<PAGE> 1
VANGUARD
STAR FUND
[PHOTO]
SEMIANNUAL
REPORT
JUNE 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- The 200th anniversary of the Battle of the Nile, which commenced on
August 1, 1798. HMS Vanguard, the victorious British flagship at the
Nile, is our namesake. And its motto--"Leading the way"--serves as a
guiding principle for our company.
- The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group.
Mr. Morgan was friend and mentor to Vanguard founder John C. Bogle,
and helped to shape the standards and business principles that Mr.
Bogle laid down for Vanguard at its beginning nearly 25 years ago: a
stress on balanced, diversified investments; insistence on fair
dealing and candor with clients; and a focus on long-term investing.
To our great regret, Mr. Morgan died on September 2, 1998.
- The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual
fund, and one of only a handful of funds created in the 1920s that are
still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
4
FUND PROFILE
6
PERFORMANCE SUMMARY
8
FINANCIAL STATEMENTS
9
FOR AN UPDATE ON OUR YEAR 2000
PREPAREDNESS, SEE PAGE 15.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
JOHN J. BRENNAN JOHN C. BOGLE
CHAIRMAN & CEO SENIOR CHAIRMAN
Powerful gains in the stock market more than made up for a modest downturn in
bond prices during the six months ended June 30, 1999, propelling Vanguard STAR
Fund to a strong return of +7.8% for the first half of the year.
The table below presents the fund's total return (capital change plus
reinvested dividends) for the period. It also shows the returns of our
comparative standards, both of which STAR outperformed. The first of these
standards is a portfolio made up of mutual funds weighted in accordance with
our asset-allocation guidelines. The second is a composite benchmark made up of
indexes representing the asset classes in which we invest: for stocks, the
Wilshire 5000 Equity Index, a proxy for the entire U.S. stock market; for
bonds, the Lehman Brothers Aggregate Bond Index; and for cash, the Salomon
Smith Barney 3-Month U.S. Treasury Bill Index. We also present, for your
information, the return for the large-capitalization-dominated Standard &
Poor's 500 Index.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
- ------------------------------------------------------------------------
<S> <C>
Vanguard STAR Fund + 7.8%
- ------------------------------------------------------------------------
Composite Fund Average* + 7.0%
- ------------------------------------------------------------------------
STAR Composite Index* + 7.2%
- ------------------------------------------------------------------------
Wilshire 5000 Index +11.8%
S&P 500 Index +12.4
Lehman Aggregate Bond Index - 1.4
Salomon Smith Barney
3-Month Treasury Index + 2.2
- ------------------------------------------------------------------------
</TABLE>
* The STAR Composite Index is weighted 62.5% Wilshire 5000 Index, 25% Lehman
Aggregate Bond Index, and 12.5% Salomon Smith Barney 3-Month Treasury Index.
The Composite Fund Average is similarly weighted using the average general
equity mutual fund, average fixed-income fund, and average money market fund,
respectively.
STAR Fund's return is based on an increase in net asset value from $17.96
per share on December 31, 1998, to $19.09 per share on June 30, 1999, and is
adjusted for a dividend of $0.26 per share paid from net investment income. The
fund did not distribute any net realized capital gains during the half-year.
STAR's annualized yield as of June 30 was 3.0%.
THE PERIOD IN REVIEW
The key influences on financial markets during the first half of 1999 were the
surprising strength of the U.S. economy's long-running expansion, promising
corporate earnings, and the increasing signs that a number of shaky foreign
economies were on firmer footing. These factors were responsible for both
broad-based gains in U.S. stocks and increases in interest rates, which sent
bond prices lower.
The U.S. stock market, as measured by the Wilshire 5000 Index, gained
+11.8%--equivalent to more than a full year's return based on historical norms.
But the half-year saw a sharp rotation in market leadership. As the outlook for
global economic growth kept improving, there was a notable revival in cyclical
stocks--commodity-related companies, machinery makers, and other firms whose
profit prospects are most closely tied to the economy's ups and downs. This was
a welcome change for the cyclicals and other "value" stocks, which had lagged
the market not just in the first quarter but for much of the last five years.
Within the S&P 500 Index, the value stocks--those characterized by
1
<PAGE> 4
above-average dividend yields and below-average price/earnings ratios--took
the lead during the second quarter and for the first half, when they earned
+14.0%, while growth stocks were up +11.0%.
Also rebounding vigorously were small-cap stocks, which had trailed far
behind large-caps in recent years. The small-cap Russell 2000 Index nicely
outpaced the S&P 500 during the second quarter, although it trailed the
large-cap index for the half-year, +9.3% to +12.4%.
For bondholders, a surging economy has a dark side: the possibility that
wage pressures and capacity constraints will push up inflation, which
diminishes the buying power of future bond interest and principal payments.
Interest rates held steady in January, but rose thereafter. By June 30, yields
on U.S. Treasury notes and bonds were up by roughly 1 percentage point from
their year-end 1998 levels. The benchmark 30-year Treasury bond's yield
increased 86 basis points (0.86 percentage point), from 5.10% to 5.96%. The
rate rise was smaller for short-term securities, with the 3-month Treasury
bill's yield rising 33 basis points, from 4.45% on December 31 to 4.78% on June
30.
The Lehman Aggregate Bond Index, which has an intermediate-term average
maturity and is a benchmark for the taxable bond market, returned -1.4%, as a
- -4.4% price decline more than offset +3.0% in interest income for the six
months. Price declines were larger for longer-term bonds, whose prices are more
sensitive to interest rate fluctuations.
PERFORMANCE OVERVIEW
Returns from the Vanguard funds that STAR holds diverged widely, with strong
gains for the stock funds and declines for the two bond funds. The net result,
however, was a more-than-respectable return of +7.8%, which exceeded the
composite returns of mutual funds (+7.0%) and broad market indexes (+7.2%)
weighted in accordance with STAR's target mix of 62.5% stocks, 25% bonds, and
12.5% cash reserves.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
TOTAL RETURNS
PERCENTAGE OF SIX MONTHS ENDED
VANGUARD FUND STAR ASSETS JUNE 30, 1999
- -----------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
Windsor II 26.9% +11.0%
Windsor 16.5 +17.4
Explorer 5.5 + 9.9
PRIMECAP 5.3 +17.8
Morgan Growth 5.2 +14.3
U.S. Growth 4.8 + 6.9
- -----------------------------------------------------------
BOND FUNDS
GNMA 12.3% - 0.5%
Long-Term Corporate 12.0 - 5.0
- -----------------------------------------------------------
MONEY MARKET FUND
Prime 11.5% + 2.4%
- -----------------------------------------------------------
COMBINED 100.0% + 7.8%
- -----------------------------------------------------------
</TABLE>
Three of STAR's stock funds--Windsor, PRIMECAP, and Morgan
Growth--outpaced the Wilshire 5000 Index, while Windsor II, Explorer, and U.S.
Growth trailed it. Taken as a group, STAR's equities earned +13.1%, ahead of
the +11.8% return of the Wilshire 5000.
While it's a mistake to make too much of a brief period's results, we
believe that the half-year returns make an important point on behalf of
diversification. During 1998, our worst-performing holding was Windsor Fund,
which gained only +0.8%. But during the first half of this year, Windsor was
our second-best holding, as the cyclical stocks that it emphasized roared back.
