<PAGE> 1
VANGUARD
QUANTITATIVE PORTFOLIOS
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a
balance is often achieved by a combination of Vanguard money market, bond, and
stock funds.
"Conservatism," too, remains our standard. Over the years, we have tried
to maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(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 TOWARDS 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:
In a year in which most stocks--and most stock mutual funds--tumbled, Vanguard
Quantitative Portfolios virtually "held its own" during the twelve months ended
December 31, 1994.
With a totIal return (capital change plus income) of -0.6%, our
performance was a bit better than that of the average general equity mutual
fund, which fell -1.7%. The Fund also edged out its more relevant standard--the
average value (growth and income) fund--which was off -0.8%.
On the other hand, we fell short of the stock market index we
emulate--the unmanaged Standard & Poor's 500 Composite Stock Price Index--which
turned in a gain of +1.3%. While our shortfall in 1994 may be a bit
disappointing, it follows a year in which we outpaced the Index by a
substantial margin of +3.7 percentage points (+13.8% for the Fund versus
+10.1% for the Index). This tabulation presents our 1994 results:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Total Return
-----------------
Year Ended
December 31, 1994
- ------------------------------------------------------------------------------
<S> <C>
VANGUARD QUANTITATIVE PORTFOLIOS -0.6%
STANDARD & POOR'S 500 STOCK INDEX +1.3
- ------------------------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $16.45 per share on December
31, 1993, and $15.56 on December 31, 1994, 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 a distribution of $.40 per share from
net capital gains realized from operations during 1993.
THE STOCK MARKET IN 1994
During the year, the stock market enjoyed four "ups" and endured four "downs."
A pattern of quarterly declines in the late weeks of March, June, and September
was broken when a November to mid-December decline was aborted by a solid
year-end rally, which recaptured most of the year's earlier lost ground. On
balance, the price of the Standard & Poor's 500 Composite Stock Price Index
edged just a notch lower, from 466 when the year began to 459 at its close,
down -1.5%. The positive total return (+1.3%) on the Index, then, was more than
accounted for by the $13 of dividend income that it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. In
particular, a year ago value stocks (those with above-average yields and
below-average market price-to-book value ratios) provided a return of +18.6%,
and overwhelmingly dominated the +1.7% return on growth stocks (those with the
opposite characteristics, and with above-average prospects for consistent
earnings growth). In 1994, however, growth stocks turned the tables and led the
way, if by a far more modest margin (+3.1% versus -0.6%) than for value stocks
in 1993. So, just as last year redounded to the benefit of value-oriented
investors, this past year redounded to the benefit of investors in growth
equities.
If the performance of the stock market was "so-so" during the past
year, nothing that gentle could be said about the bond market. The total return
on the Lehman U.S. Treasury Bond Index was -7.6%
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
(-14.5% decline in price, partly offset by interest income of +6.9%), as
Treasury yields rose from 6.4% to 7.8%. Yields on short-term and
intermediate-term bonds also rose sharply; however, because of their shorter
maturities, price declines were much smaller. This rising rate environment was
surely a major factor in dampening the returns on stocks of all stripes.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
As you know, Vanguard Quantitative Portfolios has traditionally
manifested a "value bias," and our annual results have generally paralleled
those of the Standard & Poor's Value Index. By way of perspective, the chart to
the left compares the returns of growth stocks and value stocks during the past
five years. While you can see that "cycles of superiority" occurred throughout
the period, when all was said and done, the annual rates of returns were very
close: Growth +8.8%; Value +8.3%.
This outcome suggests the wisdom of consistently sticking to your
objectives, rather than endeavoring (fruitlessly, I believe) to switch back and
forth between these two market segments in the search for higher returns. Put
another way, most investors would benefit by "staying the course" that best
meets their needs, whether in growth stocks or value stocks--or some steady mix
of the two.
I would call your particular attention to the modesty of both annual
rates of return. With the first half of the decade of the 1990s now behind us,
investors who had expected equity returns in this decade to be a reprise of the
"Golden Eighties" (when the average annual total return of the Standard &
Poor's 500 Index was +17.5%) are doubtless disappointed. Nonetheless, we should
not lose sight of the fact that the long-term (since 1926) return of the Index
has averaged +10.2% per annum. History, it seems clear, has a message to give
us about maintaining realistic performance expectations.
