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[PHOTO]
VANGUARD
QUANTITATIVE
PORTFOLIOS
Annual Report
December 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future.
The montage includes a bronze medallion with a likeness of our namesake, HMS
Vanguard (Lord Nelson's flagship at The Battle of the Nile); a clock built
circa 1816 in Scotland, featuring a portrait of Nelson (who is also shown,
accepting a surrender, in a detail from a nineteenth-century engraving); and
several views of our recently completed campus, which is steeped in nautical
imagery--from our buildings named after Nelson's warships (Victory, Majestic,
and Goliath are three shown), to our artwork and ornamental compass rose.
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[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Adviser
6
Portfolio
Profile
8
Performance
Summary
10
Financial
Statements
11
Report Of
Independent
Accountants
19
Directors And Officers
INSIDE BACK COVER
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[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
Amid a continuing bull market in U.S. stocks, Vanguard Quantitative
Portfolios achieved a strong return of +23.1% in 1996, nicely exceeding the
performance of the average competing mutual fund and edging out the return on
the Standard & Poor's 500 Composite Stock Price Index.
The table below compares the total return (capital change plus reinvested
dividends) of Vanguard Quantitative Portfolios with those of the average value
(growth and income) mutual fund and the unmanaged S&P 500 Index.
The Fund's return is based on an increase in net asset value from $19.95
per share on December 31, 1995, to $22.23 per share on December 31, 1996, with
the latter figure adjusted for dividends of $0.40 per share paid from net
investment income and distributions totaling $1.82 per share paid from net
realized capital gains.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- --------------------------------------------------------------
<S> <C>
Vanguard Quantitative Portfolios +23.1%
- --------------------------------------------------------------
Average Value Fund +20.9%
- --------------------------------------------------------------
S&P 500 Index +23.0%
- --------------------------------------------------------------
</TABLE>
1996 PERFORMANCE OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December. The yield
on the benchmark 30-year U.S. Treasury bond finished 1996 at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the long
bond's price down by about -8%.
In contrast, the price trend for common stocks was virtually one-way: up.
The S&P 500 Index provided positive returns in all but two months (July and
December), as both growth stocks and value stocks performed well. While returns
on these two groups are quite similar over long periods, they often diverge
over shorter periods. In 1996, the S&P/BARRA Growth Index earned a return of
+24.0%, not far ahead of the S&P/BARRA Value Index, which provided a return of
+22.0%.
Our adviser's mandate is to use computer-driven quantitative techniques in
an effort to exceed the returns on the S&P 500 Index while paralleling its risk
characteristics. We met that test in 1996, "grinding out" a slim advantage of
0.1% over the Index. But our strategy was a winning one, and we achieved a
margin of 2.2 percentage points over our average competitor--more than a 10%
enhancement.
Our edge over the Index was achieved by our adviser's generally good stock
selection, and, as usual, our industry group weightings had a negligible impact
on our relative results. Our strategy is akin to hitting for a solid average
rather than swinging for home runs by concentrating the Fund's assets in a few
sectors or individual stocks.
The wider advantage achieved over our peers in 1996 was due partly to our
policy of investing mainly in the large-capitalization stocks that constitute
the S&P 500 Index. This policy helped, because there was a pronounced large-cap
bias to the market's returns
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in 1996. A striking illustration was the astounding +94% return achieved by the
three largest technology stocks in the Index (Intel, Microsoft, and IBM),
compared with the +5% return for the technology sector of the Russell 2000
Index of small-cap stocks.
We also gained on our peers because of our policy of remaining fully
invested (99% to 100%) in stocks at all times. Traditionally-managed equity
funds usually have 5% to 10% positions in cash reserves, an obvious handicap
when stock prices are rising.
