The Board of Trustees or Directors of any of the under-
lying Vanguard Funds may impose limits on additional in-
vestments in a particular Fund. For example, restrictions
on additional investments in Vanguard/Windsor Fund imposed
by its Board of Directors have limited the Portfolio's in-
vestment in that Fund.
See "Implementation of Policies" for a description of
other investment practices of the STAR Portfolio.
- -------------------------------------------------------------------------------
INVESTMENT RISKS Like any investment program, an investment in the STAR
Portfolio entails certain risks. The Portfolio invests in
common stock funds and fixed-income funds and is therefore
subject to stock market risk, bond market risk, inflation
risk, and manager risk.
MARKET RISK-- As a mutual fund investing a little more than 60% of its
STOCKS assets in common stocks, The Portfolio is subject to stock
MARKET RISK--i.e., the possibility that stock prices in
general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline.
To illustrate the volatility of stock prices, the follow-
ing table sets forth the extremes for U.S. stock market
returns as well as the average return for the period from
1926 to 1997, as measured by the Standard & Poor's 500
Composite Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1997)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------- ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +13.0 +10.5 +10.9 +10.9
</TABLE>
7
<PAGE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.9% for all 10-year periods from 1926 to 1997. The re-
turn in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices. Average return may not be useful for
forecasting future returns in any particular period, as
stock returns are quite volatile from year to year and in-
terim losses are inevitable. For example, after the "bear
market" of 1973-1974, it took four years for many invest-
ors to recover their losses (assuming dividends were rein-
vested). And if you were invested in stocks during the
Great Crash of 1929, it would have taken an average of
eight years for your investment to return to its original
value.
MARKET RISK-- The bond market is typically less risky than the stock
BONDS market, although there have been times when some bonds
were just as risky as stocks. For example, bond prices
fell 48% from December 1976 to September 1981. The risk of
bonds declining in value, however, may be offset in whole
or in part by the high level of income that bonds provide.
Bond prices are linked to prevailing interest rates in the
economy. The price volatility of a bond depends on its ma-
turity; the longer the maturity of a bond, the greater its
sensitivity to interest rates. In general, when interest
rates rise, the prices of bonds fall; conversely, when in-
terest rates fall, bond prices generally rise.
From time to time, the stock and bond markets may fluctu-
ate independently of one another. In other words, a de-
cline in the stock market may in certain instances be off-
set by a rise in the bond market, or vice versa. As a
result, the Portfolio, with its balance of common stock,
bond and money market investments, is expected in the long
run to entail less investment risk (and potentially less
investment return) than a mutual fund investing exclu-
sively in common stocks.
INFLATION RISK Like market risk, inflation represents a significant
threat to even a well-diversified portfolio because infla-
tion erodes the real return of an investment in stocks,
bonds or reserves. Historically, inflation has averaged
3.1%, offsetting most of the return from reserves and
bonds, but less than half of the return from stocks. For
this reason, stocks are referred to as an "inflation
hedge," a way to protect your money against inflation.
The Portfolio is concentrated in investment companies in
The Vanguard Group, so investors should be aware that the
Portfolio's performance is directly related to the invest-
ment performance of the Vanguard Funds in which it in-
vests. First, changes in the net asset values of the un-
derlying Vanguard Funds affect the Portfolio's net asset
value. Second, over the long-term, the Portfolio's ability
to meet its investment objective depends on the underlying
Vanguard Funds meeting their investment objectives.
INVESTORS ARE The investment advisers manage the underlying Vanguard
EXPOSED TO Funds (except for the 500 Portfolio) according to the tra-
MANAGER RISK ditional methods of "active" investment management, which
involve the buying and selling of securities based upon
economics, financial and market analysis and investment
judgement. MANAGER RISK refers
8
<PAGE>
to the possibility that each Fund's investment adviser may
fail to execute the Fund's investment strategy effective-
ly. As a result, the Fund may fail to achieve its stated
objective.
- -------------------------------------------------------------------------------
WHO SHOULD The STAR Portfolio is designed primarily for long-term in-
INVEST vestment savings. Because of the risks associated with
common stock and bond investments, the Portfolio is in-
INVESTORS tended to be a long-term investment vehicle and is not de-
SEEKING LONG- signed to provide investors with a means of speculating on
TERM short-term stock and bond market movements. Investors who
INVESTMENT engage in excessive account activity generate additional
SAVINGS costs which are borne by all of the Portfolio's sharehold-
ers. In order to minimize such costs the Portfolio has
adopted the following policies. The Portfolio reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasona-
bly deemed to be disruptive to efficient portfolio manage-
ment, either because of the timing of the investment or
previous excessive trading by the investor. Additionally,
the Portfolio has adopted exchange privilege limitations
as described in the section "Exchange Privilege Limita-
tions." Finally, the Portfolio reserves the right to sus-
pend the offering of its shares. The Portfolio seeks to
provide individuals with a diversified investment program
consisting of Vanguard Funds which may invest in equity
and fixed-income securities. As the Portfolio invests a
significant portion of its portfolio (60% to 70% of as-
sets) in mutual funds investing primarily in equity secu-
rities, which Vanguard's management believes to offer the
best potential for high long-term rewards, investors
should consider their investment in the Portfolio as a
long-term investment.
The STAR Portfolio may be especially suitable for tax-
advantaged retirement accounts, including: Individual Re-
tirement Accounts (IRAs), Simplified Employee Plans
(SEPs), 403(b)(7) tax-sheltered retirement plans for em-
ployees of non-profit organizations, 401(k) savings plans,
profit-sharing and money-purchase pension plans, and other
corporate pension and savings plans. While the Portfolio
is specifically designed for tax-advantaged retirement ac-
counts, shares may also be purchased by investors for
other long-term investment savings purposes.
- -------------------------------------------------------------------------------
IMPLEMENTATION The Vanguard Funds in which the STAR Portfolio may invest,
OF POLICIES as well as certain other investment practices of the Port-
folio, are described below. Investors desiring more infor-
mation on a Vanguard Fund described below should call Van-
guard's Investor Information Department (1-800-662-7447)
for the Fund's prospectus.
THE PORTFOLIO Vanguard/Windsor Funds, consisting of Vanguard/Windsor
INVESTS IN TWO Fund and Vanguard/Windsor II, are growth and income mutual
GROWTH AND funds. Both Funds seek to provide long-term growth of in-
INCOME STOCK come and capital and, as a secondary objective, to provide
FUNDS current income. The Vanguard/Windsor Funds have different
investment advisers and advisory fee structures. Although
Vanguard/Windsor Fund and Vanguard/Windsor II invest pri-
marily in common stocks, either Fund may invest in fixed-
income securities and preferred stocks when, in the judg-
ment of the Fund's investment adviser, economic and market
conditions make such a course desirable.
9
<PAGE>
VANGUARD/WINDSOR FUND'S stocks are selected principally on
the basis of fundamental economic value. Key to the valua-
tion process is the relationship of a company's earning
power and dividend payout to the market price of its
stock. Vanguard/Windsor Fund's holdings are usually char-
acterized by relatively low price-earnings ratios and
above-average dividend payout yields, and are deemed by
the investment adviser at the time of purchase to be over-
looked or undervalued by the market in general.
Vanguard/Windsor II is a value-oriented growth and income
fund that invests in large- and mid-capitalization common
stocks that offer favorable prospects for capital growth
and dividend income. At times, the Fund may also invest in
preferred stock.
Vanguard/Windsor II employs four investment advisers, each
of whom independently chooses and maintains a portfolio of
common stocks for the Fund. Each adviser is responsible
for a specific percentage of the Fund's assets.
The four investment advisers employ active investment man-
agement methods, which means securities are bought and
sold according to the advisers' judgments about companies
and their financial prospects, and about the stock market
and the economy in general.
While the advisers use different processes to select secu-
rities for their portfolios, all four are committed to in-
vesting in large- and mid-cap stocks that, in their opin-
ion, are undervalued. Undervalued stocks are generally
those that are out of favor with investors and currently
trading at prices that, the adviser feels, are below what
the stocks are worth in relation to their earnings. These
stocks typically--but not always--have lower-than-average
price/earnings (P/E) ratios and higher-than-average divi-
dend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), which
is responsible for about 68% of the Fund's assets, uses
traditional methods of stock selection--research and anal-
ysis--to identify under-valued securities. A security will
be sold when, in BHM&S's opinion, its share price accu-
rately reflects the security's overall worth. At that
point, another undervalued security will be chosen. No
more than 15% of BHM&S's portfolio is devoted to a single
industry.
Like BHM&S, Tukman Capital Management, Inc. (Tukman),
which manages about 10% of the Fund's assets, uses tradi-
tional research methods to select undervalued securities.
Tukman typically buys stocks of financially sound compa-
nies in growing business sectors only and holds them for
three to five years.
Equinox Capital Management, Inc. (Equinox), which manages
about 10% of the Fund's assets, uses its own fundamental
research and proprietary software to identify undervalued
securities with attractive growth and dividend prospects.
Like BHM&S, it avoids large concentrations in a single in-
dustry.
10
<PAGE>
Vanguard Core Management Group, which is responsible for
about 7% of the Fund's assets, selects stocks from a "uni-
verse" of about 550 companies. Vanguard Core Management
Group evaluates the stocks using several fundamental fac-
tors, such as a stock's price in relation to its projected
growth rate. All of the stocks selected are expected, as a
group, to outperform the Russell 1000 Value Index, a
benchmark of undervalued large- and mid-cap stocks.
The balance of Vanguard/Windsor II Fund's assets (about
5%) is held in cash reserves, also managed by Vanguard.
Vanguard may invest the Fund's cash reserves in stock
futures. This strategy is intended to keep the Fund more
fully invested in common stocks while retaining cash on
hand to meet liquidity needs.
The top ten holdings (which amounted to 25% of the Fund's
total net assets) as of October 31, 1997, follow:
1. Chase Manhattan Corp.
2. International Business Machines Corp.
3. Ford Motor Co.
4. Exxon Corp.
5. GTE Corp.
6. Schlumberger Ltd.
7. Sears, Roebuck & Co.
8. SBC Communications Inc.
9. Allstate Corp.
10. Travelers Group Inc.
Keep in mind that, because the makeup of the Fund may
change, this listing is only a "snapshot" at one point in
time.
THE PORTFOLIO Vanguard/Morgan Growth Fund, the Vanguard U.S. Growth
INVESTS IN THREE Portfolio and Vanguard/PRIMECAP Fund are growth stock
GROWTH FUNDS AND funds, and Vanguard Explorer Fund is an aggressive growth
ONE AGGRESSIVE stock fund. Each Fund seeks to provide long-term growth of
GROWTH STOCK capital, with dividend income expected to be incidental to
FUND this objective. Each Fund generally invests in a diversi-
fied portfolio of common stocks but may also, from time to
time, hold securities that are convertible into common
stocks.
VANGUARD/MORGAN GROWTH FUND invests mainly in large-capi-
talization common stocks. The Fund also includes stocks of
smaller companies that--even though they may not have a
long history of growth--one of the Fund's advisers finds
attractive. All stocks are chosen for their above-average
earnings growth potential. At times, the Fund may also in-
vest in securities that are convertible into common
stocks.
Vanguard/Morgan Growth Fund's assets are managed by two
unaffiliated investment advisers and by Vanguard's Core
Management Group. Each adviser independently chooses com-
mon stock investments for the Fund. Wellington Management
Company, LLP, which is currently responsible for approxi-
mately 38% of Vanguard/Morgan Growth Fund's equity invest-
ments, utilizes traditional methods
11
<PAGE>
of securities valuation, including fundamental company re-
search and relative valuation techniques, in selecting
growth stocks for the Fund. In contrast, Franklin Portfo-
lio Associates LLC and Vanguard's Core Management Group,
which are each responsible for approximately 43% and 14%,
respectively, of Vanguard/Morgan Growth Fund's
equity investments, are "quantitative" investment manag-
ers. They utilize computerized techniques attempting to
outperform the returns of a specific standard, the Growth
Fund Stock Index. The Growth Fund Stock Index, a benchmark
calculated by Morningstar, Inc. (an independent company
which provides mutual fund statistics), is a measure of
the composite performance of the common stock holdings of
the 50 largest growth mutual funds.
The VANGUARD U.S. GROWTH PORTFOLIO is one of two Portfo-
lios of Vanguard World Fund, an open-end diversified in-
vestment company. The Vanguard U.S. Growth Portfolio,
which invests in equity securities of companies based in
the United States, seeks to provide long-term capital ap-
preciation. Dividend income is incidental to this objec-
tive. The Vanguard U.S. Growth Portfolio seeks to achieve
this objective by investing chiefly in equity securities,
including common stocks and securities convertible into
common stocks, which offer favorable prospects for capital
growth but little current income.
The Vanguard U.S. Growth Portfolio invests primarily in
equity securities of seasoned U.S. companies with above-
average prospects for growth. In selecting securities for
the Vanguard U.S. Growth Portfolio, Lincoln Capital Man-
agement ("Lincoln") its investment adviser, emphasizes
common stocks of high-quality, established growth compa-
nies. Such companies tend to have exceptional growth rec-
ords, strong market positions, reasonable financial
strength, and relatively low sensitivity to changing eco-
nomic conditions. Lincoln seeks to identify common stocks
that sell at attractive valuations and companies that have
the best prospects for continued above-average growth.
VANGUARD/PRIMECAP FUND is an open-end diversified invest-
ment company that seeks to provide long-term growth of
capital by investing principally in common stocks. Divi-
dend income is incidental to this objective.
Vanguard/PRIMECAP selects stocks primarily on the basis of
above-average earnings growth potential and quality of
management. Vanguard/PRIMECAP will invest primarily in
common stocks which offer favorable prospects for capital
growth but which generally provide little current income.
The Fund primarily holds common stocks considered to offer
above average corporate earnings growth potential that is
not reflected in the current valuation. The Adviser makes
judgments about portfolio securities in the context of a
3-5 year investment horizon. When evaluating earnings
growth, the Fund considers changing industry dynamics, new
markets, product cycles, management changes and other fun-
damental factors. Individual securities are assessed rela-
tive to the stock market averages as defined by the S&P
500 Composite Stock Index.
12
<PAGE>
Securities purchased by VANGUARD EXPLORER FUND may be is-
sued by small or unseasoned companies with speculative
risk characteristics. Such securities ordinarily pay neg-
ligible dividends, if any, and trade in established over-
the-counter markets. The median market capitalization of
the companies included in Vanguard Explorer Fund is ex-
pected to be up to $1 billion. By comparison, for compa-
nies included in the Small Company Growth Fund Stock In-
dex, a benchmark of the market for small company stocks,
the median market capitalization is approximately $550
million. For companies in the Standard & Poor's 500 Com-
posite Stock Price Index, a widely-used measure of the
broad stock market, the median capitalization is approxi-
mately $24.5 billion.
Vanguard Explorer Fund's assets are managed by three unaf-
filiated investment advisers and by Vanguard's Core Man-
agement Group. Granahan Investment Management, Inc., which
specialized in small company stock investments, manages
about 45% of the Fund, Wellington Management Company, LLP
manages about 30% of the Fund's assets, Chartwell Invest-
ment Partners manages about 10% of the Fund's assets, and
Vanguard's Core Management Group manages about 10% of the
Fund's assets. Each adviser also maintains a moderate cash
reserve accounting for approximately 5% of the Fund's re-
maining assets.
THE PORTFOLIO Both the GNMA and Long-Term Corporate Portfolios of Van-
INVESTS IN TWO guard Fixed Income Securities Fund are bond funds, which
BOND FUNDS seek to provide a high and stable level of dividend income
by investing in fixed-income securities. The two Portfo-
lios have distinct investment policies.
Under normal circumstances, the GNMA PORTFOLIO invests at
least 80% of its assets in Government National Mortgage
Association ("GNMA") securities, which offer the combined
benefits of a U.S. Government guarantee of timely payment
of interest and principal and yields that usually exceed
those of comparable U.S. Treasury securities.
GNMA certificates are mortgage-backed securities repre-
senting proportionate ownership of a pool of mortgage
loans. These loans--issued by lenders such as mortgage
bankers, commercial banks and savings and loan associa-
tions--are either insured by the Federal Housing Adminis-
tration (FHA) or guaranteed by the Veterans Administration
(VA). A "pool" or group of such mortgages is assembled
and, after being approved by GNMA, is offered to investors
through securities dealers. Once approved by GNMA, a gov-
ernment corporation within the U.S. Department of Housing
and Urban Development, the timely payment of interest and
principal on each mortgage is guaranteed by the full faith
and credit of the U.S. Government.
As mortgage-backed securities, GNMA certificates differ
from ordinary corporate or government bonds in that prin-
cipal is paid back by the borrower over the length of the
loan rather than returned in a lump sum at maturity. GNMA
certificates are called "pass through" securities because
both interest and principal payments (including prepay-
ments) are passed through to holders of the certificates
13
<PAGE>
(such as the Portfolio). Upon receipt, principal payments
are used by the GNMA Portfolio to purchase additional GNMA
certificates or other U.S. Government guaranteed securi-
ties.
The GNMA Portfolio is exposed to PREPAYMENT RISK. Prepay-
ment risk is the possibility that, as interest rates fall,
homeowners are likely to refinance their home mortgages,
which causes the principal on GNMA certificates held by
the GNMA Portfolio to be "prepaid" earlier than expected.
The GNMA Portfolio must then reinvest the unanticipated
principal in new GNMA certificates, which reduces the in-
come earned by the GNMA Portfolio.
Besides investing in GNMA certificates, the GNMA Portfolio
may invest up to 15% of its net assets in restricted secu-
rities (securities which are not freely marketable or
which are subject to restrictions on sale under the Secu-
rities Act of 1933).
The LONG-TERM CORPORATE PORTFOLIO invests in a diversified
portfolio of investment grade corporate bonds. Investment
grade bonds are generally considered to be those bonds
having one of the four highest grades assigned by Moody's
Investors Service, Inc. (Aaa, Aa, A, or Baa) or by Stan-
dard & Poor's Corporation (AAA, AA, A, or BBB). At least
80% of the Portfolio's assets will be invested in straight
debt securities, and at least 70% of the Portfolio's as-
sets will be rated A or better by Moody's Investors Serv-
ice, Inc. or Standard & Poor's Corporation. Securities
rated Baa or BBB are considered medium-grade obligations.
Interest payments and principal are regarded as adequate
for the present but certain protective elements found in
higher rated bonds may be lacking. Such bonds lack out-
standing investment characteristics and, in fact, have
speculative characteristics as well.
THE PORTFOLIO The PRIME PORTFOLIO of Vanguard Money Market Reserves is a
INVESTS IN ONE money market fund, and so seeks to provide the maximum
MONEY MARKET current income that is consistent with the preservation of
FUND capital and liquidity. The Prime Portfolio also seeks to
maintain a constant net asset value (price) of $1.00 per
share. An investment in the Portfolio is neither insured
nor guaranteed by the U.S. Government and there can be no
assurance that the Portfolio will be able to maintain a
constant net asset value of $1.00 per share.
The Prime Portfolio invests in the following money market
instruments:
(a) Negotiable certificates of deposit and bankers' ac-
ceptances of U.S. banks having total assets in excess
of $1 billion.
(b) Commercial paper (including variable amount master de-
mand notes) rated Prime-1 by Moody's Investors Serv-
ice, Inc. or A-1 by Standard & Poor's Corporation or,
if unrated, issued by a corporation having an out-
standing debt issue rated Aa3 or better by Moody's or
AA- or better by Standard & Poor's.
(c) Short-term corporate debt obligations rated Aa3 or
better by Moody's or AA- or better by Standard &
Poor's.
14
<PAGE>
(d) Eurodollar and Yankee bank obligations.
(e) U.S. Treasury obligations, including bills, notes,
bonds and other debt obligations issued by the U.S.
Treasury, as well as securities issued or guaranteed
by agencies or instrumentalities of the U.S. Govern-
ment, state and municipal governments.
(f) Repurchase agreements that are collateralized by secu-
rities described in (a) through (e) above.
In addition, up to 10% of the Prime Portfolio's assets may
be invested in certain commercial paper, which is not
freely marketable or which is subject to restrictions on
sale under the Securities Act of 1933.
THE PORTFOLIO The 500 Portfolio is one of six Portfolios of Vanguard In-
MAY INVEST IN AN dex Trust, an open-end diversified investment company. The
INDEX FUND 500 Portfolio is an index fund which seeks to match the
investment performance of the Standard & Poor's 500 Com-
posite Stock Price Index ("S&P 500"), an index emphasizing
large-capitalization stocks. The 500 Portfolio attempts to
duplicate the investment results of the S&P 500 by holding
all 500 stocks in approximately the same proportions as
they are represented in the S&P 500.
The 500 Portfolio is not managed according to traditional
methods of "active" investment management, which involve
the buying and selling of securities based upon economic,
financial and market analysis and investment judgment. In-
stead, the Portfolio, utilizing a "passive" or "indexing"
investment approach, attempts to duplicate the investment
performance of the S&P 500 through statistical procedures.
All index matching services are provided to the 500 Port-
folio on an at-cost basis by the Core Management Group of
The Vanguard Group, Inc.
THE PORTFOLIO The STAR Portfolio and each of its underlying Vanguard
AND EACH Funds are authorized to invest temporarily in certain
UNDERLYING FUND short-term fixed income securities. Such securities may be
MAY INVEST IN used to invest uncommitted cash balances, to maintain li-
SHORT-TERM FIXED quidity to meet shareholder redemptions, or to take a tem-
INCOME porary defensive position against market declines. These
SECURITIES securities include: obligations of the U.S. Government and
its agencies and instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and re-
purchase agreements collateralized by these securities.
DERIVATIVE Derivatives are instruments whose values are linked to or
INVESTING derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
15
<PAGE>
SOME OF THE The Portfolio's underlying equity and bond mutual funds
VANGUARD FUNDS (but not the Portfolio itself ) may invest in futures con-
MAY INVEST IN tracts and options to a limited extent. Specifically, the
FUTURES Portfolio's seven equity funds--Vanguard/Windsor Fund,
CONTRACTS AND Vanguard/Windsor II, the 500 Portfolio, Vanguard/Morgan
OPTIONS Growth Fund, the Vanguard U.S. Growth Portfolio,
Vanguard/PRIMECAP Fund and Vanguard Explorer Fund--may in-
vest in equity futures contracts and options, while the
Portfolio's two fixed-income funds--the GNMA and Long-Term
Corporate Portfolios--may invest in bond futures contracts
and options. The Portfolio's money market fund, the Prime
Portfolio, and the Portfolio itself are not permitted to
invest in futures contracts or options.
Futures contracts and options may be used for several rea-
sons: to simulate full investment in the underlying secu-
rities while retaining a cash balance for Fund management
purposes, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying
equity security or index. While futures contracts and op-
tions can be used as leveraged instruments, a Fund may not
use futures contracts or options transactions to leverage
its assets.
The underlying Vanguard Funds will not use futures con-
tracts or options for speculative purposes or to leverage
their net assets. Accordingly, the primary risks associ-
ated with the use of futures contracts and options by the
underlying Funds are: (i) imperfect correlation between
the change in market value of securities held by a Fund
and the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures
contract resulting in an inability to close a futures po-
sition prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in con-
tracts whose behavior is expected to resemble that of a
Fund's underlying securities. The risk that a Fund will be
unable to close out a futures position will be minimized
by entering into such transactions only on an exchange
with an active and liquid secondary market. Additionally,
investments in futures contracts and options involve the
risk that an investment adviser will incorrectly predict
stock market and interest rate trends.
The underlying Funds may enter into futures contracts pro-
vided that not more than 5% of their respective assets are
required as a futures contract deposit. In addition the
underlying Funds may enter into futures contracts and op-
tions transactions only to the extent that not more than
20% of their respective assets are committed to such con-
tracts or transactions.
EACH OF THE Each of the Portfolio's underlying Funds, except Prime,
PORTFOLIO'S (and not the Portfolio itself) may lend its investment se-
FUNDS MAY LEND curities to qualified institutional investors on a short-
ITS SECURITIES term or long-term basis for the purpose of realizing addi-
tional net investment income. Loans of securities by a
Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or
its agencies. The collateral will equal at least 100% of
the current market value of the loaned securities.
16
<PAGE>
PORTFOLIO The Portfolio's turnover rate is not expected to exceed
TURNOVER IS 25% annually. A portfolio turnover rate of 25% would occur
EXPECTED TO BE if one quarter of the Portfolio's investments were sold
LOW within a year. The Fund's Officers will purchase or sell
securities: (i) to accommodate purchases and sales of
Portfolio shares; (ii) on those occasions when they deem
that market conditions warrant a change in the percentage
of the Portfolio's assets invested in each of the under-
lying Vanguard Funds; and (iii) to maintain or modify the
allocation of the Portfolio's assets between the under-
lying Vanguard Funds in which the Portfolio invests within
the percentage limits described under "Investment Poli-
cies."
- -------------------------------------------------------------------------------
INVESTMENT The Fund has adopted limitations on some of its investment
LIMITATIONS policies. Some of these limitations are that the Fund will
not:
THE FUND HAS (a) borrow money, except from banks for temporary or emer-
ADOPTED CERTAIN gency purposes, and then only in an amount not in ex-
FUNDAMENTAL cess of 5% of the lower of the market value or cost of
LIMITATIONS its assets, in which case it may pledge, mortgage or
hypothecate any of its assets as security for such
borrowing, but not to an extent greater than 5% of the
market value of its assets; and
(b) invest more than 25% of its assets in any one indus-
try, except for investment companies which are members
of The Vanguard Group.
A complete list of the Fund's investment limitations can
be found in the Statement of Additional Information. These
limitations are fundamental and may be changed only by ap-
proval of a majority of the Fund's shareholders.
- -------------------------------------------------------------------------------
MANAGEMENT OF The Officers of the Fund manage its day-to-day operations.
THE PORTFOLIO The Officers are directly responsible to the Fund's Board
of Trustees. The Trustees, who are elected by the Fund's
THE OFFICERS shareholders, determine how the assets of the Portfolio
MANAGE THE should be invested among the Vanguard Funds, set general
PORTFOLIO'S policies for the Portfolio and choose its Officers. The
OPERATIONS Officers of the Fund also serve as Officers of each of the
Vanguard Funds and of The Vanguard Group, Inc. ("Van-
guard"). The Trustees each serve as Directors of The Van-
guard Group, Inc. and most of the Funds within the Group.
A list of Trustees and Officers of the Fund and a state-
ment of their present positions and principal occupations
during the past five years can be found in the Statement
of Additional Information.
The business of the Fund will be conducted by its Officers
in accordance with policies and guidelines set up by the
Fund's Trustees which were included in an Application for
an Exemptive Order subsequently issued by the U.S. Securi-
ties and Exchange Commission. As noted above, the Officers
and Trustees of the Fund also serve in similar positions
in the underlying Funds. If the interests of the Fund and
the underlying Funds were ever to become divergent, a con-
cern might arise that this could create a potential con-
flict of interest which could affect how the Officers or
Trustees fulfill their fiduciary duties to Vanguard STAR
Fund and the Vanguard Funds. The Trustees believe they
have structured the Fund to avoid the concerns which could
arise. Conceivably, a situation could occur where proper
17
<PAGE>
portfolio or other action for the Fund could be adverse to
the interests of an underlying Vanguard Fund, or the re-
verse could occur. If such a possibility appears likely,
the Trustees and Officers will carefully analyze the situ-
ation and take all steps they believe reasonable to mini-
mize and, where possible, eliminate the potential con-
flict. Moreover, limitations on aggregate investments in
the underlying Vanguard Funds and other restrictions have
been adopted by the Fund to minimize this possibility, and
close and continuous monitoring will be exercised to
avoid, insofar as possible, these concerns.
VANGUARD The Fund has entered into a Special Servicing Agreement
ADMINISTERS AND (the "Agreement") with Vanguard under which Vanguard will
DISTRIBUTES THE provide all management, administrative and distribution
PORTFOLIO services to the Fund at cost. Vanguard is a jointly-owned
subsidiary of more than 30 investment company members (the
"Funds") of The Vanguard Group. The Vanguard Funds offer
more than 95 distinct investment portfolios with total as-
sets in excess of $360 billion. As a result of Vanguard's
unique corporate structure, Vanguard Funds have costs sub-
stantially 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 .28% compared
to an average of 1.24% for the mutual fund industry (data
provided by Lipper Analytical Services).
The Special Servicing Agreement provides that Vanguard
STAR Fund will pay for services to be rendered to the Fund
by Vanguard on an "out of pocket" basis. The Fund will
also bear the expenses of services provided by other par-
ties, including auditors, the custodian, and outside legal
counsel, as well as taxes and other direct expenses of the
Fund. However, the Agreement provides that the expenses of
the Fund will be offset, in whole or in part, by a reim-
bursement from Vanguard for (a) contributions made by the
Fund to the cost of operating the underlying Vanguard
Funds the Fund invests in and (b) certain savings in ad-
ministrative and marketing costs that Vanguard is expected
to derive from the operation of the Fund. The Fund's con-
tributions to Vanguard represent revenues Vanguard re-
ceives because the Fund bears its pro rata share of the
costs of operating the underlying Vanguard Funds. The cost
savings realized by Vanguard from the Fund result primar-
ily from the assumed reduction in the number of accounts
Vanguard has to maintain due to the existence of the Fund
(i.e., one account per investor as opposed to one for each
underlying Fund per investor if the investor duplicated
the Portfolio's investment program by investing directly
in the underlying Funds).
Although such cost savings are not certain, the Trustees
believe that the reimbursements to be made by Vanguard to
the Fund should be sufficient to offset most, if not all,
of the expenses incurred by the Fund. Therefore, the Fund
is expected by the Trustees to operate at a very low, or
zero, expense ratio. Since its inception in May 1985, the
Fund has had an expense ratio of zero. Of course,
18
<PAGE>
shareholders of the Portfolio will still bear their fair
and proportionate share of the costs of operating the Van-
guard Funds owned by the Portfolio. (See "Portfolio Ex-
penses.") In the event that the economic benefits of oper-
ating the Portfolio exceed its actual costs, such benefits
will be shared by each of the Funds in The Vanguard Group,
including the underlying Funds in which the Portfolio in-
vests.
- -------------------------------------------------------------------------------
INVESTMENT The STAR Portfolio does not employ an investment adviser
MANAGEMENT and therefore pays no advisory fees. The Portfolio has no
portfolio manager. The determination of how the Portfo-
THE PORTFOLIO lio's assets will be invested in certain of the Vanguard
DOES NOT EMPLOY Funds is made by the Fund's Officers pursuant to the in-
AN INVESTMENT vestment objective and policies set forth in this Prospec-
ADVISER tus and procedures and guidelines established by the
Trustees. However, the Portfolio, as a shareholder of each
of the underlying Vanguard Funds, benefits from the in-
vestment advisory services of each of the underlying
Funds, and will indirectly bear its proportionate share of
any investment advisory fees paid by those Funds.
The STAR Portfolio's underlying Funds are managed by the
following investment advisers:
<TABLE>
<CAPTION>
INVESTMENT ADVISER FUNDS MANAGED
------------------------------- ----------------------------------
<S> <C>
Wellington Management Company, Vanguard/Windsor Fund
LLP
Vanguard Explorer Fund
Vanguard/Morgan Growth Fund
GNMA and Long-Term Corporate
Portfolios of Vanguard Fixed
Income Securities Fund
Barrow, Hanley, Mewhinney & Vanguard/Windsor II
Strauss, Inc.
Equinox Capital Management,
Inc. Vanguard/Windsor II
Tukman Capital Management, Inc. Vanguard/Windsor II
Granahan Investment Management, Vanguard Explorer Fund
Inc.
Franklin Portfolio Associates
LLC Vanguard/Morgan Growth Fund
Lincoln Capital Management Vanguard U.S. Growth Portfolio of
Vanguard World Fund
PRIMECAP Management Company Vanguard/PRIMECAP Fund
The Vanguard Group, Inc. Prime Portfolio of Vanguard Money
Market Reserves
500 Portfolio of Vanguard Index
Trust
Vanguard/Windsor II
Vanguard/Morgan Growth Fund
Chartwell Investment Partners Vanguard Explorer Fund
</TABLE>
The investment advisory agreements between the underlying
Vanguard Funds and these advisers are described below.
Each adviser is supervised by the Directors and Officers
of the Vanguard Fund whose assets it manages.
19
<PAGE>
WELLINGTON Wellington Management Company, LLP ("WMC"), 75 State
MANAGEMENT Street, Boston, MA 02109, serves as sole investment ad-
COMPANY, LLP viser to Vanguard/Windsor Fund and the GNMA and Long-Term
Corporate Portfolios of Vanguard Fixed Income Securities
Fund. WMC also serves as investment adviser for 30% of the
assets of Vanguard Explorer Fund, and 38% of the assets of
Vanguard/Morgan Growth Fund.
WMC is a professional investment advisory firm which glob-
ally provides investment services to investment companies,
institutions and individuals. Among the clients of WMC are
14 of the Vanguard Funds. As of December 31, 1997, WMC
held discretionary management authority with respect to
more than $175 billion of assets. WMC and its predecessor
organizations have provided investment advisory services
to investment companies since 1928 and to investment cli-
ents since 1960.
VANGUARD/WINDSOR Vanguard/Windsor Fund pays WMC an advisory fee equal to
FUND IS MANAGED .125 of 1% on the first $17.5 billion of Vanguard/Windsor
BY WMC Fund's assets; and .10 of 1% on Vanguard/Windsor Fund's
assets in excess of $17.5 billion. This basic advisory fee
may be increased or decreased by applying an
incentive/penalty fee adjustment based on the investment
performance of the Vanguard/Windsor Fund relative to the
investment record of the Standard & Poor's 500 Composite
Stock Price Index (the "Index").
During the fiscal year ended October 31, 1997,
Vanguard/Windsor Fund paid WMC total advisory fees repre-
senting an annual effective fee rate of 0.12% of
Vanguard/Windsor Fund's average net assets, before a de-
crease of 0.06% based on performance. This fee was paid
under a previous fee schedule that provided for a higher
rate of fees.
VANGUARD/WINDSOR Vanguard/Windsor II employs a "multi-manager" approach
II IS MANAGED utilizing four investment advisers to manage the Fund's
BY BHM&S assets. Vanguard/Windsor II has investment advisory con-
tracts with: Barrow, Hanley, Mewhinney & Strauss, Inc.
("BHM&S"), One McKinney Plaza, 3232 McKinney Avenue, 15th
Floor, Dallas, TX 75204-2429; Equinox Capital Management,
Inc. ("Equinox"), 590 Madison Avenue, 41st Floor, New
York, NY 10022; and Tukman Capital Management, Inc.
("Tukman"), 60 East Sir Francis Drake Boulevard, Larkspur,
CA 94939. Additionally, a portion of the Fund's assets are
managed on an at-cost basis by Vanguard's Core Management
Group. BHM&S, Equinox and Tukman are not affiliated in any
way with Wellington Management Company, the investment ad-
viser to Vanguard/Windsor Fund.
Vanguard/Windsor II has entered into an advisory agreement
with BHM&S, under which BHM&S manages approximately 68% of
the assets of Vanguard/Windsor II. As of December 31, 1997
BHM&S, a professional investment counseling firm founded
in 1979 and which is owned by United Asset Management, 1
International Place, Boston, MA 02110, provides investment
services to investment companies, institutions and indi-
viduals with respect to assets of approximately $28.8 bil-
lion. Vanguard/Windsor II pays BHM&S an annual basic advi-
sory fee equal to
20
<PAGE>
.30 of 1% for the first $200 million of assets. The rate
decreases to .20 of 1% on the next $300 million of assets;
to .15 of 1% on the next $500 million of assets; and to
.125 of 1% on assets in excess of $1 billion. Under the
incentive/penalty fee schedule, the basic advisory fee may
be increased or decreased by as much as 25% of the basic
fee depending on the investment performance of the assets
of Vanguard/Windsor II managed by BHM&S relative to the
investment record of the Standard & Poor's/BARRA Value In-
dex.