VANGUARD QUANTITATIVE PORTFOLIOS IN 1994
The management strategy of Vanguard Quantitative Portfolios entails using a
series of computer-driven valuation models in an attempt to enhance the returns
achieved by the Standard & Poor's 500 Index--even as we endeavor to maintain
the same risk profile as that of the Index. Given this policy, it is not
surprising that our annual returns have consistently paralleled those of the
500 Index. Our results in 1994 were no exception.
Not only was our performance quite close to that of the Index during
the past year, our industry sector weightings were virtually indistinguishable
from the sector weightings of the Index. The following table presents the
comparison.
2
<PAGE> 5
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Sector Weightings
----------------------------------------------
December 31, 1994
- -------------------------------------------------------------------------------
VANGUARD STANDARD &
QUANTITATIVE PORTFOLIOS POOR'S 500 INDEX
- -------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS 6% 8%
CAPITAL GOODS 8 8
CONSUMER CYCLICAL 16 16
CONSUMER STAPLES 22 20
ENERGY 11 11
FINANCIAL 12 11
TECHNOLOGY 8 9
UTILITIES 14 12
MISCELLANEOUS 3 5
- -------------------------------------------------------------------------------
TOTAL 100% 100%
- -------------------------------------------------------------------------------
</TABLE>
On balance, the sector differences illustrated in the table had only a marginal
impact on the Fund's return relative to the Index. Thus, nearly all of the
Fund's shortfall resulted from differences in stock selection. Specifically,
with growth stocks outperforming value stocks in 1994, our value-oriented bias
resulted in stock selections within the financial, technology, and utility
sectors that lagged their more growth-oriented counterparts in the Index. This
disparity was just enough to explain most of the difference between the Fund's
return (-0.6%) and that of the Index (+1.3%).
On the other hand, our Fund marginally exceeded the -1.7% return
achieved by the average general equity mutual fund and the -0.8% return
achieved by the average value fund, the more relevant of the two standards. I
would note that while Vanguard Quantitative Portfolios is virtually 100%
invested in the large capitalization stocks represented in the Standard &
Poor's 500 Index, our competitors, on average, have about 75% of their assets
invested in large-cap stocks, with the remainder held in mid-cap, small-cap,
and foreign stocks. Over time, these differences have been largely offsetting;
however, our large-cap bias provided a margin of advantage this past year.
REVIEWING OUR LIFETIME RECORD
Vanguard Quantitative Portfolios began operations in December 1986, and has now
completed eight years of operations. The chart below presents the Fund's record
during this period compared to our two traditional benchmarks, the unmanaged
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- ---------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD QUANTITATIVE PORTFOLIOS -0.61% +9.00% +11.95%
AVERAGE VALUE FUND -0.76 +8.09 + 9.88
STANDARD & POOR'S 500 INDEX +1.31 +8.68 +11.82
</TABLE>
* Inception: December 10, 1986. Performance begins December 31, 1986, to show
competitive data.
Note: Past performance is not predictive of future performance.
3
<PAGE> 6
Standard & Poor's 500 Stock Index and the average value mutual fund. During
this eight-year period, the Fund's average annual rate of return was a solid
+12.0%, well above the return of +9.9% for our peer group, and just slightly
ahead of the +11.8% rate of return of the Standard & Poor's 500 Stock Index.
These annual rates of return are not markedly different from the
+10.2% long-term return achieved by investing in large-cap common stocks as a
group. Such returns compound nicely over time. The summary table below presents
a comparison of an investment in the Fund with that of the most appropriate
"real world" option available to investors--the average value mutual fund.
The table illustrates the results assuming an investment of $10,000 in
both Vanguard Quantitative Portfolios and the average value fund on December
31, 1986, with all dividends and capital gains reinvested. On December 31,
1994, the investor in our Fund would have accumulated $24,680; the investor in
the average value fund, $21,250. This $3,430 of extra performance is
equivalent, even during this relatively brief time period, to 34% of the
initial $10,000 investment.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Total Return
---------------------------------------------
Eight Years Ended
December 31, 1994
- ---------------------------------------------------------------------------
Final Value of
Annual Rate Initial Investment
of Return of $10,000
- ---------------------------------------------------------------------------
<S> <C> <C>
VANGUARD QUANTITATIVE
PORTFOLIOS +12.0% $24,680
AVERAGE VALUE FUND + 9.9 21,250
- ---------------------------------------------------------------------------
VANGUARD ADVANTAGE + 2.1% $ 3,430
- ---------------------------------------------------------------------------
</TABLE>
It should go without saying that the returns reflected in the table are merely
history. Future returns of the Fund--both on an absolute basis and relative to
the average value fund--are unpredictable, and may be better or worse than
those illustrated.