LONG-TERM PERFORMANCE OVERVIEW
The strong performance by Vanguard Quantitative Portfolios in 1996 maintained
our long-term superiority over the average value fund, as is shown in the
following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED DECEMBER 31, 1996
----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------------------------------
<S> <C> <C>
Vanguard Quantitative Portfolios +15.2% $41,278
- -----------------------------------------------------------------------------
Average Value Fund +12.9% $33,729
- -----------------------------------------------------------------------------
S&P 500 Index +15.3% $41,491
- -----------------------------------------------------------------------------
</TABLE>
For the ten years ended December 31, which encompasses all but three weeks
of the Fund's operating history, we provided a margin of return over our peers
of +2.3% per year. While that advantage may appear modest at first glance, it
looms large over a decade. An initial stake of $10,000 in Vanguard Quantitative
Portfolios on December 31, 1986, would have grown to $41,278 over ten years,
compared with $33,729 for our traditionally managed competition. That is a
margin of $7,549 in our favor--equal to fully three-quarters of the entire
initial investment.
That said, we fell just short (0.1% per year) of the return of the S&P 500
Index during the decade. Although beating the Index is our goal, it is a tough
chore for us, but even tougher for other mutual funds with their high advisory
fees and operating costs. The average general equity fund's expenses amount to
1.34% of assets annually, or more than three times our Fund's 0.38% expense
ratio. The Index, of course, exists only on paper and incurs neither expenses
nor transaction costs, which diminish the returns earned by real-world
portfolios. (For the record, Quantitative Portfolios outpaced a low-cost S&P
500 Index mutual fund by 0.8% per year over the past decade.)
We emphasize that future returns from the stock market may be lower than
those of the past decade, which was an unusually bountiful era for stocks.
Indeed, with stock prices at high levels based on several valuation measures,
there is ample reason to expect lower returns in the coming decade.
IN SUMMARY
Most mutual fund investors understand that volatility risk is a measure of how
much an investment may fluctuate in value over a given period of time. But many
equity fund investors today have experienced only "upside volatility." The U.S.
stock market has been rising--with only a few brief setbacks--for nearly 15
years.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks will enjoy a repeat of the exceptional returns of this remarkable era.
Indeed, there are sure to be some rough seas ahead. Nonetheless, we believe
that investors who maintain a balanced portfolio of stock funds, bond funds,
and money market funds will overcome the volatility of financial
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markets and be rewarded. "Stay the course" has proved wise counsel in the past,
and we see no reason why it should not continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 16, 1997
NOTE: The Board of Directors of Vanguard Quantitative Portfolios has approved
designating the Fund as its Growth and Income Portfolio. Effective April 30, it
will be identified by that name. Franklin Portfolio Associates will continue to
manage the Portfolio with a quantitative strategy, seeking to enhance its
returns relative to the S&P 500 Index.
A MILESTONE FOR YOUR FUND
Vanguard Quantitative Portfolios celebrated its tenth anniversary on December
10, 1996, just three weeks before the end of our fiscal year. Over the Fund's
decade-plus-three-week lifetime, its return has matched that of the S&P 500
Index, outpaced even the lowest-cost index funds, and significantly surpassed
the results achieved by most traditionally managed stock funds.
Indeed, we outpaced some 90% of all growth and income funds during the
decade. Nonetheless, our goal from the outset has been to also outpace the S&P
500 Index itself, and that we did not quite do for the decade.
The advisory agreement with our portfolio manager, Franklin Portfolio
Associates, provides substantial incentives for outpacing the Index by
significant amounts--and commensurate penalties for shortfalls. In substance,
our fee structure (scaled down last winter) at present asset levels provides
for an effective fee of 0.15%--only a fraction of industry norms--which can be
increased by from 33% to 67% for exemplary performance. The fee would
automatically be reduced by these amounts if relative returns were
unsatisfactory.
During our history, these incentive/penalty fees have generally not come
into play, reaffirming both our basic strategy and the tough challenge that our
target represents. Nonetheless, your officers, directors, and investment
adviser believe that the Index can indeed be beaten under our strategy. To this
end, we have slightly broadened the parameters for deviating from the
construction of the Index in order to provide a larger opportunity to achieve
our goal, all the while maintaining risk characteristics similar to those of
the Index.
When we introduced Vanguard Quantitative Portfolios in 1986, our concept
of computer-driven "enhanced indexing" was unique in the mutual fund industry.