EQUINOX CAPITAL Equinox is a professional investment counseling firm
MANAGEMENT founded in 1989. As of December 31, 1997, Equinox provided
investment advisory services with respect to approximately
$9.3 billion of assets. Vanguard/Windsor II pays Equinox
an annual basic advisory fee equal to .20 of 1% on the
first $400 million of assets managed by Equinox; .15 of 1%
on the next $600 million of assets; .125 of 1% on the next
$1 billion and .10 of 1% on assets over $2 billion. Under
the incentive/penalty fee schedule, the basic advisory fee
may be increased or decreased by as much as 50% of the ba-
sic fee depending on the investment performance of the as-
sets of Vanguard/Windsor II managed by Equinox relative to
the investment performance of the Russell 1000 Value
Index.
TUKMAN CAPITAL Tukman is a professional counseling firm founded in 1980.
MANAGEMENT As of December 31, 1997, Tukman provided investment advi-
sory services with respect to assets of approximately $5.2
billion. Vanguard/Windsor II pays Tukman an annual basic
advisory fee equal to .40 of 1% on the first $25 million
of assets managed by Tukman; .35 of 1% on the next $125
million of assets; .25 of 1% on the next $350 million of
assets; .20 of 1% on the next $500 million of assets, and
.15 of 1% on assets greater than $1 billion. Under the
incentive/penalty fee schedule, the basic advisory fee may
be increased or decreased by as much as 50% of the basic
fee depending on the investment performance of the assets
of Vanguard/Windsor II managed by Tukman relative to the
investment record of the S&P 500.
AND VANGUARD'S Vanguard's Core Management Group provides investment advi-
CORE MANAGEMENT sory services on an at-cost basis with respect to a por-
GROUP tion of Vanguard/Windsor II's assets (currently approxi-
mately 7%). The Core Management Group also provides
investment advisory services to several Vanguard Funds,
including Vanguard Index Trust, several Portfolios of the
Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio
of Vanguard Horizon Fund, the REIT Index Portfolio of Van-
guard Specialized Portfolios, the Total International
Portfolio of Vanguard STAR Fund, a portion of the
Vanguard/Morgan Growth Fund and Vanguard Explorer Fund,
Vanguard International Equity Index Fund, Vanguard Insti-
tutional Index Fund, Vanguard Balanced Index Fund and the
Equity Index Portfolio of Vanguard Variable Insurance
Fund, as well as to several indexed separate accounts. To-
tal assets under management by the Core Management Group
were approximately $97 billion as of December 31, 1997.
For the fiscal year ended October 31, 1997, the aggregate
investment advisory fees paid by the Fund to BHM&S, Equi-
nox Capital Management and Tukman Capital
21
<PAGE>
Management, Inc., represented an effective annual rate of
0.13% of average net assets before an increase of 0.02%
based on performance. The investment advisory fees paid by
the Fund for this period to BHM&S represented an effective
annual rate of 0.15 of 1% of the average net assets man-
aged by BHM&S. The investment advisory fees paid by the
Fund for this period to Equinox and Tukman represented an
effective annual rate of 0.18 of 1% and 0.27 of 1% of the
average net assets managed by Equinox and Tukman,
respectively.
THE 500 The 500 Portfolio receives all investment advisory serv-
PORTFOLIO IS ices on an at-cost basis from Vanguard's Core Management
MANAGED BY Group. The Trust is not actively managed, but is instead
VANGUARD'S CORE administered by the Core Management Group using computer-
MANAGEMENT GROUP ized, quantitative techniques.
VANGUARD/MORGAN WMC is also responsible for approximately 38% of the eq-
GROWTH FUND IS uity investments of Vanguard/Morgan Growth Fund.
MANAGED BY WMC Vanguard/Morgan Growth Fund pays WMC a basic advisory fee
equal to .175 of 1% of the first $500 million of assets
managed by WMC; .10 of 1% on the next $500 million of as-
sets; and .075 of 1% on assets in excess of $1 billion.
This basic advisory fee may be increased or decreased by
applying an adjustment formula ("incentive/penalty fee")
based on WMC's investment performance relative to the in-
vestment record of the Growth Fund Stock Index. The Growth
Fund Stock Index represents the composite common stock
portfolio of the 50 largest growth mutual funds, as calcu-
lated by Morningstar, Inc., an independent company which
provides mutual fund statistics. Under the
incentive/penalty fee schedule, the basic fee payable to
WMC may be increased or decreased by as much as 50% of the
basic fee depending on the investment performance of the
equity investments managed by WMC.
AND FRANKLIN Vanguard/Morgan Growth Fund has also entered into an in-
PORTFOLIO vestment advisory agreement with Franklin Portfolio Asso-
ASSOCIATES ciates LLC ("Associates"), Two International Place, Bos-
ton, MA 02110, under which Associates manages
approximately 43% of its equity investments. Associates is
a professional investment advisory firm which specializes
in the management of common stock portfolios through the
use of quantitative investment models. As of December 31,
1997, Associates provided investment advisory services
with respect to approximately $38 billion. Vanguard/Morgan
Growth Fund pays Associates a basic advisory fee calcu-
lated by applying varying percentage rates to the average
month-end net assets of the Fund managed by Associates.
The maximum annual rate is .25 of 1% on the first $100
million in assets. The rate decreases to .20 of 1% on the
next $200 million in assets, to .15 of 1% on the next $200
million, and to .10 of 1% on assets over $500 million.
This basic fee shall be increased or decreased in an
amount equal to .100% per annum (.025% per quarter) of the
average month-end net assets of the Associates Portfolio
if the investment performance of the Associates Portfolio
for the thirty-six months preceding the end of the quarter
is six percentage points or more above or below, respec-
tively, the investment record of the Growth Fund Stock In-
dex (the "Index") for the same period.
22
<PAGE>
Under the rules of the Securities and Exchange Commission,
the incentive/penalty fee structure will not be fully op-
erable with respect to WMC until March 31, 1999. Until
that date the incentive/penalty fee will be calculated ac-
cording to certain transition rules. See the Statement of
Additional Information for a detailed description of the
incentive/penalty fee schedule for WMC and FPA, as well as
the applicable transition rules.
For the fiscal year ended December 31, 1997, the aggregate
investment advisory fees paid by Vanguard/Morgan Growth
Fund represented an effective annual base rate of 0.15 of
1% of average net assets before an increase of 0.01% based
on performance. The investment advisory fees paid by the
Fund for this period to WMC, FPA and Husic (an adviser un-
til February 1, 1998) represented an effective annual rate
of 0.13, 0.21, and 0.23 of 1%, respectively, of the aver-
age net assets managed by WMC, Associates and Husic.
THE VANGUARD The Vanguard U.S. Growth Portfolio employs Lincoln Capital
U.S. GROWTH Management Company ("Lincoln"), 200 South Wacker Drive,
PORTFOLIO IS Chicago, IL 60606, as its investment adviser. Lincoln, an
MANAGED BY investment advisory firm founded in 1967, currently pro-
LINCOLN CAPITAL vides investment counseling services to a limited number
MANAGEMENT of clients, most of which are institutional clients, such
as pension funds. As of December 31, 1997, Lincoln held
discretionary management authority with respect to approx-
imately $46 billion in assets. The Vanguard U.S. Growth
Portfolio pays Lincoln an advisory fee calculated by ap-
plying varying percentage rates to the average month-end
net assets of the Portfolio. The maximum annual rate is
.40 of 1% for the first $25 million of assets. The rate
decreases to .35 of 1% for the next $125 million; to .25
of 1% for the next $350 million; to .20 of 1% for the next
$500 million; to .15 of 1% for the next $1.5 billion; and
to .10 of 1% on assets in excess of $2.5 billion. For the
year ended August 31, 1997, the investment advisory fee
paid to Lincoln represented an effective annual rate of
0.14% of the Portfolio's average net assets.
VANGUARD/PRIMECAP Vanguard/PRIMECAP Fund employs PRIMECAP Management Company
FUND IS MANAGED ("PRIMECAP Management"), 225 South Lake Street, Pasadena,
BY PRIMECAP CA 91101, to manage the investment and reinvestment of the
MANAGEMENT assets of Vanguard/PRIMECAP. PRIMECAP Management, a pro-
COMPANY fessional investment advisory firm which provides services
to employee benefit plans, endowments funds, foundations
and other institutions, held discretionary management au-
thority with respect to over $11.3 billion of assets as of
December 31, 1997. Vanguard/PRIMECAP pays PRIMECAP Manage-
ment an advisory fee calculated by applying varying per-
centage rates to the average month-end net assets of the
Fund. The maximum annual rate is .500 of 1% for the first
$50 million of assets. The rate decreases to .450 of 1% on
the next $200 million; .375 of 1% on the next $250 mil-
lion; .250 of 1% on the next $1,750 million; .200 of 1% on
the next $2,750 million; .175 of 1% on the next 5,000 mil-
lion; and, .150 of 1% on assets in excess of $10,000 mil-
lion. For the year ended December 31, 1997, the investment
advisory fee paid by Vanguard/ PRIMECAP represented an ef-
fective annual rate of 0.24 of 1% of average net assets.
23
<PAGE>
VANGUARD The assets of Vanguard Explorer Fund are jointly managed
EXPLORER FUND IS by four investment advisers: WMC; Granahan Investment Man-
MANAGED BY WMC, agement, Inc. ("Granahan"), 303 Wyman Street, Waltham, MA
GRANAHAN, 02154; Chartwell Investment Partners ("Chartwell"), 1235
CHARTWELL AND Westlakes Drive, Suite 330, Berwyn, PA 19312; and Van-
VANGUARD'S CORE guard's Core Management Group. WMC is responsible for man-
MANAGEMENT GROUP aging 30% of the equity investments of Vanguard Explorer
Fund, Granahan is responsible for 45% of the Fund's equity
investments, Chartwell is responsible for managing 10% of
the Fund's assets, and the Core Management Group is re-
sponsible for managing 10% of the Fund's assets.
Vanguard Explorer Fund pays WMC a basic advisory fee equal
to .25 of 1% on the first $500 million of assets managed
by WMC; .20 of 1% on the next $250 million of assets; .15
of 1% on the next $250 million; and .10 of 1% on assets in
excess of $1 billion. This basic advisory fee may be in-
creased or decreased by applying an incentive/penalty fee
adjustment based on the investment performance of the as-
sets of Vanguard Explorer Fund managed by WMC relative to
the investment record of the Small Company Growth Fund
Stock Index.
Granahan is a professional counseling firm which offers
investment advisory services to employee benefit plans,
endowment funds, mutual funds and other institutions. As
of October 31, 1997, Granahan provided investment advisory
services with respect to approximately $1.5 billion. Van-
guard Explorer Fund pays Granahan an advisory fee calcu-
lated by applying varying percentage rates to the average
month-end net assets of the Fund managed by Granahan. The
maximum annual rate is .30 of 1% for the first $500 mil-
lion of assets. The rate decreases to .20 of 1% on the
next $250 million of assets; to .15 of 1% on the next $250
million of assets; and to .10 of 1% on assets in excess of
$1 billion. This basic advisory fee may be increased or
decreased by applying an adjustment formula
("incentive/penalty fee") based on the investment perfor-
mance of the assets of Vanguard Explorer Fund managed by
Granahan relative to the investment record of the Small
Company Growth Fund Stock Index.
Chartwell currently manages $1.1 billion in assets. The
investment advisory firm first began managing a portion of
Vanguard Explorer Fund's assets on August 1, 1997. The
Fund pays Chartwell an advisory fee equal to .40 of 1% on
the first $250 million of assets; .30 of 1% on the next
$250 million; and .20 of 1% on assets in excess of $500
million. This basic advisory fee may be increased or de-
creased based upon the total return performance of
Chartwell's portion of Explorer Fund compared to that of
the Small Company Growth Fund Stock Index. This
incentive/penalty fee will not be fully operable until Au-
gust 1, 2000. Until that date, the incentive/penalty will
be calculated using certain transition rules that are ex-
plained in the statement of Additional Information.
The Vanguard Group first began managing a portion of the
Fund's assets on August 1, 1997, Vanguard provides invest-
ment advisory services to the Fund on an at-cost basis.
Vanguard Core Management Group serves as investment ad-
viser to several Vanguard funds, and as of October 31,
1997 managed more than $90 billion in total assets.
24
<PAGE>
For the fiscal year ended October 31, 1997, the aggregate
investment advisory fees paid by the Vanguard Explorer
Fund to WMC, Chartwell and Granahan represented an effec-
tive annual base rate of .21 of 1% of average net assets
before a decrease of 0.01% based on performance. The in-
vestment advisory fees paid by the Fund for this period to
WMC represented an effective annual rate of .29 of 1% of
the average net assets managed by WMC. The investment ad-
visory fees paid to Granahan represented an effective an-
nual rate of .23 of 1% of the average net assets managed
by Granahan. The investment advisory fees paid by the Fund
for this period to Chartwell represented an effective an-
nual rate of .10 of 1% of the average net assets managed
by Chartwell. The Vanguard Group provides investment advi-
sory services on an at-cost basis.
GNMA AND LONG- The GNMA Portfolio of Vanguard Fixed Income Securities
TERM CORPORATE Fund pays WMC an annual advisory fee equal to .020 of 1%
PORTFOLIOS ARE on the first $3 billion of net assets of the Portfolio;
MANAGED BY WMC .010 of 1% on the next $3 billion of net assets; and .008
of 1% on the net assets of the Portfolio over $6 billion.
The Long-Term Corporate Portfolio of Vanguard Fixed Income
Securities Fund pays WMC an annual advisory fee equal to
.04 of 1% on the first $1 billion of net assets of the
Portfolio; .03 of 1% on the next $1 billion of net assets;
.02 of 1% on the next $1 billion of net assets; and .015
of 1% on the net assets of the Portfolio over $3 billion.
During the fiscal year ended January 31, 1998, the GNMA
and Long-Term Corporate Portfolios paid annual advisory
fees equal to 0.01% and 0.03% of average net assets, re-
spectively.
THE PRIME The Prime Portfolio of Vanguard Money Market Reserves re-
PORTFOLIO IS ceives all investment advisory services on an at-cost ba-
MANAGED BY sis from Vanguard's Fixed Income Group. The Fixed Income
VANGUARD'S FIXED Group also provides advisory services to more than 40 Van-
INCOME GROUP guard fixed income portfolios, both taxable and tax-ex-
empt.
The Portfolio will purchase and sell the principal portion
of its portfolio securities (i.e., shares of certain of
the underlying Vanguard Funds) by dealing directly with
the issuer. There will be no sales charges or commissions
because the underlying Funds are offered on a no-load ba-
sis, without sales charges. Investments in short-term
money market instruments and repurchase agreements usually
will be principal transactions and will generally involve
no brokerage commissions.
- -------------------------------------------------------------------------------
PERFORMANCE The table in this section provides investment results for
RECORD the STAR Portfolio for several periods throughout its
lifetime. The results shown represent "total return" in-
vestment performance, which assumes the reinvestment of
all capital gains and income dividends for the indicated
periods. Also included is comparative information with re-
spect to two indexes: a Composite Index, a performance
benchmark based upon the average performance of publicly
offered stock funds (62.5%), bond funds (25%), and money
market funds (12.5%), as reported by Lipper Analytical
Services; and the Consumer Price Index, a statistical
measure of changes in the prices of goods and services.
The table does not make any allowance for
25
<PAGE>
federal, state or local income taxes, which shareholders
who invest in the Portfolio through regular investment ac-
counts must pay on a current basis.
The results shown should not be considered a representa-
tion of the total return from an investment made in the
Portfolio today. This information is provided to help in-
vestors better understand the Portfolio and may not pro-
vide a basis for comparison with other investments or mu-
tual funds which use a different method to calculate
performance.
AVERAGE ANNUAL RETURNS FOR THE STAR PORTFOLIO
<TABLE>
<CAPTION>
CONSUMER
FISCAL PERIODS COMPOSITE PRICE
ENDED 12/31/97 PORTFOLIO INDEX INDEX
-------------------------- --------- --------- --------
<S> <C> <C> <C>
1 Year 21.2% 17.9% 1.7%
3 Years 21.9 18.2 2.5
5 Years 15.0 12.6 2.6
10 Years 14.1 12.4 3.4
Lifetime* 13.4 12.1 3.3
</TABLE>
*March 29, 1985 to December 31, 1997.
- -------------------------------------------------------------------------------
DIVIDENDS, The STAR Portfolio expects to pay dividends semiannually
CAPITAL GAINS from ordinary income. Capital gains distributions, if any,
AND TAXES will be made annually.
THE PORTFOLIO For tax-deferred retirement accounts (such as Individual
PAYS SEMI-ANNUAL Retirement Accounts or other retirement plans sponsored by
DIVIDENDS AND Vanguard), dividend and capital gains distributions from
ANY CAPITAL the Portfolio must be reinvested in additional shares. For
GAINS ANNUALLY regular investment accounts, dividend and capital gains
distributions may be reinvested in additional shares or
received in cash. See "Choosing a Distribution Option" for
a description of these distribution methods for regular
investment accounts in the Portfolio.
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, the Portfolio
may declare special year-end dividend and capital gains
distributions during December. Such distributions, if re-
ceived by shareholders by January 31, are deemed to have
been paid by the Portfolio and received by shareholders on
December 31 of the prior year.
The Portfolio intends to continue to qualify as a "regu-
lated investment company" under the Internal Revenue Code
so that it will not be subject to federal income tax to
the extent its income is distributed to shareholders. The
tax consequences of distributions from the Portfolio will
vary according to the type of account you open in the
Portfolio.
If you open an IRA or other tax-deferred retirement ac-
count, dividend and capital gains distributions from the
Portfolio will generally be exempt from current taxation.
You are advised to consult with a tax professional on the
specific rules governing your own tax-deferred arrange-
ment. There are varying restrictions imposed
26
<PAGE>
by the Internal Revenue Service on eligibility, contribu-
tions and withdrawals, depending on the type of tax-de-
ferred account you have selected. The rules governing tax-
deferred retirement plans are complex, and failure to
comply with the IRS's rules and regulations governing your
specific type of plan may result in a substantial cost to
you, including the loss of tax advantages and the imposi-
tion of additional taxes and penalties by the IRS.
If you open an account in the Portfolio outside a tax-de-
ferred retirement account, the following tax rules will
generally apply. For regular investment accounts, divi-
dends paid by the Portfolio from net investment income and
net short-term capital gains, whether received in cash or
reinvested in additional shares, will be taxable as ordi-
nary income. Distributions paid by the Portfolio from
long-term capital gains, again whether received in cash or
reinvested in additional shares, will also be taxable as
long-term capital gains, regardless of the length of time
you have owned shares in the Portfolio. Long-term capital
gains may be taxed at different rates depending on how
long the Fund held the securities.
Capital gains distributions are made when the Portfolio
realizes net capital gains on sales of portfolio securi-
ties during the year. The Portfolio does not seek to real-
ize any particular amount of capital gains during a year;
rather, realized gains are a by-product of portfolio man-
agement activities. In addition, the Portfolio receives
realized net capital gains distributions from the Portfo-
lio's underlying Funds. Consequently, capital gains dis-
tributions may be expected to vary considerably from year
to year; there will be no capital gains distributions in
years when the Portfolio realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Portfolio. In addition, keep in mind that if you pur-
chase shares of the Portfolio shortly before the record
date for a dividend or capital gains distribution, a por-
tion of your investment will be returned to you as a tax-
able distribution, regardless of whether you are reinvest-
ing your distributions or receiving them in cash.
The Portfolio will notify you annually as to the tax sta-
tus of dividend and capital gains distributions paid.
A CAPITAL GAIN A sale of shares of the Portfolio is a taxable event and
OR LOSS MAY BE may result in a capital gain or loss. A capital gain or
REALIZED UPON loss may be realized from an ordinary redemption of shares
EXCHANGE or an exchange of shares between two mutual funds (or two
OR REDEMPTION portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Portfolio is required to withhold 31% of taxable divi-
dends, capital gains distributions, and redemptions paid
to shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or
27
<PAGE>
Taxpayer Identification number and by certifying that you
are not subject to backup withholding.
Vanguard STAR Fund is organized as a Pennsylvania business
trust and, in the opinion of counsel, is not liable for
any income or franchise tax in the Commonwealth of Penn-
sylvania. 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 excep-
tion 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 Portfolio.
- -------------------------------------------------------------------------------
SHARE PRICE OF The Portfolio's share price or "net asset value" per share
THE PORTFOLIO is calculated by dividing the total assets of the Portfo-
lio, less all liabilities, by the total number of shares
outstanding. The net asset value is determined as of the
close of trading on the New York Stock Exchange (the "Ex-
change"), generally 4:00 p.m. Eastern Time; on each day
that the Exchange is open for trading. This determination
is made by appraising the Portfolio's underlying invest-
ments (i.e., the underlying Vanguard Funds) at the price
of each such Fund determined at the close of the Exchange.
The Portfolio's share price can be found daily in the mu-
tual fund listings of most major newspapers under the
heading of Vanguard Funds.
- -------------------------------------------------------------------------------
GENERAL The Fund's Declaration of Trust permits the Trustees to
INFORMATION issue an unlimited number of shares of beneficial inter-
est, without par value, from an unlimited number of clas-
ses of shares. Currently the Fund is offering six classes
of shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the
Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Fund if re-
quested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent accoun-
tants for the Fund and will audit its financial statements
annually. The Fund is not involved in any litigation.
- -------------------------------------------------------------------------------
28
<PAGE>
SHAREHOLDER GUIDE
OPENING AN The Portfolio is designed primarily for tax-advantaged re-
ACCOUNT AND tirement accounts. If you are establishing an Individual
PURCHASING Retirement Account ("IRA") or other qualified retirement
SHARES plan, you must complete the appropriate retirement plan
agreement, i.e., the Adoption Agreement. If you are estab-
lishing a Portfolio account outside a tax-deferred retire-
ment plan, you may simply complete the Account Registra-
tion Form. In either case, please indicate the amount you
wish to invest on the appropriate form. Your purchase must
be equal to or greater than the $1,000 minimum initial in-
vestment ($500 minimum for an Education IRA). (Please re-
fer to the plan agreement for information on the maximum
amount you may contribute or rollover to your retirement
account.) If you need assistance in completing any forms,
please call the Investor Information Department (1-800-
662-7447). NOTE: For other types of account registrations
(e.g., corporations, associations, other organizations,
trusts or powers of attorney), please call us to determine
which additional forms you may need.
The Portfolio's shares generally are purchased at the
next-determined net asset value after your investment has
been received. The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
PURCHASE 1) Because of the risks associated with common stock and
RESTRICTIONS bond investments, the Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on short-
term stock and bond market movements. Consequently, the
Portfolio reserves the right to reject any specific
purchase (and exchange purchase) request. The Portfolio
also reserves the right to suspend the offering of
shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Portfolio. Please be sure your purchase
check is made payable to the Vanguard Group.
IMPORTANT NOTE: This Shareholder Guide describes many of the services
IRA AND available to Vanguard Fund shareholders. Specific services
RETIREMENT PLAN described in this Shareholder Guide may not be available
INVESTORS or may only be available in limited form for tax-deferred
retirement accounts. If you are investing in the Portfolio
through an IRA or other retirement plan, you should con-
sult the retirement plan agreement, disclosure statement,
and other Vanguard brochures for the services and proce-
dures which pertain to your account. Please call our In-
vestor Information Department (1-800-662-7447) if you have
any questions.
ADDITIONAL Subsequent investments in the Portfolio may be made by
INVESTMENTS mail ($100 minimum), exchange from another Vanguard Fund
account ($100 minimum), or Vanguard Fund Express. For reg-
ular (non-retirement) accounts, additional purchases may
also be made by wire ($1,000 minimum). (In limited in-
stances, contributions to retirement accounts may be ac-
cepted by wire. Please call us for more information on
this option.)
-----------------------------------------------------------
29
<PAGE>
NEW ACCOUNT ADDITIONAL INVESTMENTS TO
EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments
MAIL amount of your initial should include the Invest-
Non-Retirement investment on the regis- by-Mail remittance form
Accounts, tration form, make your attached to your Portfolio
complete and check payable to The confirmation statements.
sign the enclosed Vanguard Group-56, and Please make your check
Account mail to: payable to The Vanguard
Registration Group-56, write your ac-
Form THE VANGUARD GROUP count number on your check
P.O. BOX 2600 and, using the return en-
VALLEY FORGE, PA 19482-2600 velope provided, mail to
the address indicated on
the Invest-by-Mail Form.
For express or THE VANGUARD GROUP All written requests
registered mail, 455 DEVON PARK DRIVE should be mailed to one of
send to: WAYNE, PA 19087-1815 the addresses indicated
for new accounts. Do not
send registered or express
mail to the post office
box address.
For IRAs or Complete the appropriate retirement plan adoption agree-
retirement plans ment and any other required documents. Make your check
payable to Vanguard Fiduciary Trust Company and send ap-
plication and check to the address indicated on your
agreement.
-----------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE ABA 031000011
Money should be wired to: CORESTATES NO. 0101 9897
BEFORE WIRING ATTN: VANGUARD
Please contact VANGUARD STAR FUND
Client Services STAR PORTFOLIO
(1-800-662-2739) ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank in-
cludes the name of the Portfolio, the account number Van-
guard 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 Ac-
count" address above after completing your wire arrange-
ment. NOTE: Federal Funds wire purchase orders will be ac-
cepted only when the Portfolio and the Custodian Bank are
open for business. IRAs and other tax-deferred accounts
cannot be opened by wire. Please see "Opening an Account."
-----------------------------------------------------------
PURCHASING BY You may open an account and purchase shares by making an
EXCHANGE (from a exchange from an existing Vanguard account. However, the
Vanguard Portfolio reserves the right to refuse any exchange pur-
account) chase request. To exchange by telephone, call our Client
Services Department (1-800-662-2739). The new account will
have the same registration as the existing account.
-----------------------------------------------------------
30
<PAGE>
PURCHASING BY The Fund Express Special Purchase option lets you move
FUND EXPRESS money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic In-
Special Purchase vestment option, money will be moved automatically from
& Automatic your bank account to your Vanguard account on the schedule
Investment (monthly, bimonthly [every other month], quarterly,
semiannually or annually) you select. To establish these
Fund Express options on regular investment accounts,
please provide the appropriate information on the Account
Registration Form. To establish Automatic Investment for
an IRA or other tax-deferred retirement plan, contact our
Investor Information Department (1-800-662-7447) for an
application. We will send you a confirmation of your Fund
Express enrollment; please wait two weeks before using the
service.
-----------------------------------------------------------
CHOOSING A If you invest in the Portfolio outside a tax-deferred re-
DISTRIBUTION tirement account, you must select one of four distribution
OPTION options:
1. AUTOMATIC REINVESTMENT OPTION--Both dividend and capi-
tal gains distributions will be reinvested in addi-
tional shares of the Portfolio. This option will be se-
lected 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 addi-
tional shares of the Portfolio.
3. CASH CAPITAL GAIN OPTION--Your capital gains distribu-
tions will be paid in cash and your dividends will be
reinvested in additional shares of the Portfolio.
4. ALL CASH OPTION--Both dividend and capital gains dis-
tributions 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 dis-
tribution option so that all dividends and other distribu-
tions are automatically reinvested in additional shares.
We will not pay interest on uncashed distribution checks.
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to trans-
fer your cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other Van-
guard Services" for more information.
If you invest in the Portfolio through a tax-deferred re-
tirement account, your dividend and capital gains distri-
butions will be automatically reinvested in additional
shares of the Portfolio. If you change this automatic re-
investment option, you
31
<PAGE>
should be aware that "cash" dividends or capital gains
will be considered taxable distributions from your ac-
count.
- -------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Portfolio is required to dis-
tribute net capital gains and dividend income to the Port-
NON-RETIREMENT folio shareholders. These distributions are made to all
INVESTORS SHOULD shareholders who own shares of the Portfolio as of the
ASK ABOUT THE distribution's record date, regardless of how long the
TIMING OF shares have been owned. Purchasing shares just prior to
CAPITAL GAINS the record date could have a significant impact on your
AND DIVIDEND tax liability for the year. For example, if you purchase
DISTRIBUTIONS shares immediately prior to the record date of a sizable
BEFORE INVESTING capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Portfolio shares for just a short period of time. (Taxes
are due on the distributions even if the dividend or gain
is reinvested in additional Portfolio shares.) While the
total value of your investment will be the same after the
distribution--the amount of the distribution will offset
the drop in the net asset value of the shares--you should
be aware of the tax implications the timing of your pur-
chase may have.
Prospective investors should, therefore, inquire about po-
tential distributions before investing. The Portfolio's
annual capital gains distribution normally occurs in De-
cember, while income dividends are generally paid
semiannually in June and December. In addition, the Port-
folio occasionally may be required to make supplemental
dividend or capital gains distributions in another month.
For additional information on distributions and taxes, see
the section titled "Dividends, Capital Gains, and Taxes."
- -------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION a regular investment account is to select the options you
desire when you complete your Account Registration Form.
ESTABLISHING
OPTIONAL IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED
SERVICES TO PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND A SIG-
NATURE GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPART-
MENT (1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A sig-
nature guarantee verifies the authenticity of your signa-
ture and may be obtained from banks, brokers and any other
guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request for regular
investment accounts. If a certificate is lost, you may in-
cur an expense to replace it. Share certificates will not
be issued for retirement accounts.
BROKER/DEALER If you purchase shares in Vanguard Funds through a regis-
PURCHASES tered broker/dealer or investment adviser, the
broker/dealer or adviser may charge a service fee.
32
<PAGE>
CANCELLING The Fund will not cancel any trade (e.g., purchase, re-
TRADES demption or exchange) believed to be authentic, once the
trade request has been received in writing or by tele-
phone.
ELECTRONIC You may receive a prospectus for the Fund or any of the
PROSPECTUS Vanguard Funds in an electronic format through Vanguard's
DELIVERY website at www.vanguard.com. For additional information
please see "Other Vanguard Services--Computer Access."
- -------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is cred-
ACCOUNT WILL BE ited. If your purchase is made by check, Federal Funds
CREDITED 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 re-
ceipt. If your purchase is received after the close of the
Exchange, your trade date is the next business day. Your
shares are purchased at the net asset value determined on
your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S. correspon-
dent bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
- -------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account
SHARES by redeeming shares at any time. (Please see "Important
Redemption Information.") For a regular investment account
in the Portfolio, you generally may initiate a request by
writing or by telephoning. For an IRA or other tax-de-
ferred account, you must make your redemption request in
writing. Your redemption proceeds are normally mailed
within two business days after the receipt of the request
in Good Order. No interest will accrue on amounts repre-
sented by uncashed redemption checks.
If you invest in the Portfolio through an IRA or other
tax-deferred retirement plan, you should be aware that any
distributions prior to age 59 1/2 are generally subject to
a 10% penalty tax, as well as ordinary income taxes. To
avoid the 10% penalty, you must generally roll over your
distribution to an IRA or qualified plan within 60 days.
-----------------------------------------------------------
SELLING BY MAIL Requests should be mailed to THE VANGUARD GROUP, VANGUARD
STAR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482-1120.
(For express or registered mail, send your request to The
Vanguard Group, Vanguard STAR Fund, 455 Devon Park Drive,
Wayne, PA 19087-1815.)
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.
-----------------------------------------------------------
33
<PAGE>
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that may be re-
quired, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPART-
MENT (1-800-662-2739).
-----------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE 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 calen-
dar days following any expedited address change to your
account. An expedited address change is one that is made
by telephone, by Vanguard Online, or in writing, without
the signatures of all account owners. Please see "Impor-
tant Information About Telephone Transactions."
-----------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal op-
EXPRESS tion, money will be automatically moved from your Vanguard
Fund account to your bank account according to the sched-
Automatic ule you have selected. The Special Redemption option (not
Withdrawal & available for IRAs or other retirement accounts) lets you
Special move money from your Vanguard account to your bank account
Redemption on an "as needed" basis. To establish these Fund Express
options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express service; please wait two weeks before
using the service.
-----------------------------------------------------------
SELLING BY You may sell shares by making an exchange into another
EXCHANGE Vanguard Fund account. Please see "Exchanging Your Shares"
for details.
-----------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be redeemed
REDEMPTION at any time. However, your redemption proceeds will not be
INFORMATION paid until payment for the purchase is collected, which
may take up to ten calendar days.
-----------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION close of trading on the Exchange are processed on the day
PROCEEDS of receipt and the redemption proceeds are normally sent
on the following business day. Please note: the telephone
redemption option is available only for non-retirement ac-
counts. Redemptions from retirement accounts must be made
in writing.
34
<PAGE>
Redemption requests received by telephone after the close
of the Exchange are processed on the business day follow-
ing receipt and the proceeds are normally sent on the sec-
ond business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as de-
scribed above in "Important Redemption Information."
If you experience difficulty in making a telephone redemp-
tion 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 Van-
guard in Good Order. The Fund reserves the right to revise
or terminate the telephone redemption privilege at any
time.
The Fund may suspend the redemption right or postpone pay-
ment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
If the Board of Trustees determines that it would be det-
rimental to the best interests of the Portfolio's remain-
ing shareholders to make payment in cash, the Portfolio
may pay redemption proceeds in whole or in part by a dis-
tribution in kind of readily marketable securities.
-----------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Van-
AVERAGE COST guard will send you an Average Cost Statement which pro-
STATEMENT vides you with the tax basis of the shares you redeemed.
Please see "Statements and Reports" for additional infor-
mation.
-----------------------------------------------------------
LOW BALANCE FEE Due to the relatively high cost of maintaining smaller ac-
AND MINIMUM counts, the Portfolio will automatically deduct a $10 an-
ACCOUNT BALANCE nual fee in either June or December from non-retirement
REQUIREMENT accounts with balances falling below $500. The fee gener-
ally will be waived for investors whose aggregate Vanguard
assets exceed $50,000.
In addition, the Portfolio reserves the right to liquidate
any non-retirement account that is below the minimum ini-
tial investment amount of $1,000. If at any time the total
investment does not have a value of at least $1,000, you
may be notified that the value of your account is below
the Portfolio's minimum account balance requirement. You
would then be allowed 60 days to make an additional in-
vestment before the account is liquidated. Proceeds would
be promptly paid to the shareholder.
- -------------------------------------------------------------------------------
35
<PAGE>
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of the Portfolio for those of other available Van-
guard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Call Portfolio name, account number, Social Security number or
Client Services employer identification number listed on the account, and
(1-800-662-2739) exact name and address in which the account is registered.
Only the registered shareholder may complete such an ex-
change. Requests for telephone exchanges received prior to
the close of trading on the Exchange are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. FOR NON-RETIREMENT INVESTMENTS, TELEPHONE EXCHANGES
ARE NOT ACCEPTED INTO OR FROM VANGUARD INDEX TRUST, VAN-
GUARD BALANCED INDEX FUND, VANGUARD INTERNATIONAL EQUITY
INDEX FUND, VANGUARD REIT INDEX PORTFOLIO, VANGUARD TOTAL
INTERNATIONAL PORTFOLIO, and VANGUARD GROWTH AND INCOME
PORTFOLIO. If you experience difficulty in making a tele-
phone exchange, your exchange request may be made by regu-
lar or express mail, and it will be implemented at the
closing net asset value on the date received by Vanguard,
provided the request is received in Good Order.
-----------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the
MAIL name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to THE VANGUARD GROUP, VANGUARD
STAR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482-1120.
(For express or registered mail, send your request to The
Vanguard Group, Vanguard STAR Fund, 455 Devon Park Drive,
Wayne, PA 19087-1815.)
-----------------------------------------------------------
EXCHANGING You may use your personal computer to exchange shares of
ONLINE most Vanguard funds by accessing our website
(www.vanguard.com). To establish this service for your ac-
count, 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 INTER-
NATIONAL PORTFOLIO, AND VANGUARD GROWTH and INCOME PORTFO-
LIO (formerly known as Vanguard Quantitative Portfolios).
These funds do permit online exchanges within IRAs and
other retirement accounts.
-----------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the fol-
EXCHANGE lowing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you
may have, call our Investor Information Department (1-
800-662-7447).
. An exchange between non-retirement accounts is treated
as a redemption and a purchase. Therefore, you could re-
alize a taxable gain or loss on the transaction.
36
<PAGE>
. Exchanges by telephone are accepted only if the regis-
trations and the taxpayer identification numbers of the
two accounts are identical.