We should note, as the chart on page 3 surely reflects, that the
Standard & Poor's 500 Index is a tough competitor for actively managed mutual
funds. It always has been! But the Index is calculated "on paper," without the
"real world" expenses of fund operations, advisory fees, portfolio transaction
costs, and the impact of cash reserves. Mutual funds, on the other hand, must
incur such costs, and it is difficult for most professional managers to provide
more than compensatory returns. Indeed, during the past decade only 13 of the
111 value funds in operation throughout the period outpaced the Index.
In response to these challenges--coming in a very competitive
business--a number of mutual fund complexes have formed index funds modeled on
the Standard & Poor's 500 Index. Returns on such "real world" index funds, of
course, are destined to fall short of returns on "paper" indexes. Indeed, the
total return on the average index fund designed for individual investors has
typically fallen short of the Index return by about -0.6% annually.
Applying this 0.6% cost to the Index returns illustrated in the chart
on the previous page would imply an index fund annual return of +11.2% rather
than +11.8%. (I hope you will forgive me if I point with pride to the fact that
the 500 Portfolio of Vanguard Index Trust--the first index mutual fund, founded
in 1976--has in recent years succeeded in providing a "match" that has come
within -0.20% of the Index return.)
LOOKING AHEAD
A year ago, I wrote to you that "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." The bumps experienced in the
stock market during 1994 seem to validate that opinion and, with yields
remaining almost as low today, the possibility of future bumps cannot be
ignored.
It is worth reemphasizing that investing in stocks is risky. That is,
in essence, why stocks offer higher reward potential than bonds and short-term
reserves. The greatest risk is faced by short-term investors who look for quick
stock market returns or transitory stock market trends. The lowest risk and the
highest rewards--at least in the past--have been achieved by long-term
investors who have "stayed the course" with a sound investment approach that is
consistent with their own financial objectives.
4
<PAGE> 7
We, too, intend to stay the course with the consistent objectives and
policies that we established for Vanguard Quantitative Portfolios at the outset
eight years ago, and to which we have hewed ever since. The Fund provides a
sound participation in a highly diversified list of common stocks selected for
their income and capital growth possibilities. As part of a balanced portfolio
of mutual funds--including stock funds, bond funds, and money market
funds--Vanguard Quantitative Portfolios should continue to provide fully
competitive relative returns, and should be a suitable investment in helping
you to implement the investment course you have chosen to follow.
Sincerely,
/s/ JOHN C BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
January 16, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED DECEMBER 31, 1994)
ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
---------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD QUANTITATIVE PORTFOLIOS 12/10/86 -0.61% +9.00% +11.43% +8.35% +3.08%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 9
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD QUANTITATIVE PORTFOLIOS since inception through December 31, 1994.
