<PAGE> 1
VANGUARD/
PRIMECAP FUND
Semiannual Report
June 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson; and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Adviser
6
Performance
Summary
8
Financial
Statements
9
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
<PAGE> 3
[PHOTO]
FELLOW SHAREHOLDER,
The stock market continued its amazing climb during the first half of 1997.
Vanguard/PRIMECAP Fund more than kept pace, achieving a return of +21.1% for
the six-month period and nicely out-running competitive norms.
The table below compares the Fund's total return (capital change plus
reinvested dividends) for the period with those of the average growth mutual
fund and the unmanaged Standard & Poor's 500 Composite Stock Price Index. The
Fund's return is based on an increase in net asset value from $30.08 per share
on December 31, 1996, to $36.24 per share on June 30, 1997, with the latter
figure adjusted for distributions totaling $0.16 per share from net realized
capital gains.
<TABLE>
<CAPTION>
- -------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
JUNE 30, 1997
- -------------------------------------------
<S> <C>
Vanguard/PRIMECAP Fund +21.1%
- -------------------------------------------
Average Growth Mutual Fund +14.3%
- -------------------------------------------
S&P 500 Index +20.6%
- -------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
A nearly perfect climate for common stocks--strong economic growth, rising
corporate profits, and decelerating inflation--prevailed during the six months
ended June 30. While the market's rising tide lifted all boats,
large-capitalization stocks rose the most. Even so, the advance was not
without incident: The S&P 500 Index endured a decline of nearly -10% during the
seven weeks following February 18, when the Index reached a record high.
However, that drop was quickly aborted and by early May the market had resumed
its ascent into record territory.
Jitters about interest rates and inflation were the apparent causes of the
brief slide. Although the Federal Reserve Board raised its target for the
federal funds rate by a quarter-point to 5.50% on March 25, short-term interest
rates ended the period where they began it (5.17% for 90-day U.S. Treasury
bills). Longer-term rates were up only slightly (less than one-quarter
percentage point) on balance during the first half of 1997. The stock market's
strong rebound in the second quarter stemmed from a combination of factors,
including strong corporate earnings reports, a lessening of inflation fears,
and an easing in interest rates. Whatever their causes, the price fluctuations
served as a clear reminder of the volatility that is very much a part of
investing in stocks.
PRIMECAP Fund provided returns that were excellent in both an absolute
sense and relative to comparative benchmarks. Our return surpassed the +20.6%
return of the S&P 500 Index by one-half percentage point, a superb showing in
light of the market's extreme tilt toward the largest-capitalization stocks,
and an achievement accomplished by very few of our peers.
One indication of the bias toward large-cap stocks during the period is
that the return on the S&P 500 Index was nearly double the +10.6% return on the
rest of the stock market (as represented by the Wilshire 4500 Equity Index).
Even within the S&P 500 Index there was a powerful bias toward big stocks and
against smaller stocks: The 100 largest stocks in the Index returned +23.4%
while the 400 others provided a return of +15.2%.
In this "bigger was better" period, we had a significant handicap versus
the S&P 500 Index: The average market capitalization of the Fund's holdings
($6.7 billion) was roughly
1
<PAGE> 4
one-fifth of the market cap of the Index ($32.9 billion). In addition, our
modest position in cash reserves represented a "drag" on our return of nearly
two percentage points in the rapidly rising stock market. Indexes, as
theoretical constructs, hold no cash. We overcame these handicaps through our
adviser's excellent stock selections--especially in the producer durables and
auto & transportation sectors. Also helping us to outperform the Index was our
light weighting during the period (less than 1% of assets) in utility stocks,
which constitute about 9% of the Index and provided the lowest return of any
market sector during the first half of 1997.
PRIMECAP beat the average growth mutual fund by 6.8 percentage points
(+21.1% to +14.3%) in the first half of the year. The lion's share of the
credit for this excellent relative showing goes to our adviser's stock
selection. Our low costs--the Vanguard advantage--gave the Fund a head start
versus competitors. PRIMECAP's annual expenses for administration, investment
management, and fund operations amount to about 0.60% of average net assets,
versus 1.50% for the average growth fund.
IN SUMMARY
The extraordinary bull market for U.S. stocks that began almost 15 years ago
has amply demonstrated the rewards of long-term investing. Risk, the
inseparable companion of reward, may not be so apparent after such a period.