We said: "In this era of self-styled investment 'genius' . . . keep in mind
that future performance of today's 'top-performing' funds is unpredictable. Our
Portfolio is designed to participate in equity market returns with a high
degree of relative predictability." We described this strategy as
"unconventional"; in fact, it was. Since then, it has been adopted by a growing
number of mutual funds. Our strategy has worked and remains in place, even as
we move forward under a new name. As a new decade begins for the Fund, we note
with pride that the record we have achieved has been good. With the tactical
change mentioned above, we believe we have improved our opportunity to provide
even better relative returns in the years ahead. We anticipate our future with
excitement and with curiosity.
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THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- --------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- --------------------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- --------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
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est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the
European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
5
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REPORT FROM THE ADVISER
[PHOTO]
We are pleased to report on our investment results for the year ended December
31, 1996. The Fund's total return in 1996 exceeded the returns of both the
unmanaged Standard & Poor's 500 Composite Stock Price Index and the average
value (growth and income) mutual fund.
Our performance in 1996 was very favorable in relation to our competitors.
The following table ranks the short-term and long-term performance of Vanguard
Quantitative Portfolios within the universe of value funds whose performance is
monitored by Morningstar, Inc.
One factor affecting our 1996 returns was the strong market performance of
the largest companies. The largest 25 stocks in the S&P 500 Index on December
31, 1995, had a total return during 1996 of 28.4%. The S&P 500 Index itself
returned "only" 23.0%. Most actively managed portfolios have trouble matching
the Index when its largest components are driving performance. By slightly
outperforming the Index in 1996, the Fund solidly outperformed most other value
funds. This type of result is what we would expect when the largest companies
drive the market's performance; we expect to do better versus the Index during
periods when market leadership is not narrow and such large companies do not
dominate results.
<TABLE>
<CAPTION>
- -------------------------------------------------------
RANK OF VANGUARD QUANTITATIVE PORTFOLIOS
AMONG GROWTH AND INCOME FUNDS
THROUGH DECEMBER 31, 1996
- -------------------------------------------------------
<S> <C>
Last 10 years 13th out of 122
Last 5 years 56th out of 210
Last 3 years 85th out of 332
Last 1 year 99th out of 505
- -------------------------------------------------------
Source: Morningstar, Inc.
</TABLE>
We build and maintain our portfolio by making a series of analytical
measurements on a large universe of securities. In attempting to identify
undervalued stocks, we employ three basic types of yardsticks:
- Fundamental momentum measures. These analytical methods are designed to
identify companies whose business and near-term business prospects are
relatively strong.
- Relative value measures. These quantify the attractiveness of a stock's
price relative to such financial ratios as book value, sales, or earnings.
- Future cash flow. These analytical measures identify likely favorable
payoffs in terms of future earnings and dividends for an investment made today.
Fundamental momentum was the primary driving force of our models'
performance during 1996, although both of the value-based measurements also
helped predict future stock performance.
As the domestic equity market climbs higher, we suspect that the role of
momentum will decrease in determining relative and absolute performance. For
our part, we have always believed in balance in our investment approach.
Vanguard Quantitative Portfolios uses more than one measure of value in
developing its purchase and sales strategies. We believe that using multiple
measures to select securities will help to deliver consistent results. The
long-term performance comparisons provided above lend credence to that view.
INVESTMENT PHILOSOPHY
The Fund reflects a belief that superior long-term investment
results can be achieved by using quantitative methods to select
stocks that, in the aggregate, have risk characteristics
similar to the S&P 500 Index but that are currently undervalued
by the market.
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In the coming year, we intend to take moderately bigger positions in
individual securities relative to their weightings in the S&P 500 Index. We
feel that these larger positions will enhance the long-term returns of the Fund
without unduly increasing shorter-term volatility.
We would like to repeat a point we try to make in every report to
shareholders: We are long-term investors. We do not expect to be near the top
of a ranked list of equity investment alternatives for every short-term period.
We are more than happy when this is the case, of course, but our goal is to be
at the top of these lists over the long term. Our investors should have a
long-term perspective. They also should be comfortable with exposure to the
equity market. We expect to be fully invested as a matter of policy.
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 the indexes to a meaningful degree.
We believe that our past success illustrates the effectiveness of the
Franklin game plan, which can be summarized as 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.