During the period illustrated, stock prices fluctuated widely; 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 TOTAL INVESTMENT RETURN*
- ---------------------------------------------------------------------------------------------------------------------------
Vanguard Quantitative Portfolios
Value with Income -------------------------------- S&P 500
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Index Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/86) $10.00 -- -- $10.00 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
1986 9.69 -- -- 9.69 - 3.1% 0.0% - 3.1% - 3.3%
- ---------------------------------------------------------------------------------------------------------------------------
1987 9.80 $ .06 $.25 10.08 + 1.8 +2.2 + 4.0 + 5.2
- ---------------------------------------------------------------------------------------------------------------------------
1988 11.08 -- .35 11.77 +13.1 +3.7 +16.8 +16.5
- ---------------------------------------------------------------------------------------------------------------------------
1989 14.14 -- .47 15.54 +27.6 +4.4 +32.0 +31.6
- ---------------------------------------------------------------------------------------------------------------------------
1990 13.29 .04 .47 15.16 - 5.7 +3.3 - 2.4 - 3.1
- ---------------------------------------------------------------------------------------------------------------------------
1991 16.32 .44 .47 19.75 +26.4 +3.9 +30.3 +30.4
- ---------------------------------------------------------------------------------------------------------------------------
1992 16.30 .71 .44 21.13 + 4.2 +2.8 + 7.0 + 7.6
- ---------------------------------------------------------------------------------------------------------------------------
1993 16.45 1.69 .39 24.06 +11.4 +2.4 +13.8 +10.1
- ---------------------------------------------------------------------------------------------------------------------------
1994 15.56 .40 .39 23.91 - 3.1 +2.5 - 0.6 + 1.3
- ---------------------------------------------------------------------------------------------------------------------------
LIFETIME +139.1% +136.3%
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 11.4% + 11.3%
- ---------------------------------------------------------------------------------------------------------------------------
</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
A strange economic recovery continues in most areas of the economy and the
country. While most Americans are not feeling better off, trade and economic
activity continue to grow. The surprising results of the mid-term elections
have added to investor uncertainty. The recent fall of the Mexican peso and
political upheaval across the world have shown that the New World Order does
not insure stability. In the United States, it would appear that the driving
force of the consumer in the economy had weakened by the Christmas season. A
weaker consumer makes the economic outlook for 1995 more doubtful than would
otherwise be the case.
There were positive developments in 1994, including a movement toward
free trade with both the North American Free Trade Agreement (NAFTA) and the
General Agreement on Tariffs and Trades (GATT). The early returns suggest that
NAFTA was indeed beneficial for the economy, as unemployment continues to fall.
The Haiti initiative has not had any negative repercussions. Those who see the
glass as half full can point out that there were many, many worse years than
1994.
Many observers took heart from the dramatic mid-term election results.
Certainly the voting populace desired a change in direction, and the election
results seemed to promise that. However, we would caution against
over-enthusiasm until the power structure in Washington and the direction of
policy begin to manifest themselves in the day-to-day workings of government.
The financial market environment during 1994 was not salubrious. It is
interesting to us that some of the better-performing areas of the stock market
included service industries and the health care sector, while consumer areas,
such as autos and consumer discretionary stocks, lagged. Utilities suffered
from weakness throughout the year. Uncertainty, fear of over-heating, and
Federal Reserve decisions led to a flat see-saw environment for equities and a
modest down year (in terms of total return) for fixed-income investors. The
upward pressure on interest rates has, in our opinion, run its course. The
abatement of these pressures will be a modest positive in the months ahead.
For fellow "value-oriented" investors, we would also point out that a
growing economy with flat-to-modestly-down equity values means that equity
prices are relatively lower. Depending on one's perspective, overvaluation of
equities has lessened or undervaluation has increased. We are cautiously
optimistic in both the short run and the long run, although there remain many
"trip wires" that could cause an equity sell-off in the near and intermediate
terms.
Looking forward, the uncertainties that we have alluded to above
continue to block our view of the far horizon. As we have often pointed out,
uncertainty leads to investment opportunity. With our long-term view, we are
not alarmed at the current state of the world.
Vanguard Quantitative Portfolios has completed eight years of
existence. We judge our own performance versus the S&P 500 Index, our unmanaged
investment standard, and the average growth and income mutual fund, as measured
by CADENCE. We lagged the S&P 500 Index in 1994; however, our performance
compared to the competitive universe of growth and income funds was much more
favorable. Our rank for 1994 was well above that of the median growth and
income fund.
Our longer-term performance compares quite favorably to our
competitive universe. We do not always expect to have pleasing short-term
results, but we would be disappointed if our longer-term results lagged
available investment alternatives. We would like to remind our investors that
our focus is on the longer term. We will inevitably have periods when
shorter-term performance will not compare favorably with competitive
benchmarks.
<TABLE>
<CAPTION>
- ------------------------------------------------------
Rank of Vanguard Quantitative Portfolios versus
CADENCE Growth and Income Funds
-----------------------------------------------
Periods Ended December 31, 1994
- ------------------------------------------------------
<S> <C>
LAST 8 YEARS 12TH OUT OF 135
LAST 5 YEARS 48TH OUT OF 193
LAST 3 YEARS 98TH OUT OF 219
LAST YEAR 78TH OUT OF 225
- ------------------------------------------------------
</TABLE>
Source: CADENCE.
