<PAGE> 1
[PHOTO -- SEE EDGAR APPENDIX]
VANGUARD
QUANTITATIVE PORTFOLIOS
ANNUAL REPORT 1993
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash reserves
averaged more than +8% annually. However, high inflation rates, averaging
8.7% annually, devastated these nominal results. Real returns (nominal
returns less the inflation rate) for each of these three major asset
classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed.
Nominal returns for stocks and bonds were close to their highest levels in
history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has had
an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
------------------------------------
1973 1983 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- ----------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
------------------------------------
1973 1981 1993
- ----------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- ----------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
- ------------------------------------------------------------------------------
VANGUARD QUANTITATIVE PORTFOLIOS SEEKS LONG-TERM GROWTH OF CAPITAL AND INCOME,
WITH THE GOAL OF EXCEEDING THE RETURN ON THE UNMANAGED STANDARD & POOR'S 500
COMPOSITE STOCK PRICE INDEX OVER TIME. THE FUND'S BROADLY DIVERSIFIED PORTFOLIO
IS WEIGHTED TOWARD THOSE STOCKS CONSIDERED MOST LIKELY TO OUTPERFORM THE INDEX,
WHILE MAINTAINING INVESTMENT CHARACTERISTICS THAT, IN THE AGGREGATE, PARALLEL
THE INDEX.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
With a return of +13.8% during the year ended December 31, 1993, Vanguard
Quantitative Portfolios enjoyed another fine year. Indeed, relative to the
market as a whole, it was the best year in our seven-year history.
As the following table shows, the Fund's total return (capital change
plus income) was sharply ahead of the +10.1% return of the unmanaged Standard &
Poor's 500 Composite Stock Price Index, a good measure of the returns achieved
by large blue-chip corporations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Total Return
------------
Year Ended
December 31, 1993
- ---------------------------------------------------------------
<S> <C>
VANGUARD QUANTITATIVE PORTFOLIOS +13.8%
- ---------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +10.1%
- ---------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $16.30 per share on
December 31, 1992, and $16.45 on December 31, 1993, with the latter figure
adjusted to take into account the reinvestment of two semi-annual dividends
totaling $.39 per share from net investment income, and two distributions
totaling $1.69 per share from net capital gains realized largely during
calendar 1993. (We remind you that the Fund is now distributing semi-annual
income dividends at the end of December and June; capital gains will continue
to be distributed at the end of December.)
[PHOTO -- SEE EDGAR APPENDIX]
THE STOCK MARKET IN 1993
On an historical basis, 1993 was a good year for stocks. The Standard & Poor's
500 Index provided a return of +10.1%, virtually identical with its long-term
(since 1926) average annual total return of +10.3%. (This 68-year historical
span is by far the longest of any diversified stock market index.) Thanks to
strong performance by smaller and medium-sized corporations, the all-market
Wilshire 5000 Index enjoyed even better results, earning a return of +11.3%.
During the year, the market's returns accumulated gradually and with
relative consistency, inch-by-inch, step-by-step, month-by-month. There were
neither explosive rises nor plummeting declines. It is probably fair to say
that such a steady course is the exception rather than the rule in market
history. Indeed, it remains a virtual certainty that most years will witness
the kind of spasmodic market action#and hence the higher volatility and
risk#that has been typical of the stock market in the past.
The precipitating factor in the market's advance almost certainly was
the decline in long-term interest rates. The yield on the long-term U.S.
Treasury bond, which had opened the year at 7.4%, fell to 6.4% by year-end,
engendering a price gain of about +14%. This sharp rate decline seemed to be
driven largely by two factors: (1) a stubbornly weak economic recovery that
encouraged the Federal Reserve to make ample credit available; and
1
<PAGE> 4
[CUMULATIVE PERFORMANCE CHART -- SEE EDGAR APPENDIX]
(2) continuing evidence that inflation remained under control. The U.S. Consumer
Price Index (CPI) increased 2.7% during 1993, down from 2.9% in 1992. As a
result, despite the decline in interest rates, "real" yields (nominal yields
less the inflation rate) on long bonds remain at healthy levels.
Since one factor that investors consider in setting their asset
allocations is the relative yield of stocks versus bonds, falling bond yields
provided impetus to stock prices. During 1993, the dividend yield on stocks (as
measured by the Standard & Poor's 500 Index) declined from 2.8% to 2.7%, enough,
in and of itself, to add some +5% to the price of the stocks in the Index.
This upward revaluation, when added to a dividend yield that is extremely low by
historical standards, accounted for the lion's share of the +10.1% total return
achieved by the Standard & Poor's 500 Index.