. To exchange into an account with a different registra-
tion (including a different name, address, or taxpayer
identification number), you must provide Vanguard with
written instructions that include the guaranteed signa-
tures of all current account owners.
. The shares to be exchanged must be on deposit and not
held in certificate form.
. New accounts are not currently accepted in the
Vanguard/Windsor Fund.
. 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 privi-
lege. However, the Portfolio reserves the right to revise
or terminate its provisions, limit the amount of, or re-
ject any exchange, as deemed necessary, at any time.
Shareholders would be notified prior to any material
change in the Portfolio's exchange policy.
The exchange privilege is only available in states in
which the shares of the Portfolio are registered for sale.
The Portfolio's shares are currently registered for sale
in all 50 states and the Portfolio intends to maintain
such registration.
- -------------------------------------------------------------------------------
EXCHANGE The Portfolio's exchange privilege is not intended to af-
PRIVILEGE ford shareholders a way to speculate on short-term move-
LIMITATIONS ments in the market. Accordingly, in order to prevent ex-
cessive use of the exchange privilege that may potentially
disrupt the management of the Portfolio and increase
transaction costs, the Portfolio has established a policy
of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Portfolio during any twelve-
month period. "Substantive" means either a dollar amount
or a series of movements between Vanguard funds that Van-
guard determines, in its sole discretion, could have an
adverse impact on the management of the Fund. Notwith-
standing these limitations, the Portfolio reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasona-
bly deemed to be disruptive to efficient portfolio manage-
ment.
- -------------------------------------------------------------------------------
37
<PAGE>
IMPORTANT The ability to initiate redemptions (except wire or Fund
INFORMATION Express redemptions) and exchanges by telephone is auto-
ABOUT TELEPHONE matically established on your non-retirement investment
TRANSACTIONS account unless you request in writing that telephone
transactions on your account not be permitted. The tele-
phone exchange option is automatically established on re-
tirement accounts.
To protect your account from losses resulting from unau-
thorized 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 So-
cial Security or employer identification number listed
on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemp-
tion by mail will be made payable to the registered
shareowner and mailed to the address of record only.
Neither the Portfolio nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent tele-
phone transactions on your account.
- -------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your non-re-
REGISTRATION tirement account shares to another person by completing a
transfer form and sending it to: THE VANGUARD GROUP, AT-
TENTION: TRANSFER DEPARTMENT, P.O. BOX 1110, VALLEY FORGE,
PA 19482-1110. The request must be in Good Order. To re-
quest a transfer form and full instructions, please call
our Client Services Department (1-800-662-2739).
- -------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market ac-
counts). 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 ac-
counts opened since January 1, 1986. In general, investors
who redeemed shares from a qualifying Vanguard account may
expect to receive their Average Cost Statement along with
their Fund Summary Statement. Please call our Client Serv-
ices 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),
38
<PAGE>
Vanguard attempts to eliminate duplicate mailings to the
same address. When we find that two or more Fund share-
holders have the same last name and address, we send just
one Fund report to that address--instead of mailing sepa-
rate reports to each shareholder. If you want us to send
separate reports, however, you may notify our Investor In-
formation Department at 1-800-662-7447.
- -------------------------------------------------------------------------------
OTHER VANGUARD Many of these services are not available to (or appropri-
SERVICES ate for) retirement account shareholders. For more infor-
mation about any of these services, please call our In-
vestor Information Department at 1-800-662-7447.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Govern-
DEPOSIT SERVICE ment checks (including Social Security and military pen-
sion checks) and private payroll checks may be automati-
cally deposited into your Vanguard Fund account. Separate
brochures and forms are available for direct deposit of
U.S. Government and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE SERVICE 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 Vanguard's Fund Express allows you to transfer money be-
EXPRESS tween your Fund account and your account at a bank, sav-
ings 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 Vanguard's Dividend Express allows you to transfer your
DIVIDEND EXPRESS 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 Au-
tomated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our In-
vestor Information Department (1-800-662-7447) for a Van-
guard Dividend Express application.
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT(R) that provides share price, price change and yield quota-
tions on Vanguard Funds through any TouchTone(TM) tele-
phone. 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's Tele-Account service, dial 1-800-ON-BOARD (1-
800-662-6273). A
39
<PAGE>
brochure offering detailed operating instructions is
available from our Investor Information Department (1-800-
662-7447).
VANGUARD ONLINE Use your personal computer to learn more about Vanguard's
www.vanguard.com funds and services; keep in touch with your Vanguard ac-
counts; 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.
- -------------------------------------------------------------------------------
40
<PAGE>
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<PAGE>
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
P056
[LOGO OF VANGUARD STAR PORTFOLIO APPEARS HERE]
--------------------------------------------
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
[LOGO OF VANGUARD STAR PORTFOLIO APPEARS HERE]
P R O S P E C T U S
APRIL 23, 1998
[LOGO OF VANGUARD GROUP(R) APPEARS HERE]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF VANGUARD LIFESTRATEGY
PORTFOLIOS APPEARS HERE]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROSPECTUS--APRIL 23, 1998
- -------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447
(SHIP)
- -------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739
(CREW)
- -------------------------------------------------------------------------------
INVESTMENT Vanguard STAR Fund is an open-end non-diversified investment
OBJECTIVES AND company which seeks to maximize total investment return
POLICIES (i.e., capital growth and income) subject to the investment
restrictions and asset allocation policies described in this
Prospectus. The Fund consists of six portfolios; however,
this prospectus relates only to four portfolios, Income, Con-
servative Growth, Moderate Growth, and Growth Portfolios (the
"LifeStrategy Portfolios"). These four Portfolios invest in
up to five Vanguard mutual funds, representing different com-
binations of stocks, bonds and cash investments and reflect-
ing varying degrees of potential investment risk and reward.
There is no assurance that the Portfolios will achieve their
stated objectives. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
- -------------------------------------------------------------------------------
The Portfolios are designed primarily for long-term invest-
ment savings. To open an Individual Retirement Account (IRA),
please use a Vanguard IRA Adoption Agreement. To obtain a
copy of this form, call 1-800-662-7447, Monday through Fri-
day, from 8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m.
to 4:00 p.m. (Eastern time). If you are establishing an in-
vestment account outside a Vanguard-sponsored retirement
plan, complete the Account Registration Form. If you need as-
sistance in completing these forms, please call the Investor
Information Department. The minimum initial investment is
$3,000 ($1,000 for Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act Accounts).
OPENING AN ACCOUNT
- -------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Portfolios before you in-
vest. It should be retained for future reference. A "State-
ment of Additional Information" containing additional
information about Vanguard STAR 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 Depart-
ment at 1-800-622-7447, or visiting the Securities and Ex-
change Commission's website (www.sec.gov).
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Highlights......... 2
Portfolio Expenses. 4
Financial
Highlights........ 5
Yield and Total
Return............ 7
PORTFOLIO INFORMATION
Investment
Objectives........ 8
Investment
Policies.......... 9
Investment Risks... 10
Who Should Invest.. 13
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Implementation of
Policies......... 14
Investment
Limitations...... 17
Management of the
Portfolios....... 17
Investment
Management....... 19
Dividends, Capital
Gains and Taxes.. 20
The Share Price of
Each Portfolio... 22
General
Information...... 22
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares.............................. 24
When Your Account Will Be Credited.................................... 28
Selling Your Shares................................................... 28
Exchanging Your Shares................................................ 30
Important Information about Telephone Transactions.................... 32
Transferring Registration............................................. 33
Other Vanguard Services............................................... 33
</TABLE>
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
<PAGE>
HIGHLIGHTS
OBJECTIVES AND Vanguard STAR Fund is an open-end non-diversified in-
POLICIES vestment company which seeks to maximize total invest-
ment return subject to the investment restrictions and
asset allocation policies described in this Prospectus.
The Fund consists of six portfolios; however this Pro-
spectus relates only to the Income, Conservative Growth,
Moderate Growth, and Growth Portfolios, collectively
known as the Vanguard LifeStrategy Portfolios. These
four Portfolios invest in up to five Vanguard mutual
funds representing different combinations of stocks,
bonds, and cash investments and reflecting varying de-
grees of potential investment risk and reward. The Port-
folios do not invest directly in a portfolio of securi-
ties, rather, in order to meet their objectives the
Portfolios invest in shares of other Vanguard Funds.
PAGE 8
- -------------------------------------------------------------------------------
FOUR SEPARATE Investors may choose to invest in any of the four
PORTFOLIOS LifeStrategy Portfolios, based on personal objectives,
time horizons, risk tolerances, and financial circum-
stances:
Income Portfolio -- seeks to provide current income.
Conservative Growth Portfolio -- seeks to provide cur-
rent income and low to moderate growth of capital.
Moderate Growth Portfolio -- seeks to provide growth of
capital and a reasonable level of current income.
Growth Portfolio -- seeks to provide growth of capital.
PAGE 8
- -------------------------------------------------------------------------------
RISK The Portfolios differ in terms of stock market risk,
CHARACTERISTICS bond market risk, and inflation risk. STOCK MARKET RISK
is the possibility that stock prices in general will de-
cline over short or extended periods. Stock markets tend
to be cyclical with periods when stock prices generally
rise or fall. The Conservative Growth, Moderate Growth
and Growth Portfolios also will have exposure to foreign
stock markets, which are generally thought to be riskier
than domestic markets. BOND MARKET RISK is the possibil-
ity that bond prices will decline over short or long pe-
riods, due primarily to changes in market interest
rates. INFLATION RISK is the possibility that rising
prices for goods and services will erode the real return
of an investment in stocks, bonds or reserves.
Two of the Portfolios, Moderate Growth and Growth, will
have a higher exposure to stock market risk because of
the significant investment these Portfolios have in
stock funds. The other two Portfolios, Income and Con-
servative Growth, will have higher exposure to bond mar-
ket risk and inflation risk because of the significant
investment exposure these Portfolios have in bond funds.
PAGE 10
- -------------------------------------------------------------------------------
2
<PAGE>
THE VANGUARD GROUP The Officers of the Fund manage the Portfolios' day-to-
day operations. The Officers are directly responsible to
the Fund's Board of Trustees. The Officers of the Fund
also serve as Officers of each of the Vanguard Funds and
of The Vanguard Group, Inc. ("Vanguard"). The Trustees
each serve as Directors of The Vanguard Group and most
of the Funds within the Group. For important information
regarding the structure of the Fund, please see "Manage-
ment of the Portfolios."
PAGE 17
- -------------------------------------------------------------------------------
INVESTMENT The Portfolios do not currently employ investment advis-
MANAGEMENT ers and therefore do not pay advisory fees. The Portfo-
lios currently do not have portfolio managers. The de-
termination of how the Portfolios' assets will be
invested in certain Vanguard funds is made by the Fund's
Officers pursuant to the investment objectives and poli-
cies. However, the Portfolios as shareholders of each of
the underlying Vanguard funds, benefit from the invest-
ment advisory services of each of the underlying funds
and will indirectly bear their proportionate share of
any investment advisory fees paid by those Funds.
PAGE 19
- -------------------------------------------------------------------------------
DIVIDENDS, CAPITAL The Income and Conservative Growth Portfolios will make
GAINS AND TAXES quarterly dividend distributions; while the Moderate
Growth and Growth Portfolios will make semi-annual divi-
dend distributions. Capital gains distributions, if any,
will be made annually for each Portfolio. Also, a sale
of shares -- whether made by redemption or exchange --
is a taxable event and may result in a capital gain or
loss.
PAGE 20
- -------------------------------------------------------------------------------
PURCHASING SHARES You may purchase shares by mail, wire, or exchange from
another Vanguard Fund. The minimum initial investment is
$3,000 per Portfolio; the minimum for subsequent invest-
ments is $100. There are no sales commissions or 12b-1
fees.
PAGE 24
- -------------------------------------------------------------------------------
SELLING SHARES You may redeem shares of the Portfolio by mail or by
telephone. Each Portfolio's share price is expected to
fluctuate, and at the time of redemption may be more or
less than at the time of initial purchase, resulting in
a gain or loss.
PAGE 28
- -------------------------------------------------------------------------------
SERVICES TO The Fund offers a number of special services including:
SHAREHOLDERS Fund Express, for electronic transfers between the Fund
and your bank account; Tele-Account, for round-the-clock
telephone access to your Fund account; Direct Deposit,
for automatic deposit of payroll checks; Average Cost
Statement, for determination of the average cost of
shares redeemed for tax purposes; and Dividend Express
for automatic transfer of dividends and/or capital gains
to a bank account.
PAGE 33
- -------------------------------------------------------------------------------
3
<PAGE>
PORTFOLIO EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of the Portfolios.
The expenses and fees set forth in the table are for the
1997 fiscal year.
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
SHAREHOLDER TRANSACTION INCOME GROWTH GROWTH GROWTH
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 None None
Exchange Fees........... None None None None
<CAPTION>
CONSERVATIVE MODERATE
ANNUAL FUND OPERATING INCOME GROWTH GROWTH GROWTH
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Management &
Administrative
Expenses............... None None None None
Investment Advisory
Fees................... None None None None
12b-1 Fees.............. None None None None
Other Expenses
Distribution Costs..... None None None None
Miscellaneous Expenses. None None None
Total Other Expenses.... None None None None
---- ---- ---- ----
TOTAL OPERATING
EXPENSES............. None None None None
==== ==== ==== ====
</TABLE>
The purpose of these tables is to assist you in under-
standing the various costs and expenses that you would
bear directly or indirectly as an investor in the Port-
folios.
The Portfolios did not incur any expenses in fiscal year
1997, and have not incurred any operating expenses since
their inception on September 30, 1994. However, while
the Portfolios are expected to operate without expenses,
shareholders in the Portfolios bear indirectly the ex-
penses of the underlying Vanguard Funds in which the
Portfolios invest.
Purchases by LifeStrategy Portfolios of Vanguard STAR
Fund -- Total International Portfolio are subject to a
0.50% portfolio transaction fee.
The following chart illustrates the indirect expense ra-
tio that each Portfolio incurred, based on its invest-
ments in the underlying Vanguard Funds, for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Indirect Expense Ratio.. 0.29% 0.29% 0.29% 0.29%
</TABLE>
4
<PAGE>
Using the above indirect expense ratios for the Portfo-
lios, 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. As noted previous-
ly, the Portfolios charge no redemption fees of any
kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Income Portfolio................... $ 3 $ 9 $16 $37
Conservative Growth Portfolio...... $ 3 $ 9 $16 $37
Moderate Growth Portfolio.......... $ 3 $ 9 $16 $37
Growth Portfolio................... $ 3 $ 9 $16 $37
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- -------------------------------------------------------------------------------
FINANCIAL The following financial highlights for each of the fis-
HIGHLIGHTS cal periods ended December 31, 1997 have been derived
from financial statements which were audited by Price
Waterhouse LLP, independent accountants, whose report on
the financial statements which contain this information,
was unqualified. This information should be read in con-
junction with the LifeStrategy Portfolios' financial
statements and notes thereto, which, together with the
remaining portions of the Portfolios' 1997 Annual Report
to Shareholders, are incorporated by reference in the
Statement of Additional Information and this Prospectus,
and which appear, along with the report of Price
Waterhouse LLP, in the Portfolios' 1997 Annual Report to
Shareholders. For a more complete discussion of the
Portfolios' performance, please see the Portfolios' 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.
5
<PAGE>
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
INCOME PORTFOLIO CONSERVATIVE GROWTH PORTFOLIO
----------------------------------- -----------------------------------
YEAR ENDED DEC. 31, SEPT. 30+ YEAR ENDED DEC. 31, SEPT. 30+
---------------------- TO DEC. 31, ---------------------- TO DEC. 31,
1997 1996 1995 1994 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $11.55 $11.54 $ 9.88 $10.00 $12.14 $11.68 $ 9.89 $10.03
------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions
Received............... .63 .64 .49 .14 .56 .53 .47 .14
Capital Gain
Distributions Received. .15 .19 .09 -- .18 .20 .11 .01
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions
Received............... .78 .83 .58 .14 .74 .73 .58 .15
Net Realized and
Unrealized Gain (Loss)
on Investments......... .83 .03 1.66 (.12) 1.27 .46 1.80 (.14)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS............. 1.61 .86 2.24 .02 2.01 1.19 2.38 .01
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends From Net
Investment Income...... (.63) (.64) (.49) (.14) (.56) (.53) (.47) (.14)
Distributions From
Realized Capital Gains. (.10) (.21) (.09) -- (.19) (.20) (.12) (.01)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS..... (.73) (.85) (.58) (.14) (.75) (.73) (.59) (.15)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD.......... $12.43 $11.55 $11.54 $ 9.88 $13.40 $12.14 $11.68 $ 9.89
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TOTAL RETURN............ 14.23% 7.65% 22.99% 0.20% 16.81% 10.36% 24.35% 0.10%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $ 244 $ 151 $ 121 $ 11 $ 803 $ 462 $ 219 $ 41
Ratio of Total Expenses
to Average Net Assets.. 0% 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment
Income to Average Net
Assets................. 5.54% 5.66% 5.76% 7.31%* 4.61% 4.86% 5.14% 7.07%*
Portfolio Turnover Rate. 6% 22% 4% 1% 1% 2% 1% 0%
</TABLE>
*Annualized.
+Commencement of operations.
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
MODERATE GROWTH
PORTFOLIO GROWTH PORTFOLIO
----------------------------------- -----------------------------------
YEAR ENDED DEC. 31, SEPT. 30+ YEAR ENDED DEC. 31, SEPT. 30+
---------------------- TO DEC. 31, ---------------------- TO DEC. 31,
1997 1996 1995 1994 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $12.97 $12.11 $ 9.86 $10.08 $13.68 $12.36 $ 9.93 $10.10
------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions
Received.............. .490 .44 .36 .14 .39 .34 .32 .13
Capital Gain
Distributions
Received.............. .236 .22 .13 .01 .28 .24 .14 .02
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions
Received.............. .726 .66 .49 .15 .67 .58 .46 .15
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.819 .87 2.25 (.22) 2.36 1.32 2.43 (.16)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 2.545 1.53 2.74 (.07) 3.03 1.90 2.89 (.01)
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends From Net
Investment Income..... (.490) (.44) (.36) (.14) (.38) (.35) (.31) (.14)
Distributions From
Realized
Capital Gains......... (.215) (.23) (.13) (.01) (.29) (.23) (.15) (.02)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.705) (.67) (.49) (.15) (.67) (.58) (.46) (.16)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $14.81 $12.97 $12.11 $ 9.86 $16.04 $13.68 $12.36 $ 9.93
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TOTAL RETURN............ 19.77% 12.71% 27.94% (0.70)% 22.26% 15.41% 29.24% (0.10)%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $1,358 $ 826 $ 235 $ 35 $1,184 $ 629 $ 217 $ 38
Ratio of Total Expenses
to Average Net Assets.. 0% 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment
Income to Average Net
Assets................. 3.72% 3.98% 4.42% 7.10%* 2.84% 3.18% 3.67% 7.06%*
Portfolio Turnover Rate. 2% 3% 1% 0% 1% 0% 1% 1%
</TABLE>
*Annualized.
+Commencement of operations.
- -------------------------------------------------------------------------------
YIELD AND TOTAL From time to time the Portfolios may advertise their
RETURN yield and total return. Both yield and total return fig-
ures are based on historical earnings and are not in-
tended to indicate future performance. The "total re-
turn" of the Portfolios refers to the average annual
compounded rates of return over one-, five- and ten-
year periods or for the life of the Portfolios (as
stated in the advertisement) that would equate an ini-
tial amount invested at the beginning of a stated period
to the ending redeemable value of the investment, assum-
ing the reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net in-
vestment 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 div-
idend income earned on the Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder ac-
counts. The yield calculation assumes that net invest-
ment income earned over 30 days is compounded monthly
for six months and then annualized. Methods used to cal-
culate advertised yields are
7
<PAGE>
standardized for all stock and bond mutual funds. Howev-
er, these methods differ from the accounting methods
used by the Portfolios to maintain their books and rec-
ords, and so the advertised 30-day yield may not fully
reflect the income paid to an investor's account.
- -------------------------------------------------------------------------------
INVESTMENT The objective of the Portfolios is to maximize total in-
OBJECTIVES vestment return (i.e., capital growth and income) sub-
ject to the investment restrictions and asset allocation
policies described in this Prospectus. Specifically:
. The INCOME PORTFOLIO seeks to provide current income.
. The CONSERVATIVE GROWTH PORTFOLIO seeks to provide
current income and low to moderate growth of capital.
. The MODERATE GROWTH PORTFOLIO seeks to provide growth
of capital and a reasonable level of current income.
. The GROWTH PORTFOLIO seeks to provide growth of capi-
tal.
The investment objectives of the Portfolios are summa-
rized below in a chart that illustrates the degree to
which each Portfolio seeks to obtain income, growth of
capital and risk of principal:
<TABLE>
<CAPTION>
PORTFOLIO NAME INCOME GROWTH OF CAPITAL RISK OF PRINCIPAL
-------------- ------ ----------------- -----------------
<S> <C> <C> <C>
Income Portfolio........ High Negligible Medium
Conservative Growth
Portfolio.............. Medium Low Medium
Moderate Growth
Portfolio.............. Medium Low to Medium Medium
Growth Portfolio........ Low Medium to High High
</TABLE>
There is no assurance that the Portfolios will achieve
their stated objectives.
The investment objective of each Portfolio is fundamen-
tal and so cannot be changed without the approval of a
majority of the Portfolio's shareholders.
- -------------------------------------------------------------------------------
ASSET ALLOCATION Asset allocation among stocks, bonds and cash invest-
FRAMEWORK ments is the most critical investment decision an in-
vestor makes. Selecting the appropriate mix should be
based on personal objectives, time horizons and risk
tolerances. These Portfolios provide different types of
investors with a way to meet target asset allocations.
8
<PAGE>
In order to achieve their investment objectives, the
Portfolios maintain different allocations of stocks,
bonds and cash/1/, reflecting varying degrees of poten-
tial investment risk and reward. These asset class allo-
cations provide investors with four diversified, dis-
tinct options that meet a wide array of investor needs.
The pie charts below, illustrate the expected asset al-
location for each Portfolio:
[PIE CHARTS APPEAR HERE]
Income Portfolio Conservative Growth Portfolio
Allocation Ranges Allocation Ranges
----------------- -----------------
Stocks.....5%-30% Stocks....25%-50%
Bonds.....70%-95% Bonds.....50%-75%
Cash.......0%-25% Cash......10%-25%
Moderate Growth Portfolio Growth Portfolio
Allocation Ranges Allocation Ranges
----------------- -----------------
Stocks....45%-70% Stocks....65%-90%
Bonds.....30%-55% Bonds.....10%-35%
Cash.......0%-25% Cash.......0%-25%
/1/ "Cash" will consist of any cash instruments held by
Vanguard Asset Allocation Fund.
- -------------------------------------------------------------------------------
INVESTMENT Each Portfolio seeks to achieve its objective by invest-
POLICIES ing in a different combination of other Vanguard Funds.
As investments for the Portfolios, the Trustees have
THE PORTFOLIOS chosen Vanguard Index Trust ("VIT")--Total Stock Market
INVEST IN A Portfolio, Vanguard STAR Fund--Total International Port-
DIVERSIFIED folio ("TIP"), Vanguard Asset Allocation Fund ("VAAF"),
PORTFOLIO OF Vanguard Fixed Income Securities Fund ("VFISF")--Short-
VANGUARD FUNDS Term Corporate Portfolio, and Vanguard Bond Index Fund--
Total Bond Market Portfolio to be the underlying invest-
ments of the Portfolios. Each Portfolio invests in these
Funds using fixed formulas in order to provide investors
with the expected asset allocation. The table below
shows, by asset class, how the Portfolios will invest in
the selected Vanguard Funds.
9
<PAGE>
INVESTMENTS IN THE UNDERLYING VANGUARD FUNDS
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
UNDERLYING PERCENT OF CONSERVATIVE MODERATE PERCENT OF
INVESTMENT VANGUARD INCOME GROWTH GROWTH GROWTH
CATEGORY FUNDS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ------------------------ ---------- ------------ ---------- ----------
<C> <S> <C> <C> <C> <C>
Stocks VIT--Total Stock Market
. US Portfolio............... 5% 20% 35% 50%
. International Vanguard Total
International Portfolio. 0% 5% 10% 15%
Bonds Total Bond Market
Portfolio............... 50% 30% 30% 10%
VFISF--STCorp Portfolio. 20% 20% 0% 0%
Asset Vanguard Asset
Allocation Allocation Fund......... 25% 25% 25% 25%
Component
---- ---- ---- ----
Total................... 100% 100% 100% 100%
</TABLE>
The allocation of each Portfolio's assets among the Van-
guard Funds was made by the Officers of the Fund under
the supervision of the Fund's Board of Trustees, and was
based on prudent asset allocation guidelines.
The investment restrictions and asset allocation poli-
cies set forth above are designed to assure that the
Portfolios maintain consistent investment approaches in
pursuit of their objectives.
From time to time, the Portfolios' investments in the
underlying Vanguard Funds may be limited by certain fac-
tors. For example, the Board of Directors of any of the
underlying Vanguard Funds may impose limits on addi-
tional investments in a particular Fund.
See "Implementation of Policies" for a description of
other investment practices of the Portfolios.
- -------------------------------------------------------------------------------
INVESTMENT RISKS Like any investment program, an investment in one or
more of the Portfolios entails certain risks. As mutual
funds investing in different combinations of stocks,
bonds and cash, the Portfolios are subject to different
levels of stock market, bond market, credit and infla-
tion risks.
MARKET RISK -- Stock MARKET RISK is the possibility that stock prices
STOCKS in general will decline over short or even extended pe-
riods. The stock market tends to be cyclical, with peri-
ods when stock prices generally rise and periods when
stock prices generally decline. Also, investments in
foreign stock markets can be as volatile, if not more
volatile than investments in U.S. markets.
10
<PAGE>
To illustrate the volatility of stock prices, the fol-
lowing table sets forth the extremes for U.S. stock mar-
ket returns as well as the average return for the period
from 1926 to 1997, as measured by the Standard & Poor's
500 Composite Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1997)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +13.0 +10.5 +10.9 +10.9
</TABLE>
As shown, common stocks have provided annual total re-
turns (capital appreciation plus dividend income) aver-
aging +10.9% for all 10-year periods from 1926 to 1997
The return in individual years has varied from a low of
-43.3% to a high of +53.9%, reflecting the short-term
volatility of stock prices. Average return may not be
useful for forecasting future returns in any particular
period, as stock returns are quite volatile from year to
year and interim losses are inevitable. For example, af-
ter the "bear market" of 1973-1974, it took four years
for many investors to recover their losses (assuming
dividends were reinvested). And if you were invested in
stocks during the Great Crash of 1929, it would have
taken an average of eight years for your investment to
return to its original value.
The bond market is typically less risky than the stock
MARKET RISK -- market, although there have been times when some bonds
BONDS were just as risky as stocks. For example, bond prices
fell 48% from December 1976 to September 1981. The risk
of bonds declining in value, however, may be offset in
whole or in part by the high level of income that bonds
provide. Bond prices are linked to prevailing interest
rates in the economy. The price volatility of a bond de-
pends on its maturity; the longer the maturity of a
bond, the greater its sensitivity to interest rates. In
general, when interest rates rise, the prices of bonds
fall; conversely, when interest rates fall, bond prices
generally rise.
From time to time, the stock and bond markets may fluc-
tuate independently of one another. In other words, a
decline in the stock market may in certain instances be
offset by a rise in the bond market, or vice versa. As a
result, each Portfolio, with its unique balance of com-
mon stocks, bonds and reserves, is expected in the long
run to entail less investment risk (and potentially less
investment return) than a mutual fund investing exclu-
sively in common stocks.
MARKET RISK -- The Portfolios invest in stocks of non-U.S. companies.
INTERNATIONAL Investments in foreign stock markets can be as risky, if
not more risky, than U.S. stock investments. Because of
their foreign investments, the Portfolios are subject to
country risk and currency risk. Country risk is the pos-
sibility that political events (such as a war), finan-
cial problems (such as government default), or natural
disasters (such as an earthquake) will weaken a
country's economy and cause investments in that country
to lose money. Currency risk is the possibility that a
"stronger" U.S. dollar will reduce returns for Americans
investing overseas. Generally, when the dollar rises in
value against a foreign currency, your investment in
that country loses value because its currency is worth
fewer U.S. dollars.
11
<PAGE>
To illustrate the volatility of international stock
prices, the following table shows the best, worst, and
average total returns (dividend income plus change in
market value) for foreign stock markets over various pe-
riods as measured by the Morgan Stanley Capital Interna-
tional Europe, Australasia, Far East (MSCI EAFE) Index,
a widely used barometer of international stock market
activity. Note that the returns shown do not include the
costs of buying and selling stocks or other expenses
that a real-world investment portfolio would incur.
Note, also, that the gap between the best and worst
tends to narrow over the long term.
INTERNATIONAL STOCK MARKET RETURNS (1969-1997)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +69.9% +36.5% +22.8% +16.3%
Worst -23.2 + 1.5 + 6.6 +12.0
Average +14.5 +13.8 +15.3 +14.9
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year pe-
riods from 1969 through 1997. Keep in mind that this was
a particularly favorable period for foreign markets. For
instance, over 10-year periods, foreign stocks provided
an average return of +15.3%, compared to +13.4% for U.S.
stocks (as measured by the Standard & Poor's 500 Compos-
ite Stock Price Index) during the same time frame. These
average returns reflect past performance and should not
be regarded as an indication of future returns from ei-
ther foreign markets as a whole or these Portfolios in
particular.
CREDIT RISK CREDIT RISK is the possibility that a bond issuer will
fail to make timely payments of interest or principal to
a Portfolio. The credit risk of a Portfolio is a func-
tion of the credit quality of its underlying securities.
INFLATION RISK Like market risk, inflation represents a significant
threat to even a well-diversified portfolio because in-
flation erodes the real return of an investment in
stocks, bonds or cash. Historically, inflation has aver-
aged 3.1%, offsetting most of the return from cash in-
vestments and bonds, but less than half of the return
from stocks. For this reason, stocks are referred to as
an "inflation hedge," a way to protect your money
against inflation.
VANGUARD FUND RISK The Portfolios are concentrated in investment companies
of The Vanguard Group, so investors should be aware that
each Portfolio's performance is directly related to the
investment performance of the Vanguard Funds in which it
invests and each Portfolio's allocation among the Funds.
First, changes in the net asset values of the underlying
Vanguard Funds affect each Portfolio's net asset value.
Second, over the long-term, each Portfolio's ability to
meet its investment objective depends on the underlying
Vanguard Funds meeting their investment objectives.
- -------------------------------------------------------------------------------
12
<PAGE>
WHO SHOULD INVEST The Portfolios are designed for investors who are seek-
ing long-term investment savings. Because of the risks
INVESTORS SEEKING associated with common stock and bond investments, the
LONG-TERM Portfolios are intended to be long-term investment vehi-
INVESTMENT SAVINGS cles and are not designed to provide investors with a
means of speculating on market movements. Specifically:
. The INCOME PORTFOLIO may be suitable for investors
seeking current income. Investors should have suffi-
cient time and tolerance for investment volatility to
accept periodic, though moderate, declines. The Port-
folio is most suitable for investors with a lower tol-
erance for risk or with a shorter time horizon (at
least 3-5 years). Example: investors who are investing
during late retirement.
. The CONSERVATIVE GROWTH PORTFOLIO is suitable for in-
vestors who are seeking current income and low to mod-
erate growth of capital. Investors should have both
sufficient time and tolerance for investment volatil-
ity to accept periodic declines. The Portfolio is most
appropriate for investors with a reasonably long time
horizon. Example: investors who are investing during
early retirement.
. The MODERATE GROWTH PORTFOLIO is suitable for invest-
ors who are still seeking reasonable stock market ex-
posure, but who are not willing to take the substan-
tial market risks of the Growth Portfolio. Investors
should have both the time and tolerance for investment
volatility to accept possibly large declines. The
Portfolio is most appropriate for investors with a
long time horizon. Example: investors in their 50s who
are saving on a regular basis for retirement and who
plan to retire in their early to mid 60s.
. The GROWTH PORTFOLIO is suitable for investors seeking
the potential for capital growth that a fund investing
predominantly in common stocks may offer. Investors
should have both the time and tolerance for investment
volatility to accept substantial declines. The Portfo-
lio is most appropriate for investors with a very long
time horizon. Example: investors in their 20s, 30s, or
40s who are saving for retirement and who plan to re-
tire in their early to mid 60s.
Investors can choose any of these four Portfolios, de-
pending on personal investment objectives, time horizons
and risk tolerances. For example: investors in their 40s
who are sensitive to market risk may choose the Moderate
Growth Portfolio; while investors in their 40s who are
not as sensitive to market risk may choose the Growth
Portfolio.
The Portfolios may be especially suitable for tax-
advantaged retirement accounts, including: Individual
Retirement Accounts (IRAs), Simplified Employee Pension
Plan Accounts (SEP-IRAs), 403(b)(7) custodial accounts
for employees of non-profit organizations, 401(k) plans
and other employer-sponsored retirement plans. While the
Portfolios are specifically designed for tax-advantaged
retirement accounts, shares may also be purchased by in-
vestors for other long-term general savings purposes.
Investors who engage in excessive account activity gen-
erate additional costs which are borne by all of the
Portfolios' shareholders. In order to minimize
13
<PAGE>
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 ex-
cessive trading by the investor. Additionally, the Port-
folios have adopted exchange privilege limitations as
described in the section "Exchange Privilege Limita-
tions." Finally, the Portfolios reserve the right to
suspend the offering of their shares.
- -------------------------------------------------------------------------------
IMPLEMENTATION OF The Vanguard Funds in which the Portfolios invest, as
POLICIES well as certain other investment practices of the Port-
folios, are described below. Investors desiring more in-
formation on an underlying Vanguard Fund described below
should call Vanguard's Investor Information Department
(1-800-662-7447) for the underlying Fund's prospectus.
THE PORTFOLIOS The TOTAL STOCK MARKET PORTFOLIO is one of six Portfo-
INVEST IN TWO lios of Vanguard Index Trust, an open-end diversified
VANGUARD EQUITY investment company. The Total Stock Market Portfolio is
INDEX FUNDS an index fund which seeks to match the investment per-
formance of the Wilshire 5000 Index, an index consisting
of all regularly and publicly traded U.S. stocks. The
Total Stock Market Portfolio attempts to match the
Wilshire 5000 Index by investing in a statistically se-
lected sample of the more than 6,000 stocks included in
the Index.
The TOTAL INTERNATIONAL PORTFOLIO is a separate portfo-
lio of Vanguard STAR Fund. As a "Fund of Funds," it in-
vests in each of the three Portfolios (European, Pacific
and Emerging Markets) of Vanguard International Equity
Index Fund, an open-end diversified investment company,
in the same percentages as these regions represent of
the total. As of December 31, 1997, the percentages were
59% in the European Portfolio, 29% in the Pacific Port-
folio and 12% in the Emerging Markets Portfolio. The Eu-
ropean Portfolio is an index fund which seeks to repli-
cate the aggregate price and yield performance of the
MSCI-Europe (Free) Index, a diversified, capitalization-
weighted index comprised of companies located in 15 Eu-
ropean countries (Austria, Belgium, Denmark, Finland,
France, Germany, Ireland, Italy, Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland, and United King-
dom). The Pacific Portfolio is an index fund which seeks
to replicate the aggregate price and yield performance
of the MSCI-Pacific Index, a diversified, capitaliza-
tion-weighted index comprised of companies located in
Australia, Japan, Hong Kong, Malaysia, New Zealand and
Singapore. The Emerging Markets Portfolio is an index
fund which seeks to track the aggregate price and yield
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 within 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 European, Pacific and Emerging Markets
Portfolios attempt to match their indexes by investing
in statistically selected samples of the stocks included
in their respective indexes.
14
<PAGE>
All four LifeStrategy Portfolios will invest a portion
of their assets in the Total Stock Market Portfolio.
However, only the Conservative Growth, Moderate Growth,
and Growth Portfolios will invest in the Total Interna-
tional Portfolio.