Yet investors disregard risk at their peril. So we hope that the sizable,
sudden fluctuations in the stock market during the first half of 1997
reinforced two key messages that we have repeatedly stressed in these Reports
to you.
The first message, of course, concerns the importance of holding a
balanced portfolio of stock funds, bond funds, and money market funds in
proportions appropriate to your financial situation, tolerance for risk, and
investment objectives. By making it easier to ride out episodes of market
volatility, a balanced portfolio helps investors to adhere to our second
message: Always "stay the course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
July 14, 1997
2
<PAGE> 5
INVESTMENT ADVISORY AGREEMENT REVISED
The board of directors of Vanguard/PRIMECAP Fund has agreed with PRIMECAP
Management Company, Inc., the Fund's investment adviser, to revise the Fund's
investment advisory agreement. The new agreement reduces the rates used to
determine the fees paid to PRIMECAP Management.
The Fund pays PRIMECAP Management a fee at the end of each fiscal quarter.
The fee is calculated by applying a quarterly rate, based on the annual rates
shown below, to the Fund's average month-end assets for the quarter. Following
are the old and revised fee schedules:
<TABLE>
<CAPTION>
- ------------------------------
OLD FEE SCHEDULE
- ------------------------------
NET ASSETS RATE
- ------------------------------
<S> <C>
First $25 million 0.750%
Next $225 million 0.500
Next $250 million 0.375
Over $500 million 0.250
- ------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------
NEW FEE SCHEDULE
- ----------------------------------------
NET ASSETS RATE
- ----------------------------------------
<S> <C>
First $50 million 0.500%
Next $200 million 0.450
Next $250 million 0.375
Next $1,750 million 0.250
Next $2,750 million 0.200
Next $5,000 million 0.175
Over $10,000 million 0.150
- ----------------------------------------
</TABLE>
The new fee structure is expected to produce annual savings of more than
$2 million, or approximately 0.04% of net assets, based on Vanguard/PRIMECAP's
current net assets of approximately $5.7 billion.
The revised investment advisory agreement will be dated and take effect on
October 1, 1997, replacing the existing agreement dated May 1, 1993. However,
PRIMECAP Management agreed to waive fees in excess of those it would have
earned under the new fee structure for the period beginning April 1, 1997,
through September 30, 1997.
- --------------------------------------------------------------------------------
RELATED INFORMATION CONCERNING PRIMECAP MANAGEMENT COMPANY
PRIMECAP Management Company, located at 225 South Lake Avenue, Pasadena, CA
91101, is a professional investment advisory firm that manages portfolios for
institutional clients. As of December 31, 1996, the firm managed nearly $7
billion in assets. During 1996, Vanguard/PRIMECAP Fund paid the firm investment
advisory fees of approximately $10.4 million.
PRIMECAP Management is organized as a California corporation. Its
out-standing shares are owned by its directors and officers. The corporation's
directors are Howard B. Schow, Chairman; Mitchell J. Milias, Vice Chairman; and
Theo A. Kolokotrones, President.
- --------------------------------------------------------------------------------
3
<PAGE> 6
[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1997
U.S. EQUITY MARKETS
As the economy continued to grow while the rate of inflation did not, a robust
market provided solid gains to investors in U.S. common stocks during the
first half of 1997. The best performers were primarily larger-capitalization
issues, although the small-company indexes exhibited some strength in the final
two months of the period. Over the half-year, the Standard & Poor's 500
Composite Stock Price Index gained 20.6%, fueled by a 10.8% boost since the end
of April. Reflecting the gains among smaller companies, the Russell 2000 Index
posted a 10.2% increase for the six-month period, driven by an 11.1% jump in
May and a 4.3% rise in June. It was particularly noteworthy that the recent
small-cap gains were led by small growth stocks, the worst segment of the U.S.
market during the past 12 months. This group has surged 17.6% since the end of
March, although at the half-year's end it still lagged the S&P 500 Index by a
sizable margin (5.2% versus 20.6%).