What was most interesting about 1993 was the striking bias that the
market exhibited toward "value" stocks-usually defined as those with
above-average dividend yields and below-average price-earnings ratios-over
"growth" stocks-those that provide lower yields but presumably richer prospects
for earnings growth. (The Standard & Poor's 500 Index is divided so that
one-half of its market capitalization is included in each category.) The
disparity between the two groups' returns during 1993 was little short of
astonishing: value stocks provided a return of +18.6%, while growth stocks
provided a return of but +1.7%.
I should note that, based on the historical record, such dichotomies
are unlikely to persist. Indeed, as shown in the chart to the left-which
contrasts the cumulative returns of the Standard & Poor's 500 Index, Growth
Index, and Value Index over the past five years-growth stocks were favored
during the first three years, only to lag value stocks during the final two
years. You can see that, despite the leadership of the Value Index in 1992 and
1993, the Growth Index (+102.0%) remains ahead of its Value counterpart
(+88.7%) for the full five years. This comparison suggests, once again, the
value of the broad diversification achieved by the ownership of the Standard &
Poor's 500 Stock Index, the anchor of our investment strategy.
VANGUARD QUANTITATIVE PORTFOLIOS IN 1993
As you know, the Fund structures its portfolio so as to maintain essentially
the same risk characteristics as the Standard & Poor's 500 Stock Index, all the
while endeavoring to eke out a higher return by using a computer-driven
investment strategy based on more than 30 different variables (including
relative price-earnings ratios, changes in corporate earnings, stock price
momentum, etc.). I think it is fair to say that, under the direction of our
investment adviser, Franklin Portfolio Associates, we succeeded on both counts
during 1993. (The adviser's report begins on page 8.)
With respect to risk, we continued to closely reflect the market risk
of the Standard & Poor's 500 Index. The standard, measured by the so-called
Beta ratio, is 1.00; our risk measure is 1.02, and we continue to have nearly
all of the variations in our monthly returns correspond with those of the
Index. In fact, 97% of our return is explained by the
2
<PAGE> 5
return of the Index. We seek our advantage, such as it may prove to be, by
essentially duplicating the industry sector weightings of the Index, while
varying our holdings of individual stocks in each industry sector based on the
analysis by our computer models. This table shows how consistent our industry
positions were relative to those of the Index:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1993 Sector Composition
------------------------------------------------
Quantitative Portfolios S&P 500 Index
- -----------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 15.2% 15.3%
ENERGY 11.2 11.1
FINANCIALS 15.6 11.2
INDUSTRIAL CYCLICALS 9.7 11.5
CONSUMER DURABLES 7.7 6.9
CONSUMER STAPLES 11.4 10.9
SERVICES 6.0 8.6
RETAIL 6.2 7.0
HEALTH CARE 7.2 7.6
TECHNOLOGY 9.8 9.9
- -----------------------------------------------------------------------------------------
TOTAL 100.0% 100.0%
- -----------------------------------------------------------------------------------------
</TABLE>
As you can see, our only major overweighting was in the financial stocks. This
sector performed about in line with the Standard & Poor's 500 Index during
1993, but the returns on the stocks held by the Fund were exceptional, earning
us a nice extra return. Even more importantly, the Fund traditionally has
maintained a somewhat larger position in stocks with marginally lower
price-earnings ratios and lower price-book value ratios#two of the traditional
measures of relative value#than the broadbased Standard & Poor's 500 Index. As
noted earlier, value stocks outpaced growth stocks by an extraordinary margin
in 1993. This strategy, then, generated another "plus" in our total return. In
all, we outpaced the Index by +13.8% versus +10.1%.
We also provided a solid return relative to the +11.4% return for the
average growth and income (or value) mutual fund. We believe that this group
best characterizes our overall strategy, and it is the comparison we have
consistently presented to you in the past. Simply put, along with
[CUMULATIVE PERFORMANCE CHART -- SEE EDGAR APPENDIX]
3
<PAGE> 6
good selections of individual stocks, our larger positions in the utilities
sector and the energy sector helped us to carry the day. Indeed, when the final
scores for 1993 were tallied, Vanguard Quantitative Portfolios had outpaced 209
of the 303 growth and income funds in operation for the full year.
In all, then, the Fund gave a fine account of itself both on an
absolute and a relative basis during 1993. A return of +13.8% is a very good
one by any long-term historical standard. And outpacing our two performance
benchmarks by an average of +3.1% (310 "basis points") is probably at the edge
of the upper range of what even the "true believer" in our innovative enhanced
index strategy might reasonably expect in a given year. Over the long-term,
this margin would make a dramatic difference.
A LIFETIME PERSPECTIVE
Even though our history has been a relatively short one-#we began operations in
December 1986#our lifetime record should be given much greater weight than our
record in any single year. In this sense, 1993 was a bit of a paradox. Our
absolute rate of return for the year was very close to our longer-term norm
(+13.9%), but our return relative to our two benchmarks was well above the
norm.
