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VANGUARD
STAR(TM)
FUND
[PHOTO]
Annual Report
December 31, 1999
[THE VANGUARD GROUP LOGO]
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FELLOW SHAREHOLDERS:
[PHOTO]
John C. Bogle
Two roads diverged in a wood, and I--I took the one less traveled by, and
that has made all the difference.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to
go before I sleep.
You have given me your loyalty and friendship over these long years, and
I deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
/s/ JOHN C. BOGLE
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
REPORT FROM THE CHAIRMAN........................... 1
AFTER-TAX RETURNS REPORT........................... 5
THE MARKETS IN PERSPECTIVE......................... 6
FUND PROFILE....................................... 8
PERFORMANCE SUMMARY................................ 10
FINANCIAL STATEMENTS............................... 11
REPORT OF INDEPENDENT ACCOUNTANTS.................. 17
</TABLE>
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REPORT FROM THE CHAIRMAN
[PHOTO]
John J. Brennan
Vanguard STAR Fund recorded a 7.1% return for 1999, which was a red-hot year for
technology stocks, a so-so year for the rest of the stock market, and a down
year for bonds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<S> <C>
Vanguard STAR Fund 7.1%
- --------------------------------------------------------------------------------
Composite Fund Average* 15.8%
- --------------------------------------------------------------------------------
STAR Composite Index* 14.9%
- --------------------------------------------------------------------------------
Wilshire 5000 Index 23.8%
S&P 500 Index 21.0
Lehman Aggregate Bond Index -0.8
Salomon Smith Barney 3-Month
Treasury Index 4.7
- --------------------------------------------------------------------------------
</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, which is derived from data provided by Lipper Inc.,
is similarly weighted using the average general equity fund, average
fixed-income fund, and average money market fund, respectively.
Although the STAR Fund's return was just a bit below the long-term
average for such an asset mix, it was disappointing in comparison with the 1999
results of our benchmarks, both of which produced returns more than double ours.
The main reason we fell short was that STAR's holdings are tilted toward value
stock funds, which lagged the overall market in 1999.
The table at right presents the fund's total return (capital change plus
reinvested dividends) for 1999. It also displays the returns for a hypothetical
portfolio based on mutual fund categories weighted in accordance with STAR
Fund's asset allocation guidelines and for a similarly weighted composite of
market indexes. These indexes are: for stocks, the Wilshire 5000 Total Market
Index; for bonds, the Lehman Brothers Aggregate Bond Index; and for short-term
reserves, the Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
STAR's return is based on an increase in net asset value from $17.96 per
share on December 31, 1998, to $18.21 per share on December 31, 1999, and is
adjusted for dividends totaling $0.61 per share paid from net investment income
and distributions totaling $0.40 per share paid from net realized capital gains.
We expect to make a supplemental distribution of approximately 90 cents per
share from capital gains realized in November and December 1999. As of December
31, our annualized yield was 3.5%, up from 3.1% at year-end 1998.
FINANCIAL MARKETS IN REVIEW
The U.S. stock market rode the technology wave in 1999 to an unprecedented fifth
consecutive year of returns exceeding 20%. This performance was something of a
come-from-behind story. Stocks got off to a strong start during the first four
months of 1999 but, weighed down by higher interest rates, struggled through
most of the summer and into the fall. Through September, the Wilshire 5000 Total
Market Index returned 4.6%. But technology stocks rallied, leading the market on
an upward tear over the final three months of 1999, bringing the Wilshire 5000's
full-year return to a remarkable 23.8%. The Standard & Poor's 500 Index, which
is dominated by large-capitalization stocks, returned 21.0%. Small-cap stocks,
as measured by the Russell 2000 Index, returned 21.3%--a fine showing for a
market segment that had badly lagged large-cap stocks in the five previous
years.
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The rise of the major indexes in 1999 suggests a broad advance for the
market, but in fact it was a year of "haves" and "have nots"--many stocks did
not join in the market's ascent. Fully 60% of the stocks listed on the New York
Stock Exchange declined in price in 1999, and so did 48% of the stocks listed on
the Nasdaq market. (In fact, 36% of NYSE stocks and 31% of Nasdaq issues fell by
more than 20%.) As mentioned, the technology sector set a torrid
pace--technology stocks in the S&P 500 Index gained 74% for the year and were
largely responsible for growth stocks within the index far outpacing value
stocks (28.2% versus 12.7%). Among small stocks, technology issues gained 107%,
and the difference between growth and value was an amazing 44.6 percentage
points (43.1% for the Russell 2000 Index's growth stocks and -1.5% for its value
stocks).