Meanwhile, U.S. Growth Fund, which led our holdings in 1998 with an astonishing
+40.0% return, posted the lowest gain of our six stock funds (+6.9%) during
this year's first half. Given the unpredictability of the financial markets,
having exposure to different sectors
2
<PAGE> 5
of the stock market--as well as to fixed-income and money market funds--is a
time-tested way to control risk while seeking investing's rewards.
Our two fixed-income holdings, the Long-Term Corporate and GNMA Funds,
posted negative returns due to the rise in interest rates during the first half
of the year. Because the average maturity of its holdings is roughly 20 years,
our Long-Term Corporate Fund is particularly sensitive to changing interest
rates. Last year, that factor helped to boost the fund's return. During the
first half of 1999, the fund's interest income of +2.9% was more than offset by
a share-price decline of -7.9%. Over the long haul, the effects of fluctuating
interest rates tend to offset one another, leaving interest income as the
primary influence on bond fund returns.
Our GNMA Fund's return was -0.5%, as its share-price decline of -3.6% only
slightly exceeded the +3.1% interest income it earned. Prices of
mortgage-backed securities held up better than those of most other bonds
because the rise in interest rates reduced the likelihood that mortgage-backed
securities would be paid off early as homeowners refinanced mortgage loans.
Our Prime Money Market Fund earned +2.4% during the half-year, exceeding
the +2.2% return of the Salomon Smith Barney 3-Month Treasury Index.
IN SUMMARY
The divergence between stock and bond returns and the sudden shift in
leadership among stocks during the first half of 1999 reinforced the benefits
of a balanced investment approach--the bedrock principle on which Vanguard STAR
Fund is built. Diversifying your investment program through holdings in stock
funds, bond funds, and cash reserves gives you exposure to the rewards of the
financial markets while spreading out the risks that go along with investing.
Sticking with a balanced investment program can be trying at times,
particularly when one market segment runs ahead of the others and seems to be
"the only game in town." But in the long run, such a program helps investors to
ride out the inevitable downturns en route to capturing the returns needed to
meet your financial goals. So once you've decided on an investment plan suited
to your time horizon, goals, and tolerance for risk, we urge you to "stay the
course."
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 13, 1999
NOTICE TO SHAREHOLDERS
In the past, the semiannual income dividend that Vanguard STAR Fund
distributed to shareholders at midyear was paid at a "set rate" of $0.25 per
share. Income the fund earned during the period that was in excess of the set
rate was distributed in the December income dividend. Beginning with the
dividend of $0.26 per share that was paid in June 1999, STAR Fund will
distribute income on a "pay as you go" basis, rather than according to a set
rate. This policy change provides for a more even distribution of income by
paying out substantially all of the income earned during the semiannual period
to shareholders at midyear.
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999
[PHOTO]
A markedly improved global economic outlook during the first half of 1999 led
to mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises in
Asia, Russia, and some Latin American nations would restrain business activity
worldwide, even in the United States, which has been the world's economic
locomotive. By spring, however, a consensus emerged that global economic
activity was likely to be solid, if not robust. This change in sentiment
stemmed from several factors, including further vigorous growth in the U.S.
economy, a belief that Asia's slump had bottomed out, and moves in Europe to
ease monetary policy to encourage growth.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both
of which had been among Wall Street's wallflowers in recent years.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
- -------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
- -------------------------------------------------------------------------
OTHER
Consumer Price Index 1.4% 2.0% 2.3%
- -------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
Large-cap growth stocks, which are generally perceived as less vulnerable
than other stocks to economic slowdowns, continued to lead the market's climb
during the first quarter of the year. During the second quarter, however, value
stocks--especially producers of commodity products such as oil, aluminum, and
chemicals--moved to the front of the pack. Providing support were generally
upbeat corporate profit reports. Indeed, earnings gains were sufficient to send
prices higher despite rising interest rates, which often depress stock prices
as well as bond prices. For the six months, the S&P 500 Index's value stocks
posted a 14.0% return while its growth stocks gained 11.0% as a group.
4
<PAGE> 7
Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second
quarter. Even so, the cumulative return of the Russell 2000 over the past three
years lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the
Russell 2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.
U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage point--a
significant rise for a six-month period. The yield of the 30-year Treasury bond
rose 86 basis points, to 5.96% on June 30 from 5.10% on December 31, 1998. The
yield of the 10-year Treasury rose 113 basis points, to 5.78% from 4.65%. Money
market rates didn't rise as far: Yields on 3-month T-bills increased on balance
by only 33 basis points, to 4.78% on June 30. Bond prices, which move in the
opposite direction from interest rates, fell. The Lehman Aggregate Bond Index,
a benchmark for investment-grade taxable bonds, declined 1.4% on a total-return
basis, as bond prices declined an average of 4.4%, outweighing the 3.0% in
interest income for the period.
INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies
during the six months. However, a pervasive rise in the value of the U.S.
dollar against other currencies reduced returns for U.S. investors (returns
from abroad are augmented when the dollar falls in value against other
currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in
U.S. dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the
return from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.
5
<PAGE> 8
FUND PROFILE
STAR FUND
This Profile presents key characteristics of the fund as of June 30, 1999,
including its allocations to various asset classes and to underlying Vanguard
funds. Key elements of this Profile are defined on page 7.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------------------------
<S> <C>
Yield 3.0%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.37%
</TABLE>
*For underlying funds; annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -------------------------------------------------------
<S> <C>
STOCKS 64%
BONDS 24%
CASH RESERVES 12%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------------------
STAR S&P 500
- -------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.62 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING VANGUARD FUNDS
- -------------------------------------------------------
<S> <C>
Windsor II Fund 26.9%
Windsor Fund 16.5
Explorer Fund 5.5
PRIMECAP Fund 5.3
Morgan Growth Fund 5.2
U.S. Growth Fund 4.8
GNMA Fund 12.3
Long-Term Corporate Fund 12.0
Prime Money Market Fund 11.5
- ---------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- -------------------------------------------------------
<S> <C>
AVERAGE MATURITY Long
CREDIT QUALITY Investment-Grade Corporate
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- -------------------------------------------------------
<S> <C>
STYLE Value
MARKET CAP Large
</TABLE>
6
<PAGE> 9
ALLOCATION TO UNDERLYING VANGUARD FUNDS. This table shows the distribution of a
fund's assets in underlying Vanguard funds.
AVERAGE WEIGHTED EXPENSE RATIO. Funds that invest in other Vanguard funds incur
no direct expenses, but do bear proportionate shares 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 fund invested in each underlying fund.
BETA. A measure of the magnitude of a fund'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 fund 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 fund'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 fund'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 fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
7
<PAGE> 10
PERFORMANCE SUMMARY
STAR FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MARCH 29, 1985-JUNE 30, 1999
- ----------------------------------------------------------------
STAR FUND 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 9.0 3.4 12.4 11.3
1999** 6.3 1.5 7.8 7.0
- ----------------------------------------------------------------
</TABLE>
* 62.5% average general equity fund, 25% average fixed-income fund, and 12.5%
average money market fund.
