<PAGE> 1
[VANGUARD QUANTITATIVE PORTFOLIOS LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Quantitative Portfolios and the other Funds in
The Vanguard Group. Mr. Brennan will continue to serve as President of the
Funds, and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
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:
With a total return of +35.9% during 1995, Vanguard Quantitative Portfolios
enjoyed the largest gain in its nine-year history. To be sure, we rode the
ebullient bull market wave that lifted all common stocks, but we also outpaced
the typical value (growth and income) mutual fund by a substantial margin.
The table below reflects our fine absolute performance and compares
our total return (capital change plus reinvested dividends) with that of the
unmanaged Standard & Poor's 500 Composite Stock Price Index and the average
value mutual fund. We fell short of the Index, which turned in a gain of
+37.6%, by 1.7 percentage points, but we surpassed by 4.5 percentage points the
+31.4% return provided by the average value mutual fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURN
------------------
YEAR ENDED
DECEMBER 31, 1995
- ----------------------------------------------------------
<S> <C>
VANGUARD QUANTITATIVE PORTFOLIOS +35.9%
- ----------------------------------------------------------
AVERAGE VALUE MUTUAL FUND +31.4%
STANDARD & POOR'S 500 STOCK INDEX +37.6
- ----------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $15.56 per share on December
31, 1994, and $19.95 on December 31, 1995, with the latter figure adjusted to
take into account the reinvestment of two semi-annual dividends totaling $.42
per share from net investment income, and a December 1995 distribution totaling
$.74 per share from net realized capital gains. The Fund realized additional
capital gains (presently estimated at $.39 per share) during 1995 and will
distribute them to shareholders in March.
THE STOCK MARKET IN 1995
The great bull market in stocks we enjoyed during the year was virtually
uninterrupted as stock prices rose in eleven of the past twelve months. The
dimension of the increase was close to record breaking, delighting the bulls
even as it astonished the bears. By year's end, the Standard & Poor's 500 Index
had generated a total return of +37.6%--its best year since 1958.
There were, as always, many opinions as to the source of the
surprising strength in the stock market. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) a growing
speculative fever in the marketplace, especially during the final weeks of the
year; and (3) a sharp decline in long-term interest rates. The rise in
corporate profits was particularly striking. It's estimated that operating
earnings for the companies in the Standard & Poor's 500 Index increased about
+15% in 1995, after already rising +16% in 1994. (Since 1926, earnings growth
has averaged less than +7% per year.) If there is a cautionary signal in this
boom in profits, it is that the two-year cumulative earnings growth of +33% has
been accompanied by dividend growth of only +11%.
This subdued dividend growth in the face of sharply higher stock
prices resulted in a decline in the yield on the Index to 2.2%, the lowest
level on record. Nonetheless, the Wall Street chorus sings "this time it's
different." Dividend yield and earnings growth--the two fundamentals of stock
returns--are clearly taking a back seat to the market's high valuation of the
long-term fundamentals. This is called "speculation," and it is hardly an
inconsequential component of 1995's high returns on stocks. So, as 1996 begins,
we face an environment that is surely sobering.
The huge decline in interest rates during the year not only provided a
major stimulus to the stock market but also set bond prices afire. The yield of
the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during
1995, even below its level of 7.1% at the start of 1994. The 1995 decline drove
long-term bond prices up by fully +19%, resulting in a total return (including
the interest coupon) of +28%--remarkably competitive with the return on stocks.
Short-term rates also declined as the Federal Reserve reduced the Federal funds
rate (the rate at which banks borrow from one another) in July and again in
December. On balance during the
1
<PAGE> 4
[FIGURE 2]
[FIGURE 3]
year, the yield on the U.S. Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate
environment was caused largely by a measurable softening in the growth of the
U.S. economy, perhaps with further weakness to come. A sluggish economy, in
turn, engendered continued optimism about the benign outlook for inflation.
(Indeed, the Consumer Price Index (CPI) was quite well-behaved in 1995, rising
by but +2.6%, its smallest increase since 1986.) Investors should carefully
ponder the extent to which today's high growth rate of corporate earnings is
likely to be sustained in a slowing economy.
