<PAGE> 1
VANGUARD
STAR PORTFOLIO
Semiannual Report - June 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly motivated
men and women--who form the cornerstone of our operations. We could not survive
long--let alone prosper--without them. That's why we chose this fiscal year's
fund reports to celebrate the spirit, enthusiasm, and achievements of our crew.
(We call those who work at Vanguard crew members, not employees, because they
operate as a team to accomplish our mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
JOHN C. BOGLE JOHN J. BRENNAN
SENIOR CHAIRMAN CHAIRMAN & CEO
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS ................................ 1
THE MARKETS IN PERSPECTIVE ................................... 5
PERFORMANCE SUMMARY .......................................... 7
PORTFOLIO PROFILE ............................................ 8
FINANCIAL STATEMENTS ......................................... 10
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
Financial assets--led by a continuing bull market in stocks--produced generous
returns during the first six months of 1998, boosting Vanguard STAR Portfolio to
a +9.7% return for the half-year.
The adjacent table compares STAR's total return (capital change plus
reinvested dividends) for the six months with those of the unmanaged benchmarks
that represent the three asset classes in which we invest: for stocks, the
Standard & Poor's 500 Composite Stock Price Index; for bonds, the Lehman
Brothers Aggregate Bond Index; and for cash reserves, the Salomon Brothers
Three-Month U.S. Treasury Bill Index.
STAR's total return is based on an increase in net asset value from $17.38 per
share on December 31, 1997, to $18.82 per share on June 30, 1998, with the
latter figure adjusted for a dividend of $0.25 per share paid from net
investment income. On June 30, STAR's current annualized yield was 3.17%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1998
- -----------------------------------------------------------------
<S> <C>
Vanguard STAR Portfolio + 9.7%
- -----------------------------------------------------------------
Composite Fund Average* + 8.4%
- -----------------------------------------------------------------
STAR Composite Index* +12.3%
- -----------------------------------------------------------------
S&P 500 Index +17.7%
Lehman Aggregate Bond Index + 3.9
Salomon Three-Month Treasury Index + 2.6
- -----------------------------------------------------------------
</TABLE>
*The STAR Composite Index is weighted 62.5% S&P 500 Index, 25% Lehman Aggregate
Bond Index, and 12.5% Salomon Three-Month Treasury Index. The Composite Fund
Average is similarly weighted using the average general equity mutual fund,
average fixed-income fund, and average money market fund, respectively.
THE PERIOD IN REVIEW
The U.S. economy grew vigorously, inflation was subdued, and interest rates
declined during the first half of 1998. Strong consumer spending, triggered by
high employment and rising wages, was the economy's propellant and was more than
enough to offset the negative effects of Asia's severe economic slump.
Asia's troubles were partly responsible for the benign behavior of
inflation--consumer prices rose only 1.1% for the six months and 1.7% for the
twelve months ended June 30. And low inflation soothed the bond market, where
prices rose and interest rates declined: The yield on the 30-year U.S. Treasury
bond was 5.63% on June 30, down 29 basis points (0.29 percentage point) from its
yield at the start of the year, reflected in a price increase of about 3%.
Stock prices rose in five of the period's six months, with the market
rebounding strongly in June from a modest setback in May. The stock market's
advance was--once again--led by a relatively narrow segment of blue-chip growth
companies. More than half of the S&P 500 Index's remarkable +17.7% return during
the period was accounted for by fewer than 20 very large-capitalization stocks.
The growth component of the S&P 500 Index returned +23.1%, nearly double the
+12.1% earned by the value stocks within the Index. The Wilshire 4500 Index,
comprising stocks outside the S&P 500, earned +9.4%, a return that was excellent
except in comparison to the large-cap segment.
Among the Vanguard funds that make up STAR are some that concentrate on
mid- and small-cap stocks and have, on balance, a tilt toward value stocks. This
was not the ideal mix during a period when the market had a strong bias toward
large-cap growth stocks, and it was the main reason that STAR trailed its
unmanaged Composite Index
1
<PAGE> 4
by 2.6 percentage points during the half-year. That said, we note that while
large-cap growth stocks have lately been the market's best performers, smaller
stocks and value stocks have in the past played the leadership role for
substantial periods of time. Over long periods, in fact, returns from growth and
value stocks and from large- and small-cap issues have been very similar.
