VANGUARD
PRIMECAP FUND
SEMIANNUAL
REPORT
JUNE 30, 1999
[A MEMBER OF THE VANGUARD GROUP (R) LOGO]
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AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
o The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
o The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.Morgan
died on September 2, 1998.
o The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE
SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE>
FELLOW SHAREHOLDER,
[PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
Vanguard PRIMECAP Fund earned a stellar total return of +17.8% during the first
half of its fiscal year, which ended June 30, 1999, outpacing by substantial
margins the returns of its average peer and the Standard & Poor's 500 Index.
The table below compares PRIMECAP's six-month total return (capital
change plus reinvested dividends) with those of the average growth mutual fund
and the S&P 500 Index, which is a widely recognized benchmark of
large-capitalization stocks. The fund's return is based on an increase in net
asset value from $47.66 per share on December 31, 1998, to $55.47 per share on
June 30, 1999, and is adjusted for a distribution of $0.62 per share paid from
net realized capital gains.
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TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
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Vanguard PRIMECAP Fund +17.8%
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Average Growth Fund +11.7%
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S&P 500 Index +12.4%
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FINANCIAL MARKETS IN REVIEW
The key influences on financial markets during the first half of 1999 were the
surprising strength of the U.S. economy's long-running expansion, promising
corporate earnings, and increasing signs that a number of shaky foreign
economies were on firmer footing. These factors were partly responsible for both
broad-based gains in U.S. stocks and increases in interest rates, which sent
bond prices lower.
The U.S. stock market, as measured by the Wilshire 5000 Equity Index,
gained +11.8%--equivalent to more than a full year's return based on historical
norms. But the half-year saw a sharp rotation in market leadership. As the
outlook for global economic growth kept improving, there was a notable revival
in cyclical stocks--commodity-related companies, machinery makers, and other
firms whose profit prospects are most closely tied to the economy's ups and
downs. This was a welcome change for cyclicals and other "value" stocks, which
had lagged the market not just in the first quarter but for much of the last
five years. Within the S&P 500 Index, the value stocks--those generally
characterized by above-average dividend yields and below-average price/earnings
ratios--carried the day during the second quarter and for the first half of the
year, when they gained +14.0% versus a gain of +11.0% for growth stocks.
For bond investors, a surging economy has a dark side: the possibility
that wage pressures and capacity constraints will push up inflation, which
diminishes the buying power of future bond interest and principal payments.
After treading water in January, interest rates rose throughout the rest of the
period. And on the final day of the half-year, the Federal Reserve Board hiked
its target for short-term interest rates by 0.25% amid concern that higher
inflation would be an inevitable by-product of strong growth. The yield of the
benchmark 30-year U.S. Treasury bond rose 86 basis points (0.86 percentage
point) on balance to end the six months at 5.96%. The Lehman Brothers Aggregate
Bond Index, a proxy for the taxable U.S. bond market, earned a negative return
of -1.4% for the six months, as a price decline of -4.4% engendered by the
interest rate rise more than offset the +3.0% return from interest income.
1
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PERFORMANCE OVERVIEW
Vanguard PRIMECAP Fund's six-month return of +17.8% was 6.1 percentage points
above that of its average peer and 5.4 percentage points higher than that of the
S&P 500 Index. This outstanding performance was the result of excellent
investment management by our adviser, PRIMECAP Management Company. A large part
of our advantage over the index came from the technology sector, where the fund
has about one-third of its assets invested, compared with about 17% for the
index. The Report From the Adviser, which begins on page 5, provides more
details on the fund's holdings.
The fund's relatively large stake in the producer durables group (about
14% of assets versus about 3% for the index) was also beneficial, as this sector
turned in the second-best return among the industry groups in the index for the
half-year. The specific stocks chosen by the adviser enhanced the benefit of the
sector weighting.
In achieving its fine performance, the fund overcame several negative
factors: subpar selections among stocks in the consumer-discretionary sector
(mainly retailers) and an average cash position of roughly 7% (cash acts as a
drag on returns when stocks are rising). Especially notable is our surpassing of
the S&P 500 Index, considering that the index does not hold cash or incur
expenses, which all mutual funds must bear.