The chart at the bottom of page 3 shows our return since 1986 compared
with the returns of our two competitive standards. This table summarizes the
results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Total Return
------------------------------------------
December 31, 1986, to December 31, 1993
- -----------------------------------------------------------------------------------------
Cumulative Annual Rate
- -----------------------------------------------------------------------------------------
<S> <C> <C>
VANGUARD QUANTITATIVE
PORTFOLIOS +148% +13.9%
- -----------------------------------------------------------------------------------------
AVERAGE GROWTH
AND INCOME FUND +113% +11.4%
STANDARD & POOR'S
500 STOCK INDEX +141 +13.4
- -----------------------------------------------------------------------------------------
</TABLE>
I should emphasize that these returns reflect past performance and are in no
way intended as an indication of the results that the Fund, the average growth
and income fund, or the Standard & Poor's 500 Stock Index may achieve in the
future.
In the competitive world of mutual fund performance, it is of course
gratifying to have churned out such a substantial margin over our peer group
during this period. It is perhaps even more gratifying to have also surpassed
the cumulative return of the Standard & Poor's 500 Index. While our annual
margin over our peers has been fairly consistent, our returns relative to the
Index have been mixed, generally within plus or minus 70 basis points. The sole
exception was in a turbulent 1987#our first full year of operations#when we
fell 120 basis points short. However, with our 370-basis-point margin over the
Index during 1993, we now enjoy a positive margin averaging 50 basis points per
year.
Our advantage over an unmanaged index may not seem very large, but, as
shown in the summary table, most of our peers have fallen remarkably short of
the Index. I should add that the Standard & Poor's 500 Index is always a tough
"bogey," since it operates only in a "paper world," bereft of the frictional
costs of investing. We must operate in the "real world," paying the expenses of
our operations and incurring the cost of portfolio transactions. Included in
our expenses is the advisory fee that we pay to Franklin Portfolio Associates.
This fee is set at a very low basic rate (about 18 basis points at current
asset levels, compared with 75 to 100 basis points or more for many equity
mutual funds). It also includes an incentive/penalty provision in which the
base advisory fee is increased when a positive annual margin of 1% or more
versus our Index standard is achieved over three years; a 1% shortfall would
reduce the fee by a similar amount. Given the Fund's success over the past
three years, we are delighted to have our adviser receive an incentive fee in
1993.
A FEW FINAL THOUGHTS
One year ago, I cited a renowned stock market oracle who predicted that in 1993
those who invest "in some form of indexing vehicle . . . are going to
4
<PAGE> 7
be disappointed." To the extent that forecast was intended to relate to the
Standard & Poor's 500 Index, it was vaguely on the mark. The Index, with its
bias toward large stocks, outpaced "only" 40% of all general equity mutual
funds, and Vanguard Quantitative Portfolios outperformed 60% of these funds.
Given that outcome in a relatively tough year, it is hard to be negative on
index funds as a group, and easy to be enthusiastic about the Fund's "enhanced
indexing" strategy.
That said, Vanguard Quantitative Portfolios, as a matter of policy,
remains 100% invested in common stocks. You should not lose sight of the fact
that stocks, because they carry substantial short-term price volatility,
involve significant risk. "The stock market giveth, and the stock market taketh
away" is a biblical-like way of summarizing this risk. With stock yields at
extremely low levels on an historical basis, it would be logical to assume that
the risks involved in stocks today are higher than historical norms.
These comments are in no way intended to derogate the considerable
long-term merits of investing in stocks. Indeed, if, in the future, we are able
to emulate our relative performance since our inception, the particular merits
of an enhanced index strategy will prove eminently worthwhile. However, you
should, at all times, maintain a portfolio that includes bonds and short-term
reserves as well as stocks, balanced in whatever proportion meets your own
investment objectives and tolerance for risk. This advice was valid when I
presented it to you one year ago. It is at least equally valid today. Indeed,
it is a "strategy for the ages."