As you know, STAR invests in nine Vanguard funds. Among its six equity
holdings, only the U.S. Growth Portfolio, which emphasizes large-cap growth
stocks, beat the S&P 500 Index. But it did so with a flourish, surpassing the
Index by more than 6 percentage points. Explorer Fund--with its emphasis on
small-cap stocks--was the laggard among our six equity-fund holdings.
STAR's bond holdings also performed well. While the GNMA Portfolio fell 0.6
percentage point short of the +3.9% return on the Lehman Aggregate Bond Index,
our Long-Term Corporate Portfolio's return surpassed that of the Index by 1.4
percentage points. The Prime Portfolio also slightly outperformed its benchmark,
the Salomon Three-Month Treasury Index. The table at left summarizes the
six-month performance of STAR's underlying funds.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURNS
PERCENT OF SIX MONTHS ENDED
VANGUARD PORTFOLIO STAR ASSETS JUNE 30, 1998
- -----------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
Windsor II 27.4% +14.8%
Windsor 14.9 +10.3
U.S. Growth 5.3 +23.9
Morgan Growth 5.2 +16.2
Explorer 5.0 + 3.0
PRIMECAP 4.9 +11.9
- -----------------------------------------------------------------
BOND FUNDS
Long-Term Corporate 12.5% + 5.3%
GNMA 12.5 + 3.3
- -----------------------------------------------------------------
MONEY MARKET FUND
Prime 12.3% + 2.7%
- -----------------------------------------------------------------
TOTAL 100.0% + 9.7%
</TABLE>
IN SUMMARY
We confess to having been surprised--though quite gratified--by the strength of
the stock market's continuing advance during the first half of 1998.
Though we claim no predictive powers, we feel safe in saying that such
outsized returns can't continue indefinitely. And we reiterate our long-standing
recommendation that investors hold balanced portfolios--consisting of bond and
money market funds in addition to stock funds--appropriate to their unique
financial situations, goals, and temperament. We feel that STAR Portfolio,
because it comprises all of those elements, offers the sort of balance and
diversification that can be so helpful in steering a steady course toward your
long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 16, 1998
2
<PAGE> 5
Notice to Shareholders
At a special meeting on June 30, 1998, shareholders of Vanguard STAR Portfolio
overwhelmingly approved six proposals. The proposals and voting results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. Vanguard STAR Fund will not
realize a tax savings as a result of the change, but it will benefit from the
efficiency of being organized the same way as all other Vanguard funds. Approved
by 96.35%* of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
555,282,847 11,339,142 9,715,775
---------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. Permits STAR
Portfolio to participate in Vanguard's interfund lending program, which allows
funds to loan money to each other if--and only if--it makes good financial sense
to do so on both sides of the transaction. The interfund lending program won't
be an integral part of your portfolio's investment program; it is a contingency
arrangement for managing unusual cash flows. Approved by 94.19% of the shares
voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
304,253,363 9,905,049 8,872,547
---------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 92.94% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
300,213,891 12,738,403 10,078,665
---------------------------------------------------
</TABLE>
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminated the portfolio's policy of avoiding
investments in securities that are owned in certain amounts by Trustees,
officers, and key advisory personnel. This policy was well-intentioned, but
wrongly focused and unnecessary in light of the portfolio's Code of Ethics and
other regulatory protections against conflicts of interest on the part of
portfolio management. Approved by 92.71% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
299,472,667 13,361,594 10,196,698
---------------------------------------------------
</TABLE>
*The results shown for this proposal represent votes cast on behalf of all of
the portfolios of Vanguard STAR Fund: Vanguard STAR Portfolio, Vanguard
LifeStrategy Portfolios, and Vanguard Total International Portfolio.