While PRIMECAP's excellent absolute and relative performance is
certainly welcome, keep in mind that a double-digit return for a six-month
period is well above what should be expected from any investment. Also, it's
important to remember that because PRIMECAP strives to outperform the broader
market--by emphasizing certain market sectors or particular companies from time
to time--its returns will often differ from those of broad market benchmarks.
These divergences will sometimes be favorable, as during the past six months,
and sometimes unfavorable, as in 1998. Overall, we believe that PRIMECAP's
skillful investment management and our significantly lower costs--our annualized
expense ratio is nearly 1 percentage point lower than that of the average growth
fund--are important advantages in our quest to provide long-term returns that
surpass those of similar funds.
IN SUMMARY
Sticking with an investment program diversified across various asset classes
(stock funds, bond funds, and short-term reserves) and market segments can be
trying at times, particularly when one segment runs ahead of the others and
seems to be "the only game in town." But in the long run, investors are well
served by portfolios constructed with the knowledge that market leadership can
change abruptly and unpredictably. So once you've decided on an investment plan
suited to your time horizon, goals, and tolerance for risk, we urge you to "stay
the course."
We look forward to reporting to you on the full 1999 fiscal year in our
annual report six months hence.
/S/ /S/
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 15, 1999
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999
A markedly improved global economic outlook during the first half of 1999 led to
mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises
in Asia, Russia, and some Latin American nations would restrain business
activity worldwide, even in the United States, which has been the world's
economic locomotive. By spring, however, a consensus emerged that global
economic activity was likely to be solid, if not robust. This change in
sentiment stemmed from several factors, including further vigorous growth in the
U.S. economy, a belief that Asia's slump had bottomed out, and moves in Europe
to ease monetary policy to encourage growth.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both of
which had been among Wall Street's wallflowers in recent years.
U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
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6 MONTHS 1 YEAR 5 YEARS*
STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
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BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
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OTHER
Consumer Price Index 1.4% 2.0% 2.3%
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*Annualized.
Large-cap growth stocks, which are generally perceived as less
vulnerable than other stocks to economic slowdowns, continued to lead the
market's climb during the first quarter of the year. During the second quarter,
however, value stocks--especially producers of commodity products such as oil,
aluminum, and chemicals--moved to the front of the pack. Providing support were
generally upbeat corporate profit reports. Indeed, earnings gains were
sufficient to send prices higher despite rising interest rates, which often
depress stock prices as well as bond prices. For the six months, the S&P 500
Index's value stocks posted a 14.0% return while its growth stocks gained 11.0%
as a group.
3
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Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second quarter.
Even so, the cumulative return of the Russell 2000 over the past three years
lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the Russell
2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.
U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage
point--a significant rise for a six-month period. The yield of the 30-year
Treasury bond rose 86 basis points, to 5.96% on June 30 from 5.10% on December
31, 1998. The yield of the 10-year Treasury rose 113 basis points, to 5.78% from
4.65%. Money market rates didn't rise as far: Yields on 3-month T-bills
increased on balance by only 33 basis points, to 4.78% on June 30. Bond prices,
which move in the opposite direction from interest rates, fell. The Lehman
Aggregate Bond Index, a benchmark for investment-grade taxable bonds, declined
1.4% on a total-return basis, as bond prices declined an average of 4.4%,
outweighing the 3.0% in interest income for the period.
INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies during
the six months. However, a pervasive rise in the value of the U.S. dollar
against other currencies reduced returns for U.S. investors (returns from abroad
are augmented when the dollar falls in value against other currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in U.S.
dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the return
from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.
4
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REPORT FROM THE ADVISER
During the first half of 1999, Vanguard PRIMECAP Fund's total return of 17.8%
exceeded both the 12.4% return recorded by the unmanaged S&P 500 Index and the
11.7% return of the average growth fund.