Sincerely,
/s/ John C. Bogle
- ---------------------
John C. Bogle
Chairman of the Board
January 6, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
NOTE: In March 1994, the Fund will be making a distribution of about $.42 per
share from net capital gains realized from 1993 operations, but taxable to
shareholders in 1994.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
AVERAGE ANNUAL TOTAL RETURNS#THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED DECEMBER 31, 1993) ARE AS FOLLOWS:
1 YEAR: +13.83% 5 YEARS: +15.37% SINCE INCEPTION (12/10/86): +13.25%
THE AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION INCLUDES A CAPITAL RETURN OF
+10.07% AND AN INCOME RETURN OF +3.18%. ALL OF THE DATA REPRESENT PAST
PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 9
TOTAL INVESTMENT RETURN
The table below illustrates the returns for Vanguard Quantitative Portfolios
from December 10, 1986, to December 31, 1993, the lifetime of the Fund. During
this period, stock prices fluctuated and were higher at the end than at the
beginning. These results should not be considered a representation of the
dividend income or capital gain or loss that may be realized from an investment
made in the Fund today.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA YEAR-END VALUE TOTAL INVESTMENT RETURN
- ---------------------------------------------------------------------------------------------------------------------------------
Annual Percentage Change*
---------------------------
Value with Income Vanguard Vanguard
Year Ended Net Asset Income Capital Gains Dividends & Capital Quantitative S&P 500 Quantitative S&P 500
December 31 Value Dividends Distributions Gains Reinvested Portfolios Index Portfolios Index
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/86) $10.00 - - $10.00 $10,000 $10,000 - -
- ---------------------------------------------------------------------------------------------------------------------------------
1986 9.69 - - 9.69 9,690 9,668 -3.1% - 3.3%
- ---------------------------------------------------------------------------------------------------------------------------------
1987 9.80 $ .25 $ .06 10.08 10,080 10,169 +4.0 + 5.2
- ---------------------------------------------------------------------------------------------------------------------------------
1988 11.08 .35 - 11.77 11,773 11,847 +16.8 +16.5
- ---------------------------------------------------------------------------------------------------------------------------------
1989 14.14 .47 - 15.54 15,540 15,589 +32.0 +31.6
- ---------------------------------------------------------------------------------------------------------------------------------
1990 13.29 .47 .04 15.16 15,161 15,103 -2.4 - 3.1
- ---------------------------------------------------------------------------------------------------------------------------------
1991 16.32 .47 .44 19.75 19,753 19,694 +30.3 +30.4
- ---------------------------------------------------------------------------------------------------------------------------------
1992 16.30 .44 .71 21.13 21,136 21,193 + 7.0 + 7.6
- ---------------------------------------------------------------------------------------------------------------------------------
1993 16.45 .39 1.69 24.06 24,061 23,325 +13.8 +10.1
- ---------------------------------------------------------------------------------------------------------------------------------
LIFETIME $2.84 $2.94 +140.6% +133.3% +13.2% +12.7%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital
gains distributions both for the Fund and the Index.
Note: No adjustment has been made for income taxes payable by
shareholders on reinvested income dividends and capital gains distributions.
7
<PAGE> 10
REPORT FROM THE INVESTMENT ADVISER
The slow economic recovery continued during 1993, as did the decline in the
general level of interest rates. Inflation has not been a significant concern
to experienced observers of the economy for some time, and in our view, it is
not a near-term threat. Overall concern about the Administration lessened as
the President's approval ratings rose. All of these factors led to a continued
advance in equity prices.
The passage of NAFTA and movement toward a GATT agreement were, in our
view, positive long-term developments for the worldwide economy. Indeed, NAFTA
epitomizes the continued evolution of the cross-border trading relationships
and the increasing reliance of all countries on international trade. In this
regard, global economic problems abound. Nonetheless, we believe that there has
been worldwide economic progress, and that the groundwork has been laid for
increased economic well-being.
In this environment, it is easy to cite economic and financial
benchmarks that indicate that equity prices are somewhat high based on
fundamental valuation measures. Our investment program has always been directed
toward the long term, and we view the shorter-term prognosticating of equity
prices to be a difficult, if not impossible, task. We view the long-term
prospect for equities as quite attractive, especially when compared to
fixed-income alternatives.
There were significant differences in performance among different
sectors of the equity market. In general, value stocks outperformed growth
stocks, and smaller-cap stocks outperformed larger-cap stocks. The volatility
of individual stocks seemed higher than normal to us, and all investors should
be sensitive to what this increased volatility means in terms of short-term
uncertainty. In this regard, we emphasize our long-term perspective in terms of
investment objectives.
As noted in prior reports to you, we compare our performance with both
the S&P 500 Index, our investment policy proxy, and our competitors. For a
competitive proxy, we use the CADENCE mutual fund universe for growth and
income mutual funds. We had a fine 1993, our seventh year of serving as the
Fund's adviser, versus the S&P 500, and we beat roughly 60% of our competitors.
Our longer-term performance compares quite favorably to our performance
objectives. We do not expect to always have pleasing short-term results, but we
would be disappointed if our longer-term results lagged our objectives. We
would remind you that our focus is on the longer term, and that we will
inevitably have periods when shorter-term performance does not compare
favorably with competitive benchmarks.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Vanguard Quantitative Portfolios versus
CADENCE Growth and Income Funds
-----------------------------------------
Periods Ended VQP versus
December 31, 1993 Competitor Funds
- ---------------------------------------------------------------------------
<S> <C>
7 YEARS 12TH OUT OF 137
5 YEARS 19TH OUT OF 188
3 YEARS 80TH OUT OF 211
1 YEAR 89TH OUT OF 219
- ---------------------------------------------------------------------------
</TABLE>
Source: CADENCE.