8
<PAGE> 11
Our investment performance in 1994 was subject to the same climate of
uncertainty, blended with high interest rates, that provided difficulties for
all money managers. In particular, our momentum-oriented measures (which
compare the business health of our investment universe) were not particularly
effective in the start-and-stop environment of 1994. We have experienced such
periods in the past and would close our analysis by pointing to the difficulty
that most money managers experienced in outperforming the Index in a trendless,
start-and-stop year.
The S&P 500 Index has been a more-than-worthy opponent for managed
growth and income funds over the eight years of Vanguard Quantitative
Portfolios' existence. We believe our success in this environment 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 10, 1995
9
<PAGE> 12
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.8%)
- ------------------------------------------------------
General Electric Co. 421,200 $ 21,481
Royal Dutch Petroleum Co. 144,400 15,523
Philip Morris Cos., Inc. 255,100 14,668
International Business
Machines Corp. 193,600 14,230
Merck & Co., Inc. 363,100 13,843
Johnson & Johnson 228,300 12,499
Wal-Mart Stores, Inc. 515,100 10,946
BellSouth Corp. 195,200 10,565
Procter & Gamble Co. 169,984 10,539
Exxon Corp. 171,700 10,431
GTE Corp. 336,900 10,233
OIainMobil Corp. 112,700 9,495
Abbott Laboratories, Inc. 290,240 9,469
Amoco Corp. 159,600 9,436
The Coca-Cola Co. 182,700 9,409
Ford Motor Co. 327,100 9,159
E.I. du Pont de Nemours & Co. 162,300 9,129
Archer-Daniels-Midland Co. 438,987 9,054
Unilever NV 65,900 7,677
NationsBank, Inc. 169,700 7,658
Motorola, Inc. 130,600 7,558
Capital Cities/ABC, Inc. 88,500 7,545
CIGNA Corp. 109,600 6,932
J.C. Penney Co., Inc. 153,000 6,828
Ameritech Corp. 158,900 6,416
*The Kroger Co. 263,000 6,345
Sprint Corp. 229,200 6,332
Bristol-Myers Squibb Co. 104,880 6,070
Textron, Inc. 114,400 5,763
MCI Communications Corp. 309,900 5,694
Central & South West Corp. 248,500 5,622
Citicorp 135,500 5,606
Southwestern Bell Corp. 138,100 5,576
The Seagram Co. Ltd. 184,700 5,449
Enron Corp. 172,500 5,261
Service Corp. International 176,100 4,887
*Tandem Computers, Inc. 284,600 4,874
PepsiCo, Inc. 131,600 4,770
BankAmerica Corp. 120,400 4,756
American Stores Co. 164,500 4,421
Avery Dennison Corp. 118,900 4,221
Echlin, Inc. 140,400 4,212
Eaton Corp. 83,500 4,133
Dow Chemical Co. 60,900 4,096
NBD Bancorp, Inc. 148,150 4,056
Baltimore Gas & Electric Co. 179,200 3,965
American General Corp. 138,418 3,910
*Varity Corp. 107,500 3,897
Minnesota Mining &
Manufacturing Co. 73,000 3,896
Brunswick Corp. 204,700 3,864
Parker Hannifin Corp. 82,800 3,767
Federal Home Loan
Mortgage Corp. 74,400 3,757
Federal National Mortgage Assn. 48,900 3,564
Public Service Enterprise
Group Inc. 134,300 3,559
International Paper Co. 47,000 3,543
Alcan Aluminium Ltd. 132,300 3,357
Ryder System, Inc. 144,300 3,175
Computer Associates
International, Inc. 65,400 3,172
First Union Corp. 75,800 3,136
Consolidated Edison Co.