Somewhat surprisingly, these stock market returns occurred in a rising
interest rate environment. Rates rose substantially in 1999--a trend encouraged
by Federal Reserve policymakers, who boosted short-term interest rates in three
steps by a total of 0.75 percentage point (75 basis points). Rising interest
rates can depress stock prices, especially for growth issues, because they
lessen the current value of projected future earnings. But during 1999,
investors decided that improving prospects for corporate profits outweighed the
negative impact of higher rates.
Bond prices are, of course, tightly linked to interest rates, and rising
rates cause prices of existing bonds to fall. Interest rates rose across all
maturities in 1999, so prices dropped. The yield of the benchmark 30-year U.S.
Treasury bond stood at 6.48% on December 31, 138 basis points above its 5.10%
yield when the year began. Long-term bond prices were hardest hit by the rise in
rates, as always, falling almost -15%. The total return of the Lehman Aggregate
Bond Index, a broad measure of the U.S. bond market, was -0.8%, as a price
decline of -7.0% more than offset interest income of 6.2%.
Rates also rose on short-term money market instruments, though not as
much as for long-term securities. The yield of 90-day Treasury bills increased
88 basis points during 1999 to 5.33% at year-end.
1999 PERFORMANCE OVERVIEW
Vanguard STAR Fund's 7.1% return for 1999 was, as stated, disappointing in
comparison with peer funds and our index benchmark. It was the first time in
eight years that STAR did not outpace the average return for its composite
mutual fund benchmark. The key reason was that about two-thirds of STAR's stock
allocation is invested in value funds whose 1999 average returns were well below
both the 23.8% gain of the Wilshire 5000 Index and the 27.1% average return for
general equity funds. In addition, our single-largest investment, Windsor II
Fund, stumbled badly, to a -5.8% decline.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERCENTAGE OF YEAR ENDED
VANGUARD FUND STAR ASSETS DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS
Windsor II 23.4% -5.8%
Windsor 16.2 11.6
Explorer 6.5 37.3
PRIMECAP 6.4 41.3
Morgan Growth 5.2 34.1
U.S. Growth 5.2 22.3
- --------------------------------------------------------------------------------
BOND FUNDS
GNMA 12.6% 0.8%
Long-Term Corporate 12.3 -6.2
Short-Term Corporate 11.2 3.3
- --------------------------------------------------------------------------------
MONEY MARKET FUND
Prime 1.0% 5.0%
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COMBINED 100.0% 7.1%
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</TABLE>
Three of the growth funds that STAR holds (PRIMECAP, Explorer, and Morgan
Growth) achieved returns well in excess of both benchmarks, while our fourth,
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the U.S. Growth Fund, was only a bit behind. However, our weighting in those
funds is smaller than that in our value-fund holdings--Windsor II and Windsor.
Unlike its cousin, Windsor Fund's 11.6% return was in line with or better than
returns recorded by value stock indexes in 1999.
Despite last year's results, we retain confidence in the value approach
to stock investing and in our value funds. By definition, a diversified approach
to investing means that in any given period, some parts of a portfolio will lag
other parts. Value and growth stocks have historically produced similar
long-term returns, although leadership has switched back and forth between the
two categories.
The STAR Fund's fixed-income holdings were hurt by rising interest rates
during 1999. The damage done by higher rates is, of course, inversely related to
the maturity of a bond. This fact was clearly evident in the returns of our
underlying funds. The Long-Term Corporate Fund returned -6.2%, as prices of its
bonds fell by more than -12%, swamping its 5.9% income return. The GNMA Fund,
which has an intermediate-term average maturity, managed a positive total return
of 0.8%, as income of 6.4% was reduced by a -5.6% capital return. The Short-Term
Corporate Fund's 3.3% total return reflected a -2.9% capital return and an
income return of 6.2%. Given that Vanguard Prime Money Market Fund earned 5.0%
in 1999, our decision to shift most of our short-term reserves from Prime to
Short-Term Corporate hurt us a bit. Over longer periods, however, we are
confident that the higher income available from short-term bonds will enhance
STAR's return with only a modest increase in volatility.