**Six months ended June 30, 1999.
See Financial Highlights table on page 13 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STAR Fund 3/29/1985 10.37% 17.42% 8.07% 4.87% 12.94%
- ------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund'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 fund's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the fund 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 fund'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 fund 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 fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
STAR FUND SHARES (000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANIES (100.1%)
- -----------------------------------------------------------------------------------
STOCK FUNDS (64.3%)
Vanguard Windsor II Fund 68,688,102 $2,255,717
Vanguard Windsor Fund 76,038,566 1,381,621
Vanguard Explorer Fund 7,352,034 458,326
Vanguard PRIMECAP Fund 8,031,144 445,487
Vanguard Morgan Growth Fund 19,774,152 432,461
Vanguard U.S. Growth Fund 10,060,396 403,120
-------------
5,376,732
-------------
BOND FUNDS (24.3%)
Vanguard GNMA Fund 102,220,421 1,029,360
Vanguard Long-Term Corporate Fund 118,010,233 1,003,087
-------------
2,032,447
-------------
MONEY MARKET FUND (11.5%)
Vanguard Prime Money Market Fund Investor Shares 964,180,628 964,181
-------------
- -----------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $6,102,196) 8,373,360
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT
- -----------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
4.87%, 7/1/1999
(COST $872) $872 872
- -----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $6,103,068) 8,374,232
- -----------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
STAR FUND (000)
- -----------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-0.1%)
- -----------------------------------------------------------------------------------
Other Assets $ 17,870
Liabilities (31,289)
-------------
(13,419)
- -----------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------
Applicable to 437,882,522 outstanding $.001 par value shares
of beneficial interest (unlimited authorization) $8,360,813
===================================================================================
NET ASSET VALUE PER SHARE $19.09
===================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $6,011,561 $13.72
Undistributed Net Investment Income 4,141 .01
Accumulated Net Realized Gains 73,947 .17
Unrealized Appreciation--Note D 2,271,164 5.19
- -----------------------------------------------------------------------------------
NET ASSETS $8,360,813 $19.09
===================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
This Statement shows the fund'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 FUND
SIX MONTHS ENDED JUNE 30, 1999
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Income Distributions Received $115,527
Interest 21
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 115,548
- -------------------------------------------------------------------------------------
REALIZED NET GAIN
Capital Gain Distributions Received 23,105
Investment Securities Sold 52,082
- -------------------------------------------------------------------------------------
REALIZED NET GAIN 75,187
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 422,149
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $612,884
=====================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund'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 fund'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 fund, 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 FUND
-------------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 115,548 $ 247,383
Realized Net Gain 75,187 412,556
Change in Unrealized Appreciation (Depreciation) 422,149 239,881
-------------------------------------
Net Increase in Net Assets Resulting from Operations 612,884 899,820
-------------------------------------
DISTRIBUTIONS
Net Investment Income (112,433) (246,270)
Realized Capital Gain -- (412,420)
-------------------------------------
Total Distributions (112,433) (658,690)
-------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 371,448 956,647
Issued in Lieu of Cash Distributions 109,091 642,212
Redeemed (702,803) (1,112,742)
-------------------------------------
Net Increase (Decrease) from Capital Share Transactions (222,264) 486,117
- ----------------------------------------------------------------------------------------------------------
Total Increase 278,187 727,247
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 8,082,626 7,355,379
-------------------------------------
End of Period $8,360,813 $8,082,626
==========================================================================================================
(1)Shares Issued (Redeemed)
Issued 20,066 52,426
Issued in Lieu of Cash Distributions 5,843 35,613
Redeemed (38,053) (61,339)
-------------------------------------
Net Increase (Decrease) in Shares Outstanding (12,144) 26,700
==========================================================================================================
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. The table also presents the fund's Total
Return and shows net investment income and expenses as percentages of average
net assets. The expense ratio is zero because the fund pays no direct expenses;
the fund'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 fund's net income and total returns from year to year; the
relative contributions of net income and capital gains to the fund's total
return; the extent to which the fund 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 fund for one year.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
STAR FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.96 $17.38 $15.86 $15.03 $12.61 $13.41
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .58 .60 .58 .590 .53
Capital Gain Distributions Received .05 .86 1.06 .63 .435 .26
Net Realized and Unrealized Gain (Loss)
on Investments 1.07 .70 1.65 1.19 2.550 (.82)
---------------------------------------------------------------------
Total from Investment Operations 1.39 2.14 3.31 2.40 3.575 (.03)
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.58) (.59) (.59) (.590) (.52)
Distributions from Realized Capital Gains -- (.98) (1.20) (.98) (.565) (.25)
---------------------------------------------------------------------
Total Distributions (.26) (1.56) (1.79) (1.57) (1.155) (.77)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.09 $17.96 $17.38 $15.86 $15.03 $12.61
======================================================================================================================
TOTAL RETURN 7.77% 12.38% 21.15% 16.11% 28.64% -0.21%
======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $8,361 $8,083 $7,355 $5,863 $4,842 $3,766
Ratio of Total Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 2.84%* 3.18% 3.46% 3.71% 4.12% 4.01%
Portfolio Turnover Rate 5%* 16% 15% 18% 13% 9%
======================================================================================================================
</TABLE>
*Annualized.
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard STAR Fund is registered under the Investment Company Act of 1940 as an
open-end investment company, or mutual fund. The fund follows a balanced
investment strategy by investing in selected Vanguard funds. The fund 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 fund 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 fund 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 fund, 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 fund.
The special service agreement provides that Vanguard will reimburse the fund's
expenses to the extent of savings in administrative and marketing costs
realized by Vanguard in the operation of the fund. Accordingly, all expenses
incurred by the fund during the six months ended June 30, 1999, were reimbursed
by Vanguard. The fund's Trustees and officers are also Directors and officers
of Vanguard and the funds in which the fund invests.
C. During the six months ended June 30, 1999, the fund purchased $195,655,000
of investment securities and sold $404,000,000 of investment securities other
than money market fund and temporary cash investments.
D. At June 30, 1999, unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $2,271,164,000,
consisting of unrealized gains of $2,313,359,000 on securities that had risen
in value since their purchase and $42,195,000 in unrealized losses on
securities that had fallen in value since their purchase.
14
<PAGE> 17
NOTICE TO SHAREHOLDERS ABOUT Y2K
As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.
OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated and
thoroughly tested and are ready for the date change. As for the external
systems that connect with ours, we have been working for many months with
clients, business partners, and providers of products and services to assess
their compliance. We have analyzed the external services we require and have
developed contingency plans--including provision for alternative providers
where appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their
accounts via our website or automated telephone systems, which offer much
greater service capacity and efficiency. This will also help our live
representatives to provide a higher level of service to those with specific
transaction or other service-related needs.
WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records
will not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com), you
can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare our
systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.
15
<PAGE> 18
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital
Appreciation Fund*
Tax-Managed Growth and
Income Fund*
Tax-Managed Small-Cap Fund*
Total International Stock
Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund
Windsor II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative
Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate
Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
Admiral Intermediate-Term
Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
Admiral Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
16
<PAGE> 19
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JoANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson - Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, 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.,
NACCO Industries, and Newfield Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer 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> 20
VANGUARD
MILESTONES
[PHOTO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[PHOTO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[PHOTO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q562-08/10/1999
(C) 1999 The Vanguard Group, Inc.
Vanguard Marketing
Corporation, Distributor.
All rights reserved.