of New York, Inc. 117,500 3,026
*Federal Express Corp. 49,400 2,976
Upjohn Co. 92,200 2,835
Norwest Corp. 119,600 2,796
New York Times Co. Class A 124,400 2,752
General Motors Corp. 64,000 2,704
Niagara Mohawk Power Corp. 188,900 2,692
St. Paul Cos., Inc. 59,500 2,663
Intel Corp. 41,700 2,653
First Mississippi Corp. 105,100 2,627
Columbia/HCA Healthcare Corp. 71,375 2,605
Santa Fe Pacific Corp. 143,800 2,516
ITT Corp. 27,400 2,428
*Harris Corp. 54,600 2,320
Beneficial Corp. 59,200 2,309
Caterpillar, Inc. 39,600 2,183
*Compaq Computer Corp. 55,200 2,180
Phillips Petroleum Co. 66,300 2,171
Pacific Gas & Electric Co. 87,300 2,128
Wendy's International, Inc. 147,200 2,116
Transco Energy Co. 125,900 2,093
MBNA Corp. 86,100 2,013
United Technologies Corp. 31,700 1,993
Dean Witter Discover & Co. 57,900 1,961
Browning-Ferris Industries, Inc. 69,000 1,958
Ball Corp. 60,400 1,903
TRW, Inc. 28,100 1,855
*Owens-Corning Fiberglas Corp. 56,400 1,805
Nucor Corp. 31,300 1,737
Dana Corp. 73,100 1,709
Bruno's Inc. 209,900 1,705
Maytag Corp. 109,500 1,642
Panhandle Eastern Corp. 81,600 1,612
Chemical Banking Corp. 44,800 1,607
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------
<S> <C> <C>
*Price/Costco Inc. 121,200 $ 1,560
Dow Jones & Co., Inc. 50,000 1,550
Pioneer Hi Bred International 45,500 1,547
Morton International, Inc. 54,100 1,542
PPG Industries, Inc. 40,600 1,507
Temple-Inland Inc. 33,000 1,489
The Gap, Inc. 48,600 1,482
Whitman Corp. 85,400 1,473
AT&T Corp. 29,300 1,472
Baker Hughes, Inc. 79,900 1,458
Newell Co. 68,600 1,441
Praxair, Inc. 69,900 1,433
Fleetwood Enterprises, Inc. 75,700 1,419
Reebok International Ltd. 35,800 1,414
Conagra, Inc. 44,900 1,403
Circuit City Stores, Inc. 60,600 1,348
The Tribune Co. 24,600 1,347
Alco Standard Corp. 20,600 1,293
American Express Co. 42,800 1,263
Union Pacific Corp. 26,700 1,218
Travelers Inc. 36,600 1,190
H.F. Ahmanson & Co. 72,100 1,163
FPL Group, Inc. 32,900 1,156
Outboard Marine Corp. 57,300 1,125
Placer Dome Group, Inc. 51,600 1,122
Barnett Banks of Florida, Inc. 28,800 1,105
Nordstrom, Inc. 26,300 1,105
Westvaco Corp. 28,000 1,099
USF&G Corp. 78,900 1,075
Wachovia Corp. 33,200 1,071
Premark International, Inc. 24,400 1,067
SuperValu, Inc. 42,700 1,046
Marriott International 37,000 1,041
Williams Cos., Inc. 40,700 1,023
Comcast Corp. Class A 66,300 1,019
Micron Technology Inc. 22,700 1,002
Eastern Enterprises 37,800 992
Adolph Coors Co. Class B 58,600 989
Phelps Dodge Corp. 15,900 984
Bank of Boston Corp. 37,100 960
*Advanced Micro Devices, Inc. 38,500 958
Rite Aid Corp. 40,800 954
Colgate-Palmolive Co. 14,800 938
Apple Computer, Inc. 23,500 911
Air Products & Chemicals, Inc. 20,100 897
*Bethlehem Steel Corp. 49,300 887
Fleet Financial Group, Inc. 26,100 848
The Goodyear Tire & Rubber Co. 25,100 844
Louisiana-Pacific Corp. 30,500 831
Deere & Co. 12,300 815
Tyco International Ltd. 16,600 789
Rohm & Haas Co. 13,800 788
*Amdahl Corp. 69,700 767
Lowes Cos., Inc. 21,900 761
Homestake Mining Co. 43,900 752
*Western Atlas Inc. 19,900 749
Dayton-Hudson Corp. 10,500 743
Suntrust Banks, Inc. 15,200 726
Northern Telecom Ltd. 20,300 678
The Chase Manhattan Corp. 19,400 667
Boise Cascade Corp. 24,900 666
U.S. Healthcare, Inc. 16,100 660
*National Semiconductor Corp. 33,700 657
Texas Instruments, Inc. 8,700 651
Meredith Corp. 13,900 648
Manor Care Inc. 23,500 643
Bemis Co., Inc. 25,800 619
Federal Paper Board Co., Inc. 20,100 583
Scientific-Atlanta, Inc. 26,900 565
Ingersoll-Rand Co. 17,900 564
Dover Corp. 10,900 563
First Interstate Bancorp. 8,300 561
The Stanley Works 15,700 561
Briggs & Stratton Corp. 15,600 511
National Service Industries, Inc. 19,500 500
Pep Boys (Manny, Moe & Jack) 15,600 484
Paccar, Inc. 11,000 481
McDonnell Douglas Corp. 3,300 469
*Sun Microsystems, Inc. 12,100 428
Pittston Services Group 16,000 424
Cummins Engine Co., Inc. 9,200 416
Coastal Corp. 15,900 409
Clark Equipment Co. 6,900 374
Keycorp 14,800 370
Mattel, Inc. 13,475 339
Alberto-Culver Co. Class B 12,100 330
The BF Goodrich Co. 6,700 291
Chrysler Corp. 4,600 225
Millipore Corp. 4,600 223
*National Medical Enterprises, Inc. 15,000 212
Cooper Tire & Rubber Co. 8,900 210
Rockwell International Corp. 4,600 164
Worthington Industries, Inc. 8,200 162
*Stone Container Corp. 4,300 74
Great Western Financial Corp. 4,400 70
*National Education Corp. 13,300 55
Union Carbide Corp. 1,500 44
Trinova Corp. 1,300 38
Armstrong World Industries Inc. 800 31
Harris Computer Systems 1,915 22
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $536,828) 571,295
- ---------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (3.9%)
- ------------------------------------------------------------------
U.S. TREASURY BILL--Note E
5.535%, 3/16/95 $ 850 $ 840
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.90%, 1/3/95 22,356 22,356
- ------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $23,196) 23,196
- ------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $560,024) 594,491
- ------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- ------------------------------------------------------------------
Other Assets--Note C 3,317
Liabilities (1,759)
---------