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year, and from a widespread confidence reflected
in increased price/earnings ratios. The strength in earnings, the expectation
that income will continue to increase at an attractive pace, and the further
conviction that inflation is not a problem helped stocks to continue to produce
solid gains in the fiscal period. What's more, earnings have shown not only
good strength but remarkable consistency in beating the consensus forecasts of
Wall Street analysts.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997
---------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 20.6% 34.7% 19.8%
Russell 2000 Index 10.2 16.3 17.9
MSCI EAFE Index 11.4 13.2 13.2
- ---------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.1% 8.2% 7.1%
Lehman 10-Year Municipal
Bond Index 3.3 8.3 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.5
- ---------------------------------------------------------
OTHER
Consumer Price Index 1.1% 2.3% 2.7%
- ---------------------------------------------------------
</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the health-care sector (up 31.4%) and the consumer-staples sector (up
23.9%). By contrast, numerous uncertainties for utilities caused the issues in
that sector to lag the broad market, although, on an absolute basis, their 8.2%
return over six months is quite good.
U.S. FIXED-INCOME MARKETS
The modest rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased from
6.42% at the end of December to 6.97% by the middle of April. In the following
weeks, economic reports indicated a slowing in economic growth and further
reduced fears of an increase in inflation. This news helped interest rates fall
to 6.50% by the end of June.
4
<PAGE> 7
Fueled by robust consumer spending, the U.S. economy expanded at a
remarkable 5.8% rate in the first three months of 1997. Reflecting the vibrant
economy, the nation's unemployment rate stood at 5.0% in June. Strong economic
growth and tight labor markets have often led to rising inflation because of
increased demand for goods and services. With this in mind, the Federal Reserve
raised its federal funds interest rate target by 0.25% on March 25 in a
"preemptive" strike against mounting inflationary pressures. Observed price
increases have been subdued in recent months, however. Wholesale prices have
fallen in each of the first six months of 1997, and so far this year consumer
prices have risen at a slower pace than last year.
With interest rates very close to year-end levels, bond investors have
fared reasonably well during the past six months, as illustrated by the 3.1%
return of the Lehman Brothers Aggregate Bond Index. Investors who favored
shorter-maturity and lower-quality issues achieved somewhat better returns.
Mortgage-backed securities continued to perform well because refinancing
activity has been reduced to historically low levels as interest rates have
risen. Municipal issues also tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors received fairly good returns over the past six months.
As measured by the broad Morgan Stanley Capital International Europe,
Australasia, Far East Index, foreign markets gained 11.4%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, returning 11.1% in May and 7.5% in June to
U.S. investors. Better tone in the economy, plus strong earnings reported by
export-oriented companies benefiting from the weak yen, gave Japan a
long-awaited boost. For the six months, the Japanese market is up 9.2%. The
competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 17.0% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. For the six months, Europe gained 24.8%
in local currencies, which a strong dollar trimmed to 14.4% for U.S. investors.
5
<PAGE> 8
[PHOTO]
REPORT FROM THE ADVISER
During the first half of 1997, Vanguard/PRIMECAP Fund's total return of 21.1%
exceeded the 20.6% recorded by the unmanaged Standard & Poor's 500 Composite
Stock Price Index and the 14.3% achieved by the average growth mutual fund.
The first six months have been particularly satisfying. We enjoyed
excellent absolute and relative returns that were derived primarily through
stock selection. As advisers, we focus the vast majority of our efforts on
individual stock selection. We believe it is our greatest strength.
Consequently, we are pleased when stock selection is the key factor in
outperforming our benchmarks.
A look at the Fund's largest holdings illustrates the role selection
played in the first-half results. Naturally, the largest holdings represent our
highest-conviction ideas. As depicted in the adjacent table, the Fund's ten
largest holdings appreciated an average of 27.6% in the first half. As these
stocks make up a substantial one-third of the Fund's assets, they were the
driving force in the first-half results.
<TABLE>
<CAPTION>
- ---------------------------------------------------
TEN LARGEST HOLDINGS
- ---------------------------------------------------
SECURITY % OF FUND GAIN
- ---------------------------------------------------
<S> <C> <C>
Intel Corp. 4.7% 8.4%
Texas Instruments, Inc. 4.3 32.4
Federal Express Corp. 4.2 30.1
Guidant Corp. 3.9 49.2
AMR Corp. 3.4 5.0
L.M. Ericsson Telephone Co. 3.2 31.4
Delta Air Lines, Inc. 3.0 16.7
Tandem Computers, Inc. 2.5 47.3
Motorola, Inc. 2.3 24.7
Costco Cos., Inc. 2.0 30.9
- ---------------------------------------------------
</TABLE>
It should be of no surprise that techno-logy and transportation issues
dominated our top ten holdings, contributing eight names. However, the
best-performing stock was Guidant, a medical device company, which soared 49%.
