Vanguard(R) PRIMECAP Fund
June 30, 2000
SEMIANNUAL
[GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP(R) LOGO]
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
* Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
* Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
* Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
* Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
CONTENTS
REPORT FROM THE CHAIRMAN 1 FUND PROFILE 8
THE MARKETS IN PERSPECTIVE 4 PERFORMANCE SUMMARY 10
REPORT FROM THE ADVISER 6 FINANCIAL STATEMENTS 11
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted. "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 5000(R)" and "Wilshire 4500" are trademarks of
Wilshire Associates Incorporated.
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1
REPORT FROM THE CHAIRMAN
[PHOTO]
John J. Brennan
Vanguard PRIMECAP Fund earned a 16.3% return during the first half of 2000. This
was a terrific result for a six-month interval, and especially so given that
this was a volatile and difficult period for the overall stock market.
As the table at right shows, the fund's return trounced the 2.5% average
return achieved by the average multi-capitalization core fund, the peer group in
which fund analysts Lipper Inc. place PRIMECAP Fund. Our result was also far
ahead of the Russell 1000 Growth Index, a benchmark for large- and mid-cap
growth companies, and the broad stock market, as measured by the Wilshire 5000
Total Market Index.
The fund's return is based on an increase in net asset value from $62.07
per share on December 31, 1999, to $71.27 per share on June 30, 2000, and is
adjusted for a March distribution of $0.98 per share paid from net realized
capital gains.
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TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 2000
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Vanguard PRIMECAP Fund 16.3%
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Average Multi-Cap Core Fund* 2.5%
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Wilshire 5000 Index -0.7%
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Russell 1000 Growth Index 4.2%
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*Derived from data provided by Lipper Inc.
THE PERIOD IN REVIEW
The first half of 2000 was a tumultuous time in the financial markets, which
were buffeted by a complex set of crosscurrents. The domestic economy continued
to grow at a strong pace--the production of goods and services during the second
quarter of 2000 was about 6% higher than in the same period last year, even
after adjusting for inflation. Unemployment remained low, hovering around 4% of
the workforce. Elsewhere in the world, growth was picking up from more subdued
levels.
Robust economic growth is generally good for corporate earnings and, thus,
for stocks. But investors and economic policymakers have worried that the
combination of rapid economic growth and low unemployment would trigger sharply
higher wages and inflation. The Federal Reserve Board, in an effort to slow the
economy's momentum and forestall an inflationary outburst, continued to raise
short-term interest rates during the half-year. The Fed boosted its target for
the federal funds rate three times by a total of 1.0 percentage point (100 basis
points). In all, the Fed has raised its target rate by 175 basis points in the
past 12 months.
For most of the first quarter of 2000, a continuing boom in technology
stocks kept the market averages rising, despite the threat of higher interest
rates. But during the second quarter, tech stocks in particular cooled off. The
market may have reacted to evidence that the ideal combination of rapid growth
and low inflation was coming to an end. If the Fed succeeds in slowing the
economy, corporate earnings growth might slow, too. And if earnings growth
slowed, some investors reasoned, technology and telecommunications stocks would
have a tough time maintaining their lofty price/earnings multiples. The split
between the two quarters was evident in the results for the tech-dominated
Nasdaq Composite Index, which rose 12.7% in the first quarter, only to
slide-14.7% in the second. End result? A -3.9% return for the half-year.
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2
The overall stock market, as measured by the Wilshire 5000 Index, posted a
-0.7% return for the six months. The small-cap Russell 2000 Index gained 3.0%,
outpacing the large-cap Standard & Poor's 500 Index, which posted a negative
return of -0.4%. Leadership within the market during the period switched back
and forth between growth stocks--those whose prices reflect high expectations
for future profitability--and value stocks, whose low prices in relation to
earnings, book value, and dividends reflect lower expectations by the market.
Growth stocks were in front early on, but value stocks performed best in late
March and April. Growth issues bounced back in June, however, and for the full
six months, growth generally outpaced value. For example, the growth stocks
within the Russell 1000 Index (comprising the 1,000 largest U.S. stocks) earned
4.2%, while the value stocks declined by an equal amount.