(continued on next page)
3
<PAGE> 6
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN UNSEASONED COMPANIES. This
change eliminates the portfolio's policy of not investing more than 5% of net
assets in securities issued by companies that have fewer than three years of
operating history, taking into account any predecessors. Approved by 90.65% of
the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
292,826,890 18,598,586 11,605,482
---------------------------------------------------
</TABLE>
2e. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN RESERVES. This change allows
the portfolio to invest all or part of its reserves--constituting 10%-20% of its
assets--in the Short-Term Corporate Portfolio of Vanguard Fixed Income
Securities Fund. Short-Term Corporate is a sensible alternative to investing in
Vanguard Money Market Reserves-Prime Portfolio because it will, we believe,
modestly increase your portfolio's total return without exposing it to a much
greater degree of risk. Approved by 94.42% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
304,999,320 8,562,829 9,468,810
---------------------------------------------------
</TABLE>
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
Six Months Ended June 30, 1998
Blue skies predominated for U.S. financial markets during the first six months
of 1998, and even the occasional clouds had silver linings. The bond market
provided solid returns during the half-year, while the stock market's
performance was extraordinarily strong.
After expanding at a 5.4% annual pace during the first quarter, the U.S.
economy kept steaming along through June, fueled by powerful increases in
household spending. Consumers had reason to be upbeat: plentiful jobs
(unemployment fell to 4.3% of the workforce in May); rising wages (personal
income in May was 5.9% higher than in May 1997); and tame inflation (consumer
prices in June were up only 1.7% from a year before).
The economic push provided by consumers more than compensated for the drag
caused by Asia's severe economic problems. Weakening currencies and business
slowdowns in Asia cut into U.S. exports and lowered the cost of Asian imports,
causing the U.S. trade deficit to hit record levels. Ominously, Asia's problems
appear to be more serious and enduring than many economists expected. Yet for
Americans this "Asian contagion" has a bright side: It serves as an escape valve
for the inflationary pressures that ordinarily would be expected to build up
with the U.S. economy humming along at high speed.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998
-------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 17.7% 30.2% 23.1%
Russell 2000 Index 4.9 16.5 16.0
MSCI EAFE Index 16.1 6.4 10.3
- --------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.9% 10.5% 6.9%
Lehman 10-Year Municipal Bond Index 2.6 8.5 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- --------------------------------------------------------------------
OTHER
Consumer Price Index 1.1% 1.7% 2.5%
- --------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. EQUITY MARKETS
The mixture of robust economic growth and anemic inflation was a tonic for the
U.S. stock market. Although prices generally rose, there were striking
disparities in returns between large-capitalization and small-cap stocks and
between growth and value stocks. The large-cap-dominated S&P 500 earned 17.7%
during the six months, nearly double the 9.4% return on the rest of the market
(as measured by the Wilshire 4500 Index) and more than triple the 4.9% return on
the small-cap Russell 2000 Index. Within the S&P 500 Index, growth stocks were
up 23.1%, while value stocks rose 12.1%.
A decline in interest rates contributed to the stock market's rise, as
falling rates on bonds tend to make equities more attractive and to boost the
price investors will pay for each dollar of a stock's earnings or dividends. Yet
growth in earnings and dividends--the long-term underpinning of stock
prices--was unimpressive during the first half of 1998.
Corporate earnings estimates were reduced in June, the tenth consecutive
month in which securities analysts have cut their earnings estimates, according
to I/B/E/S International, a financial research group. Earnings by the S&P 500
companies were expected to
5
<PAGE> 8
rise by only about 2% for the first half of 1998, I/B/E/S reported. With gains
in prices outstripping increases in earnings and dividends, stock valuations are
at or near all-time highs, an indication that investors expect ideal conditions
to continue.
Technology stocks were the best-performing sector during the first half of
1998, generating a 32.7% return. Three other sectors of the stock market--health
care, consumer discretionary stocks such as retailers, and auto &
transportation--each provided returns of about 25% for the six months. Companies
involved in energy, chemicals, or other commodity-based businesses were
generally laggards. Prices of many commodities have declined as Asia's economic
funk cuts demand for energy and other industrial materials in the face of
plentiful supplies.
U.S. FIXED-INCOME MARKETS
Investors in fixed-income securities enjoyed a moderate rise in the market value
of their holdings because of declining interest rates. This price appreciation,
added to coupon interest income, resulted in solid total returns. The 3.9% total
return of the Lehman Aggregate Bond Index during the half-year brought its
return for the 12 months ended June 30 to 10.5%, or a very generous 8.8% after
adjustment for inflation.