<PAGE> 21
VANGUARD
LIFESTRATEGY FUNDS
VANGUARD LIFESTRATEGY INCOME FUND
VANGUARD LIFESTRATEGY CONSERVATIVE
GROWTH FUND
VANGUARD LIFESTRATEGY MODERATE
GROWTH FUND
VANGUARD LIFESTRATEGY GROWTH FUND
SEMIANNUAL REPORT - JUNE 30, 1999
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 22
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle for
our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS
IN PERSPECTIVE
4
PERFORMANCE SUMMARIES
6
FUND PROFILES
8
FINANCIAL STATEMENTS
13
FOR AN UPDATE ON OUR YEAR 2000
PREPAREDNESS, SEE PAGE 26.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 23
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brenan John C. Bogle
Chairman & CEO Senior Chairman
Returns from stock and bond markets diverged during the first half of 1999, as
stock prices rose significantly and bond prices declined. In this environment,
all four Vanguard LifeStrategy Funds provided positive returns during the six
months ended June 30, ranging from +1.2% for our Income Fund (which typically
holds about 80% of its assets in bonds) to +7.7% for our Growth Fund (which
holds about 80% of its assets in common stocks).
The table below shows the total return (capital change plus reinvested
dividends) for each fund during the half-year. The table also presents the
returns for the composite benchmarks by which we gauge our funds' performance.
These composite indexes are constructed from unmanaged indexes in proportions
that match the target asset-class allocations of each of our funds. During the
half-year, each of the LifeStrategy Funds trailed its composite index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
- -------------------------------------------------------------------------
<S> <C>
LIFESTRATEGY INCOME +1.2%
Income Composite Index* +1.9
- -------------------------------------------------------------------------
LIFESTRATEGY CONSERVATIVE GROWTH +3.4%
Conservative Growth Composite Index* +4.2
- -------------------------------------------------------------------------
LIFESTRATEGY MODERATE GROWTH +5.3%
Moderate Growth Composite Index* +5.7
- -------------------------------------------------------------------------
LIFESTRATEGY GROWTH +7.7%
Growth Composite Index* +7.9
- -------------------------------------------------------------------------
</TABLE>
*Total returns for the composite indexes are derived by applying the fund's
target allocation to the results of the following benchmarks: for U.S. stocks,
the Wilshire 5000 Equity Index; for international stocks, the Morgan Stanley
Capital International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash investments, the Salomon
Smith Barney 3-Month U.S. Treasury Bill Index.
On page 3, in the table following this letter, you'll find detailed
per-share figures for each fund, including its net asset values at the beginning
and end of the semiannual period, the income dividends it paid during the
period, and its annualized yield as of June 30.
THE PERIOD IN REVIEW
The key influences on financial markets during the first half of 1999 were the
surprising strength of the U.S. economy's long-running expansion, promising
corporate earnings, and increasing signs that a number of shaky foreign
economies were on firmer footing. These factors were responsible for both
broad-based gains in U.S. stocks and increases in interest rates, which sent
bond prices lower.
The overall U.S. stock market, as measured by the Wilshire 5000 Index,
gained +11.8%--equivalent to more than a full year's return based on historical
norms. But the half-year saw a sharp rotation in market leadership. As the
outlook for global economic growth kept improving, there was a notable revival
in cyclical stocks--commodity-related companies, machinery makers, and other
firms whose profit prospects are most closely tied to the economy's ups and
downs. This was a welcome change for the cyclicals and other "value" stocks that
had lagged the market not just in the first quarter but for much of the last
five years. During the first quarter, the growth stocks in the S&P 500 Index
outpaced the value stocks--those characterized by above-average dividend yields
and
1
<PAGE> 24
below-average price/earnings ratios. However, the situation reversed during the
second quarter, and for the half-year value stocks carried the day with a gain
of +14.0%, while growth stocks were up +11.0%.
Also rebounding vigorously were small-cap stocks, which had trailed far
behind large-caps in recent years. The small-cap Russell 2000 Index nicely
outpaced the S&P 500 during the second quarter, although its half-year return of
+9.3% trailed the +12.4% return of the large-cap index.
The half-year also saw a change in leadership among international stocks.
The long-suffering Pacific region--led by Japan--gained +21.1% in U.S.-dollar
terms, while the heretofore robust European market declined -2.3% for U.S.
investors due to the dollar's strong gains versus European currencies.
For bondholders, the surging U.S. economy had a dark side: the
possibility that prices and wages will rise and push up inflation, which
diminishes the buying power of future bond interest and principal payments.
Interest rates held steady in January, but rose throughout the rest of the
half-year. By June 30, yields on U.S. Treasury notes and bonds were up by
roughly 1 percentage point from their year-end 1998 levels. The benchmark
30-year Treasury bond's yield increased 86 basis points (0.86 percentage point),
from 5.10% to 5.96%. The rate rise was less pronounced for short-term
securities, with the 3-month Treasury bill's yield rising 33 basis points, from
4.45% on December 31 to 4.78% on June 30.
The Lehman Aggregate Bond Index, which has an intermediate-term average
maturity and is a benchmark for the taxable bond market, returned -1.4%, as a
- -4.4% price decline more than offset +3.0% in interest income for the six
months. Price declines were larger for longer-term bonds, whose prices are more
sensitive to interest rate fluctuations.
PERFORMANCE OVERVIEW
As you know, the four LifeStrategy Funds are "funds of funds," meaning that each
holds shares in other Vanguard funds. Each LifeStrategy Fund has a different
target mix of assets selected to provide a proportionately greater or lesser
emphasis on current income and growth of capital. The table below shows each
fund's asset allocation as of June 30. Because of the stock market's strong
advance and the bond market's modest slump, returns of our funds rose in
proportion to their allocations to stocks.
Returns of the underlying funds during the half-year ranged from +11.9%
for the Total Stock Market Index Fund to -1.4% for the Total Bond Market Index
Fund. The Short-Term Corporate Fund posted a +1.2% return during the half-year,
while the Total International Stock Index Fund gained +6.4%. The Asset
Allocation Fund, which constitutes about one-fourth of the assets of each
LifeStrategy Fund, earned +3.7%. Variations from our target allocations are due
to the funds' holdings of Vanguard Asset Allocation Fund, which changes its mix
of assets according to its adviser's expectations for future
TARGET AND ACTUAL ASSET ALLOCATIONS (JUNE 30, 1999)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
STOCKS* BONDS RESERVES
---------------- ---------------- ----------------
LIFESTRATEGY FUND TARGET ACTUAL TARGET ACTUAL TARGET ACTUAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income 20% 18% 80% 82% 0% 0%
Conservative Growth 40 38 60 62 0 0
Moderate Growth 60 58 40 42 0 0
Growth 80 78 20 22 0 0
- ----------------------------------------------------------------------------------------
</TABLE>
*International stock positions for the Income, Conservative Growth, Moderate
Growth, and Growth Funds equal, respectively, 0%, 5%, 10%, and 15% of assets.
2
<PAGE> 25
returns from stocks, bonds, and cash investments. The Asset Allocation Fund
began the period with an allocation of 60% stocks/40% bonds. On May 10, it took
a more cautious stance toward stocks, changing its asset mix to 50% stocks/50%
bonds. This stance proved detrimental, given the continued rise of the stock
market and the price declines suffered by bonds during the half-year.