The Fed's efforts succeeded in pushing up short-term interest rates: The
yield of 3-month U.S. Treasury bills climbed 52 basis points (from 5.33% to
5.85%) during the half-year. But after rising early in the year, yields for
longer-term Treasuries began to fall after the Treasury announced that it would
use rising federal budget surpluses to buy back billions of dollars' worth of
long-term bonds. A shrinking supply of long-term Treasuries caused their prices
to rise and their yields to fall. By June 30, the 30-year Treasury bond's yield
had fallen 58 basis points, from 6.48% to 5.90%. Yields on high-quality
corporate bonds were flat to slightly higher. But for low-quality corporate
("junk") bonds, prices fell and yields rose as investors worried about increased
defaults.
PERFORMANCE OVERVIEW
Vanguard PRIMECAP Fund posted a 19.5% gain during the first three months of 2000
and avoided the worst of the downdraft that occurred during the second quarter,
when it fell -2.7%. We salute the skill of our adviser, PRIMECAP Management
Company, for the excellent half-year return of 16.3%. This was nearly 14
percentage points higher than the 2.5% return posted by the average multi-cap
core fund and was some 12 points above the 4.2% return for our unmanaged
benchmark, the Russell 1000 Growth Index.
The fund's outstanding results relative to its comparative standards were
due primarily to excellent stock selection, especially within the technology
sector. PRIMECAP Fund's tech holdings--which accounted for about 40% of assets
during the half-year--earned a return of nearly 33%, more than seven times the
4.6% return for tech stocks within the S&P 500 Index. Another sector where the
fund's holdings far outpaced those in the index was the consumer discretionary
group (including retailers, entertainment companies, and publishing firms).
PRIMECAP's stocks within this group eked out a gain of nearly 2%, which was
notable because the sector's return was -15.9% within the S&P 500 Index. The
fund's large stake in the auto & transportation sector hurt its relative
performance, since this group within the index returned about -12% during the
half-year.
Long-term shareholders in PRIMECAP Fund know that its past success has been
based on the willingness of our adviser to make large commitments to industry
sectors and companies that appear to have promising long-term futures. It often
takes time for these positions to work out, so shareholders should bring a
long-term orientation to the fund and a willingness to ride out considerable
volatility--on the downside as well as on the upside.
IN SUMMARY
During the first half of 2000 we witnessed very sharp day-to-day price
fluctuations, significant swings in investor sentiment, and sudden shifts in
market leadership. All of
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3
this volatility, squeezed into a mere six months, underscored the fact that
unpredictability is par for the course in financial markets. The timing, extent,
and duration of such episodes are impossible to foretell with precision, but
investors must be willing to endure them to reap the long-term rewards of
investing.
At Vanguard, we reiterate our long-standing recommendation for navigating
stormy seas toward long-term financial goals. First, create an investment plan
with a balance of stock funds, bond funds, and money market funds suited to your
time horizon, investment objectives, and tolerance for market fluctuations.
Then, once you have such a diversified plan in place, stick with it. Avoid the
impulse to alter it based on short-term events--whether those be unsettling
turbulence in the market or glittery returns from some particular corner of the
market. "Stay the course" is timeless investment wisdom.
/S/ John J. Brennan
John J. Brennan
Chairman and Chief Executive Officer
July 12, 2000
IN MEMORY
It is with great sadness that I report the death of John C. Sawhill, an
independent trustee of the fund and a member of The Vanguard Group's board of
directors since 1991. John, an economist who was president and chief executive
officer of The Nature Conservancy, died on May 18 at age 63. He was a senior
lecturer at the Harvard Business School and had formerly served as president of
New York University and as deputy secretary of the U.S. Department of Energy
under President Jimmy Carter. John was a remarkable man who was full of energy,
vigor, and life. His experience and wisdom added a great deal to Vanguard, and
his death is a blow to everyone who knew and loved him. Though John's work on
behalf of our funds was often carried on behind the scenes, he was a dedicated
advocate for the best interests of our shareholders. He will be missed.
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4
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 2000
The perpetual tug-of-war in the financial markets ended in a near stalemate
during the first half of 2000, despite lots of back-and-forth movement. On
average, neither stock nor bond prices ended the period far from where they
began it. However, bonds, thanks to their superior income, outpaced stocks in
total return.