These two equity index funds, the Total Stock Market and
Total International Portfolios, are not managed accord-
ing to traditional methods of active investment manage-
ment, which involve the buying and selling of securities
based upon economic, financial, and market analyses and
investment judgment. Instead, the funds use a "passive"
or indexing investment approach to duplicate the results
of their respective indexes. All index matching services
are provided to the two funds on an at-cost basis by the
Core Management Group of The Vanguard Group.
THE PORTFOLIOS The Short-Term Corporate Portfolio of Vanguard Fixed In-
INVEST IN TWO come Securities Fund and the Total Bond Market Portfolio
VANGUARD of Vanguard Bond Index Fund are bond funds, which seek
BOND FUNDS to provide current income by investing in fixed-income
securities. These funds have distinct investment poli-
cies.
The SHORT-TERM CORPORATE PORTFOLIO invests in a diversi-
fied portfolio of investment grade quality corporate
bonds with an expected dollar-weighted average maturity
of one to three years. Some investors consider short-
term bonds as part of the "reserves" portion of their
portfolios, along with such cash investments as money
market funds or short-term bank certificates of deposit.
Since its inception, the Short-Term Corporate Portfo-
lio's net asset value has experienced fluctuations of
approximately 18% from low to high. The TOTAL BOND MAR-
KET PORTFOLIO will invest in a portfolio of fixed-income
securities selected to match the Lehman Brothers Aggre-
gate Bond Index (the "Aggregate Bond Index"). The Aggre-
gate Bond Index is a broad market-weighted index which
encompasses four major classes of investment grade
fixed-income securities in the United States: U.S. Trea-
sury and agency securities, corporate bonds, interna-
tional (dollar-denominated) bonds, and mortgage-backed
securities, with maturities greater than one year.
Each Portfolio will invest a portion of its assets in
the Total Bond Market Portfolio, while only the Income
Portfolio and Conservative Growth Portfolio will invest
in the Short-Term Corporate Portfolio.
ALL FOUR VANGUARD ASSET ALLOCATION FUND, an open-end diversified
PORTFOLIOS INVEST investment company, which allocates its assets among a
IN VANGUARD ASSET common stock portfolio, a bond portfolio and money mar-
ALLOCATION FUND ket instruments. The investment adviser allocates the
Fund's assets among stocks, bonds, and money market in-
struments in proportions which reflect the anticipated
returns and risks of each asset class. The estimates of
return and risk are developed based upon the adviser's
disciplined valuation methodology. There are no limita-
tions on the amount of the Fund's assets which may be
allocated to each of the three asset classes (stocks,
bonds, and money market instruments).
THE PORTFOLIOS AND The Portfolios and their underlying Vanguard Funds are
EACH UNDERLYING authorized to invest temporarily in certain short-term
FUND MAY INVEST IN fixed income securities. Such securities may be used to
SHORT-TERM FIXED invest uncommitted cash balances, to maintain liquidity
INCOME SECURITIES to meet shareholder redemptions, or to take a temporary
defensive position against market declines. These secu-
rities include: obligations of the U.S. Government
15
<PAGE>
and its agencies and instrumentalities; commercial pa-
per, bank certificates of deposit, and bankers' accept-
ances; and repurchase agreements collateralized by these
securities.
DERIVATIVE Derivatives are instruments whose values are linked to
INVESTING or derived from an underlying security or index. The
most common and conventional types of derivative securi-
ties are futures and options.
THE PORTFOLIOS AND The Portfolios and their underlying Vanguard Funds may
EACH UNDERLYING invest in futures contracts and options to a limited ex-
FUND MAY INVEST IN tent. Specifically, the Portfolios' underlying funds,
FUTURES CONTRACTS including Total Stock Market Portfolio, Total Interna-
AND OPTIONS tional Portfolio, Short-Term Corporate Portfolio, Total
Bond Market Portfolio, and Vanguard Asset Allocation
Fund, may invest in futures contracts and options. The
Portfolios have no present intention of investing di-
rectly in futures contracts and options, but if they
were to do so, investment decisions regarding such in-
struments would be made by Vanguard's Core Management or
Fixed Income Group.
Futures contracts and options may be used for several
reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund man-
agement purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns
when a futures contract is priced more attractively than
the underlying security or index. While futures con-
tracts and options can be used as leveraged instruments,
neither the Portfolios nor the underlying Funds may use
futures contracts or options transactions to leverage
their assets.
The Portfolios and their underlying Funds will not use
futures contracts or options for speculative purposes or
to leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts and
options by the underlying Funds are: (i) imperfect cor-
relation between the change in market value of securi-
ties held by a Fund and the prices of futures contracts
and options; and (ii) possible lack of a liquid second-
ary market for a futures contract resulting in an in-
ability to close a futures position prior to its matu-
rity date. The risk of imperfect correlation will be
minimized by investing only in contracts whose behavior
is expected to resemble that of a Fund's underlying se-
curities. The risk that a Fund will be unable to close
out a futures position will be minimized by entering
into such transactions only on an exchange with an ac-
tive and liquid secondary market. Additionally, invest-
ments in futures contracts and options involve the risk
that an investment adviser will incorrectly predict
stock market and interest rate trends.
The Portfolios and their underlying Funds may enter into
futures contracts provided that not more than 5% of
their respective assets are required as a futures con-
tract deposit; in addition the Portfolios and their un-
derlying Funds may enter into futures contracts and op-
tions transactions to the extent that not more than 20%
of their respective assets (50% with respect to Vanguard
Asset Allocation Fund) are committed to such contracts
or transactions.
EACH OF THE Each of the Portfolios' underlying Funds may lend their
PORTFOLIOS' investment securities to qualified institutional invest-
UNDERLYING FUNDS ors on a short or long term basis for the purpose of re-
MAY LEND ITS alizing additional net investment income. Loans of secu-
SECURITIES rities by a
16
<PAGE>
Fund will be collateralized by cash, letters of credit,
or securities issued or guaranteed by the U.S. Govern-
ment or its agencies. The collateral will equal at least
100% of the current market value of the loaned securi-
ties.
PORTFOLIO TURNOVER The portfolio turnover rate is not expected to exceed
IS EXPECTED TO BE 25% annually. A portfolio turnover rate of 25% for a
LOW Portfolio would occur if one quarter of a Portfolio's
investments were sold within a year. The Fund's Officers
will purchase or sell securities: (i) to accommodate
purchases and sales of Portfolio shares; and (ii) to
maintain or modify the allocation of the Portfolios' as-
sets between the underlying Vanguard Funds in which the
Portfolios invest within the percentage limits described
under "Investment Policies."
- -------------------------------------------------------------------------------
INVESTMENT Each Portfolio has adopted limitations on some of its
LIMITATIONS investment policies. Some of these limitations are that
the Portfolios will not:
THE PORTFOLIOS (a) borrow money, except from banks for temporary or
HAVE ADOPTED emergency purposes, and then only in an amount not
CERTAIN in excess of 5% of the lower of the market value or
FUNDAMENTAL cost of its assets, in which case it may pledge,
LIMITATIONS mortgage or hypothecate any of its assets as secu-
rity for such borrowing, but not to an extent
greater than 5% of the market value of its as-
sets; and
(b) invest more than 25% of its assets in any one
industry, except for investment companies which are
members of The Vanguard Group of Investment
Companies.
A complete list of the Fund'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 the Portfolio's share-
holders.
- -------------------------------------------------------------------------------
MANAGEMENT OF THE The Officers of the Fund manage the day-to-day operation
PORTFOLIOS of the Portfolios. The Officers are directly responsible
to the Fund's Board of Trustees. The Trustees, who are
THE OFFICERS elected by the Fund's shareholders, determine how the
MANAGE THE assets of each Portfolio should be invested among the
PORTFOLIOS' Vanguard Funds, set general policies for the Fund and
OPERATIONS choose its Officers. The Officers of the Fund also serve
as Officers of each of the Vanguard Funds and of The
Vanguard Group, Inc. ("Vanguard"). The Trustees each
serve as Directors of The Vanguard Group, Inc. and most
of the Vanguard Funds within the Group. A list of Trust-
ees and Officers of the Fund and a statement of their
present positions and principal occupations during the
past five years can be found in the Statement of Addi-
tional Information.
The business of the Fund will be conducted by its Offi-
cers in accordance with policies and guidelines set up
by the Fund's Trustees which were included in an Appli-
cation for an Exemptive Order subsequently issued by the
U.S. Securities and Exchange Commission. As noted above,
the Officers and Trustees of the Fund also serve in sim-
ilar positions in the underlying Funds. If the interests
of the Portfolios and the underlying Funds were ever to
become divergent, a concern might arise that this could
create a potential conflict of interest which could af-
fect how the Officers or Trustees fulfill their fidu-
ciary duties to the Portfolios and the Vanguard Funds.
The Trustees believe they have structured the Fund to
avoid the concerns which could arise. Conceivably, a
situa-
17
<PAGE>
tion could occur where proper portfolio or other action
for the Portfolios could be adverse to the interests of
an underlying Vanguard Fund, or the reverse could occur.
If such a possibility appears likely, the Trustees and
Officers will carefully analyze the situation and take
all steps they believe reasonable to minimize and, where
possible, eliminate the potential conflict. Moreover,
limitations on aggregate investments in the underlying
Vanguard Funds and other restrictions have been adopted
by the Fund to minimize this possibility, and close and
continuous monitoring will be exercised to avoid, inso-
far as possible, these concerns.
VANGUARD The Fund has entered into a Special Servicing Agreement
ADMINISTERS AND (the "Agreement") with Vanguard under which Vanguard
DISTRIBUTES will provide all management, administrative and distri-
THE PORTFOLIOS bution services to the Portfolios of the Fund. Vanguard
is a jointly-owned subsidiary of more than 30 investment
company members (the "Funds") of The Vanguard Group. The
Vanguard Funds offer over 95 distinct investment portfo-
lios with total assets in excess of $360 billion. Van-
guard provides the Portfolios and other Funds in the
Group with corporate management, administrative and dis-
tribution services (similar to those provided to the
Portfolios) on an at-cost basis. As a result of Van-
guard's unique corporate structure, 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 as-
sets) for the Vanguard Funds amounted to approximately
.28% compared to an average of 1.24% for the mutual fund
industry (data provided by Lipper Analytical Services
Inc.).
The Special Servicing Agreement provides that the Port-
folios will pay for services to be rendered to the Port-
folios by Vanguard on an "out of pocket" basis. The
Portfolios will also bear the expenses of services pro-
vided by other parties, including auditors, the custodi-
an, and outside legal counsel, as well as taxes and
other direct expenses of the Portfolios. However, the
Agreement provides that the expenses of the Portfolios
will be offset, in whole or in part, by a reimbursement
from Vanguard for (a) contributions made by each Portfo-
lio to the cost of operating the underlying Vanguard
Funds the Portfolios invest in and (b) certain savings
in administrative and marketing costs that Vanguard is
expected to derive from the operation of the Portfolios.
The Portfolios' contributions to Vanguard represent rev-
enues Vanguard receives because the Portfolios bear
their pro rata share of the costs of operating the un-
derlying Vanguard Funds. The cost savings realized by
Vanguard from the Portfolios result primarily from the
assumed reduction in the number of accounts Vanguard has
to maintain due to the existence of the Portfolios
(i.e., one account per investor as opposed to one for
each underlying Fund per investor if the investor dupli-
cated the Portfolio's investment program by investing
directly in the underlying Funds).
Although such cost savings are not certain, the Trustees
believe that the reimbursements to be made by Vanguard
to the Portfolios should be sufficient to offset most,
if not all, of the expenses incurred by the Portfolios.
Therefore, the Portfolios are expected by the Trustees
to operate at a very low, or zero, expense ratio. In the
event that the economic benefits of operating the Port-
folios exceed their actual costs, such benefits will be
shared by each of the
18
<PAGE>
Funds in The Vanguard Group, including the underlying
Funds in which the Portfolios invest.
- -------------------------------------------------------------------------------
INVESTMENT The Portfolios do not employ an investment adviser and
MANAGEMENT therefore do not pay advisory fees. The Portfolios do
not have portfolio managers at this time. The determina-
THE FUND DOES tion of how the Portfolios' assets will be invested in
NOT EMPLOY certain of the Vanguard Funds is made by the Fund's Of-
ANINVESTMENT ficers pursuant to the investment objective and policies
ADVISER set forth in this Prospectus and procedures and guide-
lines established by the Trustees. However, the Portfo-
lios, as shareholders of each of the underlying Vanguard
Funds, benefit from the investment advisory services of
each of the underlying Funds, and will indirectly bear
their proportionate share of any investment advisory
fees paid by those Funds.
The Portfolios' underlying Funds are managed by the fol-
lowing investment advisers:
<TABLE>
<CAPTION>
INVESTMENT ADVISER PORTFOLIO'S UNDERLYING FUNDS
------------------------- ------------------------------
<S> <C>
The Vanguard Group, Inc. Short-Term Corporate Portfolio
of Vanguard Fixed Income
Securities Fund
Total Bond Market Portfolio of
Vanguard Bond Index Fund
Total Stock Market Portfolio
of Vanguard Index Trust
Total International Portfolio
of Vanguard STAR Fund
Mellon Capital Management Vanguard Asset Allocation Fund
</TABLE>
VANGUARD'S CORE Vanguard's Core Management Group provides investment ad-
MANAGEMENT GROUP visory services on an at-cost basis with respect to Van-
guard Index Trust --Total Stock Market Portfolio and the
Total International Portfolio of Vanguard STAR Fund. The
Core Management Group provides investment advisory serv-
ices to other Vanguard Funds, including the remaining
five Portfolios of Vanguard Index Trust. The Core Man-
agement Group also provides investment advisory services
to the Total International Portfolio's underlying port-
folios -- the European, Pacific and Emerging Markets
Portfolios of Vanguard International Equity Index Fund,
Vanguard Institutional Index Fund, Vanguard Balanced In-
dex Fund and the Equity Index Portfolio of Vanguard
Variable Insurance Fund, several Portfolios of the Van-
guard Tax-Managed Fund, the Aggressive Growth Portfolio
of Vanguard Horizon Fund, the REIT Index Portfolio of
Vanguard Specialized Portfolios, a portion of
Vanguard/Morgan Growth Fund, a portion of
Vanguard/Windsor II's assets, as well as to several in-
dexed separate accounts. Total assets under management
by the Core Management Group were approximately $97 bil-
lion as of December 31, 1997.
VANGUARD'S FIXED Vanguard's Fixed Income Group provides investment advi-
INCOME GROUP sory services on an at-cost basis to the Short-Term Cor-
porate Portfolio of Vanguard Fixed Income Securities
Fund and the Total Bond Market Portfolio of Vanguard
Bond Index Fund. The Fixed Income Group provides advi-
sory services to more than 40 Vanguard fixed-income
portfolios, both taxable and tax-exempt. Total assets
under management by the Fixed Income Group were more
than $100 billion as of December 31, 1997.
19
<PAGE>
MELLON CAPITAL Mellon Capital Management is a professional counseling
MANAGEMENT firm which manages well-diversified stock and bond port-
folios for institutional clients. As of December 31,
1997 the adviser provided investment advisory services
to 237 clients and managed assets with an approximate
value of more than $63 billion. The adviser's asset al-
location strategy was developed by the adviser's Chair-
man, William Fouse, in 1972, and is used by 103 of its
clients and accounts for approximately $23.2 billion of
the assets that it manages. For its asset allocation
clients, including the Fund, the adviser employs a pro-
prietary asset allocation model in managing client in-
vestment portfolios and an indexing approach in select-
ing individual equity securities. The Fund is one of the
adviser's two investment company clients.
Vanguard Asset Allocation Fund pays Mellon Capital Man-
agement an annual basic fee equal to 0.20% on the first
$100 million of assets; .15 of 1% on the next $900 mil-
lion of assets; .125 of 1% on the next $500 million of
assets; and .10% of 1% on assets greater than $1.5 bil-
lion. This fee may be increased or decreased by applying
an adjustment formula based on the performance of the
Fund relative to the investment record of a "Combined"
Index. The Combined Index shall be comprised of the
Standard & Poor's 500 Composite Index (65% of the Com-
bined Index) and the Lehman Brothers Long-Term U.S.
Treasury Index (35% of the Combined Index). The fee pay-
ment will be increased (decreased) by an incentive (pen-
alty) of 0.05% of average net assets if the Fund's cumu-
lative investment performance for the thirty-six months
preceding the end of the quarter is at least six per-
centage points above (below) the cumulative investment
record of the Combined Index for the same period.
Each Portfolio will purchase and sell the principal por-
tion of its portfolio securities (i.e., shares of the
underlying Vanguard Funds) by dealing directly with the
issuer. There will be no sales charges or commissions
because the underlying Funds are offered on a no-load
basis, without sales charges. Investments in short-term
money market instruments and repurchase agreements usu-
ally will be principal transactions and will generally
involve no brokerage commissions.
- -------------------------------------------------------------------------------
DIVIDENDS, CAPITAL The Income and Conservative Growth Portfolios expect to
GAINS AND TAXES pay dividends quarterly from ordinary income, while the
Moderate Growth and Growth Portfolios expect to pay div-
idends semi-annually from ordinary income. Capital gains
distributions from the Portfolios, if any, will be made
annually.
For tax-deferred retirement accounts (such as Individual
Retirement Accounts or other retirement plans sponsored
by Vanguard), dividend and capital gains distributions
from the Portfolios must be reinvested in additional
shares. For regular investment accounts, dividend and
capital gains distributions may be reinvested in addi-
tional shares or received in cash. See "Choosing a Dis-
tribution Option" for a description of these distribu-
tion methods for regular investment accounts in the
Portfolios.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Portfo-
lios may declare special year-end dividend and capital
gains distributions during December. Such distributions,
if received by shareholders by January 31, are deemed to
have been paid by the Portfolios and received by share-
holders on December 31 of the prior year.
20
<PAGE>
Each Portfolio intends to continue to qualify as a "reg-
ulated 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 share-
holders. The tax consequences of distributions from the
Portfolios will vary according to the type of account
you open.
If you open an IRA or other tax-deferred retirement ac-
count, dividend and capital gains distributions from the
Portfolios will generally be exempt from current taxa-
tion. You are advised to consult with a tax professional
on the specific rules governing your own tax-deferred
arrangement. There are varying restrictions imposed by
the Internal Revenue Service on eligibility, contribu-
tions and withdrawals, depending on the type of tax-de-
ferred account you have selected. The rules governing
tax-deferred retirement plans are complex, and failure
to comply with the IRS's rules and regulations governing
your specific type of plan may result in a substantial
cost to you, including the loss of tax advantages and
the imposition of additional taxes and penalties by the
IRS.
If you open an account in one or more of the Portfolios
outside a tax-deferred retirement account, the following
tax rules will generally apply. For regular investment
accounts, dividends paid by the Portfolios from net in-
vestment income and net short-term capital gains,
whether received in cash or reinvested in additional
shares, will be taxable as ordinary income. Distribu-
tions paid by the Portfolios from long-term capital
gains, again whether received in cash or reinvested in
additional shares, will also be taxable as long-term
capital gains, regardless of the length of time you have
owned shares of the Portfolios. Long-term capital gains
may be taxed at different rates depending on how long
the Fund held the securities.
Capital gains distributions are made when one or more of
the Portfolios realizes net capital gains on sales of
portfolio securities during the year. The Portfolios do
not seek to realize any particular amount of capital
gains during a year; rather, realized gains are a by-
product of portfolio management activities. In addition,
the Portfolios receive realized net capital gains dis-
tributions from the Portfolio's underlying Funds. Conse-
quently, capital gains distributions may be expected to
vary considerably from year to year; there will be no
capital gains distributions in years when a Portfolio
realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you
in the Portfolios. In addition, keep in mind that if you
purchase shares of a Portfolio shortly before the record
date for a dividend or capital gains distribution, a
portion of your investment will be returned to you as a
taxable distribution, regardless of whether you are re-
investing your distributions or receiving them in cash.
The Portfolios will notify you annually as to the tax
status of dividend and capital gains distributions paid
by the Portfolios.
21
<PAGE>
A CAPITAL GAIN OR A sale of shares of a Portfolio is a taxable event and
LOSS MAY BE may result in a capital gain or loss. A capital gain or
REALIZED UPON loss may be realized from an ordinary redemption of
EXCHANGE OR shares or an exchange of shares between two mutual funds
REDEMPTION (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges
may be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS tax-
payer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or tax-
payer identification number and by certifying that you
are not subject to backup withholding.
Vanguard STAR Fund is organized as a Pennsylvania busi-
ness trust and, in the opinion of counsel, is not liable
for any income or franchise tax in the Commonwealth of
Pennsylvania. Each Portfolio will be subject to Pennsyl-
vania 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 resi-
dents of the City and School District of Pittsburgh.
The tax discussion set forth above is included for gen-
eral information only. Prospective investors should con-
sult their own tax advisers concerning the tax conse-
quences of an investment in the Portfolios.
- -------------------------------------------------------------------------------
THE SHARE PRICE OF Each Portfolio's share price or "net asset value" per
EACHPORTFOLIO 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 trading on the New York Stock Exchange
(the "Exchange"), generally 4:00 p.m. Eastern Time, on
each day that the Exchange is open for trading. This de-
termination is made by appraising each Portfolio's un-
derlying investments (i.e., the underlying Vanguard
Funds) at the price of each such Fund determined at the
close of the Exchange.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard Funds.
- -------------------------------------------------------------------------------
GENERAL The Fund's Declaration of Trust permits the Trustees to
INFORMATION issue an unlimited number of shares of beneficial inter-
est, without par value, from an unlimited number of
classes of shares. Currently the Fund is offering six
classes of shares.
The shares of Vanguard STAR Fund are fully paid and non-
assessable; have no preference as to conversion, ex-
change, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have non-cumula-
tive voting rights, meaning that the holders of more
than 50% of the shares voting for the election of Trust-
ees can elect 100% of the Trustees if they so choose.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Trustee or Trustees of the Fund
if
22
<PAGE>
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by Chase Manhattan
Bank, New York, N.Y. CoreStates Bank, N.A., holds daily
cash balances that are used by the Fund's Portfolios to
invest in repurchase agreements or securities acquired
in these transactions. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse LLP serves as inde-
pendent accountants for the Fund and will audit its fi-
nancial statements annually. The Fund is not involved in
any litigation.
- -------------------------------------------------------------------------------
23
<PAGE>
SHAREHOLDER GUIDE
OPENING AN ACCOUNT The Portfolios are designed primarily for tax-advantaged
AND PURCHASING retirement accounts as well as other long-term invest-
SHARES ment savings plans. If you are establishing an Individ-
ual Retirement Account ("IRA") or other qualified re-
tirement plan, you must complete the appropriate
retirement plan agreement, i.e., the Adoption Agreement.
If you are establishing a Portfolio account outside a
Vanguard tax-deferred retirement plan, you may simply
complete the Account Registration Form. In either case,
please indicate the amount you wish to invest on the ap-
propriate form. Your purchase must be equal to or
greater than the $3,000 minimum initial investment
($1,000 for IRAs, $500 minimum for an Education IRA).
(Please refer to the plan agreement for information on
the maximum amount you may contribute or rollover to
your retirement account.) If you need assistance in com-
pleting any forms, please call the Investor Information
Department (1-800-662-7447). NOTE: For other types of
account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney),
please call us to determine which additional forms you
may need.
Portfolio shares 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).
PURCHASERESTRICTIONS 1) Because of the risks associated with common stock and
bond investments, the Portfolios are intended to be
long-term investment vehicles and are not designed to
provide investors with means of speculating on short-
term stock and bond market movements. Consequently,
the Portfolios reserve the right to reject any spe-
cific purchase (and exchange purchase) request. The
Portfolios also reserve the right to suspend the of-
fering of shares for a period of time.
2) Vanguard will not accept third-party checks to pur-
chase shares of the Portfolios. Please be sure your
purchase check is made payable to the Vanguard Group.
IMPORTANT NOTE: This Shareholder Guide describes many of the services
IRA AND available to Vanguard fund shareholders. Specific serv-
RETIREMENT PLAN ices described in this Shareholder Guide may not be
INVESTORS available or may only be available in limited form for
tax-deferred retirement accounts. If you are investing
in a Portfolio through an IRA or other retirement plan,
you should consult the retirement plan agreement, dis-
closure statement, and other Vanguard brochures for the
services and procedures which pertain to your account.
Please call our Investor Information Department (1-800-
662-7447) if you have any questions.
ADDITIONAL Subsequent investments in the Portfolios may be made by
INVESTMENTS mail ($100 minimum), exchange from another Vanguard Fund
account ($100 minimum), or Vanguard Fund Express. For
regular (non-retirement) accounts, additional purchases
may also be made by wire ($1,000 minimum). In limited
instances, contributions to retirement accounts may be
accepted by wire. Please call us for more information on
this option.
---------------------------------------------------------
24
<PAGE>
ADDITIONAL INVESTMENTS TO
EXISTING ACCOUNTS
NEW ACCOUNT
PURCHASING BY MAIL Please include the amount Additional investments
Non-Retirement of your initial invest- should include the In-
Accounts, complete ment on the registration vest-by-Mail remittance
and sign the form, make your check form attached to your
enclosed Account payable to The Vanguard Portfolio confirmation
Registration Form Group -- (Portfolio num- statements. Please make
ber), see below for ap- your check payable to The
propriate number and mail Vanguard Group -- (Port-
to: folio number), see below
for appropriate number,
THE VANGUARD GROUP P.O. write your account number
BOX 2600 VALLEY FORGE, PA on your check and, using
19482-2600 the return envelope pro-
vided, mail to the ad-
dress indicated on the
Invest-by-Mail Form.
For express or THE VANGUARD GROUP 455 All written requests
registered mail, DEVON PARK DRIVE WAYNE, should be mailed to one
send to: PA 19087-1815 of the addresses indi-
cated for new accounts.
Do not send registered or
express mail to the post
office box address.
For IRAs or Complete the appropriate retirement plan adoption agree-
retirement plans ment and any other required documents. Make your check
payable to Vanguard Fiduciary Trust Company and send ap-
plication and check to the address indicated on
your agreement.
VANGUARD STAR FUND
Income Portfolio -- 723
Conservative Growth Portfolio -- 724
Moderate Growth Portfolio -- 914
Growth Portfolio -- 122
---------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A. ABA 031000011
Money should be CORESTATES NO. 0101 9897 ATTN:
wired to: VANGUARD
BEFORE WIRING VANGUARD STAR FUND NAME OF PORTFOLIO
Please contact ACCOUNT NUMBER ACCOUNT REGISTRATION
Client Services
(1-800-662-2739)
To assure proper receipt, please be sure your bank in-
cludes the name of the Fund, the account number Vanguard
has assigned to you and the eight-digit CoreStates num-
ber. 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 ar-
rangement. NOTE: Federal Funds wire purchase orders will
be accepted only when the Fund and the Custodian Bank
are open for business. IRAs and other tax-deferred ac-
counts cannot be opened by wire. Please see "Opening an
Account."
25
<PAGE>
PURCHASING BY You may open an account and purchase shares by making an
EXCHANGE (from a exchange from an existing Vanguard account. However, the
Vanguard account) Portfolios reserve the right to refuse any exchange pur-
chase request. To exchange by telephone, call our Client
Services Department (1-800-662-2739). The new account
will have the same registration as the existing account.
PURCHASING BY FUND The Fund Express Special Purchase option lets you move
EXPRESSSpecial money from your bank account to your Vanguard account on
Purchase & an "as needed" basis. Or if you choose the Automatic In-
Automatic vestment option, money will be moved automatically from
Investment your bank account to your Vanguard account on the sched-
ule (monthly, bimonthly [every other month], quarterly,
semiannually or annually) you select. To establish these
Fund Express options on regular investment accounts,
please provide the appropriate information on the Ac-
count Registration Form. To establish Automatic Invest-
ment for an IRA or other tax-deferred retirement plan,
contact our Investor Information Department (1-800-662-
7447) for an application. We will send you a confirma-
tion of your Fund Express enrollment; please wait two
weeks before using the service.
- -------------------------------------------------------------------------------
CHOOSING A If you invest in a Portfolio outside a tax-deferred re-
DISTRIBUTION tirement account, you must select one of four distribu-
OPTION tion options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividend and
capital gains distributions will be reinvested in ad-
ditional shares of the Portfolio. This option will be
selected for you automatically unless you specify one
of the other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional shares of the Portfolio.
3. CASH CAPITAL GAIN OPTION -- Your capital gains dis-
tributions will be paid in cash and your dividends
will be reinvested in additional shares of the Port-
folio.
4. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Serv-
ices 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 dis-
tributions are automatically reinvested in additional
shares. We will not pay interest on uncashed distribu-
tion 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 Serv-
ices 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.
26
<PAGE>
If you invest in a Portfolio through a tax-deferred re-
tirement account, your dividend and capital gain distri-
butions will be automatically reinvested in additional
shares of the Portfolio. If you change this automatic
reinvestment option, you should be aware that "cash"
dividends or capital gains will be considered taxable
distributions from your account.
- -------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Portfolios are required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
NON-RETIREMENT all shareholders who own shares of the Portfolios as of
INVESTORS SHOULD the distribution's record date, regardless of how long
ASK ABOUT THE the shares have been owned. Purchasing shares just prior
TIMING OF CAPITAL to the record date could have a significant impact on
GAINS AND DIVIDEND your tax liability for the year. For example, if you
DISTRIBUTIONS purchase shares immediately prior to the record date of
BEFORE INVESTING a sizable capital gain or income dividend distribution,
you will be assessed taxes on the amount of the capital
gain and/or dividend distribution later paid even though
you owned the Portfolio shares for just a short period
of time. (Taxes are due on the distributions even if the
dividend or capital gain is reinvested in additional
Portfolio shares.) While the total value of your invest-
ment will be the same after the distribution -- the
amount of the distribution will offset the drop in the
net asset value of the shares -- you should be aware of
the tax implications the timing of your purchase may
have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfo-
lios' annual capital gains distributions normally occur
in December, while income dividends are generally paid
quarterly in March, June, September, and December for
the Income and Conservative Growth Portfolio and
semiannually in June and December for the Moderate
Growth and Growth Portfolios. In addition, the Portfo-
lios occasionally may be required to make supplemental
dividend or capital gains distributions at some other
time during the year. For additional information on dis-
tributions and taxes, see the section titled "Dividends,
Capital Gains, and Taxes."
- -------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services
INFORMATION on a regular investment account is to select the options
you desire when you complete your Account Registration
ESTABLISHING Form.
OPTIONAL SERVICES
IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU MAY
NEED TO PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND
A SIGNATURE GUARANTEE. PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUB-
LIC.
CERTIFICATES Share certificates will not be available for the Portfo-
lios.
BROKER/DEALER If you purchase shares in Vanguard Funds through a reg-
PURCHASES istered broker/dealer or investment adviser, the
broker/dealer or adviser may charge a service fee.
27
<PAGE>
CANCELLING TRADES The Fund will not cancel any trade (e.g., purchase, re-
demption or exchange) believed to be authentic once the
trade request has been received in writing or by tele-
phone.
ELECTRONIC You may receive a prospectus for the Fund or any of the
PROSPECTUS Vanguard Funds in an electronic format through Van-
DELIVERY guard's website at www.vanguard.com. For additional in-
formation please see "Other Vanguard Services -- Com-
puter Access."
- -------------------------------------------------------------------------------
WHEN YOUR ACCOUNT Your trade date is the date on which your account is
WILLBE CREDITED 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 busi-
ness day. Your shares are purchased at the net asset
value determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only ac-
cept a foreign check which has been drawn in U.S. dol-
lars 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 You may withdraw any portion of the funds in your ac-
SHARES count by redeeming shares at any time. (Please see "Im-
portant Redemption Information.") For a regular invest-
ment account in the Portfolios, you generally may
initiate a request by writing or by telephoning. For an
IRA or other tax-deferred account, you must make your
redemption request in writing. Your redemption proceeds
are normally mailed within two business days after the
receipt of the request in Good Order. No interest will
accrue on amounts represented by uncashed redemption
checks.
If you invest in the Portfolios through an IRA or other
tax-deferred retirement plan, you should be aware that
any distributions prior to age 59 1/2 are generally sub-
ject to a 10% penalty tax, as well as ordinary income
taxes. To avoid the 10% penalty, you must generally roll
over your distribution to an IRA or qualified plan
within 60 days.
SELLING BY MAIL Requests should be mailed to THE VANGUARD GROUP, VAN-
GUARD STAR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482-
1120. (For express or registered mail, send your request
to The Vanguard Group, Vanguard STAR Fund, 455 Devon
Park Drive, Wayne, PA 19087-1815.)
The redemption price of shares will be a Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
---------------------------------------------------------
28
<PAGE>
DEFINITION OF GOOD GOOD ORDER means that the request includes the follow-
ORDER ing:
1. The account number and Fund and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. Signatures of all owners EXACTLY as they are regis-
tered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that may be re-
quired, in the case of estates, corporations, trusts,
and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PER-
TAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
---------------------------------------------------------
SELLING To sell shares by telephone, you or your pre-authorized
BYTELEPHONE 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."
---------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal op-
EXPRESS tion, money will be automatically moved from your Van-
guard Fund account to your bank account according to the
AUTOMATIC schedule you have selected. The Special Redemption op-
WITHDRAWAL & tion (not available for IRAs or other retirement ac-
SPECIAL REDEMPTION counts) lets you move money from your Vanguard account
to your bank account on an "as needed" basis. To estab-
lish these Fund Express options, please provide the ap-
propriate information on the Account Registration Form.
We will send you a confirmation of your Fund Express
service; please wait two weeks before using the service.
---------------------------------------------------------
SELLING BY You may sell shares by making an exchange into another
EXCHANGE Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
---------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be re-
REDEMPTION deemed at any time. However, your redemption proceeds
INFORMATION will not be paid until payment for the purchase is col-
lected, which may take up to ten calendar days.
---------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION close of trading on the Exchange are processed on the
PROCEEDS day of receipt and the redemption proceeds are normally
sent on the following business day. Please note: The
telephone redemption option is available only for non-
retirement accounts. Redemptions from retirement ac-
counts must be made in writing.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
29
<PAGE>
If you experience difficulty in making a telephone re-
demption 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 re-
ceived by Vanguard in Good Order. The Fund reserves the
right to revise or terminate the telephone redemption
privilege at any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as deter-
mined by the United States Securities and Exchange Com-
mission.
If the Board of Trustees determines that it would be
detrimental to the best interests of the Portfolio's re-
maining shareholders to make payment in cash, the Port-
folios may pay redemption proceeds in whole or in part
by a distribution in kind of readily marketable securi-
ties.
---------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Van-
COST STATEMENT guard will send you an Average Cost Statement which pro-
vides you with the tax basis of the shares you redeemed.
Please see "Statements and Reports" for additional in-
formation.
---------------------------------------------------------
LOW BALANCE FEE Due to the relatively high cost of maintaining smaller
AND MINIMUM accounts, each Portfolio will automatically deduct a $10
ACCOUNT BALANCE annual fee in either June or December from non-retire-
REQUIREMENT ment 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 aggre-
gate Vanguard assets exceed $50,000.
In addition, the Portfolios reserve the right to liqui-
date any non-retirement account that is below the mini-
mum initial investment amount of $3,000. If at any time
your total investment does not have a value of at least
$3,000, you may be notified that the value of your ac-
count is below the Fund's minimum account balance re-
quirement. 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 share-
holder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining mar-
kets (i.e., a decline in a Portfolio's net asset value).
- -------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange
SHARES your shares of a Portfolio for those of other available
Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready
TELEPHONE Call the Portfolio name, account number, Social Security num-
Client Services ber or employer identification number listed on the ac-
(1-800-662-2739) count and exact name and address in which the account is
registered. Only the registered shareholder may complete
such an exchange. Requests for telephone exchanges re-
ceived prior to the close of trading on the Exchange are
processed at the close of business that same day. Re-
quests received after the close of the Exchange are
processed the next business day. FOR NON-RETIREMENT IN-
VESTMENTS, TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR
FROM 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.