LONG-TERM PERFORMANCE OVERVIEW
Despite a subpar 1999, STAR Fund's long-term record remains a bit better than
the average for peer funds. The table below presents the returns of STAR and our
comparative standards during the decade of the 1990s. It shows how an investment
of $10,000 in STAR, our composite fund average, the average balanced fund, and
the Composite Index would have grown, assuming that income and capital gains had
been reinvested.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
TEN YEARS ENDED DECEMBER 31, 1999
----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Vanguard STAR Fund 12.3% $31,882
- --------------------------------------------------------------------------------
Composite Fund Average 12.1% $31,396
- --------------------------------------------------------------------------------
Average Balanced Fund 11.7% $30,372
- --------------------------------------------------------------------------------
STAR Composite Index 13.7% $36,037
- --------------------------------------------------------------------------------
</TABLE>
STAR Fund's average return of 12.3% would have resulted in an ending
value of $31,882 for the hypothetical $10,000 investment, nearly $500 more than
would have resulted from $10,000 in a similar balanced portfolio of mutual funds
and about $1,500 more than in the average balanced mutual fund. However, STAR's
results significantly lagged that of $10,000 invested in our composite index.
The main reason that the composite index fared so much better is that growth
stocks far outperformed value stocks during the 1990s. Within the S&P 500 Index,
for example, growth stocks earned an average of 20.6% annually during the past
decade, more than 5 percentage points ahead of the 15.4% return for value stocks
within the index. As noted before, STAR Fund's allocation is tilted toward value
funds.
One other advantage indexes possess is that they exist only on paper and
incur no operating or transaction costs. Although the STAR Fund itself charges
no expenses to shareholders, it bears a proportionate share of the expenses of
its underlying funds. The weighted average of these expenses amounted in 1999 to
0.36% of average net assets, or
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<PAGE> 6
$3.60 per $1,000. However, STAR's costs are much lower than those of the typical
mutual fund. The expenses charged by a similarly weighted portfolio of mutual
funds would have been 1.25%, or $12.50 per $1,000 in assets. This cost advantage
has been crucial--it accounts for all of the excess return we've earned versus
the composite fund average.
We believe it is important to note that the past decade's returns for the
STAR Fund and its comparative standards were much higher than long-term norms.
This is principally due to the fantastic stock market returns experienced during
the period. The U.S. stock market, as measured by the Wilshire 5000 Index,
produced an average annual return of 17.6% during the 1990s, more than 1 1/2
times the average return of about 11% achieved by stocks since 1925.
In part, the decade's big returns reflect underlying growth in the
economy and in corporate profits. But part of the gains can be traced to growing
optimism about stocks and less fear of their risks. These changes in perception
are reflected in the doubling of the market's average price/earnings ratio--from
about 16 for the S&P 500 Index as the decade of the 1990s began to 33 when it
ended. No one knows whether or how investor perceptions will change. But we note
that the moods of markets, like the moods of the millions of individuals who
make up the markets, can shift dramatically.
In constructing long-term plans, we believe it is prudent to recognize
that financial markets will go through bad times as well as good times and to
adopt realistic assumptions about future returns. We don't believe it is
realistic to expect the next decade to be as rewarding as the past one. This
isn't a forecast of doom. If inflation remains in the neighborhood of 3%
annually, it would take stock returns of only 8% to 9% a year to provide decent
real, or inflation-adjusted, returns of 5% to 6%. If long-term bond returns
approximate their current yields--and that's the best guess to make--the current
yields of nearly 6.5% on long-term U.S. Treasury securities translate into a
real return of nearly 4 percentage points over recent inflation rates.
IN SUMMARY
Vanguard has long advocated that you build your investment program after
thinking about your own investment time horizon, goals, and financial situation.
Further, we believe that a diversified portfolio of stocks, bonds, and
short-term reserves is a good way to participate in the long-term rewards of
investing while being prepared for the ever-present risks. Such a balanced
approach is, in a nutshell, what the STAR Fund is all about. Diversification and
balance can help you to keep an even keel and "stay the course" as you pursue
your long-term goals.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer January 13, 2000
A NOTE OF THANKS TO OUR FOUNDER
As you may have read on the inside cover of our report, our founder, John C.