John Nagorniak
Franklin Portfolio Associates
January 13, 1997
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PORTFOLIO PROFILE: QUANTITATIVE PORTFOLIOS
DECEMBER 31, 1996
This Profile provides a snapshot of the Fund's characteristics, compared where
appropriate to an unmanaged index. Key elements of this Profile are defined on
page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------
QUANTITATIVE
PORTFOLIOS S&P 500
- --------------------------------------------------------
<S> <C> <C>
Number of Stocks 155 500
Median Market Cap $17.5B $24.5B
Price/Earnings Ratio 17.3x 19.6x
Price/Book Ratio 2.9x 3.4x
Yield 1.9% 2.0%
Return on Equity 18.1% 19.6%
Earnings Growth Rate 14.1% 13.5%
Foreign Holdings 1.7% 3.7%
Turnover Rate 75% --
Expense Ratio 0.38% --
Cash Reserves 4.4% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------------------
QUANTITATIVE
PORTFOLIOS S&P 500
- --------------------------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.04 1.00
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
<S> <C> <C>
- --------------------------------------------------
General Electric Co. 3.4%
Merck & Co., Inc. 2.7
Johnson & Johnson 2.6
Travelers Group Inc. 2.3
Exxon Corp. 2.1
Dayton-Hudson Corp. 2.1
BankAmerica Corp. 2.0
Pfizer, Inc. 1.9
The Coca-Cola Co. 1.9
Chrysler Corp. 1.9
- --------------------------------------------------
Top Ten 22.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
-----------------------------------------------
QUANTITATIVE QUANTITATIVE
PORTFOLIOS PORTFOLIOS S&P 500
-----------------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . . . . 11.0% 3.9% 6.2%
Capital Goods & Construction . . . . . 6.8 13.3 8.4
Consumer Cyclical . . . . . . . . . . 9.9 16.9 12.1
Consumer Staples . . . . . . . . . . . 12.4 9.5 12.4
Energy . . . . . . . . . . . . . . . . 9.6 10.1 9.7
Financial . . . . . . . . . . . . . . 12.5 15.8 15.0
Health Care . . . . . . . . . . . . . 11.6 11.5 10.4
Technology . . . . . . . . . . . . . . 10.0 7.2 12.1
Transport & Services . . . . . . . . . 1.2 1.5 1.5
Utilities . . . . . . . . . . . . . . 12.7 9.1 9.9
Miscellaneous . . . . . . . . . . . . . 2.3 1.2 2.3
- --------------------------------------------------------------------------------------------------------
</TABLE>
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[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside of the United
States.
INVESTMENT FOCUS. This grid indicates a portfolio's characteristics in terms of
market capitalization (large, medium, or small) and relative valuation (growth,
value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's total net assets in its
ten largest investments (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to
investors). The average turnover rate for stock mutual funds is about 80%.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year.
9
<PAGE> 12
PERFORMANCE SUMMARY: QUANTITATIVE PORTFOLIOS
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 12/10/86-12/31/96
- ----------------------------------------------------------
QUANTITATIVE PORTFOLIOS S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1986 -3.1% 0.0% -3.1% -3.3%
1987 1.8 2.2 4.0 5.3
1988 13.1 3.7 16.8 16.6
1989 27.6 4.4 32.0 31.7
1990 -5.7 3.3 -2.4 -3.1
1991 26.4 3.9 30.3 30.5
1992 4.2 2.8 7.0 7.6
1993 11.4 2.4 13.8 10.1
1994 -3.1 2.5 -0.6 1.3
1995 33.1 2.8 35.9 37.6