Rounding out the strong performance of the top holdings was a retailer, Costco
Companies, which rose nearly 31%.
The Fund continues to substantially overweight the technology and
transportation sectors. Our holdings in these sectors performed better than the
overall Fund. Performance in the technology sector was the antithesis of the
1996 experience. We wrote extensively in last year's Annual Report on how
performance in the sector was concentrated in a handful of the
largest-capitalization stocks--Intel, Microsoft, Cisco, and IBM. These four
stocks, which in aggregate have a market capitalization exceeding $300 billion,
surged a staggering 88% on average. Their collective size and performance made
it nearly impossible to keep up with the 43% return on this sector of the S&P
500 Index. In contrast, thus far in 1997, Intel, Cisco, and IBM have lagged the
Index.
We also highlighted in the 1996 Report a dozen of our technology holdings
whose performance was mixed. However, we pointed out that these companies are
industry leaders with differentiated products serving exciting markets. Many of
these names experienced solid gains in the first half. Stratus and Tandem, the
leading manufacturers of fault-tolerant computers, gained 83% and 47%,
respectively. Ericsson, Motorola, and Nokia--
INVESTMENT PHILOSOPHY
The Fund reflects a belief that superior long-term investment results can be
achieved by selecting stocks with prices lower than the "fundamental value" of
the underlying companies, based on the investment adviser's assessment of such
factors as their industry positions, growth potential, and expected
profitability.
6
<PAGE> 9
the undisputed leaders in wireless communications equipment--appreciated 31%,
25%, and 29%, respectively. Octel, the leading vendor of voice-messaging
systems, and Texas Instruments, the market leader in digital signal processor
solutions, both enjoyed gains in excess of 30% during the half-year.
The Fund's holdings in airline stocks continue to depress our results.
After failing to keep pace with the S&P 500 Index in 1996, AMR, Delta Air
Lines, and Southwest Airlines again lagged in the first half of 1997. There is
pending legislation that would apply a more onerous ticket tax on the airline
companies. This has caused concern among investors, as have fears of renewed
fare competition and more difficult earnings comparisons. Fundamentally,
traffic remains robust, earnings are at record levels, and balance sheets are
improving every quarter. We continue to like the stocks. Despite the airlines,
the return on our transportation holdings surpassed that of the overall Fund
because of the air freight stocks we hold. Airborne Freight and Federal Express
were up 79.8% and 30.1%, respectively. These companies are enjoying good growth
in volume and have implemented pricing strategies that will favorably influence
profitability going forward.
Our strongest sector in the first half was financial services. Our
holdings generated a return of 31.2%, led by gains of 40%-plus in State Street
and Torchmark. Our largest holding in the sector, American International Group,
rose 38%. Unfortunately, we were significantly underweighted in this strong
sector, which detracted from our results in the first half as it has for
several years (financial services are second only to technology as the best
sector for the last five years).
The Fund's avoidance of the utilities, integrated oils, and other energy
sectors contributed meaningfully to our results in the first half. These
sectors constitute more than 18% of the S&P 500 Index, yet were less than 1% of
the Fund's assets during the period. Utilities and other energy were the two
worst-performing sectors in the first half, and integrated oils also lagged the
Index.
As the market averages scale new heights, valuation commands even greater
attention in our analysis. We perceive the greatest valuation excesses to be in
some of the largest-capitalization issues in the S&P 500 Index. Many of these
stocks are household names and considered to be extremely safe. Conversely, we
still find value in some of the smaller- and mid-cap issues that are less
well-known to the average investor. More than 50% of the Fund's equity assets
are invested in mid- and small-cap stocks (as categorized by Frank Russell
Company) versus approximately 17.5% for the S&P 500. In this universe of
companies, stock selection is critical, and fundamental research can play an
important role in such selection. We believe these skills are our greatest
strength and should position us to enjoy positive relative performance over the
long term.