Bogle, retired on December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
4
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the STAR Fund's after-tax performance. The figures on this page demonstrate the
considerable impact that federal income taxes can have on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pretax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is a better representation of the return that many
investors actually received. If you own the STAR Fund in a tax-deferred account
such as an individual retirement account or a 401(k), this information does not
apply to you. Such accounts are not subject to current taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
- The after-tax return calculations use the top federal income tax rates
in effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
- The peer funds' returns are provided by Morningstar, Inc. (Elsewhere in
this report, returns for comparable mutual funds are derived from data provided
by Lipper Inc., which differ somewhat.)
As you can see, the STAR Fund's pretax total return of 7.1% for the 12
months ended December 31, 1999, was reduced by taxes to 5.0%. In other words,
for investors in the highest bracket, taxes cut the fund's pretax return by 2.1
percentage points. In comparison, the average pretax return for Morningstar's
"domestic hybrid" category was 8.8%, and the average after-tax return was 6.5%,
a difference of 2.3 percentage points.
<TABLE>
<CAPTION>
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AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED DECEMBER 31, 1999
----------------- ----------------- -----------------
1 YEAR 5 YEARS 10 YEARS
----------------- ----------------- -----------------
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Vanguard STAR Fund 7.1% 5.0% 16.9% 13.8% 12.3% 9.6%
- ------------------------------------------------------------------------------------------
Average Domestic
Hybrid Fund* 8.8 6.5 15.6 12.7 11.4 8.8
- ------------------------------------------------------------------------------------------
</TABLE>
*Based on data from Morningstar, Inc.
Over longer periods, STAR Fund's returns have exceeded those of the
average comparable fund both before and after taxes. For the ten years ended
December 31, 1999, STAR outpaced its average peer by about 1 percentage point
both before and after taxes. For investors in the highest brackets, STAR Fund
lost an average of 2.7 percentage points annually to taxes, while its average
peer lost 2.6 percentage points a year.
We stress that because many interrelated factors affect how tax-friendly
a fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, we note that our calculation does not reflect the effect of your
own investment activities. Specifically, you may incur additional capital gains
taxes--and lower your after-tax return--if you decide to sell all or some of
your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1999
A global expansion in economic activity bolstered stocks at home and abroad
during 1999. The muscular U.S. economy provided a good bit of the oomph, but it
got an assist from solid growth in Asian, European, and Latin American economies
that had slumped in 1997 and 1998.
Interest rates increased significantly--causing bond prices to fall--as
both investors and monetary policymakers grew concerned that economic growth was
so vigorous that it would cause inflation to accelerate.
U.S. STOCK MARKETS
The booming economy and growing corporate profits provided plenty of fuel for
stock prices during 1999. However, higher interest rates restrained the rise,
especially for financial-services and electric utility stocks regarded as
interest rate sensitive.
U.S. economic output increased at an inflation-adjusted rate of about
4%--a very rapid pace for such a large, mature economy. Analysts estimated that
corporate profits would grow by 14% in 1999 and again in 2000. Consumer
spending, which accounts for roughly two-thirds of economic activity, was
strong. People felt prosperous, thanks to the long bull market, plentiful jobs,
and rising incomes. (After-tax personal income grew by more than 5% in 1999, and
unemployment at year-end was at a three-decade low of 4.1% of the workforce.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 INDEX 21.0% 27.6% 28.6%
Russell 2000 Index 21.3 13.1 16.7
Wilshire 5000 Index 23.8 26.1 27.1
MSCI EAFE Index 27.3 16.1 13.2
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -0.8% 5.7% 7.7%
Lehman 10 Year Municipal Bond Index -1.3 4.8 7.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.7% 2.0% 2.4%
- --------------------------------------------------------------------------------
</TABLE>
The stock market, as measured by the Wilshire 5000 Index, gained 23.8%,
with more than three-quarters of the gain coming in the final quarter of 1999.
For the first time in several years, smaller stocks outpaced
large-capitalization issues. The S&P 500 Index, which is dominated by large-cap
stocks and accounts for more than three-quarters of the U.S. stock market's
total value, gained 21.0% during the year; the rest of the market gained 35.4%.