Economic signals were conflicting. Growth continued at a rapid pace, and
corporate profits rose smartly. On the other hand, stock prices as the year
began already reflected high levels of optimism, and the market administered
severe punishment to companies that failed to live up to earnings expectations.
Also weighing on the market were concerns that the economy's vigor at a time of
low unemployment would inevitably push labor costs and other prices higher.
Indeed, higher costs for oil and natural gas pushed broad gauges of inflation
higher (the Consumer Price Index gained 2.4% for the six months and 3.7% for the
twelve months ended June 30). Yet core inflation, which excludes energy and food
items, registered a moderate 2.4% gain during the 12 months ended June 30.
The Federal Reserve Board raised short-term interest rates by 0.25
percentage point in February and again in March, before adding a half-point
boost in May. These steps, which followed three quarter-percentage-point
increases in 1999, took the Fed's target for short-term rates to 6.5%.
Thereafter, signs of a slowing in economic activity cropped up, although it was
not certain that the Fed was done trying to throttle down the economic engine.
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 2000
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6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index -0.4% 7.2% 23.8%
Russell 2000 Index 3.0 14.3 14.3
Wilshire 5000 Index -0.7 10.0 22.6
MSCI EAFE Index -4.0 17.4 11.6
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BONDS
Lehman Aggregate Bond Index 4.0% 4.6% 6.3%
Lehman 10 Year Municipal Bond Index 4.0 4.5 6.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.8 5.3 5.2
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OTHER
Consumer Price Index 2.4% 3.7% 2.5%
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*Annualized.
U.S. STOCK MARKETS
Stock prices were quite volatile during the half-year, and large day-to-day
price fluctuations in market averages were commonplace. There also were two
swift shifts in market leadership. The year began with a continuance in the
rapid rise for the "TMT" stocks (technology, media, telecommunications) that
were the market's darlings during 1999. Through mid-March, the surge in these
"new economy" groups left "old economy" stocks far behind. For example, the
Nasdaq Composite Index, which is dominated by tech-related stocks, gained 15.6%
and the Russell 1000 Value Index fell -10.4% during January and February. But in
mid-March, value stocks took charge and TMT stocks slumped. The Russell 1000
Value Index returned 12.1% while the Nasdaq plummeted to a -27.4% return in the
March-May period. But June brought another flip-flop: The value index declined
-4.6%, while the Nasdaq rebounded with a 14.5% return.
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5
When the half-year was over, most broad market indexes had modest declines.
The all-market Wilshire 5000 Index returned -0.7%, the large-capitalization S&P
500 Index slipped -0.4%, and the Nasdaq fell -3.9%. Small- and mid-cap stocks
did better: The small-cap Russell 2000 Index gained 3.0% and the Wilshire 4500
Completion Index, comprising virtually all the U.S. stocks outside of the S&P
500, eked out a 0.3% return.
U.S. BOND MARKETS
The Federal Reserve most directly influences interest rates of short-term
securities. The Fed pushed up its target federal funds rate (charged on
overnight loans between banks) by 1 percentage point to 6.5%. But yields of
3-month U.S. Treasury bills rose only half as far (0.52 percentage point, or 52
basis points to 5.85%). And yields actually declined on long-term Treasury
securities, whose prices rose. Big federal budget surpluses are causing a
shrinking supply of Treasury bonds. The 10-year Treasury note's yield fell 41
basis points to 6.03% as of June 30, and the yield of the 30-year Treasury
declined 58 basis points--from 6.48% to 5.90%--during the half-year.
The upshot was an unusual "inversion" in the yield curve. Instead of
sloping upward--with yields increasing along with the maturity of Treasury
securities--the curve descended. The 5.90% yield of 30-year Treasuries on June
30 was 49 basis points below the 6.39% yield on 3-year Treasury notes.
Corporate bonds did not perform as well as Treasuries for two main reasons:
a record level of new offerings and investors' concern that credit quality might
be declining. The rise in yields (and fall in prices) was slight for
higher-quality corporate bonds but more severe for high-yield "junk" bonds.