Yields on 10-year and 30-year U.S. Treasury bonds declined by 29 basis
points (0.29 percentage point) to 5.45% and 5.63%, respectively, during the
first half of 1998, with most of the drop occurring during the second quarter.
The yield on 3-month Treasury bills declined 36 basis points to 4.99%. Mild
inflation--consumer prices were up 1.1% for the half-year--enabled rates to
decline despite the economy's strong growth.
Yields on corporate and municipal bonds did not decline as far as those on
Treasury securities because of a large increase in the supply of new bonds
issued by companies and municipalities taking advantage of lower rates to
refinance old debt. Similarly, mortgage-backed securities did not match
Treasuries' performance because of expectations that large numbers of homeowners
would pay off old, higher-coupon mortgage loans and refinance with new,
lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Stock markets in Europe soared while those in Asia and most emerging economies
suffered steep declines in U.S.-dollar terms. The 16.1% overall return from
international markets, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index, masked the divergence between Europe and
other regions.
Europe's markets were up 27.1% when measured in local currencies and 26.5%
in U.S. dollars, after adjusting for a slight overall rise in the dollar's
value. Stocks benefited from an upswing in most European economies, from signs
that corporate managers are increasingly focused on shareholder value, and from
optimism concerning next year's planned adoption of the euro as a single
European currency.
In the Pacific, which is dominated by Japan's stock market, stocks were
buffeted by several problems: slowing growth in economic activity; continued
instability in currencies; political upheavals; and widespread worries about
corporate and banking insolvencies. On balance, the region's stocks fell 6.0% in
U.S.-dollar terms. Japanese stocks were down 2.5%, but losses were more severe
in the region's smaller markets.
Emerging markets were, on balance, down sharply. Asian stock markets were
hurt by continued weakness in the currency values of several countries, by
Japan's recession, and by a growing conviction that the region's economic
troubles are far from transitory. Venezuela and Mexico, both key oil-producing
nations, were hard hit by falling oil prices.
6
<PAGE> 9
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
STAR PORTFOLIO
TOTAL INVESTMENT RETURNS: MARCH 29, 1985-JUNE 30, 1998
- ---------------------------------------------------------
STAR PORTFOLIO COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1985 14.5% 0.5% 15.0% 15.1%
1986 5.5 8.4 13.9 12.6
1987 -5.5 7.2 1.7 3.1
1988 11.7 7.3 19.0 11.8
1989 11.8 7.0 18.8 18.0
1990 -9.6 6.0 -3.6 -1.6
1991 18.1 6.1 24.2 26.9
1992 6.3 4.2 10.5 8.0
1993 7.1 3.8 10.9 10.6
1994 -4.1 3.9 -0.2 -1.2
1995 23.7 4.9 28.6 23.3
1996 12.0 4.1 16.1 13.6
1997 17.3 3.9 21.2 17.9
1998** 8.3 1.4 9.7 8.4
- ---------------------------------------------------------
</TABLE>
*62.5% average general equity fund, 25% average fixed-income fund, and 12.5%
average money market fund.
**Six months ended June 30, 1998.
See Financial Highlights table on page 14 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------------------
INCEPTION 10 YEARS
- ------------------------------------------------------------------------------------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STAR Portfolio 3/29/1985 19.93% 15.69% 8.61% 5.05% 13.66%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
PORTFOLIO PROFILE
STAR Portfolio
This Profile presents key characteristics of the portfolio as of June 30, 1998,
including its allocations to various asset classes and to underlying Vanguard
funds. Key elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------------------------
<S> <C>
Yield 3.2%
Expense Ratio 0%
Average Weighted Expense Ratio 0.37%*
</TABLE>
*For underlying portfolios; annualized.