Hidden in the market averages was an amazing divergence in stock
performance. Prices soared for most technology-related stocks, but performance
was pedestrian, at best, for most other issues. Indeed, three-fifths of stocks
on the New York Stock Exchange fell in 1999. The technology sector of the S&P
500 Index gained 74%, and the producer-durables sector, driven by huge gains for
some makers of telecommunications and technology gear, was up 49%. These results
were in stark contrast to the declines suffered by food and beverage companies
in the consumer-staples sector (-16%) and by many companies in the health-care
group (-10%).
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Investors seemed bedazzled by the prospects for growth in revenue and
profits among tech stocks, but less interested in the actual profits for nontech
companies. Remarkably, the average S&P 500 stock without earnings gained 36.5%
in 1999, while the average stock with earnings rose 11.5%. There is general
agreement that growth in Internet commerce, computers, software, wireless
communications, and other key tech sectors will be stupendous. However, there is
much disagreement about whether profits will grow so impressively, given the
intense competition. During 1999, optimists clearly ruled.
U.S. BOND MARKETS
The pickup in worldwide economic activity buoyed stock prices but depressed bond
prices. Interest rates, which move in the opposite direction from bond prices,
rose sharply. The rate increase stemmed from increased borrowing by corporations
and individuals and from investors' fears that a sizzling economy was bound to
send inflation soaring.
The inflation evidence was ambiguous. Price increases were greater in
1999 than in 1998 at both the wholesale and consumer levels. Wholesale prices
rose 3.0%, the biggest gain since 1990. And the Consumer Price Index advanced
2.7% in 1999 after a gain of just 1.6% in 1998. However, energy prices, which
plunged in 1998 and shot up in 1999, skewed the figures in both periods. At the
consumer level, the "core rate" of inflation, which excludes food and energy
prices, was up just 1.9% in 1999, the smallest increase in 35 years.
At midyear, the Federal Reserve Board, aiming to cool the economy a bit
to head off price pressures, began raising short-term interest rates. In all,
the Fed pushed up rates by 0.75 percentage point in three quarter-point steps.
The bond market anticipated the Fed--interest rates began rising sharply in
February--and at year-end the yield of 30-year U.S. Treasury bonds was up 1.38
percentage points (138 basis points) to 6.48%. The 10-year Treasury note--a
benchmark for mortgage lenders--rose 179 basis points, from 4.65% to 6.44%.
Short-term rates didn't rise as far; 3-month Treasury bill yields were up 88
basis points to 5.33% at year-end.
Price declines, as usual, were greatest for long-term bonds and least for
short-term bonds. The overall market, as measured by the Lehman Aggregate Bond
Index, which has an intermediate-term average maturity, posted a -0.8% total
return in 1999. Short-term bonds generally provided returns of 2% to 3%.
Long-term bonds suffered significant price declines, and the Lehman Long
Government/Corporate Index recorded a -7.7% total return.
INTERNATIONAL STOCK MARKETS
Bullishness among stock investors was an international phenomenon in 1999. The
biggest gains came in Pacific-region and emerging markets that had suffered most
from economic slumps and currency crises during 1997 and 1998.
Overall, the Morgan Stanley Capital International Europe, Australasia,
Far East (EAFE) Index of major developed markets produced a 27.3% return for
U.S. dollar-based investors. The MSCI Pacific Free Index gained an astounding
56.4% for U.S. investors, as a strong rise in the Japanese yen against the U.S.
dollar tacked on about 12.5 percentage points to a 43.9% return in local
currencies. In Europe, currency fluctuations had the opposite effect: European
currencies, including the new 11-nation common currency, the euro, mostly fell
against the dollar, and the 30.3% return in local currencies was nearly halved
to 15.8% in U.S. dollars.
Emerging markets managed a stunning turnaround, as the Select Emerging
Markets Free Index rose 60.9% in U.S.-dollar terms after having plummeted -18.4%
in 1998 and -16.4% in 1997.
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<PAGE> 10
FUND PROFILE
STAR FUND
This Profile presents key characteristics of the fund as of December 31, 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 3.5%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.36%
*For underlying funds.
</TABLE>
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -----------------------------------------------------------
<S> <C>
STOCKS 63%
BONDS 36%
CASH RESERVES 1%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
STAR S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.92 1.00
Beta 0.62 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING VANGUARD FUNDS
- -----------------------------------------------------------
<S> <C>
Windsor II Fund 23.4%
Windsor Fund 16.2
Explorer Fund 6.5
PRIMECAP Fund 6.4
Morgan Growth Fund 5.2
U.S. Growth Fund 5.2
GNMA Fund 12.6
Long-Term Corporate Fund 12.3
Short-Term Corporate Fund 11.2
Prime Money Market Fund 1.0
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------------------------
<S> <C>
AVERAGE MATURITY Medium
CREDIT QUALITY Investment-Grade
Corporate
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- -----------------------------------------------------------
<S> <C>
STYLE Value
MARKET CAP Large
</TABLE>
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<PAGE> 11
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.