Howard B. Schow, Portfolio Manager
Theo A. Kolokotrones, Portfolio Manager
Joel P. Fried, Assistant Portfolio Manager
PRIMECAP Management Company
July 11, 1997
7
<PAGE> 10
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
PRIMECAP FUND
TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1984-JUNE 30, 1997
- -----------------------------------------
PRIMECAP FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------
<S> <C> <C> <C> <C>
1984 4.9% 0.0% 4.9% 0.6%
1985 35.6 0.2 35.8 31.8
1986 21.8 1.7 23.5 18.7
1987 -3.2 0.9 -2.3 5.3
1988 13.7 1.0 14.7 16.6
1989 20.2 1.4 21.6 31.7
1990 -3.8 1.0 -2.8 -3.1
1991 31.8 1.3 33.1 30.5
1992 8.2 0.8 9.0 7.6
1993 17.6 0.4 18.0 10.1
1994 10.7 0.7 11.4 1.3
1995 34.4 1.1 35.5 37.6
1996 17.5 0.8 18.3 23.0
1997* 21.1 0.0 21.1 20.6
- -----------------------------------------
</TABLE>
*Six months ended June 30, 1997.
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, 1997
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRIMECAP Fund 11/1/84 31.90% 23.64% 13.81% 0.94% 14.75%
- --------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
[PHOTO]
FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. 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*
PRIMECAP FUND SHARES (000)
- -----------------------------------------------------------------------------
COMMON STOCKS (90.1%)
- -----------------------------------------------------------------------------
AUTO & TRANSPORTATION (14.0%)
<S> <C> <C>
- - AMR Corp. 2,125,000 $ 196,563
APL Ltd. 726,350 22,698
(1) Airborne Freight Corp. 1,580,000 66,163
- -(1) Alaska Air Group, Inc. 900,000 23,063
Arvin Industries, Inc. 675,000 18,394
Delta Air Lines, Inc. 2,130,000 174,660
- - Federal Express Corp. 4,200,000 242,550
Fleetwood Enterprises, Inc. 450,000 13,416
Southwest Airlines Co. 1,850,000 47,869
------------
805,376
------------
CONSUMER DISCRETIONARY (8.1%)
- - BET Holdings Inc. Class A 380,000 12,445
- - Costco Cos., Inc. 3,500,000 115,063
- - Electronic Arts Inc. 1,200,000 40,350
- - Filene's Basement Corp. 995,000 6,530
- - GC Cos. 200,000 9,150
Harcourt General, Inc. 850,000 40,481
Manpower Inc. 1,170,000 52,065
McClatchy Newspapers, Inc. 580,000 17,038
- - Neiman-Marcus Group Inc. 2,040,000 53,550
- -(1) Plantronics, Inc. 804,000 40,301
Reuters Holdings PLC ADR 740,000 46,620
Time Warner, Inc. 600,000 28,950
------------
462,543
------------
CONSUMER STAPLES (1.2%)
Block Drug Co. Class A 164,800 7,169
The Seagram Co. Ltd. 1,550,000 62,387
------------
69,556
------------
FINANCIAL SERVICES (7.6%)
American International
Group, Inc. 725,016 108,299
City National Corp. 621,485 14,954
General Re Corp. 570,000 103,740
HSB Group Inc. 200,000 10,675
Marsh & McLennan Cos., Inc. 240,000 17,130
State Street Corp. 1,440,000 66,600
Torchmark Corp. 485,000 34,556
Transatlantic Holdings 375,000 37,219
Zurich Reinsurance Centre
Holdings, Inc. 1,089,000 43,015
------------
436,188
------------
HEALTH CARE (11.6%)
American Home Products Corp. 180,000 13,770
- - Boston Scientific Corp. 205,000 12,595
Guidant Corp. 2,605,316 221,452
Johnson & Johnson 1,100,000 70,812
Eli Lilly & Co. 980,000 107,126
Medtronic, Inc. 998,444 80,874
- -(1) Nellcor Puritan Bennett, Inc. 3,350,000 60,719
Pharmacia & Upjohn, Inc. 2,850,000 99,037
------------
666,385
------------
MATERIALS & PROCESSING (5.0%)
Belden Inc. 283,000 9,640
Engelhard Corp. 2,200,000 46,062
(1) Granite Construction Co. 1,400,000 27,650
(1) MacDermid, Inc. 567,000 25,869
Monsanto Co. 550,000 23,684
- - Mycogen Corp. 800,000 15,500
Pioneer Hi-Bred
International, Inc. 750,000 60,000
Quaker Chemical Corp. 93,800 1,630
Stepan Co. 300,000 7,387
Temple-Inland Inc. 1,300,000 70,200
------------
287,622
------------
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
MARKET
VALUE*
PRIMECAP FUND SHARES (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
PRODUCER DURABLES (9.3%)