THE 1990S SO FAR
During the past year, growth stocks (return of +38.1%) and value stocks
(+37.0%) were relatively equal participants in the great bull market. So far
during the 1990s, there has been little difference between the two investment
styles, as shown in the upper chart to the left, despite some considerable
year-to-year variations. For the six years on balance, the average annual
returns were: Standard & Poor's Growth Index +13.3%; Standard & Poor's Value
Index +12.6%.
During 1995, stocks with large market capitalizations provided
substantially higher returns than small-cap stocks. The giant blue-chip stocks,
which dominate the Standard & Poor's 500 Index, provided an average return of
+37.6%, while the small-cap Russell 2000 Index return was +28.4%. This
outstanding relative performance by the target index your Fund emulates,
however, should not be taken for granted.
Indeed, the performance of large-cap stocks and small-cap stocks
normally swings back and forth from one year to the next, as shown in the upper
right-hand chart. But, so far this decade, these ups and downs have exactly
canceled out one another. The average annual return has been +13% for large-cap
and small-cap alike. Thus, over time, there has
2
<PAGE> 5
been little to distinguish the performance of large- and small-cap stocks, just
as has been the case between the growth and value objectives.
What should you make of these numbers? I suggest that you consider my
comments in our 1994 Annual Report: "This outcome suggests the wisdom of
consistently sticking to your objectives, rather than endeavoring (fruitlessly,
I believe) to switch back and forth between . . . 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 large-cap or small-cap
stocks--or in some steady mix of each--or even in the entire stock market
(presently about 70% large-caps and 30% smaller-caps).
I should add that the extraordinary gains achieved by stocks in the
great bull market of 1995 have materially added to the total return of the
stock market so far during the 1990s. One year ago, the five-year return on the
Standard & Poor's 500 Stock Index averaged just +8.7% annually. When we tack on
an ebullient 1995, the six-year return rises sharply, to an annual average of
+13.1%. These two returns, in substance, nicely bracket the +10.7% long-term
(since 1926) annual return on stocks. Either way, I would be very surprised if
the decade of the 1990s, when it comes to its conclusion, will have matched the
average return on stocks of +17.5% per year during the Golden Eighties.
THE FUND IN 1995
As you know, Vanguard Quantitative Portfolios seeks to provide incrementally
better returns than those achieved by the Standard & Poor's 500 Index, while
maintaining risk characteristics that are similar to the Index. Thus, the
Fund's absolute returns are driven primarily by the performance of the Standard
& Poor's 500 Index, and our annual returns have consistently paralleled those
of the Index. We did not, however, quite match our standard during 1995. Our
total return of +35.9%, marvelous in any absolute sense, compared with a return
of +37.6% for the Index.
This modest shortfall was accounted for by a combination of our
operating expenses (while among the industry's lowest, our expense ratio
reduced our gross return by about 0.5%) and the costs of portfolio
transactions. The Standard & Poor's 500 Index, of course, is a theoretical
construct that assumes a 100% equity investment at all times. What's more, in
the "paper world" in which it operates, it incurs none of the real-world costs
of doing business--operating expenses, advisory fees, and portfolio transaction
costs--to which all mutual funds are subject.
Our individual stock selections and our industry group weightings
proved to have only a trivial impact on our 1995 results relative to those of
the Standard & Poor's 500 Index. The positive impact on our performance from
good individual selections of energy and financial stocks was offset by the
negative impact of sub-par stock selections in the health-care and technology
groups. Our industry weightings had minimal impact on our return largely
because we use industry selection as the major element of our risk-controls
relative to the Index. This table shows that the similarity in sector
weightings between the Fund and the Index in 1995 was, once again, quite
striking:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
SECTOR WEIGHTINGS
-----------------
DECEMBER 31, 1995
---------------------------------
VANGUARD
QUANTITATIVE STANDARD & POOR'S
PORTFOLIOS 500 STOCK INDEX
- ------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS 12% 7%
CAPITAL GOODS 7 8
CONSUMER CYCLICAL 12 14
CONSUMER STAPLES 13 12
ENERGY 10 10
FINANCIAL 12 12
HEALTH CARE 10 9
TECHNOLOGY 9 11
UTILITIES 11 13
TRANSPORTATION 2 2
MISCELLANEOUS 2 2
- ------------------------------------------------------------
TOTAL 100% 100%
- ------------------------------------------------------------
</TABLE>
Importantly, we gave our mutual fund competitors a sound drubbing (there is
really no other word to use)
3
<PAGE> 6
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- -------------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Quantitative Portfolios +35.93% +16.48% +13.90%
Average Value Fund +31.36 +15.20 +11.61
Standard & Poor's 500 Index +37.58 +16.59 +13.95
</TABLE>
*Inception, December 10, 1986.