Investors grew wary of riskier bonds due to an increase in defaults. The Lehman
High Yield Bond Index saw a price decline of -5.7% during the first half of
2000, more than offsetting its six-month income of 4.5%. Tax-exempt municipal
bonds generally outperformed corporates but did not do as well as Treasury
securities. The overall taxable bond market, as measured by the Lehman Aggregate
Bond Index, returned 4.0%, as a price gain of 0.4% augmented a 3.6% income
return.
INTERNATIONAL STOCK MARKETS
International stock markets were generally unprofitable for U.S. investors due
to lack-luster local market performances and a stronger U.S. dollar during the
half-year. Although economic growth in most of Europe appeared to be
strengthening, stocks were hurt by continued economic weakness in Japan and from
expectations of higher interest rates. On the other hand, European stock prices
got some support from an increase in corporate takeovers.
In local currencies, European stocks posted a 1.7% return in the aggregate
and stocks from the Pacific region recorded a modest decline of -2.6%. However,
the dollar's strength diminished those results for U.S. investors, for whom the
Morgan Stanley Capital International (MSCI) Europe Index returned -3.0% and the
MSCI Pacific Free Index returned -5.9%. The MSCI Europe, Australasia, Far East
(EAFE) Index of developed foreign markets registered a -4.0% return for U.S.
investors.
The Select Emerging Markets Free Index fell -9.6% in U.S. dollars, having
declined -3.5% in local currencies. The index was hit by weakness in South
Africa (-15%) and several emerging Asian markets, including Indonesia (-44%),
Thailand (-36%), and the Philippines (-36%). The biggest gains among emerging
markets were in Israel (+27%) and Venezuela (+19%).
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6
REPORT FROM THE ADVISER
Vanguard PRIMECAP Fund produced a total return of 16.3% during the first half of
2000. This significantly outpaced both the -0.4% return of the unmanaged S&P 500
Index and the 2.5% gain posted by the average multi-cap core fund. As was the
case in 1999, the fund's excellent first-half results stemmed primarily from
outstanding stock selection within the technology and producer durables sectors.
Overweighting these two sectors also favorably contributed to performance.
The fund's holdings in the technology and technology-laden
producer-durables sectors paced the results once again, appreciating 32.8% and
20.5%, respectively. About half of the fund's assets are invested in these two
groups. Our selections performed substantially better than these sectors in the
indexes, which produced returns of 4.6% and 10.5%, respectively. Semiconductor
stocks, to which the fund has a major commitment, turned out to be the
best-performing group within technology during the period. As of June 30, about
40% of the fund's technology investments resided in five semiconductor companies
that experienced significant six-month gains: Micron Technology (125.4%), Xilinx
(81.6%), Intel (62.5%), LSI Logic (60.4%), and Texas Instruments (42.3%).
Outside of the semiconductor group, the stocks of Coherent and Adobe Systems
turned in particularly noteworthy performances. Coherent, a manufacturer of
lasers and precision optics systems serving the scientific research community,
soared 213.6%. Adobe Systems, the leading provider of graphic design,
publishing, and imaging software for Web and print production, rose 93.4%.
After technology and producer durables, the fund's largest sector
commitments remain transportation and health care. Our results in these areas
were mixed. The fund's transportation holdings performed marginally better than
the index sector's-11.6% return, but hurt our results nonetheless. Despite
generally strong operations, airlines and trucking companies saw their
profitability depressed by surging fuel prices.
Our experience in health care during the half-year was the antithesis of
our experience in transportation. Although the 20.5% gain in our health care
holdings modestly lagged the 23.4% gain enjoyed by health care stocks in the
index, the fund certainly benefited from our decision to overweight the sector.
Recently, we have increased our exposure among major pharmaceutical companies,
including Pharmacia and Novartis AG.
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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 both the fundamentals of the technology sector and our commitment
to it remain strong, high valuations have led us to reduce our positions in a
number of technology holdings. On the other hand, we have introduced a number of
new names and added
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7
to positions in the transportation, materials & processing, and
consumer-discretionary sectors. Performance in these sectors has been relatively
poor for some time, and valuations appear considerably depressed. In our view,
these sectors represent a fertile area for increased investment.