The underperformance of the Asset Allocation Fund was the main reason
that each LifeStrategy Fund fell slightly short of its composite index and
mutual fund benchmark during the half-year. The adjacent table shows the returns
of our funds and their fund composite benchmarks, which are constructed by
applying our target asset allocations to the average returns earned by mutual
funds in the various asset categories.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------
VANGUARD MUTUAL FUND
LIFESTRATEGY FUND FUND BENCHMARK* DIFFERENCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
Income +1.2% +2.3% -1.1%
Conservative Growth +3.4 +4.5 -1.1
Moderate Growth +5.3 +6.1 -0.8
Growth +7.7 +8.3 -0.6
- ---------------------------------------------------------------
</TABLE>
*Each benchmark is a blended composite that weights the returns of the average
comparable mutual fund for each asset class in proportion with the target
weighting of the appropriate LifeStrategy Fund.
IN SUMMARY
The divergence between stock and bond returns during the first half of 1999
reinforced the benefits of a balanced investment approach-- the bedrock
principle on which the Vanguard LifeStrategy Funds rest. Diversifying your
investment program through holdings in stock funds, bond funds, and short-term
reserves gives you exposure to the rewards of the financial markets while
spreading out the risks that go along with investing.
Sticking with a balanced investment program can be trying at times,
particularly when one market segment runs ahead of the others and seems to be
"the only game in town." But in the long run, such a program helps investors to
ride out the inevitable downturns encountered en route to your financial goals.
So once you've decided on an investment plan suited to your time horizon, goals,
and tolerance for risk, we urge you to "stay the course."
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 16, 1999
<TABLE>
<CAPTION>
FUND STATISTICS
- ------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE SIX MONTHS ENDED JUNE 30, 1999
------------------------- ------------------------------
DECEMBER 31, JUNE 30, INCOME CAPITAL GAINS SEC
LIFESTRATEGY FUND 1998 1999 DIVIDENDS DISTRIBUTIONS YIELD*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income $13.22 $13.05 $0.32 -- 5.34%
Conservative Growth 14.71 14.93 0.28 -- 4.33
Moderate Growth 16.86 17.51 0.23 -- 3.37
Growth 18.79 20.07 0.16 -- 2.38
- ------------------------------------------------------------------------------------------
</TABLE>
*30-day advertised yield net of expenses at month-end.
3
<PAGE> 26
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999
[PHOTO]
A markedly improved global economic outlook during the first half of 1999 led to
mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises in
Asia, Russia, and some Latin American nations would restrain business activity
worldwide, even in the United States, which has been the world's economic
locomotive. By spring, however, a consensus emerged that global economic
activity was likely to be solid, if not robust. This change in sentiment stemmed
from several factors, including further vigorous growth in the U.S. economy, a
belief that Asia's slump had bottomed out, and moves in Europe to ease monetary
policy to encourage growth.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both of
which had been among Wall Street's wallflowers in recent years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
---------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
- -----------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
- -----------------------------------------------------------------
OTHER
Consumer Price Index 1.4% 2.0% 2.3%
- -----------------------------------------------------------------
</TABLE>
*Annualized.
U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
Large-cap growth stocks, which are generally perceived as less vulnerable
than other stocks to economic slowdowns, continued to lead the market's climb
during the first quarter of the year. During the second quarter, however, value
stocks--especially producers of commodity products such as oil, aluminum, and
chemicals--moved to the front of the pack. Providing support were generally
upbeat corporate profit reports. Indeed, earnings gains were sufficient to send
prices higher despite rising interest rates, which often depress stock prices as
well as bond prices. For the six months, the S&P 500 Index's value stocks posted
a 14.0% return while its growth stocks gained 11.0% as a group.
4
<PAGE> 27
Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second quarter.
Even so, the cumulative return of the Russell 2000 over the past three years
lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the Russell
2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.
U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage point--a
significant rise for a six-month period. The yield of the 30-year Treasury bond
rose 86 basis points, to 5.96% on June 30 from 5.10% on December 31, 1998. The
yield of the 10-year Treasury rose 113 basis points, to 5.78% from 4.65%. Money
market rates didn't rise as far: Yields on 3-month T-bills increased on balance
by only 33 basis points, to 4.78% on June 30. Bond prices, which move in the
opposite direction from interest rates, fell. The Lehman Aggregate Bond Index, a
benchmark for investment-grade taxable bonds, declined 1.4% on a total-return
basis, as bond prices declined an average of 4.4%, outweighing the 3.0% in
interest income for the period.
INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies during
the six months. However, a pervasive rise in the value of the U.S. dollar
against other currencies reduced returns for U.S. investors (returns from abroad
are augmented when the dollar falls in value against other currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in U.S.
dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the return
from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.
5
<PAGE> 28
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the funds. Note, too, that both
share price and return can fluctuate widely, so an investment in the funds could
lose money.
<TABLE>
<CAPTION>
LIFESTRATEGY INCOME FUND
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-JUNE 30, 1999
- ----------------------------------------------------------
LIFESTRATEGY INCOME FUND INCOME
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.2% 1.4% 0.2% 0.3%
1995 17.7 5.3 23.0 19.2
1996 1.9 5.7 7.6 7.4
1997 8.5% 5.7% 14.2% 13.0%
1998 7.9 5.3 13.2 11.2
1999** -1.3 2.5 1.2 1.9
- ----------------------------------------------------------
</TABLE>
* 60% Lehman Aggregate Bond Index, 20% Wilshire 5000 Index, and 20% Salomon
Smith Barney 3-Month Treasury Index.
**Six months ended June 30, 1999.
See Financial Highlights table on page 21 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
LIFESTRATEGY CONSERVATIVE GROWTH FUND
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-JUNE 30, 1999
- ----------------------------------------------------------
LIFESTRATEGY CONSERVATIVE CONSERVATIVE
GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.3% 1.4% 0.1% 0.1%
1995 19.3 5.0 24.3 21.4
1996 5.6 4.8 10.4 10.1
1997 12.0% 4.8% 16.8% 15.8%
1998 11.3 4.6 15.9 14.2
1999** 1.5 1.9 3.4 4.2
- ----------------------------------------------------------
</TABLE>
* 40% Lehman Aggregate Bond Index, 35% Wilshire 5000 Index, 20% Salomon Smith
Barney 3-Month Treasury Index, and 5% MSCI EAFE Index.
**Six months ended June 30, 1999.
See Financial Highlights table on page 22 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LifeStrategy Income Fund 9/30/1994 6.97% 6.84% 5.46% 12.30%
LifeStrategy Conservative Growth Fund 9/30/1994 9.84 10.01 4.76 14.77
- -----------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 29
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the funds. Note, too, that both
share price and return can fluctuate widely, so an investment in the funds could
lose money.
<TABLE>
<CAPTION>
LIFESTRATEGY MODERATE GROWTH FUND
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-JUNE 30, 1999
- ----------------------------------------------------------
LIFESTRATEGY MODERATE MODERATE
GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.1% 1.4% -0.7% -0.3%
1995 24.1 3.8 27.9 26.5
1996 9.0 3.7 12.7 12.6
1997 15.9 3.9 19.8 19.5
1998 15.5 3.5 19.0 17.8
1999** 3.9 1.4 5.3 5.7
- ----------------------------------------------------------
</TABLE>
* 50% Wilshire 5000 Index, 40% Lehman Aggregate Bond Index, and 10% MSCI EAFE
Index.