Note: Past performance is not predictive of future performance.
in 1995. The return of Vanguard Quantitative Portfolios handily exceeded both
the +31.1% return for the average general equity mutual fund and the +31.4%
return achieved by the average value fund, the more relevant of the two
standards.
In this regard, I should note that the Fund's equity position is
composed almost entirely of the large capitalization stocks represented in the
Standard & Poor's 500 Index, while our typical competitor holds roughly 75% of
its assets in large-cap stocks, with the remainder in mid-cap, small-cap, and
foreign stocks. As a result, our large-cap bias provided a substantial
advantage over the average value mutual fund during 1995, and we outpaced the
returns of fully 379 of our 491 peers, 77% of the total.
A REVIEW OF OUR LIFETIME RECORD
Vanguard Quantitative Portfolios, having commenced operations in December 1986,
will soon complete its first decade of operations. The chart above presents
the Fund's record during this period compared to our two traditional
benchmarks, the unmanaged Standard & Poor's 500 Index and the average value
mutual fund. Since our inception on December 10, 1986, the Fund's average
annual return is +13.9%, well above the +11.6% return achieved by our average
peer, and in a virtual dead heat with the +13.9% annual average return of the
Standard & Poor's 500 Index. This table summarizes the results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN*
---------------------------------
DECEMBER 10, 1986, TO
DECEMBER 31, 1995
---------------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- -----------------------------------------------------------------
<S> <C> <C>
VANGUARD
QUANTITATIVE PORTFOLIOS +13.9% $32,500
- -----------------------------------------------------------------
AVERAGE VALUE FUND +11.6% $27,040
STANDARD & POOR'S 500 INDEX +13.9 32,630
- -----------------------------------------------------------------
</TABLE>
* Assuming the reinvestment of all dividends and capital gains distributions.
The compounding effect of these returns is remarkable. On December 31, 1995,
based on an
4
<PAGE> 7
initial $10,000 investment, the investor in our Fund would have accumulated
$32,500; the investor in the average value fund, $27,040; and the investor in
the Standard & Poor's 500 Index, $32,630. In a competitive world, our $5,460
performance edge over our average competitor is equivalent to roughly 55%(!) of
the initial $10,000 investment when the Fund began operations.
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 those of the average value fund and the Standard & Poor's 500
Index--are unpredictable and may be better or worse than those illustrated. Our
consistent competitive superiority over the average value fund since the Fund's
inception helped us to outpace 88% of our competitors.
The table also shows that we have yet to realize our objective of
achieving an incremental annual advantage over the Standard & Poor's 500 Index.
Nonetheless, our ability to at least virtually match this tough bogey has
resulted in a large financial advantage for our shareholders. I noted above the
principal reasons why the Standard & Poor's 500 Index is such a tough benchmark
for actively managed mutual funds. In sum, it is difficult for most
professional managers to provide returns that can compensate for their
operating and frictional costs. But, we have set for ourselves the goal of
outperforming this Index, and we will continue to do our utmost to meet this
objective.
I would add that, because of these frictional costs, even most index
mutual funds fall well short of the return on the Index itself (a notable
exception is the 500 Portfolio of Vanguard Index Trust). So, if Vanguard
Quantitative Portfolios has not surpassed the results of the Index itself, it
has succeeded over its lifetime in outpacing all of the Standard & Poor's 500
Index funds available to individual investors.
IN SUMMARY
When I wrote to you in our 1994 Annual Report, after a tough and bumpy ride in
a lackluster year, I warned you that "the possibility of future bumps cannot be
ignored." As 1995 was to turn out, I hardly could have been more wide of the
mark. Whether 1996 or 1997 will confirm my caution remains to be seen.