AMP, Inc. 531,900 $ 22,207
BW/IP Inc. 515,000 10,461
Caterpillar, Inc. 755,000 81,068
Deere & Co. 500,000 27,437
- - Dionex Corp. 510,000 26,010
Donaldson Co., Inc. 540,000 20,520
Kennametal, Inc. 1,140,000 49,020
Molex, Inc. 156,250 5,703
Molex, Inc. Class A 156,250 5,420
- -(1) Octel Communications Corp. 2,775,000 64,866
Perkin-Elmer Corp. 940,000 74,789
Pitney Bowes, Inc. 860,000 59,770
Tektronix, Inc. 1,400,000 84,000
------------
531,271
------------
TECHNOLOGY (29.0%)
COMMUNICATIONS TECHNOLOGY (1.7%)
Lucent Technologies, Inc. 150,000 10,809
- - Tellabs, Inc. 1,600,000 89,200
COMPUTER SERVICES, SOFTWARE & SYSTEMS (1.9%)
Adobe Systems, Inc. 3,090,000 108,343
COMPUTER TECHNOLOGY (9.9%)
- - Bay Networks, Inc. 3,270,000 86,859
- - Digital Equipment Corp. 1,148,000 40,682
L.M. Ericsson Telephone Co.
ADR Class B 4,600,000 181,125
L.M. Ericsson Telephone Co.
Cvt. Pfd. 4.25% 620,000 3,371
- -(1) Evans & Sutherland Computer
Corp. 840,000 22,995
Hewlett-Packard Co. 1,320,000 73,920
- - Stratus Computer, Inc. 377,000 18,850
- -(1) Tandem Computers, Inc. 6,991,000 141,568
- - Tripos Inc. 100,000 1,500
ELECTRONICS (2.1%)
Nokia Corp. Pfd. ADR 480,000 35,400
Sony Corp. ADR 965,000 84,920
ELECTRONICS-SEMICONDUCTORS/COMPONENTS (9.7%)
Intel Corp. 1,914,000 270,951
- - LSI Logic Corp. 1,188,700 38,038
Texas Instruments, Inc. 2,910,000 244,622
ELECTRONICS-TECHNOLOGY (3.7%)
- - Coherent, Inc. 500,000 22,281
Motorola, Inc. 1,730,000 131,480
Symbol Technologies, Inc. 1,666,500 56,036
------------
1,662,950
------------
OTHER (4.3%)
- - Lynx Therapeutics Inc. 72,900 1,021
MISCELLANEOUS (4.2%) 243,254
------------
244,275
------------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $2,836,412) 5,166,166
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (9.9%)
- -----------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.93%, 7/1/97
(COST $570,052) $570,052 $ 570,052
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $3,406,464) 5,736,218
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
Other Assets--Notes C and F 71,297
Liabilities--Note F (70,167)
------------
1,130
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 158,301,335 outstanding
$.001 par value shares
(authorized 400,000,000 shares) $5,737,348
=============================================================================
NET ASSET VALUE PER SHARE $36.24
=============================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $473,194,000.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,352,383 $21.17
Undistributed Net
Investment Income 12,659 .08
Accumulated Net
Realized Gains 42,552 .27
Unrealized Appreciation--
Note E 2,329,754 14.72
- -----------------------------------------------------------------------------
NET ASSETS $5,737,348 $36.24
=============================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any 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>
- -------------------------------------------------------------------------------------
PRIMECAP FUND
SIX MONTHS ENDED JUNE 30, 1997
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 17,823
Interest 10,529
------------
Total Income 28,352
------------
EXPENSES
Investment Advisory Fees--Note B 6,321
The Vanguard Group--Note C
Management and Administrative 6,512
Marketing and Distribution 536
Taxes (other than income taxes) 179
Custodian Fees 6
Auditing Fees 6
Shareholders' Reports 90
Annual Meeting and Proxy Costs 5
Directors' Fees and Expenses 6
Total Expenses 13,661
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 14,691
- -------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 42,309
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 881,084
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $938,084
=====================================================================================
</TABLE>
*Dividend income from affiliated companies was $630,000.