1,558
- ------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------
Applicable to 38,302,275 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $596,049
- ------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.56
==================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $563,234 $14.70
Undistributed Net
Investment Income 2,519 .07
Accumulated Net
Realized Losses--Note D (4,455) (.12)
Unrealized Appreciation of
Investments--Note E 34,751 .91
- ------------------------------------------------------------------
NET ASSETS $596,049 $15.56
- ------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,222
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 919
- -------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . 17,141
- -------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . $1,017
Performance Adjustment . . . . . . . . . . . . . . . . . . 62 1,079
------ -------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . 1,462
Marketing and Distribution . . . . . . . . . . . . . . . . 109 1,571
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . 46
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . 7
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 56
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . 9
Directors' Fees and Expenses . . . . . . . . . . . . . . . . 3
- -------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 2,780
- -------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 14,361
- -------------------------------------------------------------------------------------------------------
REALIZED NET LOSS
Investment Securities Sold . . . . . . . . . . . . . . . . . (3,615)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . (838)
- -------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . . . . . . . . . (4,453)
- -------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . (14,133)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . 228
- -------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . (13,905)
- -------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations. $ (3,997)
=======================================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1994 December 31, 1993
(000) (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $ 14,361 $ 10,298
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . (4,453) 61,441
Change in Unrealized Appreciation (Depreciation) . . . . . . . . (13,905) (12,404)
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . (3,997) 59,335
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . (14,418) (10,830)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . (13,668) (48,656)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (28,086) (59,486)
- ---------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A . . . . . . . . . . . . . . . . . . 673 877
- ---------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . 175,535 111,687
--In Lieu of Cash Distributions . . . . . . . . . . . . 26,576 57,229
--Exchange . . . . . . . . . . . . . . . . . . . . . . 28,135 29,204
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . (99,386) (56,419)
--Exchange . . . . . . . . . . . . . . . . . . . . . . (34,137) (27,219)
- ---------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . 96,723 114,482
- ---------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . 65,313 115,208
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . 530,736 415,528
- ---------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . $596,049 $530,736
===============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $.39 $.39
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . $.40 $1.69
- ---------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,877 8,164
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 1,690 3,501
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (8,525) (4,892)
- ---------------------------------------------------------------------------------------------------------------
6,042 6,773
- ---------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . $ 2,519 $ 1,903
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $16.45 $16.30 $16.32 $13.29 $14.14
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .40 .40 .44 .47 .49
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . (.50) 1.83 .69 3.47 (.83)
-------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . (.10) 2.23 1.13 3.94 (.34)
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.39) (.39) (.44) (.47) (.47)
Distributions from Realized Capital Gains . . (.40) (1.69) (.71) (.44) (.04)
-------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.79) (2.08) (1.15) (.91) (.51)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $15.56 $16.45 $16.30 $16.32 $13.29
=============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . -0.61% +13.83% +7.01% +30.29% -2.44%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $596 $531 $416 $335 $211
Ratio of Expenses to Average Net Assets . . . . . .48% .50% .40% .43% .48%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 2.50% 2.22% 2.67% 2.95% 3.34%
Portfolio Turnover Rate . . . . . . . . . . . . . 71% 85% 51% 61% 81%