To state the obvious, 1995 was an extraordinarily bountiful year for
the shareholders of Vanguard Quantitative Portfolios. We should all take
(only) a moment to bask in the light of the generous rewards we earned. We
should also recognize, however, that the financial markets are never a "one-way
street," and the risks that exist today in the stock market may well come home
to roost in 1996 and erode our 1995 bounty. Put even more bluntly, Fund
shareholders enjoyed an enhancement of +35.9% in value during the year. With
this gain now behind us, even a significant market decline seems unlikely to
take us back to where we were--presumably with satisfaction--just one year ago.
Under these circumstances, what course of action should shareholders
of Vanguard Quantitative Portfolios follow? In our Annual Report a year ago,
under very different circumstances, I urged you to "stay the course," despite
the lackluster returns provided by equities during the year. Today, you should
recognize that, despite the short-term risk of investing, the biggest long-term
risks are: (1) failing to invest in stocks at all; and (2) following an erratic
and ever-changing course.
For our part, we can assure shareholders that the Fund will be managed
as it has been over its lifetime, now nearly ten years. It has provided sound
participation in a highly diversified group of common stocks selected for their
income and capital growth potential. As part of a balanced portfolio of stock
funds, bond funds, and money market funds, Vanguard Quantitative Portfolios
should continue to provide fully competitive returns relative to other value
funds, and should help you to carry out the investment strategy you have chosen
to employ.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board January 17, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD QUANTITATIVE PORTFOLIOS since inception through December 31, 1995.
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*
- --------------------------------------------------------------------------------------------------------------------------------
Quantitative Portfolios S&P 500
Value with Income ------------------------------ --------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total 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 + 5.1
- --------------------------------------------------------------------------------------------------------------------------------
1988 11.08 -- .35 11.77 +13.1 +3.7 +16.8 +16.6
- --------------------------------------------------------------------------------------------------------------------------------
1989 14.14 -- .47 15.54 +27.6 +4.4 +32.0 +31.7
- --------------------------------------------------------------------------------------------------------------------------------
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 +30.5
- --------------------------------------------------------------------------------------------------------------------------------
1992 16.30 .71 .44 21.14 + 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
- --------------------------------------------------------------------------------------------------------------------------------
1995 19.95 .74 .42 32.50 +33.1 +2.8 +35.9 +37.6
- --------------------------------------------------------------------------------------------------------------------------------
LIFETIME +225.0% +226.3%
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +13.9% +13.9%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both 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.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED DECEMBER 31, 1995) 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>
QUANTITATIVE PORTFOLIOS 12/10/86 +35.93% +16.48% +13.90% +10.83% +3.07%
</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
REPORT FROM THE INVESTMENT ADVISER
Toward the end of 1995, the economy began to show some signs of slowing as the
1996 election campaign approached. A downward shift in rates by the Fed
indicates that policymakers are attuned to mitigating the boom-bust cycle. The
shift rightward in the economic agenda seems to have peaked. We foresee a new
political equilibrium emerging that will have the government's share of the
economy at lower levels. The degree to which the budget negotiations have
foundered is a sign of sensitivity to the approaching elections. Although the
two sides in the debate have never been as far apart as their rhetoric
indicated, it still seems too early to glance with fear or joy toward the 1996
elections.
The nation's problems associated with income inequality appear to be
growing. This is a structural phenomenon and cannot change greatly in the short
term. The degree to which either policy or market forces mitigate this problem
is open to question, and may be one of the big questions of the next few years.
In the financial markets, the dollar showed weakness against the major
European currencies during the year, but was strong against major Pacific Rim
currencies. We continue to view equities as being slightly on the "rich" side,
and we offer the caveat that market timing is not, in our view, an ingredient
of most successful investment strategies. "Staying the course" with a
well-chosen investment mix suits most investors' needs and temperaments.
Vanguard Quantitative Portfolios has completed nine years of
existence. For this period, the S&P 500 Index has produced a total return of
+13.9% per annum. The strong 1995, with the S&P returning +37.6%, was an
unusual year, underscoring the benefits of equity ownership.