**Six months ended June 30, 1999.
See Financial Highlights table on page 22 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
LIFESTRATEGY GROWTH FUND
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-JUNE 30, 1999
- ----------------------------------------------------------
LIFESTRATEGY GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.5% 1.4% -0.1% -0.6%
1995 26.0 3.2 29.2 28.9
1996 12.5 2.9 15.4 15.4
1997 19.4 2.9 22.3 22.3
1998 18.8 2.6 21.4 20.5
1999** 6.8 0.9 7.7 7.9
- ----------------------------------------------------------
</TABLE>
* 65% Wilshire 5000 Index, 20% Lehman Aggregate Bond Index, and 15% MSCI EAFE
Index.
**Six months ended June 30, 1999.
See Financial Highlights table on page 23 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
- ---------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LifeStrategy Moderate Growth Fund 9/30/1994 12.45% 13.72% 3.76% 17.48%
LifeStrategy Growth Fund 9/30/1994 15.16 17.10 2.96 20.06
- ---------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 30
FUND PROFILE
LIFESTRATEGY INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, 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 5.3%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds; annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -------------------------------------------
<S> <C>
BONDS 82%
STOCKS 18%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
LIFESTRATEGY LEHMAN
INCOME INDEX*
- -------------------------------------------
<S> <C> <C>
R-Squared 0.71 1.00
Beta 0.25 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- ---------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25.3%
Vanguard Short-Term Corporate Fund 19.8
Vanguard Total Bond Market Index Fund 49.7
Vanguard Total Stock Market Index Fund 5.2
- ---------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
STYLE Blend
MARKET CAP Large
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
AVERAGE MATURITY Medium
CREDIT QUALITY Treasury/Agency
</TABLE>
8
<PAGE> 31
ALLOCATION TO UNDERLYING FUNDS. This table shows the distribution of a fund's
assets in underlying Vanguard funds.
AVERAGE WEIGHTED EXPENSE RATIO. Funds that invest in other Vanguard funds incur
no direct expenses, but do bear proportionate shares 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 fund invested in each underlying fund.
BETA. A measure of the magnitude of a fund'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 fund 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 fund'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 fund'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 fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
9
<PAGE> 32
FUND PROFILE
LIFESTRATEGY CONSERVATIVE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, 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 4.3%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds; annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -------------------------------------------------
<S> <C>
BONDS 62%
STOCKS 38%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------------
LIFESTRATEGY
CONSERVATIVE GROWTH S&P 500
- -------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 0.42 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- -----------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25.2%
Vanguard Short-Term Corporate Fund 19.8
Vanguard Total Bond Market Index Fund 29.8
Vanguard Total International Stock Index Fund 4.9
Vanguard Total Stock Market Index Fund 20.3
- -----------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
STYLE Blend
MARKET CAP Large
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
AVERAGE MATURITY Medium
CREDIT QUALITY Treasury/Agency
</TABLE>
10
<PAGE> 33
FUND PROFILE
LIFESTRATEGY MODERATE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, 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 3.4%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds; annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -----------------------------------------------------
<S> <C>
BONDS 42%
STOCKS 58%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------
LIFESTRATEGY
MODERATE GROWTH S&P 500
- -----------------------------------------------------
<S> <C> <C>
R-Squared 0.97 1.00
Beta 0.61 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- -----------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25.1%
Vanguard Total Bond Market Index Fund 29.7
Vanguard Total International Stock Index Fund 9.8
Vanguard Total Stock Market Index Fund 35.4
- -----------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
STYLE Blend
MARKET CAP Large
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
AVERAGE MATURITY Medium
CREDIT QUALITY Treasury/Agency
</TABLE>
11
<PAGE> 34
FUND PROFILE
LIFESTRATEGY GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, 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 2.4%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds; annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -----------------------------------------------------
<S> <C>
BONDS 22%
STOCKS 78%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------
LIFESTRATEGY
GROWTH S&P 500
- -----------------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 0.79 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- ------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund 25.0%
Vanguard Total Bond Market Index Fund 9.9
Vanguard Total International Stock Index Fund 14.7
Vanguard Total Stock Market Index Fund 50.4
- ------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
STYLE Blend
MARKET CAP Large
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------
<S> <C>
AVERAGE MATURITY Medium
CREDIT QUALITY Treasury/Agency
</TABLE>
12
<PAGE> 35
FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund'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 fund's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the fund 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 fund'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 fund 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 fund's investments and their
cost, and reflects the gains (losses) that would be realized if the fund were
to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY INCOME FUND SHARES (000)
- ----------------------------------------------------------------------------------
INVESTMENT COMPANIES (100.1%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUND (5.2%)
Vanguard Total Stock Market Index Fund Investor Shares 993,784 $ 30,161
--------
BALANCED FUND (25.3%)
Vanguard Asset Allocation Fund 5,933,691 147,927
--------
BOND FUNDS (69.6%)
Vanguard Total Bond Market Index Fund Investor Shares 29,593,851 290,316
Vanguard Short-Term Corporate Fund Investor Shares 10,862,528 115,686
--------
406,002
--------
- ----------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $555,872) 584,090
- ----------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 4.87%, 7/1/1999
(COST $466) $466 466
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(COST $556,338) 584,556
- ----------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 36
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY INCOME FUND SHARES (000)
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.2%)
- ----------------------------------------------------------------------------------
<S> <C>
Other Assets $ 3,010
Liabilities (4,266)
--------
(1,256)
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 44,705,268 outstanding
$ .001 par value shares
of beneficial interest (unlimited authorization) $583,300
==================================================================================
NET ASSET VALUE PER SHARE $13.05
==================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $554,703 $12.41
Overdistributed Net Investment Income (90) --
Accumulated Net Realized Gains 469 .01
Unrealized Appreciation--Note D 28,218 .63
- ----------------------------------------------------------------------------------
NET ASSETS $583,300 $13.05
==================================================================================
</TABLE>
14
<PAGE> 37
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY CONSERVATIVE GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------------------
INVESTMENT COMPANIES (100.1%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS (25.3%)
Vanguard Total Stock Market Index Fund Investor Shares 10,944,898 $332,178
Vanguard Total International Stock Index Fund 6,786,394 80,690
--------
412,868
--------
BALANCED FUND (25.2%)
Vanguard Asset Allocation Fund 16,480,488 410,858
--------
BOND FUNDS (49.6%)
Vanguard Total Bond Market Index Fund Investor Shares 49,609,855 486,673
Vanguard Short-Term Corporate Fund Investor Shares 30,315,858 322,864
--------
809,537
--------
- ----------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $1,430,619) 1,633,263
- ----------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT
- ----------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 4.87%, 7/1/1999
(COST $795) $795 795
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $1,431,414) 1,634,058
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- ----------------------------------------------------------------------------------
Other Assets 6,646
Liabilities (8,170)
--------
(1,524)
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 109,332,509 outstanding $.001 par value
shares of beneficial interest (unlimited authorization) $1,632,534
==================================================================================
NET ASSET VALUE PER SHARE $14.93
==================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,427,254 $13.05
Overdistributed Net Investment Income (107) --
Accumulated Net Realized Gains 2,743 .03
Unrealized Appreciation--Note D 202,644 1.85
- ----------------------------------------------------------------------------------
NET ASSETS $1,632,534 $14.93
==================================================================================
</TABLE>
15
<PAGE> 38
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY MODERATE GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------------------
INVESTMENT COMPANIES (100.0%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS (45.2%)
Vanguard Total Stock Market Index Fund Investor Shares 32,692,796 $ 992,226