30
<PAGE>
If you experience difficulty in making a telephone ex-
change, your exchange request may be made by regular or
express mail, and it will be implemented at the closing
net asset value on the date received by Vanguard, pro-
vided the request is received in Good Order.
---------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name
of the Fund you wish to exchange into, the amount you
wish to exchange, and the signatures of all registered
account holders. Send your request to THE VANGUARD
GROUP, VANGUARD STAR FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482-1120. (For express or registered mail, send
your request to The Vanguard Group, Vanguard STAR Fund,
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 pass-
word that will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or sell
through online exchange are VANGUARD INDEX TRUST, VAN-
GUARD BALANCED INDEX FUND, VANGUARD INTERNATIONAL EQUITY
INDEX FUND, VANGUARD REIT INDEX PORTFOLIO, VANGUARD TO-
TAL INTERNATIONAL PORTFOLIO, AND VANGUARD GROWTH AND IN-
COME PORTFOLIO (formerly known as Vanguard Quantitative
Portfolios). These funds do permit online exchanges
within IRAs and other retirement accounts.
---------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
. An exchange between non-retirement accounts is treated
as a redemption and a purchase. Therefore, you could
realize a taxable gain or loss on the transaction.
. Exchanges by telephone are accepted only if the regis-
trations and the taxpayer identification numbers of
the two accounts are identical.
. In order to exchange into an account with a different
registration (including a different name, address, or
taxpayer identification number), you must provide Van-
guard with written instructions that include the guar-
anteed signatures of all current account owners.
. The shares to be exchanged must be on deposit and not
held in certificate form.
. New accounts are not currently accepted in the
Vanguard/Windsor Fund.
. 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.
31
<PAGE>
Every effort will be made to maintain the exchange priv-
ilege. However, the Portfolios reserve the right to re-
vise or terminate their provisions, limit the amount of,
or reject any exchange, as deemed necessary, at any
time. Shareholders would be notified prior to any mate-
rial change in the Fund's exchange policy.
The exchange privilege is only available in states in
which the shares of the Portfolio are registered for
sale. The Portfolio's shares are currently registered
for sale in all 50 states and the Portfolio intends to
maintain such registration.
- -------------------------------------------------------------------------------
EXCHANGE PRIVILEGE The Portfolios' exchange privileges are not intended to
LIMITATIONS afford shareholders a way to speculate on short-term
movements in the market. Accordingly, in order to pre-
vent excessive use of the exchange privilege that may
potentially disrupt the management of the Portfolios and
increase transaction costs, the Portfolios have estab-
lished a policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Portfolios during any
twelve-month period. "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 Portfolios re-
serve the right to reject any purchase request (includ-
ing exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient
portfolio management.
- -------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire or Fund
INFORMATION ABOUT express redemptions) and exchanges by telephone is auto-
TELEPHONE matically established on your non-retirement investment
TRANSACTIONS account unless you request in writing that telephone
transactions on your account not be permitted. The tele-
phone exchange option is automatically established on
retirement accounts.
To protect your account from losses resulting from unau-
thorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by tele-
phone, the caller must know (i) the name of the Port-
folio; (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 redemp-
tion by mail will be made payable to the registered
shareowner and mailed to the address of record only.
Neither the Portfolios nor Vanguard will be responsible
for the authenticity of transaction instructions re-
ceived 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.
- -------------------------------------------------------------------------------
32
<PAGE>
TRANSFERRING You may transfer the registration of any of your Portfo-
REGISTRATION lio non-retirement account shares to another person by
completing a transfer form and sending it to: THE VAN-
GUARD GROUP, ATTENTION: TRANSFER DEPARTMENT, P.O. BOX
1110, VALLEY FORGE, PA 19482-1110. The request must be
in Good Order. To request a transfer form and full in-
structions, please call our Client Services Department
(1-800-662-2739).
- -------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each
REPORTS 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 cate-
gory method. This service is available for most taxable
accounts opened since January 1, 1986. In general, in-
vestors who redeemed shares from a qualifying Vanguard
account may expect to receive their Average Cost State-
ment along with their Portfolio Summary Statement.
Please call our Client Services Department (1-800-662-
2739) for information.
Financial reports on the Fund will be mailed to you
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 in-
vestment earnings), Vanguard attempts to eliminate du-
plicate 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 ad-
dress -- instead of mailing separate reports to each
shareholder. If you want us to send separate reports,
however, you may notify our Investor Information Depart-
ment at 1-800-662-7447.
- -------------------------------------------------------------------------------
OTHER VANGUARD Many of these services are not available to (or appro-
SERVICES priate for) retirement account shareholders. For more
information about any of these services, please call our
Investor Information Department at 1-800-662-7447.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Gov-
DEPOSIT SERVICE ernment checks (including Social Security and military
pension checks) and private payroll checks may be auto-
matically 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 Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE 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 Vanguard's Fund Express allows you to transfer money be-
EXPRESS tween your Fund account and your account at a bank, sav-
ings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
33
<PAGE>
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 spe-
cific Vanguard Funds. For more information, please refer
to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividend and/or capital gains distributions automati-
cally 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- Vanguard's Tele-Account is a convenient, automated serv-
ACCOUNT(R) ice 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 Van-
guard Fund shares and redemptions by check using Tele-
Account. To contact Vanguard's Tele-Account service,
dial 1-800-ON-BOARD (1-800-662-6273). A brochure offer-
ing detailed operating instructions is available from
our Investor Information Department (1-800-662-7447).
COMPUTER ACCESS Use your personal computer to learn more about Van-
VANGUARD ONLINE guard's funds and services; keep in touch with your Van-
www.vanguard.com guard 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 on-
line "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>
[LOGO OF VANGUARD LIFESTRATEGY
PORTFOLIOS APPEARS HERE]
--------------------
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
P088 042398
<PAGE>
[LOGO OF VANGUARD LIFESTRATEGY PORTFOLIOS APPEARS HERE]
PROSPECTUS--APRIL 23, 1998
PARTICIPANT SERVICES--1-800-523-1188
INVESTMENT Vanguard STAR Fund is an open-end non-diversified invest-
OBJECTIVES AND ment company which seeks to maximize total investment re-
POLICIES turn (i.e., capital growth and income) subject to the in-
vestment restrictions and asset allocation policies
described in this Prospectus. The Fund consists of six
portfolios; however, this prospectus relates only to four
portfolios, Income, Conservative Growth, Moderate Growth,
and Growth Portfolios (the "LifeStrategy Portfolios").
These four Portfolios invest in up to five Vanguard mutual
funds, representing different combinations of stocks,
bonds and cash investments and reflecting varying degrees
of potential investment risk and reward. There is no as-
surance that the Portfolios will achieve their stated ob-
jectives. Shares of the Fund are neither insured nor guar-
anteed by any agency of the U.S. Government, including the
FDIC.
OPENING AN The Portfolios are investment options under a retirement
ACCOUNT or savings program sponsored by your employer. The admin-
istrator of your retirement plan or your employee benefits
office can provide you with detailed information on how to
participate in your plan and how to elect a Portfolio as
an investment option.
If you have any questions about these Portfolios, please
contact Participant Services at 1-800-523-1188. If you
have any questions about your plan account, contact your
plan administrator or the organization that provides re-
cordkeeping services for your plan.
ABOUT THIS This Prospectus is designed to set forth concisely the in-
PROSPECTUS formation you should know about the Portfolios before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing addi-
tional information about Vanguard STAR Fund has been filed
with the Securities and Exchange Commission. This State-
ment 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 In-
vestor Information Department at 1-800-662-7447, or visit-
ing the Securities and Exchange Commission's
website (www.sec.gov).
TABLE OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Highlights............. 2
Portfolio Expenses..... 4
Financial Highlights... 5
Yield and Total Return. 7
PORTFOLIO INFORMATION
Investment Objectives.. 7
Investment Policies.... 8
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Risks...... 9
Who Should Invest..... 12
Implementation of
Policies............. 13
Investment
Limitations.......... 16
Management of the
Portfolios........... 16
Investment Management. 18
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Dividends, Capital Gains and Taxes....... 20
The Share Price of Each
Portfolio............................... 20
General Information...................... 20
SERVICE GUIDE
Participating in Your Plan............... 22
</TABLE>
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.
<PAGE>
HIGHLIGHTS
OBJECTIVES AND Vanguard STAR Fund is an open-end non-diversified invest-
POLICIES ment company which seeks to maximize total investment re-
turn subject to the investment restrictions and asset al-
location policies described in this Prospectus. The Fund
consists of six portfolios; however this Prospectus re-
lates only to the Income, Conservative Growth, Moderate
Growth, and Growth Portfolios, collectively known as the
Vanguard LifeStrategy Portfolios. These four Portfolios
invest in up to five Vanguard mutual funds representing
different combinations of stocks, bonds, and cash invest-
ments and reflecting varying degrees of potential invest-
ment risk and reward. The Portfolios do not invest di-
rectly in a portfolio of securities, rather, in order to
meet their objectives the Portfolios invest in shares of
other Vanguard Funds. PAGE 7
FOUR SEPARATE Investors may choose to invest in any of the four
PORTFOLIOS LifeStrategy Portfolios, based on personal objectives,
time horizons, risk tolerances, and financial circumstances:
INCOME PORTFOLIO--seeks to provide current income.
CONSERVATIVE GROWTH PORTFOLIO--seeks to provide current
income and low to moderate growth of capital.
MODERATE GROWTH PORTFOLIO--seeks to provide growth of cap-
ital and a reasonable level of current income.
GROWTH PORTFOLIO--seeks to provide growth of capital. PAGE 7
RISK The Portfolios differ in terms of stock market risk, bond
CHARACTERISTICS market risk, and inflation risk. STOCK MARKET RISK is the
possibility that stock prices in general will decline over
short or extended periods. Stock markets tend to be cycli-
cal with periods when stock prices generally rise or fall.
The Conservative Growth, Moderate Growth and Growth Port-
folios also will have exposure to foreign stock markets,
which are generally thought to be riskier than domestic
markets. BOND MARKET RISK is the possibility that bond
prices will decline over short or long periods, due pri-
marily to changes in market interest rates. INFLATION RISK
is the possibility that rising prices for goods and serv-
ices will erode the real return of an investment in
stocks, bonds or reserves.
Two of the Portfolios, Moderate Growth and Growth, will
have a higher exposure to stock market risk because of the
significant investment these Portfolios have in stock
funds. While the other two Portfolios, Income and Conser-
vative Growth, will have higher exposure to bond market
risk and inflation risk because of the significant invest-
ment exposure these Portfolios have in bond funds. PAGE 9
2
<PAGE>
THE VANGUARD The Officers of the Fund manage the Portfolios' day-to-day
GROUP operations. The Officers are directly responsible to the
Fund's Board of Trustees. The Officers of the Fund also
serve as Officers of each of the Vanguard Funds and of The
Vanguard Group, Inc. The Trustees each serve as Directors
of The Vanguard Group and most of the Funds within the
Group. For important information regarding the structure
of the Fund, please see "Management of the Portfolios."
PAGE 16
- -------------------------------------------------------------------------------
INVESTMENT The Portfolios do not currently employ investment advisers
MANAGEMENT and therefore do not pay advisory fees. The Portfolios
currently do not have portfolio managers. The determina-
tion of how the Portfolios' assets will be invested in
certain Vanguard funds is made by the Fund's Officers pur-
suant to the investment objectives and policies. However,
the Portfolios as shareholders of each of the underlying
Vanguard funds, benefit from the investment advisory serv-
ices of each of the underlying funds and will indirectly
bear their proportionate share of any investment advisory
fees paid by those Funds. PAGE 18
- -------------------------------------------------------------------------------
DIVIDENDS, The Income and Conservative Growth Portfolios will make
CAPITAL GAINS quarterly dividend distributions; while the Moderate
AND TAXES Growth and Growth Portfolios will make semi-annual divi-
dend distributions. Capital gains distributions, if any,
will be made annually for each Portfolio. PAGE 20
- -------------------------------------------------------------------------------
3
<PAGE>
PORTFOLIO
EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Portfolios. The
expenses and fees set forth in the table are for the 1997
fiscal year.
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
SHAREHOLDER TRANSACTION INCOME GROWTH GROWTH GROWTH
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 None None
Exchange Fees............. None None None None
<CAPTION>
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management &
Administrative Expenses.. None None None None
Investment Advisory Fees.. None None None None
12b-1 Fees................ None None None None
Other Expenses
Distribution Costs....... None None None None
Miscellaneous Expenses... None None None None
Total Other Expenses...... None None None None
---- ---- ---- ----
TOTAL OPERATING
EXPENSES............... None None None None
==== ==== ==== ====
</TABLE>
The purpose of these tables is to assist you in under-
standing the various costs and expenses that you would
bear directly or indirectly as an investor in the Portfo-
lios.
The Portfolios did not incur any expenses in fiscal year
1997, and have not incurred any operating expenses since
their inception on September 30, 1994. However, while the
Portfolios are expected to operate without expenses,
shareholders in the Portfolios bear indirectly the ex-
penses of the underlying Vanguard Funds in which the Port-
folios invest.
Purchases by LifeStrategy Portfolios of Vanguard STAR
Fund--Total International Portfolio are subject to a 0.50%
portfolio transaction fee.
The following chart illustrates the indirect expense ratio
that each Portfolio incurred, based on its investments in
the underlying Vanguard Funds, for the year ended December
31, 1997:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE
INCOME GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indirect Expense Ratio.. 0.29% 0.29% 0.29% 0.29%
</TABLE>
Using the above indirect expense ratios for the Portfo-
lios, the following example illustrates the expenses that
you would incur on a $1,000 investment over various peri-
ods, assuming (1) a 5% annual rate of return and (2) re-
demption at the
4
<PAGE>
end of each period. As noted previously, the Portfolios
charge no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Income Portfolio................... $ 3 $ 9 $16 $37
Conservative Growth Portfolio...... $ 3 $ 9 $16 $37
Moderate Growth Portfolio.......... $ 3 $ 9 $16 $37
Growth Portfolio................... $ 3 $ 9 $16 $37
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR
LOWER THAN THOSE SHOWN.
FINANCIAL The following financial highlights for each of the fiscal
HIGHLIGHTS periods ended December 31, 1997 have been derived from fi-
nancial statements which were audited by Price Waterhouse
LLP, independent accountants, whose report on the finan-
cial statements which contain this information, was un-
qualified. This information should be read in conjunction
with the LifeStrategy Portfolios' financial statements and
notes thereto, which, together with the remaining portions
of the Fund's 1997 Annual Report to Shareholders, are in-
corporated by reference in the Statement of Additional In-
formation and this Prospectus, and which appear, along
with the report of Price Waterhouse LLP, in the Portfo-
lios' 1997 Annual Report to Shareholders. For a more com-
plete discussion of the Fund's performance, please see the
Portfolios' 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.
5
<PAGE>
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
CONSERVATIVE
INCOME PORTFOLIO GROWTH PORTFOLIO
----------------------------------- -----------------------------------
YEAR ENDED DEC. 31, SEPT. 30+ YEAR ENDED DEC. 31, SEPT. 30+
---------------------- TO DEC. 31, ---------------------- TO DEC. 31,
1997 1996 1995 1994 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $11.55 $11.54 $ 9.88 $10.00 $12.14 $11.68 $ 9.89 $10.03
------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions
Received.............. .63 .64 .49 .14 .56 .53 .47 .14
Capital Gain
Distributions
Received.............. .15 .19 .09 -- .18 .20 .11 .01
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions
Received.............. .78 .83 .58 .14 .74 .73 .58 .15
Net Realized and
Unrealized Gain (Loss)
on Investments........ .83 .03 1.66 (.12) 1.27 .46 1.80 (.14)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 1.61 .86 2.24 .02 2.01 1.19 2.38 .01
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends From Net
Investment Income..... (.63) (.64) (.49) (.14) (.56) (.53) (.47) (.14)
Distributions From
Realized Capital
Gains................. (.10) (.21) (.09) -- (.19) (.20) (.12) (.01)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.73) (.85) (.58) (.14) (.75) (.73) (.59) (.15)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $12.43 $11.55 $11.54 $ 9.88 $13.40 $12.14 $11.68 $ 9.89
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TOTAL RETURN............ 14.23% 7.65% 22.99% 0.20% 16.81% 10.36% 24.35% 0.10%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $ 244 $ 151 $ 121 $ 11 $ 803 $ 462 $ 219 $ 41
Ratio of Total Expenses
to Average Net Assets.. 0% 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment
Income to Average Net
Assets................. 5.54% 5.66% 5.76% 7.31%* 4.61% 4.86% 5.14% 7.07%*
Portfolio Turnover Rate. 6% 22% 4% 1% 1% 2% 1% 0%
------------------------------ ------------------------------
<CAPTION>
MODERATE GROWTH
PORTFOLIO GROWTH PORTFOLIO
----------------------------------- -----------------------------------
YEAR ENDED DEC. 31, SEPT. 30+ YEAR ENDED DEC. 31, SEPT. 30+
---------------------- TO DEC. 31, ---------------------- TO DEC. 31,
1997 1996 1995 1994 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $12.97 $12.11 $ 9.86 $10.08 $13.68 $12.36 $ 9.93 $10.10
------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Income Distributions
Received.............. .490 .44 .36 .14 .39 .34 .32 .13
Capital Gain
Distributions
Received.............. .236 .22 .13 .01 .28 .24 .14 .02
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions
Received.............. .726 .66 .49 .15 .67 .58 .46 .15
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.819 .87 2.25 (.22) 2.36 1.32 2.43 (.16)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 2.545 1.53 2.74 (.07) 3.03 1.90 2.89 (.01)
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends From Net
Investment Income..... (.490) (.44) (.36) (.14) (.38) (.35) (.31) (.14)
Distributions From
Realized Capital
Gains................. (.215) (.23) (.13) (.01) (.29) (.23) (.15) (.02)
------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.705) (.67) (.49) (.15) (.67) (.58) (.46) (.16)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $14.81 $12.97 $12.11 $ 9.86 $16.04 $13.68 $12.36 $ 9.93
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TOTAL RETURN............ 19.77% 12.71% 27.94% (0.70)% 22.26% 15.41% 29.24% (0.10)%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $1,358 $ 826 $ 235 $ 35 $1,184 $ 629 $ 217 $ 38
Ratio of Total Expenses
to Average Net Assets.. 0% 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment
Income to Average Net
Assets................. 3.72% 3.98% 4.42% 7.10%* 2.84% 3.18% 3.67% 7.06%+
Portfolio Turnover Rate. 2% 3% 1% 0% 1% 0% 1% 1%
</TABLE>
*Annualized.
+Commencement of operations.
*Annualized.
+Commencement of operations.
- --------------------------------------------------------------------------------
6
<PAGE>
YIELD AND TOTAL From time to time the Portfolios may advertise their yield
RETURN and total return. Both yield and total return figures are
based on historical earnings and are not intended to indi-
cate future performance. The "total return" of the Portfo-
lios refers to the average annual compounded rates of re-
turn over one-, five- and ten- year periods or for the
life of the Portfolios (as stated in the advertisement)
that would equate an initial amount invested at the begin-
ning of a stated period to the ending redeemable value of
the investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net in-
vestment income per share earned during a 30-day period by
the net asset value per share on the last day of the peri-
od. Net investment income includes interest and dividend
income earned on the Portfolio's securities; it is net of
all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Portfolios to maintain their books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to an investor's account.
INVESTMENT The objective of the Portfolios is to maximize total in-
OBJECTIVES vestment return (i.e., capital growth and income) subject
to the investment restrictions and asset allocation poli-
cies described in this Prospectus. Specifically:
. The INCOME PORTFOLIO seeks to provide current income.
. The CONSERVATIVE GROWTH PORTFOLIO seeks to provide cur-
rent income and low to moderate growth of capital.
. The MODERATE GROWTH PORTFOLIO seeks to provide growth of
capital and a reasonable level of current income.
. The GROWTH PORTFOLIO seeks to provide growth of capital.
The investment objectives of the Portfolios are summarized
below in a chart that illustrates the degree to which each
Portfolio seeks to obtain income, growth of capital and
risk of principal:
<TABLE>
<CAPTION>
PORTFOLIO NAME INCOME GROWTH OF CAPITAL RISK OF PRINCIPAL
-------------------------------------------------------------------
<S> <C> <C> <C>
Income Portfolio........ High Negligible Medium
Conservative Growth
Portfolio.............. Medium Low Medium
Moderate Growth
Portfolio.............. Medium Low to Medium Medium
Growth Portfolio........ Low Medium to High High
</TABLE>
There is no assurance that the Portfolios will achieve
their stated objectives.
The investment objective of each Portfolio is fundamental
and so cannot be changed without the approval of a major-
ity of the Portfolio's shareholders.
7
<PAGE>
ASSET ALLOCATION Asset allocation among stocks, bonds and cash investments
FRAMEWORK is the most critical investment decision an investor
makes. Selecting the appropriate mix should be based on
personal objectives, time horizons and risk tolerances.
These Portfolios provide different types of investors with
a way to meet target asset allocations.
In order to achieve their investment objectives, the Port-
folios maintain different allocations of stocks, bonds and
cash/1/, reflecting varying degrees of potential invest-
ment risk and reward. These asset class allocations pro-
vide investors with four diversified, distinct options
that meet a wide array of investor needs. The pie charts
below, illustrate the expected asset allocation for each
Portfolio:
/1"Cash"/will consist of any cash instruments held by
VAAF.
- -------------------------------------------------------------------------------
INVESTMENT Each Portfolio seeks to achieve its objective by investing
POLICIES in a different combination of other Vanguard Funds. As in-
vestments for the Portfolios, the Trustees have chosen
Vanguard Index Trust ("VIT")--Total Stock Market Portfo-
lio, Vanguard STAR Fund--Total International Portfolio
("TIP"), Vanguard Asset Allocation Fund ("VAAF"), and Van-
guard Fixed Income Securities Fund ("VFISF")--Short-Term
Corporate Portfolio and Vanguard Bond Index Fund--Total
Bond Market Portfolio to be the underlying investments of
the Portfolios. Each Portfolio invests in these Funds us-
ing fixed formulas in order to provide investors with the
8
<PAGE>
expected asset allocation. The table below shows, by asset
class, how the Portfolios will invest in the selected Van-
guard Funds.
INVESTMENTS IN THE UNDERLYING VANGUARD FUNDS
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
PERCENT OF CONSERVATIVE MODERATE PERCENT OF
INVESTMENT UNDERLYING INCOME GROWTH GROWTH GROWTH
CATEGORY VANGUARD FUNDS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ------------------------ ---------- ------------ ---------- ----------
<C> <S> <C> <C> <C> <C>
Stocks VIT--Total Stock
. US Market Portfolio........ 5% 20% 35% 50%
Vanguard Total
. International International Portfolio. 0% 5% 10% 15%
Total Bond Market
Bonds Portfolio............... 50% 30% 30% 10%
VFISF--STCorp Portfolio. 20% 20% 0% 0%
Asset Allocation Vanguard Asset
Component Allocation Fund......... 25% 25% 25% 25%
---- ---- ---- ----
Total................... 100% 100% 100% 100%
</TABLE>
The allocation of each Portfolio's assets among the Van-
guard Funds was made by the Officers of the Fund under the
supervision of the Fund's Board of Trustees, and was based
on prudent asset allocation guidelines.
The investment restrictions and asset allocation policies
set forth above are designed to assure that the Portfolios
maintain consistent investment approaches in pursuit of
their objectives.
From time to time, the Portfolios' investments in the un-
derlying Vanguard Funds may be limited by certain factors.
For example, the Board of Directors of any of the under-
lying Vanguard Funds may impose limits on additional in-
vestments in a particular Fund.
See "Implementation of Policies" for a description of
other investment practices of the Portfolios.
- -------------------------------------------------------------------------------
INVESTMENT RISKS Like any investment program, an investment in one or more
of the Portfolios entails certain risks. As mutual funds
investing in different combinations of stocks, bonds and
cash, the Portfolios are subject to different levels of
stock market, bond market, credit and inflation risks.
MARKET RISK-- Stock MARKET RISK is the possibility that stock prices in
STOCKS general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices
generally decline. Also, investments in foreign stock mar-
kets can be as volatile, if not more volatile than invest-
ments in U.S. markets.
9
<PAGE>
To illustrate the volatility of stock prices, the follow-
ing table sets forth the extremes for U.S. stock market
returns as well as the average return for the period from
1926 to 1997, as measured by the Standard & Poor's 500
Composite Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1997)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 -0.9 +3.1
Average +13.0 +10.5 +10.9 +10.9
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.9% for all 10-year periods from 1926 to 1997. The re-
turn in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices. Average return may not be useful for
forecasting future returns in any particular period, as
stock returns are quite volatile from year to year and in-
terim losses are inevitable. For example, after the "bear
market" of 1973-1974, it took four years for many invest-
ors to recover their losses (assuming dividends were rein-
vested). And if you were invested in stocks during the
Great Crash of 1929, it would have taken an average of
eight years for your investment to return to its original
value.
MARKET RISK-- The bond market is typically less risky than the stock
BONDS market, although there have been times when some bonds
were just as risky as stocks. For example, bond prices
fell 48% from December 1976 to September 1981. The risk of
bonds declining in value, however, may be offset in whole
or in part by the high level of income that bonds provide.
Bond prices are linked to prevailing interest rates in the
economy. The price volatility of a bond depends on its ma-
turity; the longer the maturity of a bond, the greater its
sensitivity to interest rates. In general, when interest
rates rise, the prices of bonds fall; conversely, when in-
terest rates fall, bond prices generally rise.
From time to time, the stock and bond markets may fluctu-
ate independently of one another. In other words, a de-
cline in the stock market may in certain instances be off-
set by a rise in the bond market, or vice versa. As a
result, each Portfolio, with its unique balance of common
stocks, bonds and reserves, is expected in the long run to
entail less investment risk (and potentially less invest-
ment return) than a mutual fund investing exclusively in
common stocks.
MARKET RISK-- The underlying Funds invest in stocks of non-U.S. compa-
INTERNATIONAL nies. Investments in foreign stock markets can be as
risky, if not more risky, than U.S. stock investments. Be-
cause of their foreign investments, the Portfolios are
subject to country risk and currency risk. Country risk is
the possibility that political events (such as a war), fi-
nancial problems (such as a government default), or natu-
ral disasters (such as an earthquake) will weaken a
country's economy and cause investments in that
10
<PAGE>
country to lose money. Currency risk is the possibility
that a "stronger" U.S. dollar will reduce returns for
Americans investing overseas. Generally, when the dollar
rises in value against a foreign currency, your investment
in that country loses value because its currency is worth
fewer U.S. dollars.
To illustrate the volatility of international stock pric-
es, the following table shows the best, worst, and average
total returns (dividend income plus change in market val-
ue) for foreign stock markets over various periods as mea-
sured by the Morgan Stanley Capital International Europe,
Australasia, Far East (MSCI EAFE) Index, a widely used ba-
rometer of international stock market activity. Note that
the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world invest-
ment portfolio would incur. Note, also, that the gap be-
tween the best and worst tends to narrow over the long
term.
INTERNATIONAL STOCK MARKET RETURNS (1969-1997)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 7.0 12.0
Average 14.5 13.8 15.3 14.9
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year peri-
ods from 1969 through 1997. Keep in mind that this was a
particularly favorable period for foreign markets. For in-
stance, over 10-year periods, foreign stocks provided an
average return of 15.3%, compared to 13.4% for U.S. stocks
(as measured by the Standard & Poor's 500 Composite Stock
Price Index) during the same time frame. These average re-
turns reflect past performance and should not be regarded
as an indication of future returns from either foreign
markets as a whole or these Portfolios in particular.
CREDIT RISK CREDIT RISK is the possibility that a bond issuer will
fail to make timely payments of interest or principal to a
Portfolio. The credit risk of a Portfolio is a function of
the credit quality of its underlying securities.
INFLATION RISK Like market risk, inflation represents a significant
threat to even a well-diversified portfolio because infla-
tion erodes the real return of an investment in stocks,
bonds or cash. Historically, inflation has averaged 3.1%,
offsetting most of the return from cash investments and
bonds, but less than half of the return from stocks. For
this reason, stocks are referred to as an "inflation
hedge," a way to protect your money against inflation.
VANGUARD FUND The Portfolios are concentrated in investment companies of
RISK The Vanguard Group, so investors should be aware that each
Portfolio's performance is directly related to the invest-
ment performance of the Vanguard Funds in which it invests
and each Portfolio's allocation among the Funds. First,
changes in the net asset values of the underlying Vanguard
Funds affect each Portfolio's net asset value. Second,
over the long-term, each Portfolio's ability to meet its
investment objective depends on the underlying Vanguard
Funds meeting their investment objectives.
- -------------------------------------------------------------------------------
11
<PAGE>
WHO SHOULD The Portfolios are designed for investors who are seeking
INVEST long-term investment savings. Because of the risks associ-
ated with common stock and bond investments, the Portfo-
INVESTORS lios are intended to be long-term investment vehicles and
SEEKING LONG- are not designed to provide investors with a means of
TERM INVESTMENT speculating on market movements. Specifically:
SAVINGS
. The INCOME PORTFOLIO may be suitable for investors seek-
ing current income. Investors should have sufficient
time and tolerance for investment volatility to accept
periodic, though moderate, declines. The Portfolio is
most suitable for investors with a lower tolerance for
risk or with a shorter time horizon (at least 3-5
years). Example: investors who are investing during late
retirement.
. The CONSERVATIVE GROWTH PORTFOLIO is suitable for
investors who are seeking current income and low to
moderate growth of capital. Investors should have both
sufficient time and tolerance for investment volatility
to accept periodic declines. The Portfolio is most
appropriate for investors with a reasonably long time
horizon. Example: investors who are investing during
early retirement.
. The MODERATE GROWTH PORTFOLIO is suitable for investors
who are still seeking reasonable stock market exposure,
but who are not willing to take the substantial market
risks of the Growth Portfolio. Investors should have
both the time and tolerance for investment volatility to
accept possibly large declines. The Portfolio is most
appropriate for investors with a long time horizon. Ex-
ample: investors in their 50s who are saving on a regu-
lar basis for retirement and who plan to retire in their
early to mid 60s.
. The GROWTH PORTFOLIO is suitable for investors seeking
the potential for capital growth that a fund investing
predominantly in common stocks may offer. Investors
should have both the time and tolerance for investment
volatility to accept substantial declines. The Portfolio
is most appropriate for investors with a very long time
horizon. Example: investors in their 20s, 30s, or 40s
who are saving for retirement and who plan to retire in
their early to mid 60s.
Investors can choose any of these four Portfolios, depend-
ing on personal investment objectives, time horizons and
risk tolerances. For example: investors in their 40s who
are sensitive to market risk may choose the Moderate
Growth Portfolio; while investors in their 40s who are not
as sensitive to market risk may choose the Growth Portfo-
lio.
The Portfolios may be especially suitable for tax-
advantaged retirement accounts, including: Individual Re-
tirement Accounts (IRAs), Simplified Employee Pension Plan
Accounts (SEP-IRAs), 403(b)(7) custodial accounts for em-
ployees of non-profit organizations, 401(k) plans and
other employer-sponsored retirement plans. While the Port-
folios are specifically designed for tax-advantaged re-
tirement accounts, shares may also be purchased by invest-
ors for other long-term general retirement savings
purposes.
12
<PAGE>
Investors who engage in excessive account activity gener-
ate additional costs which are borne by all of the Portfo-
lios' shareholders. In order to minimize such costs the
Portfolios have adopted the following policies. The Port-
folios reserve the right to reject any purchase request
(including exchange purchases from other Vanguard portfo-
lios) that is reasonably deemed to be disruptive to effi-
cient portfolio management, either because of the timing
of the investment or previous excessive trading by the in-
vestor. Additionally, the Portfolios have adopted exchange
privilege limitations as described in the section "Ex-
change Privilege Limitations." Finally, the Portfolios re-
serve the right to suspend the offering of their shares.
- -------------------------------------------------------------------------------
IMPLEMENTATION The Vanguard Funds in which the Portfolios invest, as well
OF POLICIES as certain other investment practices of the Portfolios,
are described below. Investors desiring more information
on an underlying Vanguard Fund described below should call
Vanguard's Investor Information Department (1-800-662-
7447) for the underlying Fund's prospectus.
THE PORTFOLIOS The TOTAL STOCK MARKET PORTFOLIO is one of six Portfolios
INVEST IN TWO of Vanguard Index Trust, an open-end diversified invest-
VANGUARD EQUITY ment company. The Total Stock Market Portfolio is an index
INDEX FUNDS fund which seeks to match the investment performance of
the Wilshire 5000 Index, an index consisting of all regu-
larly and publicly traded U.S. stocks. The Total Stock
Market Portfolio attempts to match the Wilshire 5000 Index
by investing in a statistically selected sample of the
more than 6,000 stocks included in the Index.
The TOTAL INTERNATIONAL PORTFOLIO is a separate Portfolio
of Vanguard STAR Fund. As a "Fund of Funds", it invests in
each of the three Portfolios (European, Pacific and Emerg-
ing Markets) of Vanguard International Equity Index Fund,
an open-end diversified investment company, in the same
percentages as these regions represent of the total. As of
December 31, 1997, the percentages were 59% in the Euro-
pean Portfolio, 29% in the Pacific Portfolio and 12% in
the Emerging Markets Portfolio. The European Portfolio is
an index fund which seeks to replicate the aggregate price
and yield performance of the MSCI-Europe (Free) Index, a
diversified, capitalization-weighted index comprised of
companies located in 15 European countries (Austria,
Belgium, Denmark, Finland, France, Germany, Ireland, Ita-
ly, Netherlands, Norway, Portugal, Spain, Sweden, Switzer-
land, and United Kingdom). The Pacific Portfolio is an in-
dex fund which seeks to replicate the aggregate price and
yield performance of the MSCI-Pacific Index, a diversi-
fied, capitalization-weighted index comprised of companies
located in Australia, Japan, Hong Kong, Malaysia, New Zea-
land and Singapore. The Emerging Markets Portfolio is an
index fund which seeks to track the aggregate price and
yield performance of the Morgan Stanley Capital Interna-
tional (MSCI)--Select Emerging Markets (Free) Index, which
is made up of common stocks of companies located in 16
emerging markets within 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
13
<PAGE>
Turkey). The European, Pacific and Emerging Markets Port-
folios attempt to match their indexes by investing in sta-
tistically selected samples of the stocks included in
their respective indexes.
All four LifeStrategy Portfolios will invest a portion of
their assets in the Total Stock Market Portfolio. However,
only the Conservative Growth, Moderate Growth, and Growth
Portfolios will invest in the Total International Portfo-
lio.
These two equity index funds, the Total Stock Market and
Total International Portfolios, are not managed according
to traditional methods of active investment management,
which involve the buying and selling of securities based
upon economic, financial, and market analyses and invest-
ment judgment. Instead, the funds use a "passive" or in-
dexing investment approach to duplicate the results of
their respective indexes. The two index funds do not pay
advisory fees. All index matching services are provided to
the two funds on an at-cost basis by the Core Management
Group of The Vanguard Group.
THE PORTFOLIOS The Short-Term Corporate Portfolio of Vanguard Fixed In-
INVEST IN TWO come Securities Fund and the Total Bond Market Portfolio
VANGUARD of Vanguard Bond Index Fund are bond funds, which seek to
BOND FUNDS provide current income by investing in fixed-income secu-
rities. These Portfolios have distinct investment poli-
cies.
The SHORT-TERM CORPORATE PORTFOLIO invests in a diversi-
fied portfolio of investment grade quality corporate bonds
with an expected dollar-weighted average maturity of one
to three years. Some investors consider short-term bonds
as part of the "reserves" portion of their portfolios,
along with such cash investments as money market funds or
short-term bank certificates of deposit. Since its incep-
tion, the Short-Term Corporate Portfolio's net asset value
has experienced fluctuations of approximately 18% from low
to high. The TOTAL BOND MARKET PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match the
Lehman Brothers Aggregate Bond Index (the "Aggregate Bond
Index"). The Aggregate Bond Index is a broad market-
weighted index which encompasses four major classes of in-
vestment grade fixed-income securities in the United
States: U.S. Treasury and agency securities, corporate
bonds, international (dollar-denominated) bonds, and mort-
gage-backed securities, with maturities greater than one
year.