We judge our own performance versus the S&P 500 Index, our investment
policy proxy, and our competitors. For a competitive proxy, we use the
Morningstar Mutual Fund computer data base. We lagged the S&P 500 Index
performance for the year, as did most equity mutual funds. Our performance
compared to the competitive universe of growth and income funds continues to be
quite favorable. The following table summarizes our record.
<TABLE>
<CAPTION>
- -------------------------------------------------------
RANK OF VANGUARD QUANTITATIVE PORTFOLIOS VERSUS
MORNINGSTAR GROWTH AND INCOME FUNDS
---------------------------------------------------
THROUGH 12/31/95
- -------------------------------------------------------
<S> <C>
SINCE INCEPTION 13TH OUT OF 130
LAST 5 YEARS 47TH OUT OF 194
LAST 3 YEARS 48TH OUT OF 270
LAST 1 YEAR 98TH OUT OF 437
- -------------------------------------------------------
</TABLE>
Source: Morningstar, Inc.
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.
Our investment performance in 1995 was subject to unusual market
pressures. Most actively managed funds, including Quantitative Portfolios to a
modest degree, hold a portfolio of stocks with an average market capitalization
that is smaller than that of the S&P 500 Index. This was not a beneficial
differential during 1995.
Our outlook for the future is positive. We have demonstrated an
ability to outperform most active managers in a difficult period for active
management. In periods when active management outperforms indexing, we believe
that we will outperform both our peers and indexing alternatives to a
meaningful degree.
We believe our past success 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
Quantitative Portfolios an attractive option for equity investors.
Respectfully,
Franklin Portfolio Associates
January 9, 1996
7
<PAGE> 10
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard Quantitative
Portfolios has reached an agreement with Franklin Portfolio Associates (FPA),
the Fund's investment adviser, on a revised investment advisory agreement. The
revised agreement involves a reduction in the annual rate of advisory fees to
be paid to FPA. At the Fund's current asset level of $909,447,000, the dollar
amount of the annual fee would decline from $1,514,000 to $1,434,000, a
reduction of $80,000. The new effective annual fee rate would equal 0.16% of
the Fund's current assets and would decline further if the assets were to
continue to grow.
Under the terms of the new agreement, the Fund will pay FPA a basic
advisory fee at the end of each fiscal quarter based on the Fund's average
month-end net assets during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- ----------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- ----------------------------------------
<S> <C>
FIRST $100 MILLION 0.30%
NEXT $650 MILLION 0.15
OVER $750 MILLION 0.10
- ----------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the Fund relative to the investment performance
of the Standard & Poor's 500 Composite Stock Price Index.
This revised investment advisory agreement replaces the Fund's
existing agreement with the adviser dated October 1, 1987, and will go into
effect on April 1, 1996. Until the effective date, the adviser has agreed to
waive its advisory fees to the extent necessary to abide by the new fee
schedule. For the fiscal year ended December 31, 1995, the Fund paid
approximately $1,362,000 to FPA for investment advisory services.
The adviser, located at One Post Office Square, Boston, Massachusetts,
is a professional investment advisory firm which specializes in the management
of common stock portfolios through the use of quantitative investment models.
Founded in 1982, FPA, a Massachusetts business trust, is a wholly-owned
subsidiary of Mellon Financial Services Corporation, which is itself a
wholly-owned subsidiary of Mellon Bank Corporation. Under the terms of its
investment advisory agreement with the Fund, the adviser agrees to manage the
investment and reinvestment of the assets of the Fund and to continuously
review, supervise, and administer the Fund's investment program. The adviser
discharges its responsibilities subject to the control of the officers and
directors of the Fund.