Howard B. Schow Theo A. Kolokotrones
Portfolio Manager Portfolio Manager
Joel P. Fried
Portfolio Manager
PRIMECAP Management Company
July 12, 2000
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8
FUND PROFILE
PRIMECAP FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
2000, 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 117 500
Median Market Cap $27.7B $94.9B
Price/Earnings Ratio 27.9x 28.7x
Price/Book Ratio 4.0x 5.2x
Yield 0.8% 1.1%
Return on Equity 18.6% 24.5%
Earnings Growth Rate 14.2% 17.3%
Foreign Holdings 7.9% 1.2%
Turnover Rate 12%* --
Expense Ratio 0.48%* --
Cash Investments 11.7% --
*Annualized.
INVESTMENT FOCUS
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STYLE - GROWTH
MARKET CAP - LARGE
VOLATILITY MEASURES
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PRIMECAP S&P 500
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R-Squared 0.63 1.00
Beta 0.92 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
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Micron Technology, Inc. 7.1%
Texas Instruments, Inc. 6.0
Pharmacia Corp. 5.8
Adobe Systems, Inc. 5.6
Intel Corp. 3.3
LM Ericsson Telephone Co. ADR Class B 3.2
General Motors Corp. Class H 2.9
Nortel Networks Corp. 2.7
FedEx Corp. 2.5
Delta Air Lines, Inc. 2.4
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Top Ten 41.5%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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JUNE 30, 1999 JUNE 30, 2000
----------------------------------------
PRIMECAP PRIMECAP S&P 500
----------------------------------------
Auto & Transportation ...... 18.4% 10.7% 1.6%
Consumer Discretionary ..... 7.1 5.7 11.8
Consumer Staples ........... 0.4 0.0 5.7
Financial Services ......... 2.4 2.3 13.4
Health Care ................ 12.7 13.6 11.7
Integrated Oils ............ 0.0 0.0 4.5
Other Energy ............... 2.6 1.9 1.8
Materials & Processing ..... 4.8 2.4 2.2
Producer Durables .......... 13.1 6.9 2.9
Technology ................. 36.5 49.9 29.9
Utilities .................. 0.5 0.9 8.6
Other ...................... 1.5 5.7 5.9
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9
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 INVESTMENTS. 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 35%.) 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.
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10
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1984-JUNE 30, 2000
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PRIMECAP FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
---------------------------------------------------------
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
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PRIMECAP FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
----------------------------------------------------------
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 40.7 0.6 41.3 21.0
2000* 16.3 0.0 16.3 -0.4
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*Six months ended June 30, 2000.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000
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10 YEARS
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
PRIMECAP Fund 11/1/1984 39.52% 29.27% 21.85% 0.84% 22.69%
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11
FINANCIAL STATEMENTS
JUNE 30, 2000 (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.
--------------------------------------------------------------------------------
MARKET
VALUE*
PRIMECAP FUND SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (88.3%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (9.4%)
*(1) FedEx Corp. 15,146,000 $ 575,548
(1) Delta Air Lines, Inc. 11,190,800 565,835
*(1) AMR Corp. 13,477,800 356,319
Southwest Airlines Co. 13,058,250 247,291
* General Motors Corp. 2,632,364 152,842
UAL Corp. 2,300,000 133,831
*(1) Alaska Air Group, Inc. 2,540,000 68,898
(1) Airborne Freight Corp. 3,400,000 64,387
Fleetwood Enterprises, Inc. 1,238,100 17,643
Arvin Industries, Inc. 1,000,000 17,375
-----------
2,199,969
-----------
CONSUMER DISCRETIONARY (5.0%)
*(1) Robert Half International, Inc. 10,400,000 296,400
(1) Harcourt General, Inc. 4,332,200 235,563
News Corp. Ltd. Pfd. ADR 2,250,000 106,875
*(1) The Neiman Marcus Group, Inc.