As you may recall, the fund closed 1998 with an exceptional fourth
quarter--appreciating 28.8%. In our annual report we cited two significant
developments that sparked the rally. First, business activity in Southeast Asia
showed signs of recovery. Second, market breadth improved as investors ventured
outside a relatively short list of the very largest-capitalization stocks. These
important trends persisted throughout the first half of 1999, providing a
favorable environment for your fund. PRIMECAP Fund holds the stocks of many
companies with significant Southeast Asian exposure, and our average holding has
a substantially smaller market cap than the average company in the S&P 500
Index.
On the heels of a 57.5% gain in 1998, our technology holdings again led
the fund's results in the first half of 1999. Roughly one-third of the fund's
assets are committed to this sector, with particular emphasis on semiconductors
and communications equipment. The outlook for the semiconductor industry has
brightened markedly as the profusion of digital appliances continues. Orders are
picking up, lead times are lengthening, and excess capacity is being absorbed.
This results in much higher profitability for this industry. The stocks of LSI
Logic, Xilinx, and Texas Instruments led our semiconductor holdings, producing
gains of 186%, 76%, and 68%, respectively.
Our communications-equipment stocks also enjoyed excellent returns in
the period. Here, the leading manufacturers are serving one of the greatest
growth markets of this century. The explosive growth of e-commerce and Internet
surfing has created a seemingly insatiable demand for network infrastructure,
commonly referred to as bandwidth. Also, continued extraordinary growth in the
usage of various wireless communication technologies offers unprecedented
opportunities for equipment providers. Many of the premier companies serving
these markets (Nokia, Ericsson, Motorola, Nortel Networks, and Tellabs) are
significant holdings for the fund. These five stocks, which together represent
more than 10% of the fund's assets, posted an average gain of nearly 64% during
the first half.
The fund also enjoyed strong performances from technology holdings
outside of the semiconductor and communications arenas. Specifically, Adobe
Systems, Hewlett-Packard, Sony, and the SABRE Group, which in aggregate account
for approximately 10% of the fund's assets, gained an average of about 60%
during the six months. Each of these four companies is a leader in its market,
with strong brand identity and franchise value.
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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.
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Although our exposure to the energy sector is small, our holdings there
performed well. Four of our five energy stocks (Burlington Resources, Pogo
Producing, Schlumberger, and Union Pacific Resources)
5
<PAGE>
outperformed the overall market. This sector had been out of favor for a long
time. However, our interest in it increased as energy prices (adjusted for
inflation) neared historic lows and valuations on the stocks became attractive.
Following a 69% gain in 1997 and a 53% gain in 1998, our holdings in
health care have suffered thus far in 1999. Many of the major pharmaceutical
companies had benefited from the stock market's obsession with the largest
growth stocks. As mentioned previously, this infatuation has waned, and the drug
stocks were hurt in the process. Additionally, talk of a prescription drug
benefit for Medicare patients has raised concern regarding the industry's future
profitability. Our largest holding in the sector, Pharmacia & Upjohn, is one of
the smallest of the major pharmaceutical companies. Unlike most of its brethren,
Pharmacia & Upjohn has been a relatively poor performer over the last five
years. Two years ago, new management joined the company and moved quickly to cut
costs and increase operational productivity. The company is well positioned with
several new drugs and has few products that will be losing patent protection in
the near term. The company has a promising pipeline of products in development,
especially the lead compound in the first new class of antibiotics in 30 years.
We believe the growth and profitability of Pharmacia & Upjohn over the next five
years can be dramatically better than industry observers expect.
Within the health-care sector, we have marginally increased our
commitment to biotechnology stocks. In our opinion, over the last few years the
viability of this industry has clearly been validated. Many of these companies
have exciting products in the pipeline, with multiple compounds in late-stage
clinical trials. They have secured distribution by forging partnerships with the
major drug companies. They are also serving as important components of the major
pharmaceutical companies' research-and-development efforts, receiving in
exchange funding and royalties on future product sales. Despite these
attributes, the stocks generally sell at a material discount to the valuations
accorded the more traditional drug companies.