8
<PAGE> 11
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.5%)
- -----------------------------------------------------------------------------
Exxon Corp. 376,500 $ 30,167
Philip Morris Cos., Inc. 297,700 26,942
Merck & Co., Inc. 385,000 25,314
General Electric Co. 340,300 24,502
Johnson & Johnson 236,400 20,242
International Business
Machines Corp. 218,800 20,075
Travelers Group Inc. 288,700 18,152
Archer-Daniels-Midland Co. 881,696 15,871
Sprint Corp. 390,800 15,583
BankAmerica Corp. 232,500 15,054
Pfizer, Inc. 238,900 15,051
GTE Corp. 336,900 14,824
Unicom Corp. 444,200 14,548
Unilever NV ADR 102,800 14,469
Pacific Gas & Electric Co. 481,000 13,648
The Coca-Cola Co. 182,700 13,565
Royal Dutch Petroleum Co. ADR 96,000 13,548
Abbott Laboratories, Inc. 309,740 12,932
Dow Chemical Co. 170,900 12,027
E.I. du Pont de Nemours & Co. 162,300 11,341
SCEcorp 634,700 11,266
* Staples, Inc. 456,800 11,134
Union Carbide Corp. 278,500 10,444
Procter & Gamble Co. 121,684 10,100
* King World Productions, Inc. 243,600 9,470
Avnet, Inc. 211,600 9,469
Allstate Corp. 230,052 9,461
Cardinal Health, Inc. 170,600 9,340
Motorola, Inc. 162,700 9,274
NationsBank, Inc. 128,700 8,961
Texas Instruments, Inc. 170,100 8,803
Textron, Inc. 119,600 8,073
SBC Communications Inc. 137,200 7,889
First Chicago NBD Corp. 198,350 7,835
The Walt Disney Co. 131,800 7,776
Amoco Corp. 107,700 7,741
* Microsoft Corp. 86,800 7,617
* Navistar International Corp. 702,400 7,375
ConAgra, Inc. 178,400 7,359
Phelps Dodge Corp. 108,700 6,767
Lockheed Martin Corp. 84,800 6,699
Newell Co. 250,900 6,492
Phillips Petroleum Co. 186,200 6,354
American International Group, Inc. 68,550 6,341
Halliburton Co. 124,200 6,288
* Viacom International Class B 132,600 6,282
Parker Hannifin Corp. 183,000 6,268
IBP, Inc. 122,400 6,181
Columbia/HCA Healthcare Corp. 118,775 6,028
Norsk Hydro AS ADR 140,700 5,892
Avery Dennison Corp. 116,900 5,860
Service Corp. International 132,500 5,830
Panhandle Eastern Corp. 208,400 5,809
* Sun Microsystems, Inc. 125,200 5,712
AFLAC, Inc. 128,000 5,552
International Paper Co. 139,900 5,299
American General Corp. 150,918 5,263
AT&T Corp. 80,200 5,193
Echlin, Inc. 140,400 5,125
Chemical Banking Corp. 84,700 4,976
Temple-Inland Inc. 112,500 4,964
Sears, Roebuck & Co. 124,000 4,836
First Mississippi Corp. 182,000 4,823
Pacific Enterprises 169,400 4,786
Coca-Cola Enterprises, Inc. 178,000 4,762
Intel Corp. 83,400 4,733
Federal National Mortgage Assn. 38,000 4,717
PepsiCo, Inc. 81,600 4,559
Weyerhaeuser Co. 104,800 4,533
Consolidated Edison Co.
of New York, Inc. 141,400 4,525
New York Times Co. Class A 152,000 4,503
Ryder System, Inc. 181,600 4,495
Eaton Corp. 83,500 4,478
Hewlett-Packard Co. 53,400 4,472
MCI Communications Corp. 170,300 4,449
* Community Psychiatric Centers 360,600 4,417
Central & South West Corp. 157,700 4,396
PPG Industries, Inc. 94,500 4,323
Jostens Inc. 174,600 4,234
The Bank of New York Co., Inc. 85,700 4,178
MBNA Corp. 111,700 4,119
* Varity Corp. 107,500 3,991
Black & Decker Corp. 112,400 3,962
Cyprus Amax Minerals Co. 147,700 3,859
Household International, Inc. 64,900 3,837
Williams Cos., Inc. 86,800 3,808
Moore Corp. Ltd. 199,400 3,714
First Union Corp. 65,400 3,638
Enron Corp. 92,500 3,526
Loews Corp. 41,600 3,260
Aluminum Co. of America 53,800 2,845
Dover Corp. 76,500 2,821
Atlantic Richfield Co. 24,800 2,747
Union Camp Corp. 56,500 2,691
Public Service Enterprise Group Inc. 86,100 2,637
Browning-Ferris Industries, Inc. 88,400 2,608
Merrill Lynch & Co., Inc. 50,600 2,581
Autodesk, Inc. 75,800 2,577
Rockwell International Corp. 48,100 2,543
McDonnell Douglas Corp. 27,200 2,502
Marriott International 65,000 2,486
Circuit City Stores, Inc. 86,500 2,389
* The Kroger Co. 63,500 2,381
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
TRW, Inc. 30,600 $ 2,372
Imperial Oil Ltd. 65,400 2,360
* Amdahl Corp. 276,400 2,349
* Digital Equipment Corp. 35,600 2,283
Micron Technology Inc. 57,400 2,274
Schering-Plough Corp. 39,400 2,157
Conrail, Inc. 30,300 2,121
Delta Air Lines, Inc. 28,400 2,098
Westvaco Corp. 74,000 2,053
Georgia-Pacific Corp. 29,900 2,052
ONEOK, Inc. 78,600 1,798
Northrop Grumman Corp. 26,500 1,696
Harcourt General, Inc. 40,500 1,696
Integrated Health Services, Inc. 62,300 1,557
* AMR Corp. 20,500 1,522
Alcan Aluminium Ltd. 48,600 1,513
American Express Co. 35,900 1,485
Springs Industries Inc. Class A 34,600 1,431
* CDI Corp. 78,300 1,409
Boise Cascade Corp. 39,300 1,361
Eastern Enterprises 37,800 1,332
Mobil Corp. 11,600 1,299
Baker Hughes, Inc. 52,200 1,272
Entergy Corp. 42,800 1,252
Eastman Chemical 19,200 1,202
Bausch & Lomb, Inc. 30,000 1,189
* Silicon Graphics, Inc. 39,800 1,094
Alberto-Culver Co. Class B 31,200 1,072
Harnischfeger Industries Inc. 30,200 1,004
Raytheon Co. 20,600 973
Champion International Corp. 22,900 962
Salomon, Inc. 26,800 951
American Greetings Corp. Class A 33,700 931
The Timkin Co. 24,200 926
* EMC Corp. 57,600 886
Great Western Financial Corp. 34,400 877
Teledyne Inc. 33,200 851