- -------------------------------------------------------------------------------------------------------------
</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 the close of the New York Stock Exchange
(generally 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 utilizes Standard & Poor's 500 Index futures contracts to
a limited extent, with the objectives of maintaining full exposure to the
stock market, maintaining liquidity and minimizing transaction costs. The
Fund may purchase futures contracts to immediately position incoming cash in
the market, thereby simulating a fully invested position in the underlying
index while maintaining a cash balance for liquidity. In the event of
redemptions, the Fund may pay departing shareholders from its cash balance
and reduce its futures position accordingly.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks 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 values 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, 1995, 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
16
<PAGE> 19
based on performance relative to the Standard & Poor's 500 Stock Index. For the
year ended December 31, 1994, the advisory fee represented an effective annual
rate of .18 of 1% of average net assets before an increase of $62,000 (.01 of
1%) based on performance.
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, 1994, the Fund had contributed capital of $91,000 to Vanguard
(included in Other Assets), representing .5% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended December 31, 1994, directed
brokerage arrangements reduced the Fund's expenses by $70,000 (.01 of 1% of
average net assets).
D. During the year ended December 31, 1994, the Fund made purchases of
$456,147,000 and sales of $391,369,000 of investment securities other than U.S.
Government securities and temporary cash investments. At December 31, 1994, the
Fund had available realized capital losses of $4,225,000 to offset future net
capital gains through December 31, 2003.
E. At December 31, 1994, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $34,467,000, of
which $59,590,000 related to appreciated securities and $25,123,000 related to
depreciated securities.
At December 31, 1994, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in March 1995, the related unrealized
appreciation, and the market value of securities deposited as initial margin
for those contracts were $18,454,000, $284,000, and $840,000, 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, 1994, 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 3, 1995
18
<PAGE> 21
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD QUANTITATIVE PORTFOLIOS, INC.
Corporate shareholders should note that for the year ended December 31, 1994,
100% of the Fund's nvestment 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 of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
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 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., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric 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 Chief Executive Officer 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 VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
20
<PAGE> 23
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent
with each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the
same).
These principles make at least as much sense today as they did in 1929,
perhaps even more. For we live in an era when many fund organizations have
become asset-gathering machines, capitalizing on past performance that is
unrepeatable and investment fads that today, as yesterday, will come and go.
The new marketing policy is too often "if investors want it, we'll sell it to
them." But our principle remains "if it makes sound investment sense, we'll
offer it, even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no- load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets
(not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at
the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
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.
Q930-12/94
<PAGE> 25
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Cumulative Performance of the Standard & Poor's
Growth Index verses S&P500 Value Index, for the period 1990-1994
at the top of page two.
A line chart depicting Cumulative Performance of the Vanguard
Quantitative Portfolios Fund versus Standard & Poor's 500 Index & the Average
Value Fund for the period December 31, 1986 to December 31,
1994, including Average Annual Total Returns, appears at the bottom right of
page three.
A running head featuring a coiled rope appears on page six.
A running head featuring a lantern appears on page seven.
A running head featuring a map and a telescope appear on pages eight
and nine.
A running head featuring a log book and pen appears on page ten through
nineteen.
A running head featuring a compass appears on page twenty.
At the bottom of the inside back cover appears a triangle with the
sides labeled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of
the report.