Vanguard Total International Stock Index Fund 22,987,552 273,322
---------
1,265,548
---------
BALANCED FUND (25.1%)
Vanguard Asset Allocation Fund 28,213,917 703,373
---------
BOND FUND (29.7%)
Vanguard Total Bond Market Index Fund Investor Shares 84,605,769 829,983
---------
- ----------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $2,306,555) 2,798,904
- ----------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT
- ----------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 4.87%, 7/1/1999
(COST $56) $56 56
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $2,306,611) 2,798,960
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------
Other Assets 9,424
Liabilities (9,575)
---------
(151)
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 159,866,061 outstanding $.001 par
value shares of beneficial interest
(unlimited authorization) $2,798,809
==================================================================================
NET ASSET VALUE PER SHARE $ 17.51
==================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $2,301,251 $14.40
Accumulated Net Investment Income 54 --
Accumulated Net Realized Gains 5,155 .03
Unrealized Appreciation--Note D 492,349 3.08
- ----------------------------------------------------------------------------------
NET ASSETS $2,798,809 $17.51
==================================================================================
</TABLE>
16
<PAGE> 39
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.9%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS (65.0%)
Vanguard Total Stock Market Index Fund Investor Shares 41,641,057 $1,263,806
Vanguard Total International Stock Index Fund 30,951,909 368,018
---------
1,631,824
---------
BALANCED FUND (25.0%)
Vanguard Asset Allocation Fund 25,152,224 627,045
---------
BOND FUND (9.9%)
Vanguard Total Bond Market Index Fund Investor Shares 25,394,251 249,118
---------
- ----------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $1,946,077) 2,507,987
- ----------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 4.87%, 7/1/1999
(COST $2,204) $2,204 2,204
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $1,948,281) 2,510,191
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------
Other Assets 6,426
Liabilities (5,761)
---------
665
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 125,110,726 outstanding $.001 par value
shares of beneficial interest
(unlimited authorization) $2,510,856
==================================================================================
NET ASSET VALUE PER SHARE $20.07
==================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,941,793 $15.52
Accumulated Net Investment Income 948 .01
Accumulated Net Realized Gains 6,205 .05
Unrealized Appreciation--Note D 561,910 4.49
- ----------------------------------------------------------------------------------
NET ASSETS $2,510,856 $20.07
==================================================================================
</TABLE>
17
<PAGE> 40
STATEMENT OF OPERATIONS
This Statement shows each fund'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>
- ---------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY
LIFESTRATEGY CONSERVATIVE MODERATE LIFESTRATEGY
INCOME GROWTH GROWTH GROWTH
FUND FUND FUND FUND
--------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Income Distributions Received $12,899 $ 30,196 $ 36,823 $ 21,218
Interest 18 24 58 58
- ---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 12,917 30,220 36,881 21,276
- ---------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received 509 2,426 5,926 6,404
Investment Securities Sold 125 388 (339) 34
- ---------------------------------------------------------------------------------------------------
REALIZED NET GAIN 634 2,814 5,587 6,438
- ---------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES (8,309) 18,954 86,631 136,648
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 5,242 $ 51,988 $129,099 $164,362
===================================================================================================
</TABLE>
18
<PAGE> 41
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each fund'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 fund'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 fund, 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>
- --------------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY
INCOME FUND CONSERVATIVE GROWTH FUND
------------------------------- ---------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998 JUN. 30, 1999 DEC. 31, 1998
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 12,917 $ 18,114 $ 30,220 $ 47,782
Realized Net Gain 634 6,230 2,814 18,699
Change in Unrealized Appreciation
(Depreciation) (8,309) 19,239 18,954 97,520
----------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 5,242 43,583 51,988 164,001
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (13,044) (18,129) (29,725) (48,539)
Realized Capital Gain -- (6,279) -- (18,656)
----------------------------------------------------------------------
Total Distributions (13,044) (24,408) (29,725) (67,195)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 212,001 273,108 348,320 721,533
Issued in Lieu of Cash Distributions 11,375 21,361 27,754 63,978
Redeemed (81,171) (108,685) (181,512) (269,557)
----------------------------------------------------------------------
Net Increase from Capital Share Transactions 142,205 185,784 194,562 515,954
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase 134,403 204,959 216,825 612,760
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 448,897 243,938 1,415,709 802,949
----------------------------------------------------------------------
End of Period $ 583,300 $ 448,897 $ 1,632,534 $ 1,415,709
================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 16,016 21,063 23,409 50,880
Issued in Lieu of Cash Distributions 878 1,632 1,891 4,416
Redeemed (6,137) (8,368) (12,182) (19,020)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 10,757 14,327 13,118 36,276
================================================================================================================================
</TABLE>
19
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY
MODERATE GROWTH FUND GROWTH FUND
--------------------------------- ---------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998 JUN. 30, 1999 DEC. 31, 1998
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C> <C> <C>
Net Investment Income $ 36,881 $ 61,334 $ 21,276 $ 39,054
Realized Net Gain 5,587 30,755 6,438 26,190
Change in Unrealized Appreciation (Depreciation) 86,631 220,429 136,648 233,545
Net Increase in Net Assets Resulting
----------------------------------------------------------------------
from Operations 129,099 312,518 164,362 298,789
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (36,408) (61,591) (19,846) (39,473)
Realized Capital Gain -- (30,946) -- (26,309)
----------------------------------------------------------------------
Total Distributions (36,408) (92,537) (19,846) (65,782)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 696,700 874,948 614,447 712,132
Issued in Lieu of Cash Distributions 32,387 86,634 18,934 64,618
Redeemed (224,913) (337,628) (191,163) (269,352)
----------------------------------------------------------------------
Net Increase from Capital Share Transactions 504,174 623,954 442,218 507,398
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase 596,865 843,935 586,734 740,405
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,201,944 1,358,009 1,924,122 1,183,717
----------------------------------------------------------------------
End of Period $ 2,798,809 $ 2,201,944 $ 2,510,856 $ 1,924,122
================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 40,383 55,074 31,616 40,609
Issued in Lieu of Cash Distributions 1,897 5,182 972 3,460
Redeemed (13,034) (21,344) (9,856) (15,501)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 29,246 38,912 22,732 28,568
================================================================================================================================
</TABLE>
20
<PAGE> 43
FINANCIAL HIGHLIGHTS
This table summarizes each fund's investment results and distributions to
shareholders on a per-share basis. The table also presents the fund's Total
Return and shows net investment income and expenses as percentages of average
net assets. The expense ratio is zero because the fund pays no direct expenses;
its 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 fund's net income and total returns from year to year; the
relative contributions of net income and capital gains to the fund's total
return; the extent to which the fund 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 fund for one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY INCOME FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------- SEP. 30* TO
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.22 $12.43 $11.55 $11.54 $9.88 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .63 .63 .64 .49 .14
Capital Gain Distributions Received .01 .20 .15 .19 .09 --
Net Realized and Unrealized Gain (Loss)
on Investments (.18) .78 .83 .03 1.66 (.12)
-------------------------------------------------------------------------------
Total from Investment Operations .15 1.61 1.61 .86 2.24 .02
-------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.63) (.63) (.64) (.49) (.14)
Distributions from Realized Capital Gains -- (.19) (.10) (.21) (.09) --
-------------------------------------------------------------------------------
Total Distributions (.32) (.82) (.73) (.85) (.58) (.14)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.05 $13.22 $12.43 $11.55 $11.54 $9.88
==================================================================================================================================
TOTAL RETURN 1.17% 13.17% 14.23% 7.65% 22.99% 0.20%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $583 $449 $244 $151 $121 $11
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 5.04%** 5.24% 5.54% 5.66% 5.76% 7.31%**
Portfolio Turnover Rate 4%** 3% 6% 22% 4% 1%
==================================================================================================================================