Rhone-Poulenc Rorer, Inc. 14,400 767
* National Semiconductor Corp. 32,100 714
Bristol-Myers Squibb Co. 8,200 704
American Stores Co. 26,100 698
* Bally Entertainment Corp. 47,100 659
Baxter International, Inc. 14,400 603
Stone Container Corp. 39,300 565
* Firstmiss Gold, Inc. 24,396 531
* COMPAQ Computer Corp. 10,800 518
Computer Associates
International, Inc. 9,000 512
Occidental Petroleum Corp. 23,900 511
Transamerica Corp. 7,000 510
Dana Corp. 15,000 439
Medtronic, Inc. 6,900 385
* USAir Group, Inc. 25,000 331
Becton, Dickinson & Co. 3,600 270
Paccar, Inc. 4,900 206
National Service Industries, Inc. 4,400 142
Teledyne Inc. Pfd. 'E' 332 5
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $682,904) 868,888
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.4%)
- -----------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
----------
<S> <C> <C>
U.S. TREASURY BILL--Note E
5.295%, 3/14/96 $ 850 842
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.89%, 1/2/96 39,009 39,009
- -----------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $39,850) 39,851
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $722,754) 908,739
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.1%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and F 6,522
Liabilities--Note F (5,814)
---------
708
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 45,593,729 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $909,447
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $19.95
=============================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $702,960 $15.42
Undistributed Net
Investment Income 2,725 .06
Accumulated Net
Realized Gains 18,051 .40
Unrealized Appreciation
(Depreciation)--Note E:
Investment Securities 185,985 4.08
Futures Contracts (274) (.01)
- -----------------------------------------------------------------------------
NET ASSETS $909,447 $19.95
- -----------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
(000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,318
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,829
- ------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . 20,147
- ------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . $1,280
Performance Adjustment . . . . . . . . . . . . . . . . . . . 82 1,362
------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . 1,775
Marketing and Distribution . . . . . . . . . . . . . . . . . 154 1,929
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . 60
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . 5
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . 84
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . 15
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . 3
- ------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 3,467
- ------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 16,680
- ------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . 48,236
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . 6,034
- ------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . 54,270
- ------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . 151,518
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . (558)
- ------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . 150,960
- ------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $221,910
================================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $ 16,680 $ 14,361
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . 54,270 (4,453)
Change in Unrealized Appreciation (Depreciation) . . . . . . . . 150,960 (13,905)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 221,910 (3,997)
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . (17,520) (14,418)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . (31,764) (13,668)
- --------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (49,284) (28,086)
- --------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . . . . . . . . . . 1,046 673
- --------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . 171,861 175,535
--In Lieu of Cash Distributions . . . . . . . . . . 47,452 26,576
--Exchange . . . . . . . . . . . . . . . . . . . . . 32,772 28,135
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . (81,099) (99,386)
--Exchange . . . . . . . . . . . . . . . . . . . . . (31,260) (34,137)
- --------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . 139,726 96,723
- --------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . 313,398 65,313
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . 596,049 530,736
- --------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . $909,447 $596,049
========================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $.42 $.39
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . $.74 $.40
- --------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . 11,067 12,877
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 2,450 1,690
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (6,226) (8,525)