Each Portfolio will invest a portion of its assets in the
Total Bond Market Portfolio, while only the Income Portfo-
lio and Conservative Growth Portfolio will invest in the
Short-Term Corporate Portfolio.
ALL FOUR VANGUARD ASSET ALLOCATION FUND, an open-end diversified
PORTFOLIOS investment company, which allocates its assets among a
INVEST IN common stock portfolio, a bond portfolio and money market
VANGUARD ASSET instruments. The investment adviser allocates the Fund's
ALLOCATION FUND assets among stocks, bonds, and money market instruments
in proportions which reflect the anticipated returns and
risks of each asset class. The estimates of return and
risk are developed based upon the adviser's disciplined
valuation methodology.
14
<PAGE>
There are no limitations on the amount of the Fund's as-
sets which may be allocated to each of the three asset
classes (stocks, bonds, and money market instruments).
THE PORTFOLIOS The Portfolios and their underlying Vanguard Funds are au-
AND EACH thorized to invest temporarily in certain short-term fixed
UNDERLYING income securities. Such securities may be used to invest
FUND MAY INVEST uncommitted cash balances, to maintain liquidity to meet
IN SHORT-TERM shareholder redemptions, or to take a temporary defensive
FIXED INCOME position against market declines. These securities in-
SECURITIES clude: obligations of the U.S. Government and its agencies
and instrumentalities; commercial paper, bank certificates
of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
DERIVATIVE Derivatives are instruments whose values are linked to or
INVESTING derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE PORTFOLIOS The Portfolios and their underlying Vanguard Funds may in-
AND EACH vest in futures contracts and options to a limited extent.
UNDERLYING FUND Specifically, the Portfolios' underlying funds, including
MAY INVEST IN Total Stock Market Portfolio, Total International Portfo-
FUTURES lio, Short-Term Corporate Portfolio, Total Bond Market
CONTRACTS AND Portfolio, and Vanguard Asset Allocation Fund, may invest
OPTIONS in futures contracts and options. The Portfolios have no
present intention of investing directly in futures con-
tracts and options, but if they were to do so, investment
decisions regarding such instruments would be made by Van-
guard's Core Management or Fixed Income Group.
Futures contracts and options may be used for several rea-
sons: to simulate full investment in the underlying secu-
rities while retaining a cash balance for Fund management
purposes, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying
security or index. While futures contracts and options can
be used as leveraged instruments, neither the Portfolios
nor the underlying Funds may use futures contracts or op-
tions transactions to leverage their assets.
The Portfolios and their underlying Funds will not use
futures contracts or options for speculative purposes or
to leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts and op-
tions by the underlying Funds are: (i) imperfect correla-
tion between the change in market value of securities held
by a Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract resulting in an inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in contracts whose behavior is expected to resemble that
of a Fund's underlying securities. The risk that a Fund
will be unable to close out a futures position will be
minimized by entering into such transactions only on an
exchange with an active and liquid secondary market. Addi-
tionally, investments in futures contracts and options in-
volve the risk that an investment adviser will incorrectly
predict stock market and interest rate trends.
15
<PAGE>
The Portfolios and their underlying Funds may enter into
futures contracts provided that not more than 5% of their
respective assets are required as a futures contract de-
posit; in addition the Portfolios and their underlying
Funds may enter into futures contracts and options trans-
actions to the extent that not more than 20% of their re-
spective assets (50% with respect to Vanguard Asset Allo-
cation Fund) are committed to such contracts or
transactions.
EACH OF THE Each of the Portfolios' underlying Funds may lend their
PORTFOLIOS' investment securities to qualified institutional investors
UNDERLYING FUNDS on a short or long term basis for the purpose of realizing
MAY LEND ITS additional net investment income. Loans of securities by a
SECURITIES Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or
its agencies. The collateral will equal at least 100% of
the current market value of the loaned securities.
PORTFOLIO The portfolio turnover rate is not expected to exceed 25%
TURNOVER IS annually. A portfolio turnover rate of 25% for a Portfolio
EXPECTED TO BE would occur if one quarter of a Portfolio's investments
LOW were sold within a year. The Fund's Officers will purchase
or sell securities: (i) to accommodate purchases and sales
of Portfolio shares; and (ii) to maintain or modify the
allocation of the Portfolios' assets between the under-
lying Vanguard Funds in which the Portfolios invest within
the percentage limits described under "Investment Poli-
cies."
- -------------------------------------------------------------------------------
INVESTMENT Each Portfolio has adopted limitations on some of its in-
LIMITATIONS vestment policies. Some of these limitations are that the
Portfolios will not:
THE PORTFOLIOS (a) borrow money, except from banks for temporary or emer-
HAVE ADOPTED gency purposes, and then only in an amount not in ex-
CERTAIN cess of 5% of the lower of the market value or cost of
FUNDAMENTAL its assets, in which case it may pledge, mortgage or
LIMITATIONS hypothecate any of its assets as security for such
borrowing, but not to an extent greater than 5% of the
market value of its assets; and
(b) invest more than 25% of its assets in any one indus-
try, except for investment companies which are members
of The Vanguard Group of Investment Companies.
A complete list of the Fund's investment limitations can
be found in the Statement of Additional Information. These
limitations are fundamental and may be changed only by ap-
proval of a majority of the Portfolio's shareholders.
- -------------------------------------------------------------------------------
MANAGEMENT OF The Officers of the Fund manage the day-to-day operation
THE PORTFOLIOS of the Portfolios. The Officers are directly responsible
to the Fund's Board of Trustees. The Trustees, who are
THE OFFICERS elected by the Fund's shareholders, determine how the as-
MANAGE THE sets of each Portfolio should be invested among the Van-
PORTFOLIOS' guard Funds, set general policies for the Fund and choose
OPERATIONS its Officers. The Officers of the Fund also serve as Offi-
cers of each of the Vanguard Funds and of The Vanguard
Group, Inc. ("Vanguard"). The Trustees each serve as Di-
rectors of The Vanguard Group, Inc. and most of the Van-
guard Funds within the Group. A list of Trustees and Offi-
cers of the Fund and
16
<PAGE>
a statement of their present positions and principal occu-
pations during the past five years can be found in the
Statement of Additional Information.
The business of the Fund will be conducted by its Officers
in accordance with policies and guidelines set up by the
Fund's Trustees which were included in an Application for
an Exemptive Order subsequently issued by the U.S. Securi-
ties and Exchange Commission. As noted above, the Officers
and Trustees of the Fund also serve in similar positions
in the underlying Funds. If the interests of the Portfo-
lios and the underlying Funds were ever to become diver-
gent, a concern might arise that this could create a po-
tential conflict of interest which could affect how the
Officers or Trustees fulfill their fiduciary duties to the
Portfolios and the Vanguard Funds. The Trustees believe
they have structured the Fund to avoid the concerns which
could arise. Conceivably, a situation could occur where
proper portfolio or other action for the Portfolios could
be adverse to the interests of an underlying Vanguard
Fund, or the reverse could occur. If such a possibility
appears likely, the Trustees and Officers will carefully
analyze the situation and take all steps they believe rea-
sonable to minimize and, where possible, eliminate the po-
tential conflict. Moreover, limitations on aggregate in-
vestments in the underlying Vanguard Funds and other
restrictions have been adopted by the Fund to minimize
this possibility, and close and continuous monitoring will
be exercised to avoid, insofar as possible, these con-
cerns.
VANGUARD The Fund has entered into a Special Servicing Agreement
ADMINISTERS AND (the "Agreement") with Vanguard under which Vanguard will
DISTRIBUTES provide all management, administrative and distribution
THE PORTFOLIOS services to the Portfolios of the Fund at cost. Vanguard
is a jointly-owned subsidiary of more than 30 investment
company members (the "Funds") of The Vanguard Group. The
Vanguard Funds offer over 95 distinct investment portfo-
lios with total assets in excess of $360 billion. As a re-
sult of Vanguard's unique corporate structure, 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
.28% compared to an average of 1.24% for the mutual fund
industry (data provided by Lipper Analytical Services)
Inc.
The Special Servicing Agreement provides that the Portfo-
lios will pay for services to be rendered to the Portfo-
lios by Vanguard on an "out of pocket" basis. The Portfo-
lios will also bear the expenses of services provided by
other parties, including auditors, the custodian, and out-
side legal counsel, as well as taxes and other direct ex-
penses of the Portfolios. However, the Agreement provides
that the expenses of the Portfolios will be offset, in
whole or in part, by a reimbursement from Vanguard for (a)
contributions made by each Portfolio to the cost of oper-
ating the underlying Vanguard Funds the Portfolios invest
in and (b) certain savings in administrative and marketing
costs that Vanguard is expected to derive from the opera-
tion of the Portfolios. The Portfolios' contributions to
Vanguard represent revenues Vanguard receives because the
Portfolios bear their pro rata share of the costs of oper-
ating the underlying Vanguard Funds. The cost savings
17
<PAGE>
realized by Vanguard from the Portfolios result primarily
from the assumed reduction in the number of accounts Van-
guard has to maintain due to the existence of the Portfo-
lios (i.e., one account per investor as opposed to one for
each underlying Fund per investor if the investor dupli-
cated the Portfolio's investment program by investing di-
rectly in the underlying Funds).
Although such cost savings are not certain, the Trustees
believe that the reimbursements to be made by Vanguard to
the Portfolios should be sufficient to offset most, if not
all, of the expenses incurred by the Portfolios. There-
fore, the Portfolios are expected by the Trustees to oper-
ate at a very low, or zero, expense ratio. In the event
that the economic benefits of operating the Portfolios ex-
ceed their actual costs, such benefits will be shared by
each of the Funds in The Vanguard Group, including the un-
derlying Funds in which the Portfolios invest.
- -------------------------------------------------------------------------------
INVESTMENT The Portfolios do not employ an investment adviser and
MANAGEMENT therefore do not pay advisory fees. The Portfolios do not
have portfolio managers at this time. The determination of
THE FUND DOES how the Portfolios' assets will be invested in certain of
NOT EMPLOY AN the Vanguard Funds is made by the Fund's Officers pursuant
INVESTMENT to the investment objective and policies set forth in this
ADVISER Prospectus and procedures and guidelines established by
the Trustees. However, the Portfolios, as shareholders of
each of the underlying Vanguard Funds, benefit from the
investment advisory services of each of the underlying
Funds, and will indirectly bear their proportionate share
of any investment advisory fees paid by those Funds.
The Portfolios' underlying Funds are managed by the fol-
lowing investment advisers:
<TABLE>
<CAPTION>
INVESTMENT ADVISER PORTFOLIO'S UNDERLYING FUNDS
---------------------------- ---------------------------------
<C> <S>
The Vanguard Group, Inc. Short-Term Corporate Portfolio of
Vanguard Fixed Income Securities
Fund
Total Bond Market Portfolio of
Vanguard Bond Index Fund
Total Stock Market Portfolio of
Vanguard Index Trust
Total International Portfolio of
Vanguard STAR Fund
Mellon Capital Management Vanguard Asset Allocation Fund
</TABLE>
VANGUARD'S CORE Vanguard's Core Management Group provides investment advi-
MANAGEMENT GROUP sory services on an at-cost basis with respect to Vanguard
Index Trust--Total Stock Market Portfolio and the Total
International Portfolio of Vanguard STAR Fund. The Core
Management Group provides investment advisory services to
other Vanguard Funds, including the remaining five Portfo-
lios of Vanguard Index Trust. The Core Management Group
also provides investment advisory services to the Total
International's underlying portfolios--the European, Pa-
cific and Emerging Markets Portfolios of Vanguard Interna-
tional Equity Index Fund, Vanguard Institutional Index
Fund, Vanguard Balanced Index Fund and the Equity Index
Portfolio of
18
<PAGE>
Vanguard Variable Insurance Fund, several Portfolios of
the Vanguard Tax-Managed Fund, the Aggressive Growth Port-
folio of Vanguard Horizon Fund, the REIT Index Portfolio
of Vanguard Specialized Portfolios, a portion of
Vanguard/Morgan Growth Fund, a portion of Vanguard/Windsor
II's assets, as well as to several indexed separate ac-
counts. Total assets under management by the Core Manage-
ment Group were approximately $97 billion as of December
31, 1997.
VANGUARD'S FIXED Vanguard's Fixed Income Group provides investment advisory
INCOME GROUP services on an at-cost basis to the Short-Term Corporate
Portfolio of Vanguard Fixed Income Securities Fund and the
Total Bond Market Portfolio of Vanguard Bond Index Fund.
The Fixed Income Group provides advisory services to more
than 40 Vanguard fixed-income portfolios, both taxable and
tax-exempt. Total assets under management by the Fixed In-
come Group were more than $100 billion as of December 31,
1997.
MELLON CAPITAL Mellon Capital Management is a professional counseling
MANAGEMENT firm which manages well-diversified stock and bond portfo-
lios for institutional clients. As of December 31, 1997
the adviser provided investment advisory services to 237
clients and managed assets with an approximate value of
more than $63 billion. The adviser's asset allocation
strategy was developed by the adviser's Chairman, William
Fouse, in 1972, and is used by 103 of its clients and ac-
counts for approximately $23.2 billion of the assets that
it manages. For its asset allocation clients, including
the Fund, the adviser employs a proprietary asset alloca-
tion model in managing client investment portfolios and an
indexing approach in selecting individual equity securi-
ties. The Fund is one of the adviser's two investment com-
pany clients.
Vanguard Asset Allocation Fund pays Mellon Capital Manage-
ment an annual basic fee equal to 0.20% on the first $100
million of assets; .15 of 1% on the next $900 million of
assets; .125 of 1% on the next $500 million of assets; and
.10% of 1% on assets greater than $1.5 billion. This fee
may be increased or decreased by applying an adjustment
formula based on the performance of the Fund relative to
the investment record of a "Combined" Index. The Combined
Index shall be comprised of the Standard & Poor's 500 Com-
posite Price Index (65% of the Combined Index) and the
Lehman Brothers Long-Term U.S. Treasury Index (35% of the
Combined Index). The fee payment will be increased (de-
creased) by an incentive (penalty) of 0.05% of average net
assets if the Fund's cumulative investment performance for
the thirty-six months preceding the end of the quarter is
at least six percentage points above (below) the cumula-
tive investment record of the Combined Index for the same
period.
Each Portfolio will purchase and sell the principal por-
tion of its portfolio securities (i.e., shares of the un-
derlying Vanguard Funds) by dealing directly with the is-
suer. There will be no sales charges or commissions
because the underlying Funds are offered on a no-load ba-
sis, without sales charges. Investments in short-term
money market instruments and repurchase agreements usually
will be principal transactions and will generally involve
no brokerage commissions.
- -------------------------------------------------------------------------------
19
<PAGE>
DIVIDENDS, The Income and Conservative Growth Portfolios expect to
CAPITAL GAINS pay dividends quarterly from ordinary income, while the
AND TAXES Moderate Growth and Growth Portfolios expect to pay divi-
dends semiannually from ordinary income. Capital gains
distributions from the Portfolios, if any, will be made
annually. In addition, the Portfolio may occasionally be
required to make supplemental dividend or capital gains
distributions at some other time during the year. Each
Portfolio intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the
extent its income is distributed to shareholders. The tax
consequences of distributions from the Portfolios will
vary according to the type of account you open.
If you utilize the Portfolios as investment options in an
employer-sponsored retirement savings plan, dividend and
capital gain distributions from the Portfolios ordinarily
will not be subject to current taxation, but will accumu-
late on a tax-deferred basis. In general, employer-spon-
sored retirement and savings plans are governed by complex
tax rules. If you participate in such a plan, consult your
plan administrator, your plan's Summary Plan Description,
or a professional tax adviser regarding the tax conse-
quences of your participation in the plan and of any plan
contributions or withdrawals.
- -------------------------------------------------------------------------------
THE SHARE PRICE Each Portfolio's share price or "net asset value" per
OF EACH share is calculated by dividing the total assets of the
PORTFOLIO Portfolio, less all liabilities, by the total number of
shares outstanding. The net asset value is determined as
of the close of trading on the New York Stock Exchange
(the "Exchange"), generally 4:00 p.m. Eastern time on each
day that the Exchange is open for trading. This determina-
tion is made by appraising each Portfolio's underlying in-
vestments (i.e., the underlying Vanguard Funds) at the
price of each such Fund determined at the close of the Ex-
change.
Each Portfolio's share price can be found daily in the mu-
tual fund listings of most major newspapers under the
heading of Vanguard Funds.
- -------------------------------------------------------------------------------
GENERAL Vanguard STAR Fund is a Pennsylvania Business Trust. The
INFORMATION Fund's Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest,
without par value, from an unlimited number of classes of
shares. Currently the Fund is offering six classes of
shares.
The shares of Vanguard STAR Fund are fully paid and non-
assessable; have no preference as to conversion, exchange,
dividends, retirement or other features; and have no pre-
emptive rights. Such shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of Trustees can elect 100%
of the Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of Vanguard STAR Fund
20
<PAGE>
if requested in writing by the holders of not less than
10% of the outstanding shares of the Fund.
All securities and cash are held by Chase Manhattan Bank,
New York, N.Y. CoreStates Bank, N.A. Philadelphia, PA,
holds daily cash balances that are used by the Fund's
Portfolios to invest in repurchase agreements or securi-
ties acquired in these transactions. The Vanguard Group,
Inc., Valley Forge, PA, serves as the Fund's Transfer and
Dividend Disbursing Agent. Price Waterhouse LLP serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- -------------------------------------------------------------------------------
21
<PAGE>
SERVICE GUIDE
PARTICIPATING IN The Portfolios of the Fund are available as investment op-
YOUR PLAN tions in your retirement or savings plan. The administra-
tor of your plan or your employee benefits office can pro-
vide you with detailed information on how to participate
in your plan and how to elect a Portfolio of the Trust as
an investment option.
If you have any questions about a Portfolio, including a
Portfolio's investment objective, policies, risk charac-
teristics or historical performance, please contact Par-
ticipant Services at 1-800-523-1188.
If you have any questions about your account, contact your
plan administrator or the organization which provides re-
cordkeeping services for your plan.
-----------------------------------------------------------
INVESTMENT You may be permitted to elect different investment op-
OPTIONS AND tions, alter the amounts contributed to your plan, or
ALLOCATIONS change how contributions are allocated among your invest-
ment options in accordance with your plan's specific pro-
visions. See your plan administrator or employee benefits
office for more details.
-----------------------------------------------------------
TRANSACTIONS IN Contributions, exchanges or redemptions of a Portfolio's
FUND SHARES shares are effective when received in "good order" by Van-
guard. "Good order" means that complete information on the
contribution, exchange or redemption and the appropriate
monies have been received by Vanguard.
Vanguard must consider the interests of all Portfolio
shareholders. Therefore, for institutional investors who
are not participants in a retirement or savings plan, we
reserve the right to:
. Delay or reject any purchase or exchange request that
may disrupt the Portfolio's operation or performance.
. Revise or terminate the exchange privilege or limit the
amount of an exchange, at any time, without notice.
. Take up to seven days to deliver your redemption pro-
ceeds.
. Pay redemption proceeds in excess of $250,000--in whole
or in part--through a distribution in kind of readily
marketable securities.
-----------------------------------------------------------
MAKING EXCHANGES The exchange privilege (your ability to redeem shares from
one fund to purchase shares of another fund) may be avail-
able to you through your plan. Although we make every ef-
fort to maintain the exchange privilege, Vanguard reserves
the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject any exchange,
at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and in-
crease its transaction costs, Vanguard limits exchange ac-
tivity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least
30 days apart) from any Fund during any 12-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
22
<PAGE>
adverse impact on the management of the Fund. In addition,
certain investment options, particularly funds made up of
company stock or investment contracts, may be subject to
unique restrictions. Contact your plan administrator for
details on the exchange policies that apply to your plan.
Before making an exchange, you should consider the follow-
ing:
. If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact Par-
ticipant Services at 1-800-523-1188 for a copy.
. Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how fre-
quently exchanges are allowed.
- -------------------------------------------------------------------------------
23
<PAGE>
[LOGO OF VANGUARD LIFESTRATEGY PORTFOLIOS APPEARS HERE]
- ---------------
THE VANGUARD GROUP
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group Inc.
P.O. Box 2900
Valley Forge, PA 19482
[LOGO OF VANGUARD LIFESTRATEGY PORTFOLIOS APPEARS HERE]
I N S T I T U T I O N A L
P R O S P E C T U S
APRIL 23, 1998
[LOGO OF VANGUARD APPEARS HERE]
1088
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF VANGUARD FLAG APPEARS HERE]
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
[LOGO OF VANGUARD APPEARS HERE]
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
PROSPECTUS -- APRIL 23, 1998 A Member of The Vanguard Group
================================================================================
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES. Vanguard International Equity Index Fund 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, Australasia, 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.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT. To open a regular (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.
- --------------------------------------------------------------------------------
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. "Statements of Additional Information" containing
additional information about Vanguard International Equity Index Fund and
Vanguard STAR Fund have been filed with the Securities and Exchange Commission.
These Statements are dated April 23, 1998 and have been incorporated by
reference into this Prospectus. Copies 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).
- --------------------------------------------------------------------------------
<PAGE>
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 Portfolios............................................ 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>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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>
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. Transaction 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>
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.
- --------------------------------------------------------------------------------
4
<PAGE>
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
Funds' financial statements and notes thereto, which,
together with the remaining portions of the Funds' 1997
Annual Report to Shareholders, are incorporated by
reference in the Statements of Additional Information
and in this Prospectus, and which appear, along with
the report of Price Waterhouse LLP, in the Funds' 1997
Annual Report to Shareholders. For a more complete
discussion of the Funds' performance, please see the
Funds' 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>
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
</TABLE>
* 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.
5
<PAGE>
<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>
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
</TABLE>
* 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.
6
<PAGE>
<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
</TABLE>
* 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.
7
<PAGE>
<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
</TABLE>
* 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.
- --------------------------------------------------------------------------------
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>
INVESTMENT
OBJECTIVE
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The European Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe Index, which is made up of common
stocks of companies located in 15 European countries
(Austria, Belgium, Denmark, Finland, France, Germany,
Ireland, Italy, Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, and United Kingdom).
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
POLICIES
THE PORTFOLIOS USE A
"PASSIVE" APPROACH TO
INVEST IN INTERNATIONAL
STOCKS The Portfolios are not managed according to traditional
methods of "active" investment management, which
involve the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Portfolios, utilizing a
"passive" or indexing investment approach, attempt to
approximate the investment performance of their
respective indexes 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>
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>
Greece.............................................. 3.2%
The Czech Republic.................................. 1.2%
Hungary............................................. 1.6%
Poland.............................................. 0.6%
Turkey.............................................. 3.8%
----
EUROPE.............................................. 10.4%
Argentina........................................... 5.5%
Brazil.............................................. 19.6%
Mexico (Free)....................................... 15.6%
----
LATIN AMERICA....................................... 40.7%
Hong Kong........................................... 15.2%
Indonesia........................................... 2.1%
Malaysia............................................ 7.1%
Philippines (Free).................................. 1.7%
Singapore........................................... 4.8%
Thailand............................................ 1.9%
Israel.............................................. 3.2%
----
ASIA................................................ 36.0%
South Africa........................................ 12.9%
</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>
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 should not be
considered 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>
measured by the MSCI -- Europe, Australasia, and Far
East Index and as calculated for a U.S. dollar-based
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, 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>
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND
OTHER RISKS For U.S. investors, the returns of foreign investments,
such as those held by the Portfolios, are influenced by
not only the returns on foreign common stocks
themselves, but also by the returns on the currencies
in which the stocks are denominated. Currency risk is
the risk that changes in foreign exchange rates will
affect, favorably or unfavorably, the value of foreign
securities held by a Portfolio. In a period when the
U.S. dollar generally rises against foreign currencies,
the returns on foreign stocks for a U.S. investor will
be diminished. By contrast, in a period when the U.S.
dollar generally declines, the returns on foreign
stocks will be enhanced.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards; 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
INVEST
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other actively-managed equity mutual funds,
which generally seek to "beat" market averages with
often unpredictable results, the Portfolios 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 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. Investors
who engage in excessive account activity generate
additional costs which are borne by all of the
Portfolios' shareholders. In order to minimize such
costs the Portfolios have adopted the following
policies. The Portfolios reserve the right to reject
any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the
Portfolios have adopted exchange privilege limita-
13
<PAGE>
tions as described 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
COMMON STOCKS USING
SAMPLING TECHNIQUES The Portfolios utilize a number of
investment practices in an effort to parallel the
investment performance of their respective indexes.
The MSCI -- Europe 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>
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>
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
ENTER INTO FORWARD
CURRENCY CONTRACTS Each Portfolio may enter into foreign currency forward
and foreign currency futures contracts in order to
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
LEND THEIR SECURITIES The European, Pacific and Emerging Markets Portfolios
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
IS EXPECTED TO BE LOW Although the Portfolios generally seek to invest for
the long term, the Portfolios retain the right to sell
securities irrespective of how long they have been
held. However, because of the "passive" investment
management approach of the 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>
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 PORTFOLIOS HAVE
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted limitations on some of its
investment policies. Some of these limitations are that
each Portfolio will not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the
Portfolio's assets would be invested in the
securities of such issuer, 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 PORTFOLIOS
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>
.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
ADVISER
VANGUARD MANAGES
THE PORTFOLIOS ON AN
AT-COST BASIS The Vanguard International Equity Index Fund and the
Total International Portfolio of Vanguard STAR Fund
receive all investment advisory services on an at-cost
basis from Vanguard's Core Management Group, which also
provides investment advisory services to Vanguard Index
Trust, the equity portion of Vanguard Balanced Index
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 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 Portfolios'
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>
executing the transaction, will provide research
services to the adviser or the Portfolios. However, the
adviser will not pay higher commissions specifically
for the purpose of obtaining research services. The
Portfolios may direct the adviser to use a particular
broker for certain transactions in exchange for
commission rebates or research services provided to the
Fund.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
DIVIDENDS AND ANY
CAPITAL GAINS WILL BE
PAID ANNUALLY Each Portfolio intends to distribute
substantially all of its ordinary income in the form of
dividends. The Portfolios pay annual dividends. Capital
gains distributions, if any, are also made annually.
Each Portfolio's dividend and capital gains
distributions may be reinvested in additional shares or
received in cash. See "Choosing a Distribution Option"
for a description of these distribution methods.
In order to satisfy certain distribution requirements
of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital 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
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio will automatically deduct a $10 annual
account maintenance fee from the dividend income of
each Portfolio account on an annual basis. If the
dividend to be paid to an account is less than the fee
to be deducted, sufficient shares will be redeemed from
an account to make up the difference. The Board of
Directors (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>
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>
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 the
STAR Fund, 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>
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
(Trustees) 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 (Trustees).
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 (Trustees) 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 can elect 100% of the Directors if they so
choose. Annual meetings of shareholders will not be
held except as required by the Investment Company Act
of 1940 and other applicable law. An annual meeting
will be held to vote on the removal of a Director or
Directors of the Fund if requested in writing by the
holders of not less than 10% of the outstanding shares
of the Fund.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
All securities and cash for the European, Pacific and
Emerging Markets Portfolios are held by Morgan Stanley
Trust Company. CoreStates Bank, N.A., holds the daily
cash balances that are used by these three Portfolios
to invest in repurchase agreements or securities
acquired in
22
<PAGE>
these transactions. Securities and cash for the Total
International Portfolio are held by CoreStates. The
Vanguard Group, Inc., Valley Forge, PA, serves as the
Funds' Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountant for
the Funds and will audit their financial statements
annually. The Funds are not involved in any litigation.
- --------------------------------------------------------------------------------
23
<PAGE>
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>
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 Group-(Portfolio confirmation statements.
Number), see below for Please make your check
appropriate Portfolio number, payable to The Vanguard
and mail to: Group-(Portfolio Number),
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
Portfolios. You may, however, open an account by
exchange by providing the appropriate information on
the Account Registration Form. The new account will
have
25
<PAGE>
the same registration as the existing account. The
Portfolios reserve 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>
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 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>
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>
SELLING BY FUND
EXPRESS
Automatic
Withdrawal With the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard
Fund account to your bank account according to the
schedule you have selected. You may elect Fund Express
on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund
Express Application.
- -----------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange
to another Vanguard Fund account. Exchanges to or from
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 Portfolios
reserve 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 excess of
$250,000 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>
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 REGULAR
(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>
- 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 Portfolios' 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 Portfolios have
established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed
excessive if limited to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (AT LEAST 30 DAYS APART) from 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 Portfolios reserve 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>
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or employer
identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.
Neither the Portfolios nor Vanguard will be responsible
for the authenticity of transaction instructions
received by telephone, provided that reasonable
security procedures have been followed. Vanguard
believes that the security procedures described above
are reasonable, and that if such procedures are
followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone
transactions on your account.
- --------------------------------------------------------------------------------
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 Statement.
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>
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>
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>
PART B
VANGUARD STAR FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 23, 1998
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectuses (dated April 23, 1998). To obtain the Prospec-
tuses please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Limitations..................................................... 1
Repurchase Agreements...................................................... 2
Management of Vanguard STAR Fund........................................... 4
Investment Advisory Services............................................... 7
Portfolio Transactions..................................................... 25
Termination of Advisory Agreements......................................... 26
Purchase of Shares......................................................... 26
Redemption of Shares....................................................... 27
Yield and Total Return..................................................... 28
Comparative Indexes........................................................ 28
General Information........................................................ 31
Financial Statements....................................................... 32
</TABLE>
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment objectives, policies
and limitations set forth in the Prospectuses. These policies are fundamental
with respect to each Portfolio of the Fund and may not be changed without the
approval of at least a majority of the Portfolio's outstanding shares (a term
which means the lesser of (i) 67% or more of the shares present at the meeting
if the holders of more than 50% of the shares of the Portfolio are present or
represented by proxy or (ii) more than 50% of the total outstanding shares of
the Portfolio. Each Portfolio of the Fund may not:
1) Issue senior securities;
2) Purchase any securities on margin, make short sales of securities or
purchase or sell puts and calls, or combinations thereof;
3) Borrow money, except from banks for temporary or emergency purposes
and then only in an amount not in excess of 5% of the lower of the market
value or costs of its assets, in which case it may pledge, mortgage or hy-
pothecate any of its assets as security for such borrowing, but not to an
extent greater than 5% of the market value of its assets;
4) Underwrite the securities of other issuers or invest more than 15% of
its assets in securities subject to legal or contractual restrictions on
resale or for which there are no readily available market quotations, or
repurchase agreements having maturities of more than seven days;
5) Purchase real estate or real estate mortgage loans, although the un-
derlying mutual funds in which the Fund will invest may purchase marketable
securities of companies which deal in real estate, real estate mortgage
loans or interests therein;
1
<PAGE>
6) Purchase or sell commodities or commodity contracts, except that the
Growth, Conservative Growth, Moderate Growth and Income Portfolios may en-
ter into futures contracts and options transactions as described in the
prospectus;
7) Invest directly in oil, gas, or other mineral exploration or develop-
ment programs; provided, however, that the underlying funds in which the
Fund's Portfolios will invest may purchase the securities of companies en-
gaged in such activities;
8) Invest more than 5% of its assets, at the time of investment, in the
securities of any issuers which have records of less than three years' con-
tinuous operation, including the operation of any predecessor (other than
obligations issued or guaranteed as to interest and principal by the U.S.
Government or its agencies or instrumentalities or open-end investment com-
panies which are member Funds of The Vanguard Group of Investment Compa-
nies);
9) Purchase or retain any security other than shares of the underlying
Vanguard Funds if (i) one or more officers or Trustees of the Fund individ-
ually own or would own, directly or beneficially, more than 1/2 of 1 per
cent of the securities of such issuer and (ii) in the aggregate such per-
sons own or would own more than 5% of such securities;
10) Make loans except by purchasing bonds, debentures or similar obliga-
tions (including repurchase agreements, subject to the limitation described
in (4) above) which are either publicly distributed or customarily pur-
chased by institutional investors;
11) Invest in companies for the purpose of exercising control of manage-
ment.
These investment limitations are considered at the time investment securi-
ties are purchased.
Because of its investment objective and policies, each Portfolio of the Fund
will concentrate more than 25% of its assets in the mutual fund industry. How-
ever, each of the underlying mutual funds in which STAR will invest will not
concentrate 25% or more of its total assets in any one industry.
REPURCHASE AGREEMENTS
Each Portfolio of the Fund (and each of the underlying Vanguard Funds) may
invest in repurchase agreements with commercial banks, brokers or dealers to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which a Portfolio acquires a money market instrument (gener-
ally a security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date (nor-
mally, the next business day). A repurchase agreement may be considered a loan
collateralized by securities. The resale price reflects an agreed upon inter-
est rate effective for the period the instrument is held by a Portfolio and is
unrelated to the interest rate on the underlying instrument. In these transac-
tions, the securities acquired by a Portfolio (including accrued interest
earned thereon) must have a total value in excess of the value of the repur-
chase agreement and are held by a Portfolio's custodian bank until repur-
chased. In addition, the Fund's Trustees will monitor each Portfolio's repur-
chase agreement transactions generally and will establish guidelines and
standards for review of the creditworthiness of any bank, broker or dealer
party to a repurchase agreement with a Portfolio. No more than an aggregate of
15% of each Portfolio's assets, at the time of investment, will be invested in
repurchase agreements having maturities longer than seven days and securities
subject to legal or contractual restrictions on resale for which there are no
readily available market quotations. From time to time, the Fund's Board of
Directors may determine that certain restricted securities known as Rule 144A
securities are liquid and not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, a
Portfolio may incur a loss upon disposition of the security. If the other
party
2
<PAGE>
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the under-
lying security is collateral for a loan by a Portfolio not within the control
of the Portfolio and therefore the realization by the Portfolio on such collat-
eral may be automatically stayed. Finally, it is possible that a Portfolio may
not be able to substantiate its interest in the underlying security and may be
deemed an unsecured creditor of the other party to the agreement. While the
Fund's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
3
<PAGE>
MANAGEMENT OF VANGUARD STAR FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees, manage
its day-to-day operations and are responsible for determining what portion of
the Fund's assets will be invested in each of the available Vanguard Funds
pursuant to the Fund's investment objective and policies. The Trustees, set
broad policies for the Fund and choose its Officers.
A list of the Trustees and Officers of the Fund and a brief statement of
their present positions and principal occupations during the past five years
is set forth below.
The mailing address of the Trustees and Officers of the Fund is Post Office
Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Se- ALFRED M. RANKIN, JR., (DOB:
nior Chairman, and Trustee* 10/8/1941) Trustee
Senior Chairman, and Director of Chairman, President, Chief Execu-
The Vanguard Group, Inc., and each tive Officer and Director of NACCO
of the investment companies in The Industries, Inc.; Director of The
Vanguard Group. Director of The BFGoodrich Company, and The Stan-
Mead Corporation, General Accident dard Products Company.
Insurance, and Chris-Craft Indus-
tries, Inc.
JOHN C. SAWHILL, (DOB: 6/12/1936)
Trustee
JOHN J. BRENNAN, (DOB: 7/29/1954) President and Chief Executive Offi-
Chairman, Chief Executive Officer & cer of The Nature Conservancy; for-
Trustee* merly, Director and Senior Partner
Chairman, Chief Executive Officer of McKinsey & Co., and President,
and Director of The Vanguard New York University; Director of
Group, Inc., and of each of the Pacific Gas and Electric Company,
investment companies in The Van- Procter & Gamble Company, and NACCO
guard Group. Industries.
ROBERT E. CAWTHORN, (DOB: 7/28/1935) JAMES O. WELCH, JR., (DOB:
Trustee 5/13/1931) Trustee
Chairman Emeritus and Director of Retired Chairman of Nabisco Brands,
Rhone-Poulenc Rorer, Inc.; Manag- Inc., retired Vice Chairman and Di-
ing Director of Global Health Care rector of RJR Nabisco; Director of
Partners/DLJ Merchant Banking TECO Energy, Inc., and Kmart Corpo-
Partners; Director of Sun Company, ration.
Inc. and Westinghouse Electric
Corporation.