Finally, our significant overweighting in the transportation sector
provided a modest increment to our performance during the first half of 1999.
Performance within the industry and among our holdings was mixed. For example,
among the airlines, Southwest Airlines and AMR surpassed the market averages,
gaining 37% and 15%, respectively. However, Delta Air Lines and UAL trailed the
averages. Similarly, in the airfreight category, FDX gained an impressive 22%,
but Airborne Freight declined 23%.
We expect the market's expanding breadth to continue and business in
Asia to steadily improve. In such an environment, we believe the fund's
performance relative to its benchmarks should be favorable.
Howard B. Schow, Portfolio Manager Theo A. Kolokotrones, Portfolio Manager
Joel P. Fried, Assistant Portfolio F. Jack Liebau Jr., Assistant Portfolio
Manager Manager
PRIMECAP Management Company
July 9, 1999
6
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PERFORMANCE SUMMARY
PRIMECAP FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1984-JUNE 30, 1999
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PRIMECAP FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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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
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PRIMECAP FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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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 36.1 0.7 36.8 33.4
1998 24.5 0.9 25.4 28.6
1999* 17.8 0.0 17.8 12.4
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*Six months ended June 30, 1999.
See Financial Highlights table on page 14 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
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10 YEARS
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
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PRIMECAP Fund 11/1/1984 32.06% 29.16% 19.65% 0.92% 20.57%
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FUND PROFILE
PRIMECAP FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
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PRIMECAP S&P 500
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Number of Stocks 106 500
Median Market Cap $15.5B $70.1B
Price/Earnings Ratio 23.4x 29.6x
Price/Book Ratio 3.8x 5.2x
Yield 0.3% 1.2%
Return on Equity 18.5% 22.4%
Earnings Growth Rate 10.7% 14.8%
Foreign Holdings 6.6% 1.6%
Turnover Rate 16%* --
Expense Ratio 0.53%* --
Cash Reserves 7.0% --
*Annualized.
VOLATILITY MEASURES
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PRIMECAP S&P 500
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R-Squared 0.85 1.00
Beta 1.07 1.00
INVESTMENT FOCUS
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STYLE - GROWTH
MARKET CAP - MEDIUM
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
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Texas Instruments, Inc. 7.3%
FDX Corp. 5.1
AMR Corp. 3.8
Delta Air Lines, Inc. 3.7
Pharmacia & Upjohn, Inc. 3.4
Motorola, Inc. 3.4
Guidant Corp. 3.2
Nortel Networks Corp. 3.2
Intel Corp. 3.2
Micron Technology, Inc. 3.2
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Top Ten 39.5%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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JUNE 30, 1998 JUNE 30, 1999
-------------------------------------------
PRIMECAP PRIMECAP S&P 500
-------------------------------------------
Auto & Transportation ................ 18.0% 18.1% 2.5%
Consumer Discretionary ............... 10.5 5.2 12.8
Consumer Staples ..................... 2.1 0.4 7.8
Financial Services ................... 6.7 1.4 16.5
Health Care .......................... 11.9 13.7 11.1
Integrated Oils ...................... 0.0 0.0 5.1
Other Energy ......................... 2.8 2.6 1.4
Materials & Processing ............... 6.9 4.3 3.5
Producer Durables .................... 8.2 11.5 3.5
Technology ........................... 32.0 36.7 18.9
Utilities ............................ 0.0 0.0 11.3
Other ................................ 0.9 6.1 5.6
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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%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
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.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
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.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
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. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
9
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FINANCIAL STATEMENTS
JUNE 30, 1999 (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, 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.