An important aspect of our portfolio management process is the "risk control"
that we employ to keep the portfolio in line with the Standard & Poor's 500
Index. Our intent in employing this risk control is to ensure a high degree of
conformity with the returns of the Index, while trying to make the deviations
from this performance occur on the positive side. However, Fund investors
should not regard our risk control as a potential cure for a meaningful decline
in equity prices. The risk-control process assures us that representative
equity returns, as represented by the returns of the S&P 500, are not overly
different than the returns of the Fund.
Our strategy for your Fund is to build a margin of superiority over
alternative equity investments by trying to achieve many small positive
differences in performance rather than a few big ones. This strategy leads to
our being virtually fully invested in equities at all times, and thus the value
of the portfolio is almost certain to
8
<PAGE> 11
decline in a sustained bear market for equities. Thus, our strategy
is more compatible with long-term equity investors than with speculators.
The S&P 500 Index has been a more than worthy opponent for managed
growth and income funds over the seven years of Vanguard Quantitative
Portfolios' operations. We believe our success in outperforming this unmanaged
benchmark is illustrative of the effectiveness of the Franklin game plan:
seeking to win while avoiding periods of major loss. Our goal with your assets
is to be consistently above average. We believe that consistency builds strong
long-term performance and will continue to make Vanguard Quantitative
Portfolios an attractive option for equity investors.
Respectfully,
Franklin Portfolio Associates
January 11, 1994
9
<PAGE> 12
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
December 31, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.8%)
- --------------------------------------------------------------------------
General Electric Co. 186,700 $19,580
Wal-Mart Stores, Inc. 521,900 13,048
Mobil Corp. 126,800 10,017
Procter & Gamble Co. 170,084 9,695
American International Group, Inc. 103,300 9,065
Amoco Corp. 164,200 8,682
The Coca Cola Co. 182,700 8,153
J.C. Penney Co., Inc. 151,600 7,940
Unilever NV 66,700 7,704
Exxon Corp. 120,800 7,610
GTE Corp. 211,800 7,413
MCI Communications Corp. 262,200 7,374
American Express Co. 232,200 7,169
International Business Machines Corp. 126,200 7,130
Sprint Corp. 200,900 6,981
Johnson & Johnson 154,700 6,923
Philip Morris Cos., Inc. 123,500 6,885
Southwestern Bell Corp. 165,400 6,864
Sara Lee Corp. 266,600 6,665
Chevron Corp. 75,000 6,534
Bristol-Myers Squibb Co. 110,080 6,398
Public Service Enterprise Group Inc. 198,300 6,346
The Tribune Co. 104,600 6,289
Colgate-Palmolive Co. 98,700 6,156
Merck & Co., Inc. 178,600 6,139
Philadelphia Electric Co. 202,200 6,117
Chrysler Corp. 113,500 6,044
*Crown Cork & Seal Co., Inc. 142,300 5,959
Intel Corp. 90,800 5,630
Pacificorp 291,200 5,606
H.J. Heinz Co. 151,500 5,435
Black & Decker Corp. 272,100 5,374
Aetna Life and Casualty Co. 89,000 5,373
Merrill Lynch & Co., Inc. 123,300 5,179
Syntex Corp. 325,800 5,172
Texas Instruments, Inc. 80,200 5,093
Wendys International, Inc. 291,600 5,067
Lincoln National Corp. 115,900 5,042
Baltimore Gas & Electric Co. 195,500 4,961
Nalco Chemical, Inc. 128,900 4,834
NYNEX Corp. 113,000 4,534
Abbott Laboratories, Inc. 151,500 4,469
BellSouth Corp. 75,900 4,393
Sonat, Inc. 149,800 4,325
PNC Bank Corp. 148,900 4,318
McDonald's Corp. 74,700 4,258
Motorola, Inc. 46,000 4,249
Yellow Corp. 168,800 4,199
*Unisys Corp. 325,400 4,108
J.P. Morgan & Co., Inc. 58,641 4,068
*Toys R Us, Inc. 97,200 3,973
Ohio Edison Co. 174,000 3,958
Royal Dutch Petroleum Co. 36,300 3,789
Unocal Corp. 135,500 3,777
Rockwell International Corp. 101,200 3,757
Entergy Corp. 99,850 3,595
Archer-Daniels-Midland Co. 157,132 3,575
Anheuser-Busch Co., Inc. 72,500 3,562
Niagara Mohawk Power Corp. 175,300 3,550
Deere & Co. 47,800 3,537
USF&G Corp. 237,700 3,506
Norwest Corp. 141,400 3,447
Comcast Corp. Class A 95,300 3,443
Pennzoil Co. 64,200 3,419
Federal National Mortgage Assn. 43,500 3,415
Dow Chemical Co. 59,500 3,377
Clorox Co. 62,100 3,369
Sears, Roebuck & Co. 63,800 3,365
Transamerica Corp. 58,900 3,343
CBS, Inc. 11,400 3,289
Pacific Gas & Electric Co. 91,200 3,203
Lockheed Corp. 45,600 3,112
Bausch & Lomb, Inc. 60,000 3,075
*Citicorp 82,300 3,025
Whitman Corp. 183,300 2,979
Pall Corp. 155,600 2,859
The Goodyear Tire & Rubber Co. 62,000 2,836
WMX Technologies Inc. 106,300 2,804
*Federal Express Corp. 38,800 2,750
International Paper Co. 38,200 2,588
Union Carbide Corp. 111,900 2,504
Computer Associates International, Inc. 61,800 2,472
Great Lakes Chemical Corp. 32,400 2,418
NationsBank, Inc. 48,500 2,376
*National Semiconductor Corp. 132,500 2,137
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
*Compaq Computer Corp. 28,300 $2,094
*The Kroger Co. 103,400 2,081
Homestake Mining Co. 92,600 2,037
McKesson Corp. 37,700 2,036