</TABLE>
*Inception
**Annualized.
21
<PAGE> 44
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY CONSERVATIVE GROWTH FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------- SEP. 30* TO
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.71 $13.40 $12.14 $11.68 $9.89 $10.03
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .29 .58 .56 .53 .47 .14
Capital Gain Distributions Received .03 .20 .18 .20 .11 .01
Net Realized and Unrealized Gain (Loss)
on Investments .18 1.32 1.27 .46 1.80 (.14)
----------------------------------------------------------------------------
Total from Investment Operations .50 2.10 2.01 1.19 2.38 .01
----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.28) (.59) (.56) (.53) (.47) (.14)
Distributions from Realized Capital Gains -- (.20) (.19) (.20) (.12) (.01)
----------------------------------------------------------------------------
Total Distributions (.28) (.79) (.75) (.73) (.59) (.15)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.93 $14.71 $13.40 $12.14 $11.68 $9.89
==================================================================================================================================
TOTAL RETURN 3.44% 15.88% 16.81% 10.36% 24.35% 0.10%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,633 $1,416 $803 $462 $219 $41
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 3.95%** 4.32% 4.61% 4.86% 5.14% 7.07%**
Portfolio Turnover Rate 1%** 3% 1% 2% 1% 0%
==================================================================================================================================
</TABLE>
*Inception.
**Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY MODERATE GROWTH FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------- SEP. 30* TO
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.86 $14.81 $12.97 $12.11 $ 9.86 $ 10.08
INVESTMENT OPERATIONS
Net Investment Income .23 .510 .490 .44 .36 .14
Capital Gain Distributions Received .03 .241 .236 .22 .13 .01
Net Realized and Unrealized Gain (Loss)
on Investments .62 2.054 1.819 .87 2.25 (.22)
-----------------------------------------------------------------------------
Total from Investment Operations .88 2.805 2.545 1.53 2.74 (.07)
-----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.510) (.490) (.44) (.36) (.14)
Distributions from Realized Capital Gains -- (.245) (.215) (.23) (.13) (.01)
-----------------------------------------------------------------------------
Total Distributions (.23) (.755) (.705) (.67) (.49) (.15)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.51 $16.86 $14.81 $12.97 $12.11 $ 9.86
==================================================================================================================================
TOTAL RETURN 5.25% 19.03% 19.77% 12.71% 27.94% -0.70%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,799 $2,202 $1,358 $826 $235 $35
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 2.97%** 3.43% 3.72% 3.98% 4.42% 7.10%**
Portfolio Turnover Rate 1%** 5% 2% 3% 1% 0%
===================================================================================================================================
</TABLE>
*Inception
**Annualized.
22
<PAGE> 45
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY GROWTH FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------- SEP. 30* TO
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 DEC. 31, 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $18.79 $16.04 $13.68 $12.36 $9.93 $10.10
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .410 .39 .34 .32 .13
Capital Gain Distributions Received .05 .264 .28 .24 .14 .02
Net Realized and Unrealized Gain (Loss)
on Investments 1.22 2.751 2.36 1.32 2.43 (.16)
----------------------------------------------------------------------------
Total from Investment Operations 1.44 3.425 3.03 1.90 2.89 (.01)
----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.410) (.38) (.35) (.31) (.14)
Distributions from Realized Capital Gains -- (.265) (.29) (.23) (.15) (.02)
----------------------------------------------------------------------------
Total Distributions (.16) (.675) (.67) (.58) (.46) (.16)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $20.07 $18.79 $16.04 $13.68 $12.36 $9.93
================================================================================================================================
TOTAL RETURN 7.69% 21.40% 22.26% 15.41% 29.24% -0.10%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,511 $1,924 $1,184 $629 $217 $38
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 1.95%** 2.53% 2.84% 3.18% 3.67% 7.06%**
Portfolio Turnover Rate 1%** 2% 1% 0% 1% 1%
================================================================================================================================
</TABLE>
*Inception
**Annualized.
23
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
Vanguard LifeStrategy Funds comprises the LifeStrategy Income Fund,
LifeStrategy Conservative Growth Fund, LifeStrategy Moderate Growth Fund, and
LifeStrategy Growth Fund, each of which is registered under the Investment
Company Act of 1940 as an open-end investment company, or mutual fund. Each
fund follows a balanced investment strategy by investing in selected Vanguard
funds to achieve its targeted allocation of assets to U.S. stocks,
international stocks, bonds, and short-term reserves.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The funds consistently follow such
policies in preparing their 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: Each fund 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. Distri-butions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
4. REPURCHASE AGREEMENTS: Each fund, 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 funds.
The special service agreement provides that Vanguard will reimburse the funds'
expenses to the extent of savings in administrative and marketing costs
realized by Vanguard in the operation of the funds. Accordingly, all expenses
incurred by the funds during the six months ended June 30, 1999, were
reimbursed by Vanguard. The funds' Trustees and officers are also Directors and
officers of Vanguard and the funds in which the funds invest.
C. During the six months ended June 30, 1999, purchases and sales of investment
securities were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(000)
-------------------------------
LIFESTRATEGY FUND PURCHASES SALES
- ---------------------------------------------------------------------
<S> <C> <C>
Income $151,159 $ 9,775
Conservative Growth 212,009 11,331
Moderate Growth 531,496 17,645
Growth 455,270 8,469
- ---------------------------------------------------------------------
</TABLE>
24
<PAGE> 47
D. At June 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(000)
---------------------------------------------
NET
APPRECIATED DEPRECIATED UNREALIZED
LIFESTRATEGY FUND SECURITIES SECURITIES APPRECIATION
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 35,595 $ (7,377) $ 28,218
Conservative Growth 215,125 (12,481) 202,644
Moderate Growth 506,787 (14,438) 492,349
Growth 566,406 (4,496) 561,910
- -----------------------------------------------------------------------
</TABLE>
25
<PAGE> 48
NOTICE TO SHAREHOLDERS ABOUT Y2K
As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.
OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated
and thoroughly tested and are ready for the date change. As for the external
systems that connect with ours, we have been working for many months with
clients, business partners, and providers of products and services to assess
their compliance. We have analyzed the external services we require and have
developed contingency plans-- including provision for alternative providers
where appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their
accounts via our website or automated telephone systems, which offer much
greater service capacity and efficiency. This will also help our live
representatives to provide a higher level of service to those with specific
transaction or other service-related needs.
WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records
will not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com), you
can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare our
systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.
26
<PAGE> 49
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, 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.,
NACCO Industries, and Newfield Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer 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> 50
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the funds' shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q882-08/17/1999
(C) 1999 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