J. LAWRENCE WILSON, (DOB: 3/2/1936)
BARBARA BARNES HAUPTFUHRER, Trustee Chairman and Chief Executive
(DOB: 10/11/1928) Trustee Officer of Rohm & Haas Company;
Director of The Great Atlantic and Director of Cummins Engine Company,
Pacific Tea Company, IKON Office Inc., and The Mead Corporation;
Solutions, Inc., Raytheon Company, Trustee of Vanderbilt University.
Knight-Ridder, Inc., Massachusetts
Mutual Life Insurance Co. and La- RAYMOND J. KLAPINSKY, (DOB:
dies Professional Golf Associa- 12/7/1938) Secretary*
tion; and Trustee Emerita of Managing Director and Secretary of
Wellesley College. The Vanguard Group, Inc.; Secretary
of each of the investment companies
in The Vanguard Group.
BRUCE K. MACLAURY, (DOB: 5/7/1931)
Trustee President Emeritus of The RICHARD F. HYLAND, (DOB: 3/22/1937)
Brookings Institution; Director of
American Express Bank, Ltd., The
St. Paul Companies, Inc. and Na- Treasurer* Treasurer of The
tional Steel Corporation. Vanguard Group, Inc. and of each of
the investment companies in The
Vanguard Group.
BURTON G. MALKIEL, (DOB: 8/28/1932) KAREN E. WEST, (DOB: 9/13/1946) Con-
Trustee Chemical Bank Chairman's troller* Principal of The Vanguard
Professor of Economics, Princeton Group, Inc.; Controller of each
University; Director of Prudential of the investment companies in The
Insurance Co. of America, Amdahl Vanguard Group.
Corporation, Baker Fentress & Co.,
The Jeffrey Co., and Southern --------
New England Telecommunications * Officers of the Fund are "inter-
Company. ested persons" as defined in the
Investment Company Act of 1940.
The Trustees and Officers of the Fund will receive no remuneration from the
Fund. However, the Trustees are also Directors (Trustees) of The Vanguard
Group, Inc. ("Vanguard") and of the Fund's underlying investment companies in
The Vanguard Group (the "Vanguard Funds"). Each Vanguard Fund pays its unaf-
filiated Directors (Trustees) an annual fee plus a proportionate share of
travel and other expenses incurred in attending Board meetings. The Officers
are paid by Vanguard which, in turn, is reimbursed by each Vanguard Fund for
its proportionate share of Officers' salaries and benefits.
4
<PAGE>
THE VANGUARD GROUP
Through their jointly-owned subsidiary, Vanguard, the Vanguard Funds obtain
at cost virtually all of their corporate management, administrative and dis-
tribution services. Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard Funds.
Vanguard employs a supporting staff of management personnel needed to pro-
vide the requisite services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund pays its share of
Vanguard's net expenses which are allocated among the funds under procedures
approved by the Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses such as legal, auditing and custodian fees.
The Trustees of the Fund also are Directors of Vanguard. The officers of the
Fund and the Vanguard Funds are also officers and employees of Vanguard. No
officer or employee is permitted to own any securities of any external adviser
for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are per-
mitted to engage in personal securities transactions. However, such transac-
tions are subject to procedures and guidelines substantially similar to those
recommended by the mutual fund industry and approved by the U.S. Securities
and Exchange Commission.
The Vanguard Group, Inc. was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Vanguard
funds. The amounts which each of the Funds have invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Fund's relative net assets and its contribution to Vanguard's capital. The
Fund's Service Agreement for all Funds provides as follows: (a) each Vanguard
Fund may invest up to 0.40% of its current net assets in Vanguard and (b)
there is no other limitation on the amount that each Vanguard Fund may con-
tribute to Vanguard's Capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Vanguard Funds by third parties.
DISTRIBUTION. Vanguard also provides all distribution and marketing services
for the Vanguard Funds. The principal distribution expenses are for advertis-
ing, promotional materials and marketing personnel. Distribution services may
also include organizing and offering to the public, from time to time, one or
more new investment companies which will become members of the Group. The Di-
rectors and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard Funds based upon their relative net assets.
The remaining one half of these expenses is allocated among the Vanguard funds
based upon each Fund's sales for the preceding 24 months relative to the total
sales of the Funds as a Group. Provided, however, that no fund's aggregate
quarterly rate of contribution for distribution expenses of a marketing and
promotional nature shall exceed 125% of the average distribution expense rate
for the Group, and that no Fund shall incur annual distribution expenses in
excess of 20/100 of 1% of its average month-end net assets.
5
<PAGE>
INVESTMENT ADVISORY SERVICES. An experienced investment management staff em-
ployed directly by Vanguard provides investment advisory services to Vanguard
Money Market Reserves, Vanguard Treasury Fund, Vanguard Municipal Bond Fund,
several Portfolios of Vanguard Fixed Income Securities Fund, Vanguard Institu-
tional Index Fund, Vanguard International Equity Index Fund, Vanguard Balanced
Index Fund, Vanguard Bond Index Fund, several Portfolios of Vanguard Variable
Insurance Fund, Vanguard Admiral Funds, Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund;
Vanguard New York Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Penn-
sylvania Tax-Free Fund, Vanguard Index Trust, the Aggressive Growth Portfolio
of Vanguard Horizon Fund, Vanguard Tax-Managed Fund, the REIT Index Portfolio
of Vanguard Specialized Portfolios, the Total International Portfolio of Van-
guard STAR Fund, a portion of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund and Vanguard Explorer Fund, as well as several in-
dexed separate accounts. The compensation and other expenses of this staff are
paid by the Portfolios and Funds utilizing these services.
SPECIAL SERVICING AGREEMENT. The Fund has entered into a Special Servicing
Agreement with Vanguard under which Vanguard will provide management,
administrative, distribution and other services and will act as the Fund's
Dividend Disbursing, Shareholder Servicing and Transfer Agent. Currently the
Fund is not a party to the Funds' Service Agreement described above, and
therefore is not a member of The Vanguard Group of Investment Companies.
(However, a recent S.E.C. order gives the Board of Directors/Trustees of the
Vanguard Funds the discretionary authority to modify the Funds' Service
Agreement to make the Fund a member of the Vanguard Group of Investment
Companies without the Fund's bearing any duplicative capital contribution or
expense allocation costs.) The Special Servicing Agreement gives authority to
the Fund to utilize the Vanguard name so long as (1) the Special Servicing
Agreement is in effect, and (2) the assets of each Portfolio are invested
pursuant to the Fund's objective and policies in shares of the various
Vanguard Funds (except for such cash or cash items as the Trustees may
determine to maintain from time to time to meet redemptions). The Special
Servicing Agreement provides that Vanguard will utilize assets deposited with
the custodian of each Portfolio from the sale of the Portfolio's shares to
promptly purchase shares of the specified Vanguard Funds, and will undertake
redemption or exchange of such shares of the Vanguard Funds in the manner
provided by the objective and policies of the Portfolio.
The allocation of the assets of each Portfolio will be made by Officers of
the Fund pursuant to the instructions of the Fund's Board of Trustees and as
set forth in the Fund's investment objective, policies and restrictions. The
Declaration of Trust authorizes the Trustees to retain an investment adviser
if they determine that such action is in the best interests of the sharehold-
ers of each Portfolio, and that the compensation called for under the invest-
ment advisory agreement is reasonable when considered in connection with the
advisory fees, if any, paid by the Vanguard Funds in which the Fund has in-
vested its assets. However, the Trustees have no present intention to retain
an investment adviser. In accordance with the provisions of the Investment
Company Act of 1940, approval of the shareholders would be required for such
an advisory agreement.
The Special Servicing Agreement provides that the Fund will pay, on an "out-
of-pocket" basis, for services to be rendered by Vanguard. The Fund will also
bear the expenses of services provided by outside parties, including auditors,
the custodian and outside legal counsel, as well as taxes and other direct ex-
penses of the Fund. However, the Agreement provides that the expenses of the
Fund will be offset in whole, or in part, by reimbursement from Vanguard for
(a) contributions made by the Fund to the cost of operating the Vanguard Funds
in which the Fund invests in, and (b) certain savings in administrative and
marketing costs that Vanguard is expected to derive from the operation of the
Fund. The Trustees believe that the reimbursements to be made by Vanguard to
the Fund should be sufficient to offset most, if not all, the expenses in-
curred by each Portfolio. Therefore, the Portfolios are expected to operate at
a very low, or zero, expense ratio. For the fiscal year ended December 31,
1997, the STAR and Life Strategy Portfolios had expense ratios of zero, as did
the Total International Portfolio.
6
<PAGE>
While the Fund's shareholders will not pay duplicate capital contribution
charges to Vanguard, the shareholders of each Portfolio will indirectly bear
their fair share of the costs of maintaining and operating Vanguard since the
Portfolios, as shareholders of the selected Vanguard Funds, will be subject to
the proportionate contributions of those underlying Funds. Since the Fund cur-
rently is not a member fund of The Vanguard Group of Investment Companies it
will benefit, as a shareholder of the selected Vanguard funds, only from such
cost-sharing reductions in proportion to its interest in such Vanguard Funds.
INVESTMENT ADVISORY SERVICES
Vanguard STAR Fund will not employ an investment adviser and therefore, it
will pay no advisory fees. As a shareholder of an underlying Fund, the Portfo-
lios will bear their proportionate share of the investment advisory fees paid
by those Funds. The following is a description of the investment advisory
agreements for each underlying Vanguard Fund.
VANGUARD/WINDSOR FUND
Wellington Management Company ("WMC") serves as investment adviser to
Vanguard/Windsor Fund. Vanguard/Windsor Fund pays WMC a Basic Fee, calculated
by applying a quarterly rate, based on the following annual percentage rates,
to Vanguard/Windsor Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $17.5 billion.................................................. .125%
Over $17.5 billion................................................... .100%
</TABLE>
The Basic Fee may be increased or decreased by applying an incentive/penalty
fee adjustment based on Vanguard/Windsor Fund's investment performance. Such
formula provides for an increase or decrease in the basic fee paid to WMC each
quarter, depending upon Vanguard/Windsor Fund's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard and Poor's 500 Composite Stock Price Index (the "S&P
500") for the same period.
The Basic Fee, as provided above, shall be increased or decreased by apply-
ing an incentive/penalty fee adjustment based on the investment performance of
Windsor Fund relative to the investment performance of the Standard & Poor's
500 Composite Stock Price Index (the "Index").
During the fiscal years ended October 31, 1995, 1996 and 1997,
Vanguard/Windsor Fund paid the following advisory fees:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Basic Fee.......................... $19,022,000 $18,816,000 $ 23,502,000
Increase (Decrease) for Performance
Adjustment........................ 7,752,000 (4,417,000) (11,821,000)
----------- ----------- ------------
Total.............................. $26,774,000 $14,399,000 $ 11,681,000
=========== =========== ============
</TABLE>
VANGUARD/MORGAN GROWTH FUND
Vanguard/Morgan Growth Fund ("Morgan") employs two separate investment ad-
visers each of whom manages the investment and reinvestment of a portion of
the Fund's assets. Additionally, Vanguard's Core Management Group manages ap-
proximately 9% of Morgan's assets on an at-cost basis.
7
<PAGE>
WELLINGTON MANAGEMENT COMPANY
Morgan employs Wellington Management Company ("WMC") under an investment ad-
visory agreement dated as of April 1, 1996 to manage the investment and rein-
vestment of approximately 38% of the assets of the Fund and to continuously
review, supervise and administer the Fund's investment program. WMC discharges
its responsibilities subject to the control of the officers and Directors of
the Fund.
Morgan pays WMC a Basic Fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $500 million................................................... .175%
Next $500 million.................................................... .100%
Over $1 billion...................................................... .075%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of
Morgan managed by WMC relative to the investment record of The Growth Fund
Stock Index (the "Index") which is described in the Prospectus.
The following table sets forth the incentive/penalty fee rates payable by
the Fund to WMC under the proposed investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE GROWTH FUND STOCK INDEX ADJUSTMENT*
---------------------------------- -----------------
<S> <C>
Less than -12%........................................... -0.50 X Basic Fee
Between -12% and -6%..................................... -0.25 X Basic Fee
Between -6% and 6%....................................... 0.00 X Basic Fee
Between 6% and 12%....................................... +0.25 X Basic Fee
More than 12%............................................ +0.50 X Basic Fee
</TABLE>
- --------
* For purposes of this calculation, the basic fee is calculated by applying
the quarterly rate against average assets over the 36-month period.
RELATED INFORMATION CONCERNING WMC
WMC is a professional investment counseling firm which provides investment
services to investment companies, other institutions and individuals. Among
the clients of WMC are more than 10 of the other investment companies of The
Vanguard Group. As of December 31, 1997, WMC held discretionary management au-
thority with respect to more than $175 billion of assets. WMC and its prede-
cessor organizations have provided investment advisory services to investment
companies since 1928 and to investment counseling clients since 1960. WMC is a
Massachusetts limited liability partnership of which the following persons are
managing partners: Messrs. Robert W. Doran, Duncan M. McFarland and John R.
Ryan.
During the last three fiscal years, the Fund paid the following advisory
fees to WMC:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Basic Fee............................... $ 892,794 $1,084,780 $1,292,417
Increase (Decrease) for Performance
Adjustment............................. (321,731) 51,915 (63,493)
--------- ---------- ----------
Total................................... $ 571,063 $1,136,695 $1,228,924
========= ========== ==========
</TABLE>
These fees were paid pursuant to the terms of a previous investment advisory
agreement, which called for a higher rate of fees.
8
<PAGE>
FRANKLIN PORTFOLIO ASSOCIATES LLC
Morgan employs Franklin Portfolio Associates LLC ("Associates") under an in-
vestment advisory agreement dated as of April 1, 1996 to manage the investment
and reinvestment of approximately 38% of Morgan's assets. Associates dis-
charges its responsibilities subject to the control of the Officers and Direc-
tors of Morgan.
Morgan pays Associates an advisory fee by applying various percentage rates
to the average net assets of Morgan managed by Associates. The fee schedule is
as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $100 million................................................... 0.25%
Next $200 million.................................................... 0.20%
Next $200 million.................................................... 0.15%
Over $500 million.................................................... 0.10%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the Fund relative
to the investment record of the Index. Such incentive/penalty fee provides for
an increase or decrease in Associates' basic fee in an amount equal to .100%
per annum (.025% per quarter) of the average month-end net assets of the por-
tion of Morgan managed by Associates if the investment performance of that
portion of Morgan for the thirty-six months preceding the end of the quarter
is six percentage points or more above or below, respectively, the investment
record of the Index for the same period.
The following table sets forth the incentive/penalty fee rates payable by
Morgan to Associates under the proposed investment advisory agreement:
<TABLE>
<CAPTION>
THREE YEAR PERFORMANCE ANNUAL INCENTIVE
DIFFERENTIAL VS. THE INDEX (+)/PENALTY (-) FEE RATE
-------------------------- ------------------------
<S> <C>
+6% or more above................................. +.100%
Between +6% and -6%............................... -0-
-6% or more below................................. -.100%
</TABLE>
During the fiscal years ended December 31, 1995, 1996 and 1997, Morgan paid
Associates the following advisory fees:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Basic Fee.................................. $848,530 $ 987,145 $1,310,220
Increase (Decrease) for Performance
Adjustment................................ 74,545 115,797 571,862
-------- ---------- ----------
Total...................................... $923,075 $1,102,942 $1,882,082
======== ========== ==========
</TABLE>
These fees were paid pursuant to the terms of a previous investment advisory
agreement, which called for a higher rate of fees.
RELATED INFORMATION CONCERNING ASSOCIATES
Associates is a Massachusetts limited liability company. The shares of Asso-
ciates are owned by MBC Investments Corporation, a holding company of Mellon
Bank Corporation. Associates is managed by a Board of Trustees consisting of
Messrs. John J. Nagorniak, Chairman, Donald A. McMullen, Jr. and G. Christian
Lantzsch.
9
<PAGE>
Associates is a professional investment counseling firm which specializes in
the management of common stock portfolios through the use of quantitative in-
vestment models. As of December 31, 1997, Associates provided investment advi-
sory services with respect to approximately $13.5 billion of clients assets,
including approximately $2.1 billion for Vanguard Growth and Income Portfolio,
Inc., another mutual fund member of The Vanguard Group. During the year ended
December 31, 1997, Vanguard Growth and Income Portfolio, Inc. paid Associates
an annual advisory fee equal to 0.13% before a decrease of 0.01% based on per-
formance.
VANGUARD FIXED INCOME SECURITIES FUND
Wellington Management Company serves as investment adviser to the GNMA Port-
folio, the Long-Term Corporate Portfolio and the High Yield Bond Portfolio of
Vanguard Fixed Income Securities Fund. The Portfolios of the Fund will invest
a portion of their assets only in the GNMA and Long-Term Corporate Portfolios.
Under the Fund's investment advisory agreement, the fee paid to WMC is based
on the total assets of the GNMA Portfolio and the Long-Term Corporate Portfo-
lio. The two Portfolios pay WMC an aggregate fee at the end of each fiscal
quarter, calculated by applying a quarterly rate to the average month-end net
assets of each Portfolio.
GNMA PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $3 billion..................................................... .020%
Next $3 billion...................................................... .010%
Over $6 billion...................................................... .008%
</TABLE>
LONG-TERM CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $1 billion..................................................... .040%
Next $1 billion...................................................... .030%
Next $1 billion...................................................... .020%
Over $3 billion...................................................... .015%
</TABLE>
During the fiscal years ended January 31, 1996, 1997 and 1998 the GNMA and
Long-Term Corporate Portfolios paid WMC the following advisory fees:
<TABLE>
<CAPTION>
PORTFOLIO 1996 1997 1998
--------- ---------- -------- ----------
<S> <C> <C> <C>
GNMA........................................ $1,181,000 $992,000 $1,067,000
========== ======== ==========
Long-Term Corporate......................... $1,118,000 $951,000 $ 963,000
========== ======== ==========
</TABLE>
SHORT-TERM CORPORATE AND INTERMEDIATE-TERM CORPORATE PORTFOLIOS OF
VANGUARD FIXED INCOME SECURITIES FUND
The Short-Term Corporate and Intermediate-Term Corporate Portfolios (as well
as four U.S. Treasury Portfolios that are not utilized by the Fund) receive
all investment advisory services on an "internalized," at-cost, basis from an
experienced investment management staff employed directly by Vanguard. This
staff also provides investment advisory services to Vanguard Money Market Re-
serves,
10
<PAGE>
Vanguard Bond Market Fund, Vanguard Municipal Bond Fund, Vanguard California
Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey
Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard New York Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund and the Money Market and High-Grade Bond
Portfolios of Vanguard Variable Insurance Fund. The compensation and other ex-
penses of the staff are allocated among the Portfolios of each of the Funds
listed above. During the fiscal years ended January 31, 1996, 1997, and 1998,
the Short-Term Corporate Portfolio's share of these expenses totaled approxi-
mately $408,000, $543,000 and $698,000, respectively. During the fiscal years
ended January 31, 1996, 1997, and 1998, the Intermediate-Term Corporate Port-
folio's share of these expenses totaled approximately $28,000, $63,000 and
$102,000, respectively.
The investment management staff is supervised by the senior Officers of the
Fund. The senior Officers, who are also officers of Vanguard, Vanguard Money
Market Reserves, Vanguard Bond Index Fund, Vanguard Municipal Bond Fund, Van-
guard State Tax-Exempt Funds, and Vanguard Variable Insurance Fund, are di-
rectly responsible to the Board of Directors of the Fund. The Board of Direc-
tors, elected annually by shareholders, sets broad policies for the Fund and
chooses its Officers.
VANGUARD/WINDSOR II
BARROW, HANLEY, MEWHINNEY & STRAUSS
Vanguard/Windsor II has entered into an investment advisory agreement with
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage approximately
68% of the assets of Vanguard/Windsor II. Under this agreement BHM&S manages
the investment and reinvestment of the assets of Vanguard/Windsor II assigned
to it and continuously reviews, supervises and administers the investment pro-
gram of Vanguard/Windsor II. BHM&S discharges its responsibilities subject to
the control of the officers and Trustees of that Company.
Vanguard/Windsor II pay BHM&S a fee at the end of each fiscal quarter, cal-
culated by applying a quarterly rate, based on the following annual percentage
rates, to the aggregate average month-end net assets of Vanguard/Windsor II
managed by BHM&S for the quarter:
<TABLE>
<CAPTION>
NET RATE RATE
-------- -----
<S> <C>
First $200 million................................................... .300%
Next $300 million.................................................... .200%
Next $500 million.................................................... .150%
Over $1 billion...................................................... .125%
</TABLE>
INCENTIVE/PENALTY FEE. The basic fee paid to BHM&S, as provided above, will
be increased or decreased by applying an incentive/penalty fee based on the
investment performance of the assets of Vanguard/Windsor II managed by BHM&S
(the "BHM&S Portfolio") over a trailing 36-month period relative to that of
the Standard & Poor's/ BARRA Value Index (the "BARRA Value Index"). Such
incentive/penalty fee provides for (1) a 25% increase or decrease in the basic
advisory fee if the investment performance of the BHM&S Portfolio for the 36
months preceding the end of the quarter is 9 percentage points or more above
or below, respectively, the investment record of the BARRA Value Index for the
same period; or (2) a 15% increase or decrease in the basic advisory fee if
the investment performance of the BHM&S Portfolio for such 36 months is 6 or
more but less than 9 percentage points above or below, respectively, the in-
vestment record of the BARRA Value Index for the same period.
11
<PAGE>
The following table illustrates the incentive/penalty fee payable by
Vanguard/Windsor II to BHM&S under the new agreement:
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR PERFORMANCE ANNUAL INCENTIVE/
DIFFERENTIAL VS THE BARRA VALUE INDEX PENALTY FEE ADJUSTMENT
------------------------------------- ----------------------
<S> <C>
Less than or equal to -9% points..................... 0.75% X Basic Fee
Less than or equal to -6% points but greater than -9%
points.............................................. 0.85% X Basic Fee
Less than +6% points but greater than -6% points (the
"Benchmark")........................................ Basic Fee
Greater than or equal to +6% points but less than +9%
points.............................................. 1.15% X Basic Fee
Greater than or equal to +9% points.................. 1.25% X Basic Fee
</TABLE>
The BARRA Value Index includes stocks in the Standard and Poor's 500 Compos-
ite Stock Price Index with lower than average ratios of market price to book
value. These types of stocks are often referred to as "value" stocks.
The investment performance of the BHM&S Portfolio, for any period, expressed
as a percentage of the "BHM&S Portfolio Unit Value" at the beginning of such
period, will be the sum of: (i) the change in the BHM&S Portfolio unit value
during such period; (ii) the unit value of the Fund's cash distributions from
the BHM&S Portfolio's net investment income and realized net capital gains
(whether long-term or short-term) having an ex-dividend date occurring within
such period; and (iii) the unit value of capital gains taxes paid or accrued
during such period by Vanguard/Windsor II for undistributed realized long-term
capital gains realized from the BHM&S Portfolio.
The "BHM&S Portfolio Unit Value" will be determined by dividing the total
net assets of the BHM&S Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the BHM&S Portfolio will equal
the total shares outstanding of Vanguard/Windsor II. After such initial date,
as assets are added to or withdrawn from the BHM&S Portfolio, the number of
units of the BHM&S Portfolio will be adjusted based on the unit value of the
BHM&S Portfolio on the day such changes are executed.
The investment record of the BARRA Value Index will be calculated quarterly
by (i) multiplying the total return for the quarter (change in market price
plus dividends) of each stock included in the BARRA Value Index by its weight-
ing in the BARRA Value Index at the beginning of the quarter, and (ii) adding
the values discussed in (i). For any period, therefore, the investment record
of the BARRA Value Index will be the compounded quarterly returns of the BARRA
Value Index.
For the purposes of determining the incentive/penalty fee adjustment, the
net assets of the BHM&S Portfolio will be averaged over the same period as the
investment performance of the BHM&S Portfolio and the investment record of the
BARRA Value Index are computed.
During the fiscal years ended October 31, 1995, 1996 and 1997
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $8,514,842,
$11,475,528, and $16,925,953 before a performance increase of $2,495,021, re-
spectively.
EQUINOX
Equinox is a professional investment counseling firm founded in 1989. As of
December 31, 1997, Equinox provided investment advisory services with respect
to approximately assets of $9.3 billion. Ronald J. Ulrich, Director and Presi-
dent, Edward E. Murphy and David Connor are the principal investment officers
of Equinox. Equinox has had no experience in serving as an investment adviser
to an investment company.
12
<PAGE>
Under the terms of an investment advisory agreement dated August 1, 1996
Windsor II pays Equinox an advisory fee by applying a quarterly rate to the
portion of Vanguard/Windsor II's average month-end net assets managed by Equi-
nox. The fee schedule is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $400 million................................................... .200%
Next $600 million.................................................... .150%
Next $1 billion...................................................... .125%
Over $2 billion...................................................... .100%
</TABLE>
The basic fee paid to Equinox, as provided above, may be increased or de-
creased by applying an incentive/penalty fee based on the investment perfor-
mance of the portion of Vanguard/Windsor II's assets managed by Equinox rela-
tive to the investment record of the Russell 1000 Value Index. Such formula
provides for an increase or decrease in the basic fee paid to Equinox each
quarter, depending upon the Equinox Portfolio's investment performance for the
thirty-six months preceding the end of the quarter.
The following table sets forth the incentive/penalty fee payable by
Vanguard/Windsor II to Equinox under the new investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH
PERFORMANCE VERSUS THE PERFORMANCE FEE
INDEX ADJUSTMENT*
---------------------- -----------------
<S> <C>
Less than -9%........................................... -0.50 X Basic Fee
Between -9% and -4.5%................................... -0.25 X Basic Fee
Between -4.5% and 4.5%.................................. 0.00 X Basic Fee
Between 4.5% and 9%..................................... +0.25 X Basic Fee
More than 9%............................................ +0.50 X Basic Fee
</TABLE>
- --------
* For purposes of this calculation, the basic fee is calculated by applying
the quarterly rate against average assets over the 36-month period.
The investment performance of the Equinox Portfolio for such period, ex-
pressed as a percentage of the Equinox Portfolio's net asset value per share
at the beginning of such period, shall be the sum of: (i) the change in the
Equinox Portfolio's net asset value per share during such period; (ii) the
value of the Equinox Portfolio's cash distributions per share having an ex-
dividend date occurring within such period; and (iii) the per share amount of
capital gains taxes paid or accrued during such period by the Equinox Portfo-
lio for undistributed realized long-term capital gains. The foregoing notwith-
standing, any computation of the investment performance of the Equinox Portfo-
lio and the investment record of the Index shall be in accordance with any
then applicable rules of the Securities and Exchange Commission.
The investment record of the Index for any period, expressed as a percentage
of the Index at the beginning of such period, shall be the sum of (i) the
change in the level of the Index during such period and (ii) the value, com-
puted consistently with the Index, of cash distributions having an ex-dividend
date occurring within such period made by companies whose securities comprise
the Index. For this purpose cash distributions on the securities which com-
prise the Index shall be treated as reinvested in the Index at least as fre-
quently as the end of each calendar quarter following the payment of the
dividend.
For the purpose of determining the fee adjustment for investment perfor-
mance, as described above, the net assets of the Equinox Portfolio shall be
averaged over the same period as the investment performance of the Equinox
Portfolio and the investment record of the Index are computed.
13
<PAGE>
During the fiscal years ending October 31, 1995, 1996, and 1997
Vanguard/Windsor II paid advisory fees to Equinox of approximately $1,681,435,
$1,980,458 before a performance adjustment of $4,747, and $2,791,342 before a
performance adjustment of $408,295, respectively.
TUKMAN
Tukman is a professional investment counseling firm founded in 1980. As of
December 31, 1997 Tukman provided investment advisory services with respect to
assets of approximately $5.2 billion. Melvin T. Tukman, President and Direc-
tor, and Daniel L. Grossman, Vice President serve as the firm's principal in-
vestment professionals. Tukman has had no experience in serving as an invest-
ment adviser to an investment company.
Under the terms of an investment advisory agreement dated November 1, 1991
the Fund pays Tukman an investment advisory fee by applying a quarterly rate,
based on the following annual percentage rates, to the average month-end as-
sets of the portion of the Vanguard/Windsor II's assets managed by Tukman:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $25 million..................................................... .40%
Next $125 million..................................................... .35%
Next $350 million..................................................... .25%
Next $500 million..................................................... .20%
Over $1 billion....................................................... .15%
</TABLE>
The basic fee paid to Tukman, as provided above, may be increased or de-
creased by applying an incentive/penalty fee based on the investment perfor-
mance of the portion of Vanguard/Windsor II's assets managed by Tukman (the
"Tukman Portfolio") relative to the investment record of the Standard & Poor's
500 Composite Stock Price Index ("S&P 500"). Such incentive/penalty fee pro-
vides for (i) a 50% increase or decrease in the basic advisory fee if the in-
vestment performance of the Tukman Portfolio for the 36 months preceding the
end of the quarter is 12 percentage points or more above or below, respective-
ly, the investment record of the S&P 500 for the same period; or (ii) a 25%
increase or decrease in the basic advisory fee if the investment performance
of the Tukman Portfolio for such 36 months is 6 or more but less than 12 per-
centage points above or below, respectively, the investment record of the S&P
500 for the same period.
The following table sets forth the incentive/penalty fee payable by
Vanguard/Windsor II to Tukman under the new investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR PERFORMANCE ANNUAL INCENTIVE
DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT
--------------------------------- ----------------------
<S> <C>
Less than or equal to -12% points.................. 0.50 X Basic Fee
Less than or equal to -6% points but greater than -
12% points........................................ 0.75 X Basic Fee
Less than +6% points but greater than -6% points... Basic Fee
Greater than or equal to +6% points but less than
+12% points....................................... 1.25 X Basic Fee
Greater than or equal to +12% points............... 1.50 X Basic Fee
</TABLE>
The investment performance of the Tukman Portfolio, for any period, ex-
pressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning
of such period, will be the sum of: (i) the change in the Tukman Portfolio
unit value during such period; (ii) the unit value of Vanguard/ Windsor II's
cash distributions from the Tukman Portfolio net investment income and real-
ized net capital gains (whether long-term or short-term) having an ex-dividend
date occurring within such period; and (iii) the unit value of capital gains
taxes paid or accrued during such period by Vanguard/Windsor II for undistrib-
uted realized long-term capital gains realized from the Tukman Portfolio.
14
<PAGE>
The "Tukman Portfolio Unit Value" will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman Portfolio will equal
the total shares outstanding of Vanguard/Windsor II. After such initial date,
as assets are added to or withdrawn from the Tukman Portfolio, the number of
units of the Tukman Portfolio will be adjusted based on the unit value of the
Tukman Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus div-
idends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.
For the purposes of determining the incentive/penalty fee, the net assets of
the Tukman Portfolio will be averaged over the same period as the investment
performance of the Tukman Portfolio and the investment record of the S&P 500
are computed.
During the fiscal year ended October 31, 1995, 1996 and 1997
Vanguard/Windsor II paid advisory fees to Tukman of approximately $2,184,838,
$2,699,458 before a performance adjustment of $930,724, and $3,622,904 before
a performance adjustment of $785,658, respectively.
MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES
In April 1972, the Securities and Exchange Commission ("SEC") issued Release
No. 7113 under the Investment Company Act of 1940 to call attention of direc-
tors and investment advisers to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or insig-
nificant differences" between the investment performance of a fund and that of
the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a "rule of
thumb" the performance difference should be at least +/- 10 percentage points"
annually before the maximum performance adjustment may be made. However, the
Release also states that "because of the preliminary nature of these studies,
the Commission is not recommending, at this time, that any particular perfor-
mance difference exist before the maximum fee adjustment may be made". The Re-
lease concludes that the directors of a fund "should satisfy themselves that
the maximum performance adjustment will be made only for performance differ-
ences that can reasonably be considered significant." The Board of Directors
of Windsor II has fully considered the SEC Release and believes that the per-
formance adjustments as included in the proposed agreements with Equinox and
Tukman are entirely appropriate although not within the +/- 10 percentage
points per year range suggested in the Release. Under the Fund's investment
advisory agreements, the maximum performance adjustments are made at a differ-
ence of +/- 12 and +/- 9 percentage points from the performance of the index
over a thirty-six month period, which would effectively be the equivalent of
approximately +/- 4 and +/- 3 percentage points difference per year.
The investment advisory agreement with Equinox continues until July 31,
1998. The investment advisory agreement with Tukman continues until October
31, 1998. The investment advisory agreement with BHM&S continues until April
30, 1998. The agreements will be renewable thereafter for successive one-year
periods, only if each renewal is specifically approved by a vote of
Vanguard/Windsor II's Board of Directors, including the affirmative votes of a
majority of the Directors who are not parties to the contracts or "interested
persons" (as defined in the Investment Company Act of 1940) of any such party,
cast in person at a meeting called for the purpose of considering such approv-
al. In addition, the question of the continuance of the agreements may be pre-
sented to the shareholders of Vanguard/Windsor II. In such event, such contin-
uance shall be effected, only if approved by the affirmative vote of a
majority of the outstanding voting securities of Vanguard/Windsor II.
15
<PAGE>
VANGUARD'S CORE MANAGEMENT GROUP
Vanguard's Core Management Group provides investment advisory services on an
at-cost basis with respect to a portion of the Vanguard/Windsor II's assets
(currently approximately 7%). The Core Management Group also provides invest-
ment advisory services to several Vanguard Funds, including Vanguard Index
Trust, Vanguard Balanced Index Fund, Vanguard International Equity Index Fund
and Vanguard Institutional Index Fund, as well as to several indexed separate
accounts. Total assets under management by the Core Management Group were ap-
proximately $97 billion as of December 31, 1997. The portion of
Vanguard/Windsor II managed by the Core Management Group is not actively man-
aged, but is instead administered by the Core Management Group using computer-
ized, quantitative techniques based on a value index constructed to approxi-
mate the aggregate fundamental characteristics of a typical large
capitalization-value fund such as Vanguard/Windsor II. The index is composed
of approximately two hundred and fifty stocks that are chosen through quanti-
tative analysis of market capitalization, price/earnings ratios and yield
characteristics which are similar to the stocks that would normally be held in
the actively-managed portions of Vanguard/ Windsor II's portfolio. The Core
Management Group is supervised by the Officers of the Trust.
VANGUARD EXPLORER FUND
Vanguard Explorer Fund, Inc. ("Explorer") currently employs four investment
advisers: Wellington Management Company ("WMC"), 75 State Street, Boston, MA
02109; Granahan Investment Management, Inc. ("Granahan"), 275 Wyman Street,
Waltham, MA 02154; Chartwell Investment Partners ("Chartwell"), 1235 Westlakes
Drive, Suite 330, Berwyn, PA 19312; and Vanguard's Core Management Group. Un-
til February 28, 1990, when Explorer acquired the assets of Explorer II, WMC
was sole investment adviser to Explorer (then known simply as Explorer Fund),
and Granahan served as sole investment adviser to Explorer II, the acquired
fund.
The proportion of the net assets of Explorer managed by each adviser is es-
tablished by the Board of Directors of Explorer, and may be changed in the fu-
ture by the Board of Directors as circumstances warrant. Investors will be ad-
vised of any substantive change in the proportions managed by each adviser.
WELLINGTON MANAGEMENT COMPANY
Explorer has entered into an advisory agreement with WMC under which WMC
manages the investment and reinvestment of a portion of the Explorer's assets
(the "WMC Portfolio") and continuously reviews, supervises and administers the
Explorer's investment program with respect to those assets. As of October 31,
1997, WMC managed approximately 30% of the Fund's equity investments. WMC dis-
charges its responsibilities subject to the control of the officers and Direc-
tors of Explorer.
Explorer pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates,
to the average month-end net assets of the WMC Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $500 million................................................... .250%
Next $250 million.................................................... .200%
Next $250 million.................................................... .150%
Over $1 billion...................................................... .100%
</TABLE>
The Basic Fee paid to WMC may be increased or decreased by applying an
incentive/penalty fee adjustment based on the investment performance of the
net assets of the WMC Portfolio relative to the investment performance of the
Russell 2000 Small Stock Index (the "Index").