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MARKET
VALUE*
PRIMECAP FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (93.0%)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (16.8%)
o FDX Corp. 13,146,000 $ 713,171
o(1) AMR Corp. 7,700,000 525,525
(1) Delta Air Lines, Inc. 8,800,000 507,100
Southwest Airlines Co. 8,705,500 270,959
o UAL Corp. 2,300,000 149,500
(1) Airborne Freight Corp. 3,400,000 94,138
Fleetwood Enterprises, Inc. 1,680,600 44,431
Arvin Industries, Inc. 780,000 29,542
----------
2,334,366
----------
CONSUMER DISCRETIONARY (4.8%)
o Costco Cos., Inc. 2,400,000 192,150
(1) Harcourt General, Inc. 3,132,200 161,504
o(1) Neiman Marcus Group Inc. 3,152,600 80,982
Manpower Inc. 2,720,000 61,540
Dillard's Inc. 1,241,500 43,608
(1) The McClatchy Co. Class A 1,000,000 33,125
Lowe's Cos., Inc. 438,000 24,829
o PETsMART, Inc. 1,930,000 19,782
Dayton Hudson Corp. 190,000 12,350
Block Drug Co. Class A 278,100 11,593
NIKE, Inc. Class B 176,000 11,143
o GC Cos. 200,000 7,150
The Gap, Inc. 108,750 5,478
Mattel, Inc. 100,000 2,644
o Filene's Basement Corp. 985,000 1,416
----------
669,294
----------
CONSUMER STAPLES (0.4%)
Brown-Forman Corp. Class B 800,000 52,150
----------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
ENERGY (2.4%)
Schlumberger Ltd. 1,293,500 82,380
Burlington Resources, Inc. 1,887,300 81,626
Union Pacific Resources Group, Inc. 3,900,000 63,619
Noble Affiliates, Inc. 2,100,000 59,194
(1) Pogo Producing Co. 2,600,000 48,425
----------
335,244
----------
FINANCIAL SERVICES (1.3%)
Torchmark Corp. 2,600,000 88,725
Transatlantic Holdings, Inc. 562,500 42,152
St. Paul Cos., Inc. 1,100,000 34,994
City National Corp. 312,785 11,710
American International Group, Inc. 40,692 4,763
----------
182,344
----------
HEALTH CARE (12.7%)
Pharmacia & Upjohn, Inc. 8,397,900 477,106
Guidant Corp. 8,621,264 443,456
o(1) Centocor, Inc. 5,940,500 276,976
PE Corp.-PE Biosystems Group 1,300,000 149,175
Medtronic, Inc. 1,620,000 126,158
Johnson & Johnson 1,100,000 107,800
o Boston Scientific Corp. 2,000,000 87,875
Novartis AG ADR 755,000 56,059
Eli Lilly & Co. 546,640 39,153
o Biogen, Inc. 34,600 2,225
o BioChem Pharma Inc. 38,200 716
----------
1,766,699
----------
10
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
MATERIALS & PROCESSING (4.0%)
Engelhard Corp. 5,200,000 117,650
Potash Corp. of Saskatchewan, Inc. 1,800,000 93,150
Temple-Inland Inc. 1,300,000 88,725
(1) MacDermid, Inc. 1,701,000 79,097
Sigma-Aldrich Corp. 2,000,000 68,875
(1) Granite Construction Co. 2,100,000 61,556
OM Group, Inc. 1,140,000 39,330
Stepan Co. 134,200 3,405
----------
551,788
----------
PRODUCER DURABLES (10.7%)
Nortel Networks Corp. 5,087,300 441,641
Pitney Bowes, Inc. 2,400,000 154,200
Caterpillar, Inc. 2,470,000 148,200
(1) Millipore Corp. 2,820,000 114,386
o(1) Plantronics, Inc. 1,608,000 104,721
(1) Tektronix, Inc. 3,400,000 102,638
Deere & Co. 2,350,000 93,119
o Lexmark International Group,Inc.Class A 1,400,000 92,487
o Nokia Corp. ADR 800,000 73,250
o Dionex Corp. 1,020,000 41,310
Kennametal, Inc. 1,260,000 39,060
Donaldson Co., Inc. 1,080,000 26,460
Belden, Inc. 702,400 16,814
Pall Corp. 750,000 16,641
o PE Corp.-Celera Genomics Group 650,000 10,522
Molex, Inc. 195,312 7,227
Molex, Inc. Class A 195,312 6,152
----------
1,488,828
----------
TECHNOLOGY (34.2%)
COMMUNICATIONS TECHNOLOGY (7.1%)
Motorola, Inc. 4,981,850 472,030
LM Ericsson Telephone Co.ADR Class B 9,200,000 303,025
o Tellabs, Inc. 2,400,000 162,150
Corning, Inc. 600,000 42,075
LM Ericsson Telephone Co. 4.25 % Cvt. Pfd. 620,000 5,386