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- -----------------------------------------------------------
<S> <C>
Stocks 63%
Bonds 25%
Cash 12%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
STAR S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.91 1.00
Beta 0.58 1.00
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION TO FUNDS
- -----------------------------------------------------------
<S> <C>
Vanguard/Windsor II 27.4%
Vanguard/Windsor Fund 14.9
Vanguard U.S. Growth Portfolio 5.3
Vanguard/Morgan Growth Fund 5.2
Vanguard Explorer Fund 5.0
Vanguard/PRIMECAP Fund 4.9
Vanguard Fixed Income Securities Fund-
Long-Term Corporate Portfolio 12.5
GNMA Portfolio 12.5
Vanguard Money Market Reserves-
Prime Portfolio 12.3
- -----------------------------------------------------------
Total 100.0%
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
EQUITY INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
8
<PAGE> 11
AVERAGE WEIGHTED EXPENSE RATIO. Portfolios that invest in other Vanguard funds
incur no direct expenses, but do bear their share of the operating,
administrative, and advisory expenses of the underlying funds. The average
weighted expense ratio is the average of these expense ratios, weighted in
proportion to the amount of the portfolio represented by each underlying fund.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a portfolio's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
PORTFOLIO ALLOCATION TO FUNDS. This table shows the distribution of a
portfolio's assets in underlying Vanguard funds.
PORTFOLIO ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of assets.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days (7 days for money market portfolios) and is
annualized, or projected forward for the coming year.
9
<PAGE> 12
FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the portfolio's investments in shares
of each Vanguard fund, along with the value of each investment on the last day
of the reporting period. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the portfolio's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the
portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the portfolio's net assets on both a dollar and per-share
basis. Because all income and any realized gains must be distributed to
shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the portfolio's
investments and their cost, and reflects the gains (losses) that would be
realized if the portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
STAR PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES (100.1%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS (62.7%)
Vanguard/Windsor II 68,856,089 $2,248,840
Vanguard/Windsor Fund 65,435,336 1,217,752
Vanguard U.S. Growth Portfolio 12,108,072 430,563
Vanguard/Morgan Growth Fund 21,203,252 423,853
Vanguard Explorer Fund 7,262,207 413,510
Vanguard/PRIMECAP Fund 9,096,274 400,145
------------
5,134,663
------------
BOND FUNDS (25.0%)
Vanguard Fixed Income Securities Fund-Long-Term Corporate Portfolio 109,692,898 1,026,726
Vanguard Fixed Income Securities Fund-GNMA Portfolio 97,925,948 1,020,388
------------
2,047,114
------------
MONEY MARKET FUND (12.4%)
Vanguard Money Market Reserves-Prime Portfolio--Investor Shares 1,010,128,357 1,010,128
------------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $6,001,410) 8,191,905
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a Pooled Cash Account
5.67%, 7/1/1998
(COST $3,704) $3,704 3,704
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $6,005,114) 8,195,609
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Other Assets $ 22,293
Liabilities (30,137)
------------
(7,844)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 434,988,447 shares of beneficial interest
(unlimited authorization--no par value) $8,187,765
==========================================================================================================================
NET ASSET VALUE PER SHARE $18.82
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $5,963,344 $13.71
Undistributed Net Investment Income 4,150 .01
Accumulated Net Realized Gains 29,776 .07
Unrealized Appreciation--Note D 2,190,495 5.03
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $8,187,765 $18.82
==========================================================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF OPERATIONS
This Statement shows the portfolio's Income Distributions Received from the
other Vanguard funds in which it invests. This Statement also shows any Capital
Gain Distributions Received from the other funds' realized net gains, Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
STAR PORTFOLIO
SIX MONTHS ENDED JUNE 30, 1998
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Income Distributions Received $111,557
Interest 117
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 111,674
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received 19,148
Investment Securities Sold 12,004
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 31,152
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 581,361
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $724,187
=========================================================================================================================
</TABLE>
12
<PAGE> 15
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the portfolio's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the portfolio's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
portfolio, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
STAR PORTFOLIO
-----------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1998 DEC. 31, 1997
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 111,674 $ 229,478
Realized Net Gain 31,152 464,498
Change in Unrealized Appreciation (Depreciation) 581,361 571,126
-----------------------------------
Net Increase in Net Assets Resulting from Operations 724,187 1,265,102
-----------------------------------
DISTRIBUTIONS