16
<PAGE>
The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to WMC under this investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- -----------------
<S> <C>
Less than -12%......................................... -0.50 X Basic Fee
Between -12% and -6%................................... -0.25 X Basic Fee
Between -6% and 6%..................................... 0.00 X Basic Fee
Between 6% and 12%..................................... +0.25 X Basic Fee
More than 12%.......................................... +0.50 X Basic Fee
</TABLE>
- --------
* For purposes of this calculation, the basic fee is calculated by applying
the quarterly rate against average assets over the 36-month period.
For the purpose of determining the fee adjustment for investment perfor-
mance, as described above, the net assets of the WMC Portfolio shall be aver-
aged over the same period as the investment performance of the WMC Portfolio
and the investment record of the Index are computed.
Under the rules of the Securities and Exchange Commission, the new
incentive/penalty fee will not be fully operable until the quarter ending July
31, 1999. Until that date, a "blended" fee rate consisting of varying percent-
ages of (i) the performance adjustment based on the schedule set forth above
(the "new rate"), and (ii) the performance adjustment based on the schedule
set forth in the Fund's previous investment advisory agreement with WMC (the
"previous rate") shall be used.
The investment performance of the WMC Portfolio for such period, expressed
as a percentage of the WMC Portfolio's net asset value per share at the begin-
ning of such period, shall be the sum of: (i) the change in the WMC Portfo-
lio's net asset value per share during such period; (ii) the value of the WMC
Portfolio's cash distributions per share having an ex-dividend date occurring
within such period; and (iii) the per share amount of capital gains taxes paid
or accrued during such period by the WMC Portfolio for undistributed realized
long-term capital gains. The foregoing notwithstanding, any computation of the
investment performance of the WMC Portfolio and the investment record of the
Index shall be in accordance with any then applicable rules of the Securities
and Exchange Commission.
The "WMC Portfolio unit value" shall be determined by dividing the total net
assets of the WMC Portfolio by a given number of units. On the initial date of
the Agreement, the number of units in the WMC Portfolio shall equal the total
shares outstanding of the Fund. After such initial date, as assets are added
to or are withdrawn from the WMC Portfolio, the number of units of the WMC
Portfolio shall be adjusted based on the unit value of the WMC Portfolio on
the day such changes are executed.
The investment record of the Index for any period, expressed as a percentage
of the Index at the beginning of such period, shall be the sum of (i) the
change in the level of the Index during such period and (ii) the value, com-
puted consistently with the Index, of cash distributions having an ex-dividend
date occurring within such period made by companies whose securities comprise
the Index. For this purpose cash distributions on the securities which com-
prise the Index shall be treated as reinvested in the Index at least as fre-
quently as the end of each calendar quarter following the payment of the
dividend.
For the purposes of determining the fee adjustment for investment perfor-
mance, the net assets of the WMC Portfolio are averaged over the same period
as the investment performance of the WMC Portfolio and the investment record
of the Russell 2000 are computed.
Any computation of the investment performance of the WMC Portfolio and the
investment record of the Russell 2000 shall be subject to and in accordance
with any then applicable rules of the Securities and Exchange Commission.
17
<PAGE>
During the fiscal years ended October 31, 1995, 1996 and 1997 Vanguard Ex-
plorer Fund paid WMC approximately the following advisory fees:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee.............................. $1,698,254 $1,922,594 $1,950,387
Increase (Decrease) for Performance
Adjustment............................ (44,661) 6,708 (89,408)
---------- ---------- ----------
Total.................................. $1,653,593 $1,929,302 $1,860,979
========== ========== ==========
</TABLE>
GRANAHAN INVESTMENT MANAGEMENT, INC.
Granahan Investment Management, Inc. ("Granahan") serves as a second invest-
ment adviser to Explorer. Under its advisory agreement with the Fund, Granahan
manages the investment and reinvestment of a portion of the Fund's assets (the
"Granahan Portfolio") and continuously reviews, supervises and administers the
Fund's investment program with respect to those assets. As of October 31,
1997, Granahan managed approximately 48% of the Fund's equity investments.
Prior to February 10, 1994, Granahan managed approximately 25% of the Explorer
Fund's assets. Granahan discharges its responsibilities subject to the control
of the officers and Directors of Explorer.
The Fund pays Granahan a Basic Fee at the end of each fiscal quarter, calcu-
lated by applying a quarterly rate, based on the following annual percentage
rates, to the average month-end net assets of the Granahan Portfolio for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $500 million................................................... .300%
Next $250 million.................................................... .200%
Next $250 million.................................................... .150%
Over $1 billion...................................................... .100%
</TABLE>
The Basic Fee paid to Granahan shall be increased or decreased in an amount
equal to .075% per annum (.01875% per quarter) of the average month-end net
assets of the Granahan Portfolio if the investment performance of the Granahan
Portfolio for the thirty-six months preceding the end of the quarter is twelve
percentage points or more above or below, respectively, the investment record
of the Russell 2000 Small Stock Index (the "Index") for the same period; or by
an amount equal to .0375% per annum (.009375% per quarter) if the investment
performance of the Granahan Portfolio for such thirty-six months is six or
more but less than twelve percentage points above or below, respectively, the
investment record of the Index for the same period.
For the purposes of determining the incentive/penalty fee, the net assets of
the Granahan Portfolio shall be averaged over the same period as the invest-
ment performance of the Granahan Portfolio and the investment record of the
Index are computed.
The investment performance of the Granahan Portfolio for any period, ex-
pressed as a percentage of the "Granahan Portfolio unit value" at the begin-
ning of such period, shall be the sum of: (i) the change in the Granahan Port-
folio unit value during such period; (ii) the unit value of the Fund's cash
distributions from the Granahan Portfolio net investment income and realized
net capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by the Fund for undistributed realized
long-term capital gains realized from the Granahan Portfolio.
The "Granahan Portfolio unit value" shall be determined by dividing the to-
tal net assets of the Granahan Portfolio by a given number of units. On the
initial date of the Agreement, the number of
18
<PAGE>
units in the Granahan Portfolio shall equal the total shares outstanding of
the Fund. After such initial date, as assets are added to or are withdrawn
from the Granahan Portfolio, the number of units of the Granahan Portfolio
shall be adjusted based on the unit value of the Granahan Portfolio on the day
such changes are executed.
The investment record of the Index for any period, expressed as a percentage
of the Index at the beginning of such period, shall be the sum of (i) the
change in the level of the Index during such period and (ii) the value, com-
puted consistently with the Index, of cash distributions having an ex-dividend
date occurring within such period made by companies whose securities comprise
the Index shall be treated as reinvested in the Index at least as frequently
as the end of each quarter following the payment of the dividend.
For the purposes of determining the fee adjustment for investment perfor-
mance, the net assets of the Granahan Portfolio are averaged over the same pe-
riod as the investment performance of the Granahan Portfolio and the invest-
ment record of the Russell 2000 are computed.
Any computation of the investment performance of the Granahan Portfolio and
the investment record of the Russell 2000 shall be subject to and in accor-
dance with any then applicable rules of the Securities and Exchange Commis-
sion.
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee............................... $1,799,069 $2,389,787 $2,532,966
Increase (Decrease) for Performance
Adjustment............................. 69,595 386,752 (242,952)
---------- ---------- ----------
Total................................... $1,868,664 $2,776,539 $2,290,014
========== ========== ==========
</TABLE>
The factors discussed with respect to SEC Release No. 7113 on page 21 also
apply to the above-referenced agreement.
CHARTWELL INVESTMENT PARTNERS
Explorer has entered into an advisory agreement with Chartwell dated as of
August 1, 1997 under which Chartwell manages the investment and reinvestment
of a portion of the Explorer's assets (the "Chartwell Portfolio") and continu-
ously reviews, supervises and administers the Explorer's investment program
with respect to those assets. As of October 31, 1997, Chartwell managed ap-
proximately 10% of the Fund's equity investments. Chartwell discharges its re-
sponsibilities subject to the control of the Officers and Directors of the
Fund.
For the services provided by Chartwell under the advisory agreement the Fund
will pay Chartwell a basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates,
to the average month-end net assets of the Chartwell Portfolio for the quar-
ter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $250 million..................................................... 0.40%
Next $250 million...................................................... 0.30%
Over $500 million...................................................... 0.20%
</TABLE>
Effective with the quarter ending July 31, 1998 the Basic Fee, as provided
above, shall be increased or decreased by applying an incentive/penalty fee
adjustment based on the investment performance of the Chartwell Portfolio rel-
ative to the investment performance of the Small Company Growth Fund Stock
19
<PAGE>
Index. The following table sets forth the fee payable by the Fund to Chartwell
based upon the incentive/penalty adjustment:
<TABLE>
<CAPTION>
THREE-YEAR CUMULATIVE
PERFORMANCE DIFFERENTIAL PERFORMANCE FEE
VERSUS SCGFSI ADJUSTMENT*
------------------------ -----------------
<S> <C>
Trails by - 12% or more.................................... -0.20 X Basic Fee
Trails by more than -6% up to -12%......................... -0.10 X Basic Fee
Trails/exceeds from -6 through +6.......................... 0.00 X Basic Fee
Exceeds by more than 6% but less than 12%.................. +0.10 X Basic Fee
Exceeds by 12% or more..................................... +0.20 X Basic Fee
</TABLE>
- --------
* For purposes of this calculation, the Basic Fee is calculated by applying
the quarterly rate against the Fund's average net assets over the same time
period which the performance is measured.
Through the quarter ending July 31, 2000, the incentive/penalty fee for
Chartwell will be calculated according to the following transition rules:
(A) AUGUST 1, 1997 THROUGH APRIL 30, 1998. Beginning with the quarter
ending October 31, 1997 and through the quarter ending April 30, 1998,
there will be no Performance Fee Adjustment.
(B) MAY 1, 1998 THROUGH JULY 31, 2000. Beginning with the quarter ending
July 31, 1998 and through the quarter ending July 31, 2000, the Performance
Fee Adjustment will be computed based upon a comparison of the investment
performance of the Chartwell Portfolio and that of the Index over the num-
ber of quarters that have elapsed between August 1, 1997 and the end of the
quarter for which the fee is computed. During this period, the number of
percentage points by which the investment performance of the Chartwell
Portfolio must exceed or trail the investment performance of the Index at
each Performance Fee Adjustment level shall be determined on the basis of a
fraction applied to the performance differentials shown in the above table.
For each quarter, this fraction shall equal the number of quarters elapsed
since August 1, 1997 divided by twelve.
(C) ON AND AFTER JULY 31, 2000. For the quarter ending July 31, 2000 and
thereafter, the period used to calculate the Performance Fee Adjustment
shall be the 36 months through the end of the quarter for which the fee is
being computed and the number of percentage points used shall be as stated
in the table above.
The investment performance of the Portfolio, for any period, expressed as a
percentage of the "Portfolio Unit Value" at the beginning of such period, will
be the sum of: (i) the change in the Portfolio Unit Value during such period;
(ii) the unit value of the Fund's cash distributions from the Portfolio's net
investment income and realized net capital gains (whether long-term or short-
term) having an ex-dividend date occurring within such period; and (iii) the
unit value of taxes paid including withholding taxes and capital gains taxes
paid or accrued during such period by the Fund for undistributed realized
long-term capital gains from the Portfolio.
The "Portfolio Unit Value" will be determined by dividing the total net as-
sets of the Portfolio by a given number of units. On the initial date of the
agreement, the number of units in the Portfolio will equal the total shares
outstanding of the Fund. After such initial date, as assets are added to or
withdrawn from the Portfolio, the number of units of the Portfolio will be ad-
justed based on the unit value of the Portfolio on the day such changes are
executed.
For the purposes of determining the incentive/penalty fee adjustment, the
Portfolio's net assets will be averaged over the same time period as the in-
vestment performance of those assets and the investment record of the Small
Company Growth Fund Stock Index are computed.
20
<PAGE>
For the period August 1, 1997 to October 31, 1997, the Fund paid Chartwell
Investment Partners the following advisory fee:
<TABLE>
<S> <C>
Basis Fee........................................................... $202,329
Increase (Decrease) for Performance Adjustment...................... 0
--------
Total............................................................. $202,329
========
</TABLE>
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The Fund's current agreements with WMC, Granahan and Chartwell continue in
effect until July 31, 1999. The agreements will be renewable thereafter for
successive one year periods, only if each renewal is specifically approved by
a vote of the Fund's Board of Directors, including the affirmative votes of a
majority of the Directors who are not parties to the contract or "interested
persons" (as defined in the Investment Company Act of 1940) of any such party,
cast in person at a meeting called for the purpose of considering such approv-
al. In addition, the question of continuance of an investment advisory agree-
ment may be presented to the shareholders of the Fund; in such event, such
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. An agreement is au-
tomatically terminated if assigned, and may be terminated without penalty at
any time (1) either by vote of the Board of Directors of the Fund or by vote
of its outstanding voting securities on 60 days' written notice to the advis-
er, or (2) by the adviser upon 90 days' written notice to the Fund.
MORE INFORMATION ON ADVISERS' INCENTIVE PENALTY FEES
In April 1972, the Securities and Exchange Commission ("SEC") issued Release
No. 7113 under the Investment Company Act of 1940 to call the attention of di-
rectors and investment advisors to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or insig-
nificant differences" between the investment performance of a fund and that of
the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a "rule of
thumb' the performance difference should be at least P10 percentage points"
annually before the maximum performance adjustment may be made. However, the
Release also states that "because of the preliminary nature of these studies,
the Commission is not recommending, at this time, that any particular perfor-
mance difference exist before the maximum fee adjustment may be made." The Re-
lease concludes that the directors of a fund should satisfy themselves that
the maximum performance adjustment will be made only for performance differ-
ences that can reasonably be considered "significant." The Board of Directors
of Vanguard Explorer Fund has fully considered the SEC Release and believes
that the performance adjustments as included in the above mentioned agreements
are appropriate, although not within the P10 percentage point per year range
suggested in the Release. Under the proposed investment advisory agreement be-
tween Vanguard Explorer Fund and Granahan, and Vanguard Explorer Fund and WMC,
the maximum performance adjustment is made at a difference of P12 percentage
points from the performance of the index over a thirty-six month period, which
would effectively be the equivalent of approximately P4 percentage points dif-
ference per year.
THE VANGUARD GROUP, INC.
Vanguard's Core Management Group provides investment advisory services on an
at-cost basis with respect to 10% of Vanguard Explorer Fund's assets. The Core
Management Group employs a quantitative investment approach that uses computer
techniques to track--and, if possible, outperform--a specific market standard.
For Explorer Fund, this market standard is the Small Company Growth Fund Stock
Index, which is made up of stocks held by the nation's 25 largest small com-
pany funds.
21
<PAGE>
The Core Management Group also provides investment advisory services to sev-
eral Vanguard Funds, including Vanguard Index Trust, Vanguard Balanced Index
Fund, the Aggressive Growth Portfolio of Vanguard Horizon Fund, the REIT Index
Portfolio of Vanguard Specialized Portfolios, Vanguard International Equity
Index Fund, Vanguard Institutional Index Fund, the Total International Portfo-
lio of Vanguard STAR Fund, the Equity Index Portfolio of Vanguard Variable In-
surance Fund, the Growth and Income and Capital Appreciation Portfolios and
the equity portion of the Balanced Portfolio of Vanguard Tax-Managed Fund, a
portion of Vanguard Windsor II Fund's assets, a portion of Vanguard/Morgan
Growth Fund's assets, as well as several indexed separate accounts. The Core
Management Group is supervised by the Officers of the Fund.
Vanguard also manages the Fund's cash reserves. Vanguard is supervised by
the Officers of the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or
as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in
control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the ad-
viser that would have normally been included in a proxy statement.
VANGUARD U.S. GROWTH PORTFOLIO
LINCOLN CAPITAL MANAGEMENT COMPANY
The Vanguard U.S. Growth Portfolio entered into an investment advisory
agreement with Lincoln Capital Management Company (Lincoln) on April 1, 1993,
under which Lincoln manages the investment and reinvestment of the assets in-
cluded in the Vanguard U.S. Growth Portfolio and continuously reviews, super-
vises and administers the Portfolio. Lincoln will invest or reinvest such as-
sets only in U.S. securities. Lincoln discharges its responsibilities subject
to the control of the Officers and Directors of the Fund. Under this agreement
the Fund pays Lincoln an advisory fee at the end of each fiscal quarter, cal-
culated by applying a quarterly rate, based on the following annual percentage
rates, to the Portfolio's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $25 million..................................................... .40%
Next $125 million..................................................... .35%
Next $350 million..................................................... .25%
Next $500 million..................................................... .20%
Next $1.5 billion..................................................... .15%
Over $2.5 billion..................................................... .10%
</TABLE>
For the fiscal years ended August 31, 1995, 1996 and 1997 the Fund paid ad-
visory fees of $4,523,000, $6,139,000 before an increase of $393,000 based on
performance, and $8,475,000, respectively, to Lincoln.
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: Timothy H. Ubben, Chairman; J. Parker Hall III,
Chief Executive Officer; Kenneth R. Meyer, President; and Ray Zemon, Executive
Vice President.
22
<PAGE>
Because Lincoln provides only investment advisory services to the Fund and
has no control over the Fund's expenses, Lincoln has not undertaken to guaran-
tee expenses of the Fund. The Officers of the Fund have worked out alternative
arrangements with the state authorities which do not require an expense guar-
antee.
The agreement with Lincoln continues until March 31, 1998. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including
the affirmative votes of a majority of the Directors who are not parties to
the agreement or "interested persons" (as defined in the Investment Company
Act of 1940) of any such party, cast in person at a meeting called for the
purpose of considering such approval. In addition, the question of continuance
of the agreement may be presented to the shareholders of the Vanguard U.S.
Growth Portfolio; in such event continuance shall be effected only if approved
by the affirmative vote of a majority of the outstanding voting securities of
the Vanguard U.S. Growth Portfolio.
VANGUARD/PRIMECAP FUND
PRIMECAP MANAGEMENT COMPANY
Vanguard/PRIMECAP Fund ("PRIMECAP") employs PRIMECAP Management Company (the
"Adviser") under an investment advisory agreement dated as of October 1, 1997
to manage the investment and reinvestment of the assets of the Fund and to
continuously review, supervise and administer the Fund's investment program.
The Adviser discharges its responsibilities subject to the control of the Of-
ficers and Directors of the Fund.
PRIMECAP pays the Adviser an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual per-
centage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ------
<S> <C>
First $50 million................................................... 0.500%
Next $200 million................................................... 0.450%
Next $250 million................................................... 0.375%
Next $1,750 million................................................. 0.250%
Next $2,750 million................................................. 0.200%
Next $5,000 million................................................. 0.175%
Over $10,000 million................................................ 0.150%
</TABLE>
During the fiscal years ended December 31, 1995, 1996, and 1997 PRIMECAP
paid investment advisory fees of approximately $7,700,000, $10,439,000, and
$14,455,000, respectively.
The agreement with the Adviser is renewable for successive one-year periods,
only if each renewal is specifically approved by a vote of the PRIMECAP's
Board of Directors, including the affirmative votes of a majority of the Di-
rectors who are not parties to the contract or "interested persons" (as de-
fined in the Investment Company Act of 1940) of any such party, cast in person
at a meeting called for the purpose of considering such approval. In addition,
the question of continuance of the Agreement may be presented to the share-
holders of the Fund; in such event, such continuance shall be effected only if
approved by the affirmative vote of a majority of the outstanding voting secu-
rities of the Fund.
The Adviser is a California corporation whose outstanding shares are owned
by its directors and officers. The directors of the corporation and the of-
fices they currently hold are: Howard Bernard Schow, Chairman, Mitchell John
Milias, Vice Chairman and Treasurer, Theofanis Anastasios Kolokotrones, Presi-
dent and Secretary, and Joel P. Fried, Senior Vice President.
23
<PAGE>
THE PRIME PORTFOLIO
Vanguard's Fixed Income Group provides investment advisory services on an
at-cost basis to the Prime Portfolio of Vanguard Money Market Trust (see page
10 for a more complete description of the Fixed Income Group).
VANGUARD ASSET ALLOCATION FUND
Vanguard Asset Allocation Fund, Inc. ("VAAF") employs Mellon Capital Manage-
ment Corporation ("MCM"), 595 Market St., 30th Floor, San Francisco, Califor-
nia, 94105, under an investment advisory agreement dated as of April 1, 1996
to manage the investment and reinvestment of the assets of VAAF and to contin-
uously review, supervise and administer the VAAF's investment program. MCM
discharges its responsibilities subject to the control of the officers and Di-
rectors of VAAF.
VAAF pays MCM a Basic fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the VAAF's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $100 million................................................... .200%
Next $900 million.................................................... .150%
Next $500 million.................................................... .125%
Over $1.5 billion.................................................... .100%
</TABLE>
This fee may be increased or decreased by applying an adjustment formula
based on the performance of the Fund's portfolio relative to the investment
record of a Combined Index. The Combined Index is comprised of the Standard &
Poor's 500 composite Price Index (65% of the Combined Index) and the Lehman
Brothers Long-Term U.S. Treasury Index (35% of the Combined Index). The fee
payment will be increased (decreased) by an incentive (penalty) of 0.05% of
average net assets, if the Fund's cumulative investment performance for the
thirty-six months preceding the end of the quarter is at least six percentage
points above (below) the cumulative investment record of the Combined Index
for the same period.
For the fiscal years ended September 30, 1995, 1996 and 1997, Vanguard Asset
Allocation Fund paid MCM approximately $1,954,000 (before a decrease of
$131,000 based on performance), $2,691,000 (before a decrease of $515,000
based on performance), and $3,723,000 (before a decrease of $921,000 based on
performance), respectively.
The agreement will continue until June 30, 1999 and will be renewable there-
after for successive one-year periods, only if each renewal is specifically
approved by a vote of the Fund's Board of Directors, including the affirmative
votes of a majority of the Trustees who are not parties to the contract or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party, cast in person at a meeting called for the purpose of considering
such approval. In addition, the question of continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund.
24
<PAGE>
VANGUARD INDEX TRUST--TOTAL STOCK MARKET PORTFOLIOAND VANGUARD STAR FUND--
TOTAL INTERNATIONAL PORTFOLIO
The above-referenced Funds receive all investment advisory services on an
at-cost basis from Vanguard's Core Management Group.
The Core Management Group also provides investment advisory services to sev-
eral other Vanguard Funds, including the remaining 5 Portfolios in Vanguard
Index Trust, the European, Pacific and Emerging Markets Portfolios of Vanguard
International Equity Index Fund, Vanguard Institutional Index Fund, Vanguard
Balanced Index Fund, Vanguard Variable Insurance Fund--Equity Index Portfolio,
several Portfolios of Vanguard Tax-Managed Fund, the REIT Index Portfolio of
Vanguard Specialized Portfolios, the Aggressive Growth Portfolio of Vanguard
Horizon Fund, a portion of Vanguard/Morgan Growth Fund, a portion of
Vanguard/Windsor II, and a portion of Vanguard Explorer Fund, as well as to
several indexed separate accounts. Total assets under management by the Core
Management Group were $97 billion as of December 31, 1997. The Funds are not
actively managed, but is instead administered by the Core Management Group us-
ing computerized, quantitative techniques. The Core Management Group is super-
vised by the Officers of the respective funds.
PORTFOLIO TRANSACTIONS
Each of the investment advisory agreements discussed on pages 7-25 autho-
rizes the respective Adviser (with the approval of the respective Fund's Board
of Directors) to select the brokers or dealers that will execute the purchases
and sales of portfolio securities for the respective Fund and directs the Ad-
viser to use its best efforts to obtain the best available price and most fa-
vorable execution as to all transactions for the respective Fund. Each Adviser
undertakes to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, each Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services neces-
sary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available will be considered in making
these determinations. In those instances where it is reasonably determined
that more than one broker can offer the brokerage services needed to obtain
the best available price and most favorable execution, consideration may be
given to those brokers which supply investment research and statistical infor-
mation and provide other services in addition to execution services to the re-
spective Fund and/or each Adviser, provided that each Adviser considers such
information useful in the performance of its obligations under the agreement,
but is unable to determine the amount by which such services may reduce its
expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the respective Fund's Board of Directors, the Adviser may cause
the respective Fund to pay a broker-dealer which furnishes brokerage and re-
search services a higher commission than that which might be charged by an-
other broker-dealer for effecting the same transaction; provided that such
commission is deemed reasonable in terms of either that particular transaction
or the overall responsibilities of the Adviser to the Fund.
Currently, it is each Fund's policy that each Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that other-
wise might not be available. Each Adviser will only pay such higher commis-
sions if it believes this to be in the best interest of the respective Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities
25
<PAGE>
transactions are also providers of research information to the Adviser and/or
the Fund. However, each Adviser has informed the respective Fund that it will
not pay higher commission rates specifically for the purpose of obtaining re-
search services.
Since each Fund does not market its shares through intermediary brokers or
dealers, it is not the Funds' practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, each Fund may place portfolio orders with qualified broker-dealers
who recommend the Fund to other clients, or who act as agent in the purchase
of the Fund's shares for their clients, and may, when a number of brokers and
dealers can provide comparable best price and execution on a particular trans-
action, consider the sale of Fund shares by a broker or dealer in selecting
among qualified broker-dealers. Each Fund may direct its Adviser(s) to use a
particular broker in exchange for commissions or rebates or research services
provided to the Fund. Although the Funds managed by Vanguard's Core Management
Group and Vanguard's Fixed Income Group do not operate pursuant to a formal
investment advisory agreements, the aforementioned requirements and policies
also apply to them.
TERMINATION OF ADVISORY AGREEMENTS
Each of the investment advisory agreements described in the preceding pages
are automatically terminated if assigned, and may be terminated without pen-
alty at any time (1) by either a vote of the respective Fund's Board of Direc-
tors (Trustees) or by vote of a majority of the outstanding voting securities
of the respective Fund, upon 60 days' written notice to the investment advi-
sor, or (2) by the investment adviser upon 90 days' written notice to the re-
spective Fund.
PURCHASE OF SHARES
The purchase price of shares of the Fund's Portfolios is the net asset value
next determined after the order is received. The net asset value is calculated
as of the close of the New York Stock Exchange (the "Exchange"), generally 4
p.m. Eastern time, on each day the Exchange is open for business and on any
other day on which there is sufficient trading in each Portfolio's underlying
securities to materially affect its net asset value per share. An order re-
ceived prior to the close of the Exchange will be executed at the price com-
puted on the date of receipt; and an order received after the close of the Ex-
change will be executed at the price computed on the next day the Exchange is
open.
The Fund reserves the right in its sole discretion (i) to suspend the offer-
ing of its shares, (ii) to reject purchase orders when in the judgment of man-
agement such rejection is in the best interest of the Fund, and (iii) to re-
duce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved
in sales of Portfolios' shares.
To assure that the Fund continues to operate in the manner set forth in this
Prospectus, including the desired composition of shareholder investments in
the Fund, the Officers of the Fund will monitor and report to the Trustees the
composition of the Fund's shareholder base. The Fund's shares will be marketed
to tax-advantaged and other retirement accounts. The Officers will recommend
to the Trustees any action they deem necessary to assure that investments in
the Fund do not become inconsistent with the policies applicable to the Fund.
This could include recommendations to limit sales to specific categories of
investors or to revise the suitability standards for investors.
A 0.50% portfolio transaction fee is deducted from purchases of the Total
International Portfolio, including any purchases made by each of the Portfo-
lios of Vanguard STAR Fund. Portfolio transaction fees are paid directly to
this Portfolio in order to offset transaction costs of buying international
securities in the European, Pacific and Emerging Markets Portfolios. The fee
is not a sales charge.
26
<PAGE>
STOCK CERTIFICATES
Your purchase will be made in full and fractional shares of STAR calculated
to three decimal places. Shares are normally held on deposit for shareholders
by STAR, which will send to shareholders a statement of shares owned at the
time of each transaction. This saves the shareholders the trouble of safekeep-
ing the certificates, and saves STAR the cost of issuing certificates. Share
certificates are, of course, available at any time upon written request at no
additional cost to shareholders. No certificates will be issued for fractional
shares. Share certificates will not be offered for the Income, Conservative
Growth, Moderate Growth and Growth Portfolios.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably practicable for STAR to dispose of securities owned by it, or fairly
to determine the value of its assets, and (iii) for such other periods as the
Commission may permit. Any redemptions may be more or less than the sharehold-
er's cost depending on the market value of the Fund's underlying securities.
The Fund has authorized Charles Schwab & Co., Inc. ("Schwab") to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and condi-
tions. Under this arrangement, the Fund will be deemed to have received a pur-
chase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions. Cus-
tomer orders that are properly transmitted to the Fund by Schwab, or if appli-
cable, Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders re-
ceived by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
SIGNATURE GUARANTEES
To protect your account, the Fund and Vanguard from fraud, signature guaran-
tees are required for certain redemptions. Signature guarantees enable the
Fund to verify the authenticity of a signature. Signature guarantees are re-
quired in connection with: (1) all redemptions, regardless of the amount in-
volved, when the proceeds are to be paid to someone other than the registered
owner(s); and (2) share transfer requests.
These requirements are not applicable to redemptions in Vanguard's prototype
retirement plans, except in connection with: (1) distributions made when the
proceeds are to be paid to someone other than the plan participant; (2) cer-
tain authorizations to effect exchanges by telephone; and (3) when proceeds
are to be wired. These requirements may be waived by the Fund in certain in-
stances.
Signature guarantees can be obtained from a bank, broker or any other guar-
antor that Vanguard deems acceptable. Notaries public are not acceptable guar-
antors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
27
<PAGE>
YIELD AND TOTAL RETURN
The yield of the STAR Portfolio for the 30-day period ended December 31,
1997 was 3.43%. The yield of the Income, Conservative Growth, Moderate Growth
and Growth Portfolios of the LifeStrategy Funds for the 30-day period ended
December 31, 1997 was 5.44%, 4.44%, 3.51% and 2.47%, respectively.
The average annual total return of the STAR Portfolio for the one- five- and
ten-year periods ended December 31, 1997 was 21.15%, 14.90% and 14.12%, re-
spectively. The average annual total return of the Life Strategy Funds--Income
Portfolio for the one-year period ended December 31, 1997 and, since its in-
ception on September 30, 1994 was 14.23% and 13.63%. The average annual total
return of the Life Strategy Funds--Conservative Growth Portfolio for the one-
year period ended December 31, 1997 and, since its inception on September 30,
1994 was 16.81% and 15.65%. The average annual total return of the Life Strat-
egy Funds--Moderate Growth Portfolio for the one-year period ended December
31, 1997 and, since its inception on September 30, 1994 was 19.77% and 18.04%.
The average annual total return of the Life Strategy Funds--Growth Portfolio
for the one-year period ended December 31, 1997 and, since its inception on
September 30, 1994 was 22.26% and 20.26%. The average annual total return of
the Total International Portfolio for the one year period ended December 31,
1997 and, since its inception on April 29, 1996 was -0.77% and -0.13%. Total
return is computed by finding the average compounded rates of return over the
one-year and since inception periods set forth above that would equate an ini-
tial amount invested at the beginning of the periods to the ending redeemable
value of the investment.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including Van-
guard STAR Fund, may from time to time, use one or more of the following un-
managed indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--is a well diversified
list of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of more than 7,000 common equity securi-
ties, covering all stocks in the U.S. for which daily pricing is available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market val-
ue-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.
28
<PAGE>
MSCI EMF INDEX--an arithmetic, market value-weighted average of the perfor-
mance of securities listed on the stock exchanges of twenty-two developing
countries.
MSCI EAFE + SELECT EMF INDEX--an arithmetic, market value-weighted average of
the performance of securities listed on the stock markets of Europe, Austra-
lia, the Far East and fourteen developing countries.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for convert-
ible issues of $100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mort-
gage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years
or greater.
LEHMAN LONG-TERM TREASURY BOND INDEX--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,000 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered, fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $25 million outstanding. This index includes
over 1,000 issues.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial In-
dex.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term Cor-
porate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index.)
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated, SEC-
registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB- or better. The index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a mar-
ket weighted index that contains individually priced U.S. Treasury, agency and
corporate investment grade bonds rated BBB- or better with maturities between
1 and 5 years. The index has a market value of over $1.6 trillion.
29
<PAGE>
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is
a market weighted index that contains individually priced U.S. Treasury, agen-
cy, and corporate securities rated BBB- or better with maturities between 5
and 10 years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The in-
dex has a market value of over $900 billion.
RUSSELL 2000 STOCK INDEX--consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
IBBOTSON ASSOCIATES YEARBOOK--various mutual fund performance data.
LIPPER BALANCED FUND AVERAGE--An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Analyt-
ical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of av-
erage non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER SMALL CAP FUND AVERAGE--the average performance of small company growth
funds as defined by Lipper Analytical Services, Inc. Lipper defines a small
company growth fund as a fund that by prospectus or portfolio practice, limits
its investments to companies on the basis of the size of the company. From
time to time, Vanguard may advertise using the average performance and/or the
average expense ratio of the small company growth funds. (This fund category
was first established in 1982. For years prior to 1982, the results of the
Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Ex-
changes or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded Stocks in the U.S.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Trust was established as a "business trust" under Pennsylvania law under
a Declaration of Trust dated July 19, 1983. The Declaration of Trust permits
the Trustees to issue an unlimited number of shares of beneficial interest,
without par value, from an unlimited number of separate classes ("Portfolios")
of shares. Currently, the Trust is offering shares of six Portfolios.
The shares of the Fund are fully paid and non-assessable, except as set
forth under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares have
no pre-emptive rights. The shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of Trustees can elect 100% of the Trustees if they choose to do so. A share-
holder is entitled to one vote for each full share held (and a fractional vote
for each fractional share held), then standing in his name on the books of the
Fund. On any matter submitted to a vote of shareholders, all shares of the
Fund then
30
<PAGE>
issued and outstanding and entitled to vote, irrespective of the class, shall
be voted in the aggregate and not by class: except (i) when required by the
Investment Company Act of 1940, shares shall be voted by individual class; and
(ii) when the matter does not affect any interest of a particular class, then
only shareholders of the affected class or classes shall be entitled to vote
thereon.
The Fund will continue without limitation of time, provided however that:
(1) Subject to the majority vote of the holders of shares of any Portfo-
lio outstanding, the Trustees may sell or convert the assets of such Port-
folio to another investment company in exchange for shares of such invest-
ment company, and distribute such shares, ratably among the shareholders of
such Portfolio;
(2) Subject to the majority vote of shares of any Portfolio outstanding,
the Trustees may sell and convert into money the assets of such Portfolio
and distribute such assets ratably among the shareholders of such Portfo-
lio; and
(3) Without the approval of the shareholders of any Portfolio, unless
otherwise required by law, the Trustees may combine the assets of any two
or more Portfolios into a single Portfolio so long as such combination will
not have a material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remain-
ing assets of any Portfolio as provided in paragraphs 1), 2) and 3) above, the
Fund shall terminate as to that Portfolio and the Trustees shall be discharged
of any and all further liabilities and duties hereunder and the right, title
and interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Pennsylvania law, shareholders of a trust may, under certain circum-
stances, be held personally liable as partners for the obligations of the
Trust. Therefore, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation, or instru-
ment entered into or executed by the Trust or the Trustees. The Declaration of
Trust provides for indemnification out of the Trust property of any share-
holder held personally liable for the obligations of the Trust. The Declara-
tion of Trust also provides that the Trust shall, upon request, assume the de-
fense of any claim made against any shareholder for any act or obligation of
the Trust and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obliga-
tions. The Trustees and officers of the Trust believe that, in view of the
above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be lia-
ble for errors of judgment or mistakes of fact or law, but nothing in the Dec-
laration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
FINANCIAL STATEMENTS
Vanguard STAR Fund's financial statements as of and for the year ended De-
cember 31, 1997, appearing in Vanguard STAR Portfolio 1997 Annual Report to
Shareholders, Vanguard Life Strategy Portfolios 1997 Annual Report to Share-
holders and the reports thereon of Price Waterhouse LLP, independent accoun-
tants, also appearing therein, are incorporated by reference in this Statement
of Additional Information.
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