COMPUTER SERVICES, SOFTWARE & SYSTEM (4.2%)
(1) Adobe Systems, Inc. 5,190,000 426,391
o(1) The SABRE Group Holdings, Inc. 2,309,200 158,758
o Tripos Inc. 95,000 784
COMPUTER TECHNOLOGY (4.0%)
Hewlett-Packard Co. 3,930,000 394,965
Compaq Computer Corp. 6,228,925 147,548
o(1) Evans & Sutherland Computer Corp. 840,000 10,972
ELECTRONICS (2.4%)
Sony Corp. ADR 3,019,000 333,222
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (15.6%)
Texas Instruments, Inc. 6,990,000 1,013,550
Intel Corp. 7,390,000 439,705
o Micron Technology, Inc. 10,900,000 439,406
- --------------------------------------------------------------------------------
MARKET
VALUE*
PRIMECAP FUND SHARES (000)
- --------------------------------------------------------------------------------
o Xilinx, Inc. 3,400,000 194,650
o LSI Logic Corp. 1,488,700 68,666
ELECTRONICS--TECHNOLOGY (0.9%)
Symbol Technologies, Inc. 2,400,000 88,500
o(1) Coherent, Inc. 1,800,000 33,525
----------
4,735,308
----------
OTHER (5.7%)
The Seagram Co. Ltd. 3,100,000 156,163
Miscellaneous (4.5%) 629,895
----------
786,058
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
Cost $6,996,543) 12,902,079
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.0%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.87%, 7/1/1999 $967,160 967,160
4.96%, 7/1/1999--Note G 3,480 3,480
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $970,640) 970,640
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $7,967,183) 13,872,719
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Other Assets--Note C 56,630
Liabilities--Note G (53,745)
----------
2,885
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 250,134,503 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $13,875,604
================================================================================
NET ASSET VALUE PER SHARE $55.47
================================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
(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 $2,820,000,000.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
- --------------------------------------------------------------------------------
Paid in Capital 7,345,493 $29.37
Undistributed Net
Investment Income 23,516 .09
Accumulated Net
Realized Gains 601,059 2.40
Unrealized Appreciation--
Note F 5,905,536 23.61
- --------------------------------------------------------------------------------
NET ASSETS $13,875,604 $55.47
================================================================================
11
<PAGE>
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, 1999
(000)
- ---------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C>
Dividends* $ 35,514
Interest 23,649
Security Lending 494
----------
Total Income 59,657
EXPENSES ----------
Investment Advisory Fees--Note B 12,256
The Vanguard Group--Note C
Management and Administrative 19,431
Marketing and Distribution 1,038
Custodian Fees 7
Auditing Fees 8
Shareholders' Reports 336
Trustees' Fees and Expenses 10
----------
Total Expenses 33,086
Expenses Paid Indirectly--Note D (4)
----------
Net Expenses 33,082
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME 26,575
- ---------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 602,043
- ---------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,431,500
- ---------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,060,118
=======================================================================================
*Dividend income from affiliated companies was $4,835,000.