- --------------------------------------------------------------------------------------------------------
7,291 6,042
- --------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . $ 2,725 $ 2,519
- --------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $15.56 $16.45 $16.30 $16.32 $13.29
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .41 .40 .40 .44 .47
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . 5.14 (.50) 1.83 .69 3.47
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 5.55 (.10) 2.23 1.13 3.94
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.42) (.39) (.39) (.44) (.47)
Distributions from Realized Capital Gains . . . . (.74) (.40) (1.69) (.71) (.44)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (1.16) (.79) (2.08) (1.15) (.91)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $19.95 $15.56 $16.45 $16.30 $16.32
================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +35.93% -0.61% +13.83% +7.01% +30.29%
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $909 $596 $531 $416 $335
Ratio of Expenses to Average Net Assets . . . . . . . . .47% .48% .50% .40% .43%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 2.25% 2.50% 2.22% 2.67% 2.95%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 59% 71% 85% 51% 61%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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 acquired over sixty days to maturity are valued utilizing the
latest quoted bid prices and on the basis of a matrix system (which
considers such factors as security prices, yields, maturities, and
ratings), both as furnished by independent pricing services. Other
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.
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (continued)
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 a custodian
bank until maturity of each repurchase agreement. Provisions of each
agreement require 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 redeeming 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 April 1, 1996, 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, 1995, the advisory fee
represented an effective annual rate of .17 of 1% of average net assets before
an increase of $82,000 (.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, 1995, the Fund had contributed capital of $103,000
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.
D. During the year ended December 31, 1995, the Fund made purchases of
$523,836,000 and sales of $420,528,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At December 31, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $185,985,000, of
which $194,959,000 related to appreciated securities and $8,974,000 related to
depreciated securities.
At December 31, 1995, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in March 1996, the related unrealized
depreciation, and the market value of securities deposited as initial margin
for those contracts were $24,738,000, $274,000, and $842,000, respectively.
F. The market value of securities on loan to broker/dealers at December 31,
1995, was $1,558,000, for which the Fund had received cash collateral of
$1,620,000.
14
<PAGE> 17
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, 1995, and 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
January 31, 1996
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD QUANTITATIVE PORTFOLIOS, INC.
Corporate shareholders should note that for the year ended December 31, 1995,
55.0% of the Fund's investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
15
<PAGE> 18
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 Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
16
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
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ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 20
VANGUARD QUANTITATIVE PORTFOLIOS
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 cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through five.
Line charts illustrating annual total returns between Growth Stocks versus Value
Stocks for the fiscal years 1990 through 1995. Line charts illustrating annual
total returns between Large Stocks versus Small Stocks for the fiscal years 1990
through 1995 appears at the top of page two.
Line charts illustrating cumulative performance between Vanguard Quantitative
Portfolios, Average Value Fund and Standard & Poor's 500 Index, average Annual
Total Returns for the period December 10, 1986, to December 31, 1995 appears at
the top of page four.
A running head featuring a cannon and battleships in the background appears at
the top of page six.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages seven and eight.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages nine through fifteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page sixteen.
A running head featuring birds flying and ships in the background appears at the
top of the inside back cover.