9
<PAGE> 12
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MARCH 29, 1985-DECEMBER 31, 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 3.7 3.4 7.1 15.8
- ----------------------------------------------------------
</TABLE>
*62.5% average general equity fund, 25% average fixed-income fund and 12.5%
average money market fund. See Financial Highlights table on page 15 for
dividend and capital gains information for the past five years.
[LINE GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: DECEMBER 31, 1989-DECEMBER 31, 1999
- -------------------------------------------------------------------
Composite STAR Wilshire
Fund Composite 5000 S&P 500
STAR Fund Average Index Index Index
<S> <C> <C> <C> <C> <C>
198912 10000 10000 10000 10000 10000
199003 9759 9844 9788 9646 9699
199006 10033 10308 10245 10178 10309
199009 8959 9312 9299 8633 8892
199012 9638 9839 9939 9376 9690
199103 10824 11024 11040 10921 11097
199106 10815 11047 11089 10891 11072
199109 11370 11720 11710 11586 11664
199112 11968 12505 12521 12590 12642
199203 12007 12506 12394 12424 12322
199206 12387 12420 12530 12419 12557
199209 12759 12774 12916 12794 12953
199212 13226 13483 13524 13730 13605
199303 13842 13927 14030 14302 14199
199306 14020 14138 14212 14422 14268
199309 14574 14699 14675 15000 14637
199312 14666 14936 14858 15271 14976
199403 14217 14559 14420 14700 14408
199406 14367 14283 14330 14582 14469
199409 14701 14865 14859 15377 15176
199412 14635 14740 14828 15257 15174
199503 15714 15590 15873 16632 16651
199506 16914 16657 17069 18188 18241
199509 18048 17679 18152 19849 19690
199512 18825 18197 18930 20814 20876
199603 19489 18813 19540 21994 21996
199606 19966 19429 20143 22971 22983
199609 20577 19895 20633 23610 23694
199612 21858 20681 21714 25239 25669
199703 22010 20446 21805 25383 26357
199706 24229 22593 24314 29670 30958
199709 26102 24463 26054 32585 33277
199712 26482 32129 26580 33152 34233
199803 28691 34695 28918 37561 39008
199806 29058 34827 29478 38265 40296
199809 26696 31758 27662 33677 36288
199812 29760 31977 31351 40905 44016
199903 30174 32207 32114 42479 46209
199906 32073 34227 33619 45729 49466
199909 30225 33212 32356 42775 46377
199912 31882 31396 36037 50627 53278
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STAR Fund 7.13% 16.85% 12.29% $31,882
Composite Fund Average* 15.82 16.33 12.12 31,396
STAR Composite Index** 14.95 19.44 13.68 36,037
Wilshire 5000 Index 23.77 27.11 17.61 50,627
S&P 500 Index 21.04 28.56 18.21 53,278
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*62.5% average general equity fund, 25% average fixed-income fund, and 12.5%
average money market fund. Derived from data provided by Lipper Inc.