1996 20.9 2.2 23.1 23.0
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 12/31/86-12/31/96
Quantitative Lipper Growth Standard & Poor's
Portfolios & Income 500 Index
<S> <C> <C> <C>
1986 12 10000 10000 10000
1987 03 12139 11600 12136
1987 06 12646 11908 12745
1987 09 13438 12479 13587
1987 12 10402 10155 10526
1988 03 11083 10870 11126
1988 06 11866 11490 11867
1988 09 11867 11602 11907
1988 12 12149 11684 12275
1989 03 13048 12412 13145
1989 06 14166 13335 14305
1989 09 15701 14591 15837
1989 12 16036 14399 16164
1990 03 15628 14044 15678
1990 06 16479 14756 16664
1990 09 14233 13010 14374
1990 12 15645 13752 15662
1991 03 17893 15700 17937
1991 06 17716 15656 17896
1991 09 18710 16818 18853
1991 12 20384 17721 20434
1992 03 19872 17645 19918
1992 06 19922 17671 20296
1992 09 20421 18466 20936
1992 12 21812 19249 21991
1993 03 23164 20094 22951
1993 06 23570 20252 23063
1993 09 24421 21326 23659
1993 12 24828 21408 24207
1994 03 23803 20709 23289
1994 06 23645 20641 23387
1994 09 24707 21945 24530
1994 12 24676 21241 24527
1995 03 26944 22948 26915
1995 06 29483 24831 29484
1995 09 32105 27137 31827
1995 12 33542 27896 33743
1996 03 35521 29382 35554
1996 06 36754 30393 37150
1996 09 37787 31869 38298
1996 12 41278 33729 41491
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUANTITATIVE PORTFOLIOS 23.06% 15.16% 15.23% $41,278
AVERAGE VALUE FUND 20.91 13.74 12.93 33,729
S&P 500 INDEX 22.96 15.22 15.29 41,491
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quantitative Portfolios 12/10/86 23.06% 15.16% 12.22% 3.01% 15.23%
- --------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
DECEMBER 31, 1996
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MARKET
VALUE*
QUANTITATIVE PORTFOLIOS SHARES (000)
- ---------------------------------------------------------------------------------------
COMMON STOCKS (95.6%)(1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS (3.7%)
Allegheny Teledyne Inc. 99,700 2,293
Avery Dennison Corp. 338,600 11,978
Battle Mountain Gold Co. Class A 64,500 443
Dow Chemical Co. 230,500 18,065
Echo Bay Mines Ltd. 56,200 372
Engelhard Corp. 80,900 1,547
International Paper Co. 139,900 5,648
Morton International, Inc. 43,000 1,752
Newmont Mining Corp. 102,400 4,582
St. Joe Corp. 12,200 793
------------
47,473
------------
CAPITAL GOODS & CONSTRUCTION (12.7%)
The Boeing Co. 70,600 7,510
Caterpillar, Inc. 78,000 5,870
Centex Corp. 194,400 7,314
Cooper Industries, Inc. 167,600 7,060
Deere & Co. 173,700 7,057
Dover Corp. 303,200 15,236
General Electric Co. 439,300 43,436
General Signal Corp. 38,800 1,659
Ingersoll-Rand Co. 360,400 16,038
- - International Rectifier Corp. 60,500 923
JLG Industries, Inc. 96,700 1,547
Lockheed Martin Corp. 69,479 6,357
Martin Marietta Materials, Inc. 71,841 1,670
Oakwood Homes Corp. 161,200 3,687
Raychem Corp. 204,900 16,418
Safety-Kleen Corp. 19,300 316
Thomas & Betts Corp. 21,200 941
Trinity Industries, Inc. 38,800 1,455
Tyco International Ltd. 347,700 18,385
------------
162,879
------------
CONSUMER CYCLICAL (16.2%)
Black & Decker Corp. 241,600 7,278
Brown Group, Inc. 25,500 469
Brunswick Corp. 141,300 3,391
- - Chrysler Corp. 721,400 23,806
- - CompUSA, Inc. 125,900 2,597
Dayton-Hudson Corp. 674,700 26,482
The Walt Disney Co. 131,700 9,170
Eastman Kodak Co. 131,600 10,561
- - Federated Department Stores 224,900 7,675
Fleetwood Enterprises, Inc. 7,100 195