Primerica Corp. 51,500 2,002
CSX Corp. 24,400 1,976
Monsanto Co. 26,500 1,944
May Department Stores Co. 49,200 1,937
Dana Corp. 31,000 1,856
Helmerich & Payne, Inc. 66,400 1,851
Norfolk Southern Corp. 25,600 1,805
American Stores Co. 41,300 1,776
Dow Jones & Co., Inc. 49,000 1,752
Handleman Co. 129,600 1,717
E-Systems, Inc. 39,500 1,713
Banc One Corp. 43,775 1,713
American Home Products Corp. 26,200 1,696
General Motors Corp. 30,100 1,652
*Armco, Inc. 272,400 1,634
USLIFE Corp. 42,150 1,618
American Telephone & Telegraph Co. 29,300 1,538
Enron Corp. 51,500 1,494
Caterpillar, Inc. 16,600 1,477
Pep Boys (Manny, Moe & Jack) 54,300 1,425
Boatmen's Bancshares, Inc. 47,700 1,425
Ford Motor Co. 21,900 1,413
Mattel, Inc. 51,100 1,412
Alcan Aluminium Ltd. 61,900 1,284
McDermott International, Inc. 47,000 1,245
Grumman Corp. 31,100 1,228
Snap-On Tools Corp. 30,600 1,159
Union Pacific Corp. 18,500 1,159
Chemical Banking Corp. 28,700 1,152
*Sun Microsystems, Inc. 38,100 1,110
Walgreen Co. 26,700 1,091
James River Corp. 54,900 1,057
Sun Co., Inc. 35,900 1,055
*Rowan Cos., Inc. 115,800 1,042
*Varity Corp. 23,200 1,038
Zurn Industries, Inc. 36,600 1,002
Briggs & Stratton Corp. 12,000 990
Dresser Industries, Inc. 47,300 981
Suntrust Banks, Inc. 21,800 981
Barnett Banks of Florida, Inc. 23,600 979
Bankers Trust New York Corp. 12,300 973
Placer Dome Group, Inc. 38,500 958
St. Paul Cos., Inc. 10,300 926
Aluminum Co. of America 13,000 902
The Chase Manhattan Corp. 26,400 894
Fleming Cos., Inc. 35,847 887
IMCERA Group, Inc. 25,900 871
UST, Inc. 31,300 869
Safeco Corp. 14,100 772
Arkla, Inc. 96,200 758
Panhandle Eastern Corp. 26,700 631
Echlin, Inc. 18,700 622
Maytag Corp. 31,600 569
Reynolds Metals Co. 12,100 549
Cummins Engine Co., Inc. 10,200 548
Browning-Ferris Industries, Inc. 21,200 546
First Interstate Bancorp. 8,300 532
Beneficial Corp. 13,800 528
Champion International Corp. 15,500 517
Warner-Lambert Co. 6,700 452
Adolph Coors Co. Class B 27,500 440
Conrail, Inc. 6,500 435
First Fidelity Bancorp. 9,500 432
Pulte Corp. 11,300 410
Westvaco Corp. 10,800 385
*Hartmarx Corp. 51,400 360
Scott Paper Co. 8,400 345
Shawmut National Corp. 14,400 313
*National Intergroup, Inc. 23,600 313
Fleet Financial Group, Inc. 9,300 310
SuperValu, Inc. 7,700 279
General Dynamics Corp. 2,700 249
Luby's Cafeterias, Inc. 9,800 220
Blockbuster Entertainment Corp. 6,900 211
CoreStates Financial Corp. 6,800 178
Centex Corp. 4,000 168
Weyerhaeuser Co. 3,700 165
Echo Bay Mines Ltd. 9,300 120
Morrison-Knudsen Co., Inc. 2,800 70
Union Camp Corp. 800 38
Ashland Oil, Inc. 900 31
American Barrick Resources 1,000 28
Perkin-Elmer Corp. 100 4
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $475,586) 524,186
- --------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (2.4%)
- --------------------------------------------------------------------------
U.S. Treasury Bill-Note E
3.06%, 3/17/94 $425 $422
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.26%, 1/3/94 12,353 12,353
- --------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $12,775) 12,775
- --------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(Cost $488,361) 536,961
- --------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- --------------------------------------------------------------------------
Accounts Receivable for Securities Sold 33,363
Other Assets-Note C 3,124
Accounts Payable for Securities Purchased (40,099)
Other Liabilities (2,613)
(6,225)
- --------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------
Applicable to 32,260,305 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $530,736
- --------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $16.45
==========================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT DECEMBER 31, 1993,
NET ASSETS CONSISTED OF:
Amount Per
(000) Share
- ----------------------------------------------------------------
<S> <C> <C>
Paid in Capital $466,511 $14.46
Undistributed Net
Investment Income 1,903 .06
Accumulated Net
Realized Gains 13,666 .42
Unrealized Appreciation
of Investments 48,656 1.51
- ----------------------------------------------------------------
NET ASSETS $530,736 $16.45
- ----------------------------------------------------------------
</TABLE>
12
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1993
(000)
- ------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $12,213
Interest 406
- ------------------------------------------------------------------------------------
Total Income 12,619
- ------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees-Note B
Basic Fees $ 852
Performance Adjustments 223 1,075
The Vanguard Group-Note C
Management and Administrative 1,039
Marketing and Distribution 109 1,148
Taxes (other than income taxes)-Note A 38
Custodian's Fees 5
Auditing Fees 9
Shareholders' Reports 39
Annual Meeting and Proxy Costs 6
Directors' Fees and Expenses 1
- ------------------------------------------------------------------------------------
Total Expenses 2,321