Class A 3,140,600 92,844
TJX Cos., Inc. 4,767,400 89,389
* Costco Wholesale Corp. 2,000,000 66,000
Manpower Inc. 1,829,400 58,541
* Fox Entertainment Group, Inc. Class A 1,500,000 45,562
(1) The McClatchy Co. Class A 1,000,000 33,125
*(1) The Neiman Marcus Group, Inc. Class B 1,124,511 31,205
Lowe's Cos., Inc. 753,000 30,920
Target Corp. 360,000 20,880
NIKE, Inc. Class B 466,000 18,553
Dillard's Inc. 1,241,500 15,208
Block Drug Co. Class A 286,443 12,120
Tiffany & Co. 131,000 8,843
* AutoZone Inc. 300,000 6,600
* GC Cos. 200,000 4,475
The Gap, Inc. 108,750 3,398
Mattel, Inc. 250,000 3,297
-----------
1,179,798
-----------
FINANCIAL SERVICES (2.0%)
Bank One Corp. 3,049,300 80,997
Wells Fargo Co. 2,000,000 77,500
The CIT Group, Inc. 4,000,000 65,000
Torchmark Corp. 2,600,000 64,188
The Chubb Corp. 800,000 49,200
Transatlantic Holdings, Inc. 562,500 47,109
Jefferson-Pilot Corp. 800,000 45,150
St. Paul Cos., Inc. 1,100,000 37,538
-----------
466,682
-----------
HEALTH CARE (12.0%)
Pharmacia Corp. 26,211,981 1,354,832
* Guidant Corp. 9,410,264 465,808
Johnson & Johnson 2,000,000 203,750
Medtronic, Inc. 3,465,000 172,600
Novartis AG ADR 3,800,000 152,000
Biomet, Inc. 4,190,000 161,053
* PE Corp.-Celera Genomics Group 1,160,000 108,460
Eli Lilly & Co. 666,640 66,581
* Boston Scientific Corp. 2,210,000 48,482
* Amgen, Inc. 442,000 31,050
* BioChem Pharma Inc. 780,200 19,212
* Genentech, Inc. 54,368 9,351
* Biogen, Inc. 13,600 877
-----------
2,794,056
-----------
<PAGE>
12
------------------------------------------------------------------------------
MARKET
VALUE*
PRIMECAP FUND SHARES (000)
------------------------------------------------------------------------------
ENERGY (1.7%)
Union Pacific Resources Group, Inc. 8,600,000 $ 189,200
Noble Affiliates, Inc. 2,400,000 89,400
(1) Pogo Producing Co. 2,800,000 61,950
Schlumberger Ltd. 420,500 31,380
Burlington Resources, Inc. 475,100 18,172
Enron Corp. 40,000 2,580
------------
392,682
------------
MATERIALS & PROCESSING (2.1%)
Potash Corp. of Saskatchewan, Inc. 2,400,000 132,450
Sigma-Aldrich Corp. 3,100,000 90,675
Engelhard Corp. 5,200,000 88,725
Temple-Inland Inc. 1,300,000 54,600
(1) Granite Construction Co. 2,100,000 51,450
OM Group, Inc. 1,036,400 45,602
(1) MacDermid, Inc. 1,701,000 39,974
------------
503,476
------------
PRODUCER DURABLES (6.1%)
(1) Tektronix, Inc. 3,400,000 251,600
(1) Millipore Corp. 2,820,000 212,558
Caterpillar, Inc. 5,770,000 195,459
*(1) Plantronics, Inc. 1,608,000 185,724
* Agilent Technologies, Inc. 1,678,160 123,764
Pitney Bowes, Inc. 2,400,000 96,000
* Lexmark International Group, Inc. Class A 1,400,000 94,150
Deere & Co. 2,448,500 90,594
Nokia Corp. ADR 1,232,000 61,523
* Dionex Corp. 1,020,000 27,285
Kennametal, Inc. 1,260,000 27,011
Donaldson Co., Inc. 1,080,000 21,330
Pall Corp. 750,000 13,875
Molex, Inc. 244,140 11,749
Molex, Inc. Class A 244,140 8,545
------------
1,421,167
------------
TECHNOLOGY (44.1%)
COMMUNICATIONS TECHNOLOGY (11.4%)
LM Ericsson Telephone Co. ADR Class B 37,486,981 749,740
(1) General Motors Corp. Class H 7,624,031 669,009
Nortel Networks Corp. 9,249,200 631,258
Motorola, Inc. 16,295,550 473,589
* Tellabs, Inc. 2,000,000 136,875
COMPUTER SERVICES, SOFTWARE & SYSTEM (7.1%)
(1) Adobe Systems, Inc. 10,130,000 1,316,900
(1) Sabre Holdings Corp. 11,904,428 339,276
COMPUTER TECHNOLOGY (3.1%)
Hewlett-Packard Co. 4,400,000 549,450
Compaq Computer Corp. 6,500,000 166,156
*(1) Evans & Sutherland Computer Corp. 840,000 5,355
ELECTRONICS (2.4%)
Sony Corp. ADR 5,847,400 551,483
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (17.4%)