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
that is 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>
- -------------------------------------------------------------------------------------------------------
PRIMECAP FUND
---------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1997 DEC. 31, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 14,691 $ 25,594
Realized Net Gain 42,309 106,160
Change in Unrealized Appreciation (Depreciation) 881,084 505,864
---------------------------------
Net Increase in Net Assets Resulting from Operations 938,084 637,618
---------------------------------
DISTRIBUTIONS
Net Investment Income -- (27,258)
Realized Capital Gain (23,303) (98,658)
---------------------------------
Total Distributions (23,303) (125,916)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 980,335 994,160
Issued in Lieu of Cash Distributions 23,039 124,436
Redeemed (384,793) (663,154)
---------------------------------
Net Increase from Capital Share Transactions 618,581 455,442
- -------------------------------------------------------------------------------------------------------
Total Increase 1,533,362 967,144
- -------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 4,203,986 3,236,842
---------------------------------
End of Period $5,737,348 $4,203,986
=======================================================================================================
(1)Shares Issued (Redeemed)
Issued 29,542 35,931
Issued in Lieu of Cash Distributions 719 4,217
Redeemed (11,740) (23,764)
---------------------------------
Net Increase in Shares Outstanding 18,521 16,384
=======================================================================================================
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data 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; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
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. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRIMECAP FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $30.08 $26.23 $19.98 $18.42 $16.19 $15.36
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .09 .19 .22 .12 .07 .12
Net Realized and Unrealized Gain (Loss)
on Investments 6.23 4.59 6.84 1.97 2.82 1.24
---------------------------------------------------------------
Total from Investment Operations 6.32 4.78 7.06 2.09 2.89 1.36
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.20) (.22) (.12) (.07) (.12)
Distributions from Realized Capital Gains (.16) (.73) (.59) (.41) (.59) (.41)
---------------------------------------------------------------
Total Distributions (.16) (.93) (.81) (.53) (.66) (.53)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $36.24 $30.08 $26.23 $19.98 $18.42 $16.19
===================================================================================================================
TOTAL RETURN 21.08% 18.31% 35.48% 11.41% 18.03% 8.99%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,737 $4,204 $3,237 $1,554 $791 $646
Ratio of Total Expenses to
Average Net Assets 0.56%* 0.59% 0.58% 0.64% 0.67% 0.68%
Ratio of Net Investment Income to
Average Net Assets 0.60%* 0.69% 0.99% 0.79% 0.44% 0.84%
Portfolio Turnover Rate 5%* 10% 7% 8% 16% 7%
Average Commission Rate Paid $.0675 $.0637 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard/PRIMECAP Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual 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. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. 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. 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.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is 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. PRIMECAP Management provides investment advisory services to the Fund for a
fee calculated at an annual percentage rate of average net assets. For the six
months ended June 30, 1997, the advisory fee represented an effective annual
rate of 0.26% of the Fund's average net assets after giving effect to a fee
waiver of $460,000 (0.02%) for the period April 1, 1997, to June 30, 1997.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the board of directors. At June 30, 1997,
the Fund had contributed capital of $421,000 to Vanguard (included in Other
Assets), representing 2.1% of Vanguard's capitalization. The Fund's directors
and officers are also directors and officers of Vanguard.
D. During the six months ended June 30, 1997, the Fund purchased $434,444,000
of investment securities and sold $116,158,000 of investment securities, other
than temporary cash investments.
E. At June 30, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $2,329,754,000,
consisting of unrealized gains of $2,342,143,000 on securities that had risen
in value since their purchase and $12,389,000 in unrealized losses on
securities that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at June 30, 1997,
was $48,047,000, for which the Fund held cash collateral of $49,828,000.
14
<PAGE> 17
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of
The Vanguard Group, Inc.; Secretary of each of the investment
companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional Investor Group.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 18
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
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INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
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INDEX FUNDS
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FIXED-INCOME FUNDS
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INCOME FUNDS
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(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q592-6/97