- ------------------------------------------------------------------------------------
Net Investment Income 10,298
- ------------------------------------------------------------------------------------
REALIZED NET GAIN-Note D
Investment Securities Sold 60,901
Futures Contracts 540
- ------------------------------------------------------------------------------------
Realized Net Gain 61,441
- ------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) - Notes D and E
Investment Securities (12,380)
Futures Contracts (24)
- ------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) (12,404)
- ------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $59,335
- ------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1993 December 31, 1992
(000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE IN NET ASSETS OPERATIONS
Net Investment Income $ 10,298 $ 9,804
Realized Net Gain-Note D 61,441 13,893
Change in Unrealized Appreciation (Depreciation)-Notes D and E (12,404) 3,300
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 59,335 26,997
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income (10,830) (10,320)
Realized Net Gain (48,656) (16,716)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (59,486) (27,036)
- ------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS-Note A 877 634
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued - Regular 111,687 108,348
- In Lieu of Cash Distributions 57,229 25,531
- Exchange 29,204 21,253
Redeemed - Regular (56,419) (56,981)
- Exchange (27,219) (18,006)
- ------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 114,482 80,145
- ------------------------------------------------------------------------------------------------------------------
Total Increase 115,208 80,740
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 415,528 334,788
- ------------------------------------------------------------------------------------------------------------------
End of Year (3) $530,736 $415,528
==================================================================================================================
(1) Distributions Per Share
Net Investment Income $ .39 $ .44
Realized Net Gain $ 1.69 $ .71
- ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 8,164 8,110
Issued in Lieu of Cash Distributions 3,501 1,569
Redeemed (4,892) (4,708)
- ------------------------------------------------------------------------------------------------------------------
6,773 4,971
- ------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income $ 1,903 $ 1,558
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> Year Ended December 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
For a Share Outstanding Throughout Each Year
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $16.30 $16.32 $13.29 $14.14 $11.08
INVESTMENT OPERATIONS
Net Investment Income .40 .44 .47 .49 .43
Net Realized and Unrealized Gain
(Loss) on Investments 1.83 .69 3.47 (.83) 3.10
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.23 1.13 3.94 (.34) 3.53
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.39) (.44) (.47) (.47) (.47)
Distributions from Realized Capital Gains (1.69) (.71) (.44) (.04) -
------- ------- ------- ------- -------
Total Distributions (2.08) (1.15) (.91) (.51) (.47)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.45 $16.30 $16.32 $13.29 $14.14
==============================================================================================================
TOTAL RETURN +13.83% +7.01% +30.29% -2.44% +32.00%
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) $531 $416 $335 $211 $175
Ratio of Expenses to Average Net Assets .50% .40% .43% .48% .53%
Ratio of Net Investment Income to Average
Net Assets 2.22% 2.67% 2.95% 3.34% 3.35%
Portfolio Turnover Rate 85% 51% 61% 81% 78%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
Vanguard Quantitative Portfolios is registered under the Investment Company Act
of 1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of 4:00 PM on the valuation date;
securities not traded are valued at the mean of the latest quoted bid
and asked prices. Securities not listed are valued at the latest quoted
bid prices. Temporary cash investments are valued at amortized cost
which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares
issued and redeemed, equivalent to undistributed net investment income
per share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income per share is
unaffected by Fund share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other
members of The Vanguard Group of Investment Companies, transfers
uninvested cash balances into a Pooled Cash Account, the daily aggregate
of which is invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase agreements
are held by the Fund's custodian bank until maturity of each repurchase
agreement. Provisions of each agreement ensure that the market value of
this collateral is sufficient in the event of default; however, in the
event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