* Micron Technology, Inc. 18,937,000 1,667,640
Texas Instruments, Inc. 20,514,000 1,409,055
Intel Corp. 5,750,000 768,703
* Xilinx, Inc. 1,600,000 132,100
* LSI Logic Corp. 1,400,000 75,775
ELECTRONICS--TECHNOLOGY (1.4%)
Symbol Technologies, Inc. 3,447,700 186,176
*(1) Coherent, Inc. 1,800,000 150,975
SCIENTIFIC EQUIPMENT & SUPPLIES (1.3%)
PE Corp.-PE Biosystems Group 4,600,000 303,025
------------
10,282,540
------------
UTILITIES (0.8%)
Sprint Corp. 2,600,000 132,600
* Global Crossing Ltd. 1,650,000 43,416
-----------
176,016
------------
OTHER (5.1%)
The Seagram Co. Ltd. 3,100,000 179,800
Miscellaneous (4.3%) 1,006,471
------------
1,186,271
------------
------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $10,262,853) 20,602,657
------------------------------------------------------------------------------
FACE
AMOUNT
(000)
------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (11.9%)
------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.71%, 7/3/2000
(COST $2,786,696) $2,786,696 2,786,696
------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(COST $13,049,549) 23,389,353
-----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.2%)
-----------------------------------------------------------------------------
Other Assets--Note C 83,429
Liabilities (134,373)
------------
(50,944)
------------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------------
Applicable to 327,472,875 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $23,338,409
==============================================================================
NET ASSET VALUE PER SHARE $71.27
==============================================================================
*See Note A in Notes to Financial Statements.
*Non-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 $5,604,895,000.
ADR--American Depositary Receipt.
<PAGE>
13
------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
------------------------------------------------------------------------------
AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
------------------------------------------------------------------------------
Paid in Capital $12,264,954 $37.46
Undistributed Net
Investment Income 86,252 .26
Accumulated Net
Realized Gains 647,399 1.98
Unrealized Appreciation--
Note F 10,339,804 31.57
------------------------------------------------------------------------------
NET ASSETS $23,338,409 $71.27
==============================================================================
<PAGE>
14
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, 2000
(000)
-----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 64,991
Interest 74,836
Security Lending 3,368
-----------
Total Income 143,195
-----------
EXPENSES
Investment Advisory Fees--Note B 19,399
The Vanguard Group--Note C
Management and Administrative 30,563
Marketing and Distribution 1,190
Custodian Fees 12
Auditing Fees 7
Shareholders' Reports 179
Trustees' Fees and Expenses 12
-----------
Total Expenses 51,362
Expenses Paid Indirectly--Note D (1,223)
-----------
Net Expenses 50,139
-----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 93,056
-----------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 650,648
-----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)OF INVESTMENT SECURITIES 2,340,605
-----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,084,309
=========================================================================================
*Dividend income and realized net loss from affiliated companies were
$16,966,000 and $1,610,000, respectively.