</TABLE>
12
<PAGE>
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>
- ------------------------------------------------------------------------------------------------------------------------
PRIMECAP FUND
----------------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998
(000) (000)
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C>
Net Investment Income $ 26,575 $ 76,585
Realized Net Gain 602,043 433,652
Change in Unrealized Appreciation (Depreciation) 1,431,500 1,697,719
----------------------------------------
Net Increase in Net Assets Resulting from Operations 2,060,118 2,207,956
----------------------------------------
DISTRIBUTIONS
Net Investment Income -- (80,088)
Realized Capital Gain (150,153) (348,822)
----------------------------------------
Total Distributions (150,153) (428,910)
----------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 1,350,409 3,038,897
Issued in Lieu of Cash Distributions 146,718 418,210
Redeemed (741,374) (2,212,430)
----------------------------------------
Net Increase from Capital Share Transactions 755,753 1,244,677
- ------------------------------------------------------------------------------------------------------------------------
Total Increase 2,665,718 3,023,723
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 11,209,886 8,186,163
----------------------------------------
End of Period $13,875,604 $11,209,886
========================================================================================================================
1Shares Issued (Redeemed)
Issued 26,511 71,476
Issued in Lieu of Cash Distributions 2,967 9,174
Redeemed (14,553) (52,348)
----------------------------------------
Net Increase in Shares Outstanding 14,925 28,302
========================================================================================================================
</TABLE>
13
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PRIMECAP FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $47.66 $39.56 $30.08 $26.23 $19.98 $18.42
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .34 .21 .19 .22 .12
Net Realized and Unrealized Gain (Loss)
on Investments 8.33 9.63 10.77 4.59 6.84 1.97
---------------------------------------------------------------------------
Total from Investment Operations 8.43 9.97 10.98 4.78 7.06 2.09
---------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.35) (.20) (.20) (.22) (.12)
Distributions from Realized Capital Gains (.62) (1.52) (1.30) (.73) (.59) (.41)
---------------------------------------------------------------------------
Total Distributions (.62) (1.87) (1.50) (.93) (.81) (.53)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $55.47 $47.66 $39.56 $30.08 $26.23 $19.98
=============================================================================================================================
TOTAL RETURN 17.85% 25.44% 36.79% 18.31% 35.48% 11.41%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $13,876 $11,210 $8,186 $4,204 $3,237 $1,554
Ratio of Total Expenses to
Average Net Assets 0.53%* 0.51% 0.51% 0.59% 0.58% 0.64%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 0.43%* 0.78% 0.69% 0.69% 0.99% 0.79%
Portfolio Turnover Rate 16%* 13% 13% 10% 7% 8%
=============================================================================================================================
*Annualized.
</TABLE>
14
<PAGE>
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: Equity securities 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. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair 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 Company 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, 1999, the advisory fee represented an effective annual
rate of 0.20% of the fund's average net assets.
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 Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 1999, the fund had contributed capital of $1,982,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 2.8% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
D. The fund's custodian bank has agreed to reduce its fees when the fund
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended June 30, 1999, custodian fee offset arrangements reduced
expenses by $4,000.
E. During the six months ended June 30, 1999, the fund purchased $1,256,289,000
of investment securities and sold $901,486,000 of investment securities, other
than temporary cash investments.
F. At June 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $5,905,536,000,
consisting of unrealized gains of $6,163,178,000 on securities that had risen in
value since their purchase and $257,642,000 in unrealized losses on securities
that had fallen in value since their purchase.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. The market value of securities on loan to broker/dealers at June 30, 1999,
was $3,400,000, for which the fund held cash collateral of $3,480,000. Cash
collateral received is invested in repurchase agreements.
16
<PAGE>
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer,
and Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson
& Johnson; Director of Johnson & JohnsonoMerck
Consumer Pharmaceuticals Co., Women First
HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St.
Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance
Co. of America, Banco Bilbao Gestinova, Baker
Fentress & Co., The Jeffrey Co., and Southern
New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer
of NACCO Industries, Inc.; Director of NACCO
Industries, The BFGoodrich Co., and The Standard
Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of
McKinsey & Co. and President of New York University;
Director of Pacific Gas and Electric Co., Procter &
Gamble Co., NACCO Industries, and Newfield
Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director
of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas
Co.; Director of Cummins Engine Co. and The Mead
Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary
of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies in
The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE>
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28,1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[SHIP LOGO]
[THE VANGUARD GROUP (R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q592-08/11/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