5. FUTURES: The Fund may utilize futures contracts to a limited
extent. The primary risks associated with the use of futures contracts
are imperfect correlation between the change in market value of the
securities held by the Fund and the prices of futures contracts, and
the possibility of an illiquid market. Futures contracts are valued
based upon their quoted daily settlement prices. Fluctuations in the
value of futures contracts are recorded as unrealized appreciation
(depreciation) until terminated, at which time realized gains (losses)
are recognized. Unrealized appreciation (depreciation) related to open
futures contracts is required to be treated as realized gain (loss) for
Federal income tax purposes.
6. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
* B. Under the terms of a contract which expires September 30, 1994, the
Fund pays Franklin Portfolio Associates a basic advisory fee calculated at an
annual percentage rate of average net assets. The basic fee thus computed is
subject to quarterly adjustments based on performance relative to the Standard
& Poor's 500 Stock Index. For the year ended December 31, 1993, the advisory
fee represented an effective annual rate of .18% of 1% of average net assets
before an increase of $223,000 (.05 of 1%) based on performance.
16
<PAGE> 19
* C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
December 31, 1993, the Fund had contributed capital of $85,000 to Vanguard
(included in Other Assets), representing .4% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
* D. During the year ended December 31, 1993, the Fund made purchases of
$452,935,000 and sales of $382,204,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At December 31, 1993, unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes aggregated $48,600,000
of which $57,626,000 related to appreciated securities and $9,026,000 related
to depreciated securities.
* E. At December 31, 1993, the aggregate settlement value of open
Standard & Poor's 500 Index futures contracts expiring in March 1994, the
related unrealized appreciation, and the market value of securities deposited
as initial margin for those contracts were $9,399,000, $56,000, and $422,000,
respectively.
17
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Quantitative Portfolios
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Quantitative Portfolios (the "Fund") at December 31, 1993, the results
of its operations, the changes in its net assets and the financial highlights
for each of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1994
18
<PAGE> 21
SPECIAL TAX INFORMATION
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD QUANTITATIVE PORTFOLIOS, INC.
Corporate shareholders should note that for the year ended December 31, 1993,
43.2% of the Fund's investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
19
<PAGE> 22
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rh-ne-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
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 Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
- -----------------------------------------------------------------------------
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
20
<PAGE> 23
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing so, you
buy more shares of a mutual fund when its price falls, and fewer shares
when its price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any changes
should be limited to, say, 15 percentage points. That is, if your normal
portfolio allocation is 60% in stock funds, it might be reduced to 45%; if
85%, to 70%.
* For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income stream,
but their prices are highly volatile. Short-term and intermediate-term bond
funds offer a "middle way" of increasing income with more modest risk to
principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20%
of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate elements
of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put another
way, high-cost funds must select investments with higher prospective gross
returns--which entail higher risks--to match the net returns earned by
low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD LOGO]
Vanguard Financial Center - Valley Forge, Pennsylvania 19482
<TABLE>
<S> <C>
New Account Information 1-(800)662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q930-12/93
<PAGE> 25
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United State of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 24.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed value (Standard & Poor's Growth Index,
Standard & Poor's 500 Index and Standard & Poor's Value Index) of the
Quantitative Portfolio for the Fiscal Years 1989 through 1993 appears at the
upper-left of page two.
Line charts illustrating cumulative performance of the Vanguard
Quantitative Portfolio compared to (i) the S&P 500 Index and (ii) Average
Growth and Income Funds for the Fiscal Years 1987 through 1983 appear on page
three.