</TABLE>
<PAGE>
15
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, 2000 DEC. 31, 1999
(000) (000)
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C>
Net Investment Income $ 93,056 $ 68,663
Realized Net Gain 650,648 1,384,850
Change in Unrealized Appreciation (Depreciation) 2,340,605 3,525,163
----------------------------------
Net Increase in Net Assets Resulting from Operations 3,084,309 4,978,676
----------------------------------
DISTRIBUTIONS
Net Investment Income -- (72,408)
Realized Capital Gain (306,482) (1,230,786)
----------------------------------
Total Distributions (306,482) (1,303,194)
----------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 3,926,826 3,367,477
Issued in Lieu of Cash Distributions 299,064 1,274,413
Redeemed (1,577,172) (1,615,394)
----------------------------------
Net Increase from Capital Share Transactions 2,648,718 3,026,496
-------------------------------------------------------------------------------------------------
Total Increase 5,426,545 6,701,978
-------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 17,911,864 11,209,886
End of Period $23,338,409 $17,911,864
=================================================================================================
1Shares Issued (Redeemed)
Issued 58,047 61,046
Issued in Lieu of Cash Distributions 3,993 21,809
Redeemed (23,139) (29,493)
----------------------------------
Net Increase in Shares Outstanding 38,901 53,362
=================================================================================================
</TABLE>
<PAGE>
16
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, 2000 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $62.07 $47.66 $39.56 $30.08 $26.23 $19.98
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .28 .26 .34 .21 .19 .22
Net Realized and Unrealized Gain (Loss)
on Investments 9.90 19.07 9.63 10.77 4.59 6.84
---------------------------------------------------------------
Total from Investment Operations 10.18 19.33 9.97 10.98 4.78 7.06
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.27) (.35) (.20) (.20) (.22)
Distributions from Realized Capital Gains (.98) (4.65) (1.52) (1.30) (.73) (.59)
---------------------------------------------------------------
Total Distributions (.98) (4.92) (1.87) (1.50) (.93) (.81)
------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $71.27 $62.07 $47.66 $39.56 $30.08 $26.23
====================================================================================================================================
TOTAL RETURN 16.33% 41.34% 25.44% 36.79% 18.31% 35.48%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $23,338 $17,912 $11,210 $8,186 $4,204 $3,237
Ratio of Total Expenses to
Average Net Assets 0.48%* 0.51% 0.51% 0.51% 0.59% 0.58%
Ratio of Net Investment Income to
Average Net Assets 0.87%* 0.50% 0.78% 0.69% 0.69% 0.99%
Portfolio Turnover Rate 12%* 19% 13% 13% 10% 7%
====================================================================================================================================
*Annualized.
</TABLE>
<PAGE>
17
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 amortized 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, 2000, the advisory fee represented an effective annual
rate of 0.18% 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, 2000, the fund had contributed capital of $4,356,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 4.4% of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. The fund has asked its investment adviser to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. The fund's
custodian bank has also 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, 2000, directed brokerage and custodian fee offset arrangements reduced
expenses by $1,218,000 and $5,000, respectively. The total expense reduction
represented an effective annual rate of 0.01% of the fund's average net assets.
E. During the six months ended June 30, 2000, the fund purchased $3,041,663,000
of investment securities and sold $1,099,179,000 of investment securities, other
than temporary cash investments.
<PAGE>
18
F. At June 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $10,339,804,000,
consisting of unrealized gains of $10,967,877,000 on securities that had risen
in value since their purchase and $628,073,000 in unrealized losses on
securities that had fallen in value since their purchase.
<PAGE>
19
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
--------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Calvert Social Index(TM) Fund*
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock Index Fund*
Energy Fund
Equity Income Fund
European Stock Index Fund*
Explorer(TM)Fund
Extended Market Index Fund*
Global Equity Fund Gold and Precious Metals Fund
Growth and Income Fund Growth
Equity Fund Growth Index Fund*
Health Care Fund
Institutional Developed Markets
Index Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund Pacific Stock Index Fund*
PRIMECAP Fund
REIT Index Fund
Selected Value Fund Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital
Appreciation Fund*
Tax-Managed Growth and
Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
--------------------------------------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R)Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
--------------------------------------------------------------------------------
Admiral(TM)Intermediate-Term
Treasury Fund
Admiral(TM)Long-Term Treasury
Fund
Admiral(TM)Short-Term Treasury
Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term Tax-Exempt
Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt
Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
--------------------------------------------------------------------------------
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market
Funds (California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
--------------------------------------------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio High-Grade Bond
Portfolio High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
<PAGE>
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. Noted in parentheses is the year in which the trustee joined the
Vanguard board.
TRUSTEES
JOHN J. BRENNAN, (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY, (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL, (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR., (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR., (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON, (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. Gregory Barton, Legal Department.
Robert A. DiStefano, Information Technology.
James H. Gately, Individual Investor Group.
Kathleen C. Gubanich, Human Resources.
Ian A. MacKinnon, Fixed Income Group.
F. William McNabb, III, Institutional Investor Group.
Michael S. Miller, Planning and Development.
Ralph K. Packard, Chief Financial Officer.
George U. Sauter, Quantitative Equity Group.
<PAGE>
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[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 082000
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