**62.5% Wilshire 5000 Index, 25% Lehman Aggregate Bond Index, and 12.5% Salomon
Smith Barney 3-month Treasury Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STAR Fund 3/29/1985 7.13% 16.85% 7.91% 4.38% 12.29%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 (100.4%)
- --------------------------------------------------------------------------------------------------------------------------
STOCK FUNDS (63.1%)
Vanguard Windsor II Fund 76,111,290 $1,900,499
Vanguard Windsor Fund 86,537,188 1,312,769
Vanguard Explorer Fund 7,641,812 524,381
Vanguard PRIMECAP Fund 8,438,556 523,781
Vanguard Morgan Growth Fund 18,336,310 420,268
Vanguard U.S. Growth Fund 9,652,383 420,168
----------
5,101,866
----------
BOND FUNDS (25.0%)
Vanguard GNMA Fund 103,700,712 1,022,489
Vanguard Long-Term Corporate Fund 123,317,078 1,000,102
----------
2,022,591
----------
SHORT-TERM BOND FUND (11.3%)
Vanguard Short-Term Corporate Fund Investor Shares 86,464,216 910,468
---------
MONEY MARKET FUND (1.0%)
Vanguard Prime Money Market Fund Investor Shares 83,902,710 83,903
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $6,556,231) 8,118,828
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- -------------------------------------------------------------------------------------------------------------------------
Other Assets 29,557
Liabilities (61,316)
----------
(31,759)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 444,081,579 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $8,087,069
=========================================================================================================================
NET ASSET VALUE PER SHARE $18.21
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
11
<PAGE> 14
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
STAR FUND AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
<S> <S> <C>
Paid in Capital $6,115,622 $13.77
Overdistributed Net Investment Income (2,387) (.01)
Accumulated Net Realized Gains 411,237 .93
Unrealized Appreciation--Note D 1,562,597 3.52
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $8,087,069 $18.21
======================================================================================================================
</TABLE>
12
<PAGE> 15
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
YEAR ENDED DECEMBER 31, 1999
(000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Income Distributions Received $ 259,615
Interest 24
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 259,639
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
- ------------------------------------------------------------------------------------------------------------------------
Capital Gain Distributions Received 495,695
Investment Securities Sold 88,869
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 584,564
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (286,418)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 557,785
========================================================================================================================
</TABLE>
13
<PAGE> 16
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
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 259,639 247,383
Realized Net Gain 584,564 412,556
Change in Unrealized Appreciation (Depreciation) (286,418) 239,881
--------------------------------
Net Increase in Net Assets Resulting from Operations 557,785 899,820
DISTRIBUTIONS --------------------------------
Net Investment Income (263,052) (246,270)
Realized Capital Gain (172,087) (412,420)
--------------------------------
Total Distributions (435,139) (658,690)
CAPITAL SHARE TRANSACTIONS(1) --------------------------------
Issued 716,147 956,647
Issued in Lieu of Cash Distributions 422,889 642,212
Redeemed (1,257,239) (1,112,742)
--------------------------------
Net Increase (Decrease) from Capital Share Transactions (118,203) 486,117
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 4,443 727,247
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 8,082,626 7,355,379
--------------------------------
End of Year $8,087,069 $8,082,626
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 38,659 52,426
Issued in Lieu of Cash Distributions 23,452 35,613
Redeemed (68,056) (61,339)
--------------------------------
Net Increase (Decrease) in Shares Outstanding (5,945) 26,700
=========================================================================================================================
</TABLE>
14
<PAGE> 17
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 THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.96 $17.38 $15.86 $15.03 $12.61
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .60 .58 .60 .58 .590
Capital Gain Distributions Received 1.13 .86 1.06 .63 .435
Net Realized and Unrealized Gain (Loss) on Investments (.47) .70 1.65 1.19 2.550
-----------------------------------------------------------
Total from Investment Operations 1.26 2.14 3.31 2.40 3.575
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.61) (.58) (.59) (.59) (.590)
Distributions from Realized Capital Gains (.40) (.98) (1.20) (.98) (.565)
-----------------------------------------------------------
Total Distributions (1.01) (1.56) (1.79) (1.57) (1.155)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $18.21 $17.96 $17.38 $15.86 $15.03
=========================================================================================================================
TOTAL RETURN 7.13% 12.38% 21.15% 16.11% 28.64%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $8,087 $8,083 $7,355 $5,863 $4,842
Ratio of Total Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 3.21% 3.18% 3.46% 3.71% 4.12%
Portfolio Turnover Rate 10% 16% 15% 18% 13%
=========================================================================================================================
</TABLE>
15
<PAGE> 18
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 intermediate- to
long-term bond funds, and 10% to 20% in short-term bond and money market funds.
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. The fund had no investments in repurchase agreements at December
31, 1999.
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 year ended December 31, 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 year ended December 31, 1999, the fund purchased $1,773,146,000 of
investment securities and sold $684,000,000 of investment securities other than
money market fund and temporary cash investments.
D. At December 31, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,562,597,000,
consisting of unrealized gains of $1,678,716,000 on securities that had risen in
value since their purchase and $116,119,000 in unrealized losses on securities
that had fallen in value since their purchase.