Net Investment Income (107,437) (226,950)
Realized Capital Gain -- (466,547)
-----------------------------------
Total Distributions (107,437) (693,497)
-----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 586,146 954,494
Issued in Lieu of Cash Distributions 104,480 678,488
Redeemed (474,990) (712,635)
-----------------------------------
Net Increase from Capital Share Transactions 215,636 920,347
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 832,386 1,491,952
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 7,355,379 5,863,427
-----------------------------------
End of Period $8,187,765 $7,355,379
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 31,916 55,184
Issued in Lieu of Cash Distributions 5,573 39,523
Redeemed (25,827) (41,066)
-----------------------------------
Net Increase in Shares Outstanding 11,662 53,641
=========================================================================================================================
</TABLE>
13
<PAGE> 16
FINANCIAL HIGHLIGHTS
This table summarizes the portfolio's investment results and distributions to
shareholders on a per-share basis. The table also presents the portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. The expense ratio is zero because the portfolio pays no direct
expenses; the portfolio's share of the expenses of the other funds in which it
invests reduces the income received from them. The data in the table will help
you assess: the variability of the portfolio's net income and total returns from
year to year; the relative contributions of net income and capital gains to the
portfolio's total return; the extent to which the portfolio tends to distribute
capital gains; and the portion of capital gains distributions representing the
"pass-through" of capital gains distributions received from other Vanguard
funds. The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
portfolio for one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
STAR PORTFOLIO
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.38 $15.86 $15.03 $12.61 $13.41 $12.89
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .60 .58 .590 .53 .47
Capital Gain Distributions Received .04 1.06 .63 .435 .26 .36
Net Realized and Unrealized Gain (Loss)
on Investments 1.39 1.65 1.19 2.550 (.82) .56
------------------------------------------------------------------------
Total from Investment Operations 1.69 3.31 2.40 3.575 (.03) 1.39
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.25) (.59) (.59) (.590) (.52) (.47)
Distributions from Realized Capital Gains -- (1.20) (.98) (.565) (.25) (.40)
------------------------------------------------------------------------
Total Distributions (.25) (1.79) (1.57) (1.155) (.77) (.87)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.82 $17.38 $15.86 $15.03 $12.61 $13.41
=========================================================================================================================
TOTAL RETURN 9.73% 21.15% 16.11% 28.64% -0.21% 10.88%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $8,188 $7,355 $5,863 $4,842 $3,766 $3,628
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 2.84%* 3.46% 3.71% 4.12% 4.01% 3.67%
Portfolio Turnover Rate 11%* 15% 18% 13% 9% 3%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
14
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
Vanguard STAR Portfolio is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. The portfolio follows a
balanced investment strategy by investing in selected Vanguard funds. The
portfolio invests 60% to 70% of its net assets in U.S. stock funds
(predominantly large-capitalization value stock funds), 20% to 30% in bond
funds, and about 10% in a money market fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The portfolio consistently follows such
policies in preparing its financial statements.
1. VALUATION: Investments are valued at the net asset value of each
Vanguard fund determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date. Temporary cash
investments are valued at cost, which approximates market value.
2. FEDERAL INCOME TAXES: The portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
4. REPURCHASE AGREEMENTS: The portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
5. OTHER: Income and capital gain distributions received are recorded on
the ex-dividend date. Security transactions are accounted for on the date
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
B. Under a special service agreement, The Vanguard Group furnishes corporate
management, administrative, marketing, and distribution services to the
portfolio. The special service agreement provides that Vanguard will reimburse
the portfolio's expenses to the extent of savings in administrative and
marketing costs realized by Vanguard in the operation of the portfolio.
Accordingly, all expenses incurred by the portfolio during the six months ended
June 30, 1998, were reimbursed by Vanguard. The portfolio's Trustees and
officers are also Directors and officers of Vanguard and the funds in which the
portfolio invests.
C. During the six months ended June 30, 1998, the portfolio purchased
$524,346,000 of investment securities and sold $391,604,000 of investment
securities other than money market fund and temporary cash investments.
D. At June 30, 1998, unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $2,190,495,000,
consisting entirely of unrealized gains on securities that had risen in value
since their purchase.
15
<PAGE> 18
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BRUCE K. MacLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 19
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q562-6/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
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FUND INFORMATION
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and should be read carefully before you invest or send money. Prospectuses can
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