16
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees
of Vanguard STAR Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard STAR Fund (the "Fund") at December 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 2000
17
<PAGE> 20
- --------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD STAR FUND
This information for the fiscal year ended December 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $51,636,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended
December 1999, all of which is designated as a 20% rate gain distribution.
For corporate shareholders, 18.1% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
- --------------------------------------------------------------------------------
18
<PAGE> 21
<TABLE>
<CAPTION>
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
500 Index Fund Growth Index Fund* Tax-Managed Capital
Aggressive Growth Fund Health Care Fund Appreciation Fund*
Capital Opportunity Fund Institutional Index Fund* Tax-Managed Growth and
Convertible Securities Fund International Growth Fund Income Fund*
Emerging Markets Stock International Value Fund Tax-Managed International Fund*
Index Fund Mid-Cap Index Fund* Tax-Managed Small-Cap Fund*
Energy Fund Morgan Growth Fund Total International Stock
Equity Income Fund Pacific Stock Index Fund Index Fund
European Stock Index Fund PRIMECAP Fund Total Stock Market Index Fund*
Explorer Fund REIT Index Fund U.S. Growth Fund
Extended Market Index Fund* Selected Value Fund Utilities Income Fund
Global Equity Fund Small-Cap Growth Index Fund* Value Index Fund*
Gold and Precious Metals Fund Small-Cap Index Fund* Windsor Fund
Growth and Income Fund Small-Cap Value Index Fund* Windsor II Fund
BALANCED FUNDS
- --------------------------------------------------------------------------------------------------------------
Asset Allocation Fund LifeStrategy Growth Fund STAR Fund
Balanced Index Fund LifeStrategy Income Fund Tax-Managed Balanced Fund
Global Asset Allocation Fund LifeStrategy Moderate Wellesley Income Fund
LifeStrategy Conservative Growth Fund Wellington Fund
Growth Fund
BOND FUNDS
- --------------------------------------------------------------------------------------------------------------
Admiral Intermediate-Term Intermediate-Term Corporate Fund Short-Term Corporate Fund*
Treasury Fund Intermediate-Term Tax-Exempt Short-Term Federal Fund
Admiral Long-Term Treasury Fund Fund Short-Term Tax-Exempt Fund
Admiral Short-Term Treasury Fund Intermediate-Term Treasury Fund Short-Term Treasury Fund
GNMA Fund Limited-Term Tax-Exempt Fund State Tax-Exempt Bond Funds
High-Yield Corporate Fund Long-Term Bond Index Fund (California, Florida,
High-Yield Tax-Exempt Fund Long-Term Corporate Fund Massachusetts, New Jersey,
Insured Long-Term Tax-Exempt Long-Term Tax-Exempt Fund New York, Ohio, Pennsylvania)
Fund Long-Term Treasury Fund Total Bond Market Index Fund*
Intermediate-Term Bond Preferred Stock Fund
Index Fund Short-Term Bond Index Fund
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------------------------------------
Admiral Treasury Money State Tax-Exempt Money Market Tax-Exempt Money Market Fund
Market Fund Funds (California, New Jersey, Treasury Money Market Fund
Federal Money Market Fund New York, Ohio, Pennsylvania)
Prime Money Market Fund*
VARIABLE ANNUITY PLAN
- --------------------------------------------------------------------------------------------------------------
Balanced Portfolio High-Grade Bond Portfolio Money Market Portfolio
Diversified Value Portfolio High Yield Bond Portfolio REIT Index Portfolio
Equity Income Portfolio International Portfolio Short-Term Corporate Portfolio
Equity Index Portfolio Mid-Cap Index Portfolio Small Company Growth Portfolio
Growth Portfolio
</TABLE>
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
19
<PAGE> 22
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN C. BOGLE * (1967) 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 * (1987) 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 * (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY * (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL * (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. * (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL * (1991) 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. * (1971) 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 * (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON * Legal Department.
ROBERT A. DiSTEFANO * Information Technology.
JAMES H. GATELY * Individual Investor Group.
KATHLEEN C. GUBANICH * Human Resources.
IAN A. MacKINNON * Fixed Income Group.
F. WILLIAM McNABB, III * Institutional Investor Group.
MICHAEL S. MILLER * Planning and Development.
RALPH K. PACKARD * Chief Financial Officer.
GEORGE U. SAUTER * Core Management Group.
<PAGE> 23
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