Ford Motor Co. 294,300 9,381
The Gap, Inc. 216,700 6,528
- - HFS Inc. 121,000 7,230
Hilton Hotels Corp. 264,800 6,918
- - ITT Corp. 30,500 1,323
International Game Technology 28,800 526
- - King World Productions, Inc. 350,500 12,925
Knight-Ridder, Inc. 126,200 4,827
Liz Claiborne, Inc. 73,600 2,843
Maytag Corp. 206,500 4,078
Newell Co. 598,900 18,865
Russell Corp. 49,800 1,482
- - Ryan's Family Steak Houses, Inc. 431,700 2,968
Sears, Roebuck & Co. 207,800 9,585
Snap-On Inc. 131,100 4,670
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MARKET
VALUE*
QUANTITATIVE PORTFOLIOS SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
The Stanley Works 195,800 5,287
TJX Cos., Inc. 117,000 5,543
- - Woolworth Corp. 521,900 11,417
------------
208,020
------------
CONSUMER STAPLES (9.1%)
Archer-Daniels-Midland Co. 925,780 20,367
The Coca-Cola Co. 466,100 24,529
Adolph Coors Co. Class B 20,900 397
Crown Cork & Seal Co., Inc. 112,100 6,095
Gillette Co. 164,500 12,790
Great Atlantic &
Pacific Tea Co., Inc. 100,400 3,200
Interstate Bakeries 16,800 825
Philip Morris Cos., Inc. 209,300 23,572
Procter & Gamble Co. 158,084 16,994
SuperValu Inc. 269,700 7,653
------------
116,422
------------
ENERGY (9.6%)
Amerada Hess Corp. 31,100 1,800
Ashland Inc. 146,100 6,410
Atlantic Richfield Co. 54,600 7,235
Baker Hughes, Inc. 132,000 4,554
Burlington Resources, Inc. 146,800 7,395
Dresser Industries, Inc. 11,200 347
Eastern Enterprises 84,600 2,993
Exxon Corp. 273,700 26,823
Halliburton Co. 126,300 7,610
Helmerich & Payne, Inc. 161,400 8,413
Louisiana Land & Exploration Co. 4,600 247
Mobil Corp. 89,800 10,978
Occidental Petroleum Corp. 249,900 5,841
Pennzoil Co. 85,900 4,853
Phillips Petroleum Co. 75,900 3,359
Royal Dutch Petroleum Co. ADR 71,900 12,277
- - Santa Fe Energy Resources, Inc. 245,500 3,406
Texaco Inc. 15,700 1,541
USX-Marathon Group 32,700 781
Unocal Corp. 169,000 6,866
------------
123,729
------------
FINANCIAL (15.1%)
American International
Group, Inc. 188,750 20,432
BankAmerica Corp. 262,600 26,194
Bankers Trust New York Corp. 35,500 3,062
Beneficial Corp. 97,000 6,147
Chase Manhattan Corp. 113,600 10,139
Conseco Co., Inc. 7,900 504
Federal National Mortgage Assn. 152,000 5,662
First Bank System, Inc. 40,400 2,757
First Chicago NBD Corp. 83,350 4,480
First Union Corp. 51,100 3,781
Golden West Financial Corp. 6,200 391
Great Western Financial Corp. 187,100 5,426
Green Tree Financial Corp. 11,500 444
J.P. Morgan & Co., Inc. 72,100 7,039
Morgan Stanley Group, Inc. 372,200 21,262
NationsBank Corp. 193,200 18,885
PNC Bank Corp. 247,900 9,327
Providian Corp. 86,300 4,434
SAFECO Corp. 84,100 3,301
Salomon, Inc. 221,400 10,433
SouthTrust Corp. 9,000 313
Travelers Group Inc. 653,400 29,648
------------
194,061
------------
HEALTH CARE (11.0%)
Abbott Laboratories 307,840 15,623
- - ALZA Corp. 296,600 7,675
- - Amgen, Inc. 128,700 6,998
- - Genetics Institute Inc.
Depository Shares 32,500 2,754
Johnson & Johnson 676,600 33,661
Merck & Co., Inc. 443,400 35,139
Pfizer, Inc. 296,900 24,606
- - Tenet Healthcare Corp. 149,400 3,268
United States Surgical Corp. 287,200 11,309
------------
141,033
------------
TECHNOLOGY (6.9%)
- - Apple Computer, Inc. 158,800 3,295
- - Cisco Systems, Inc. 56,000 3,563
- - Compaq Computer Corp. 266,200 19,765
- - DSC Communications Corp. 147,200 2,631
Harris Corp. 20,700 1,421
Hewlett-Packard Co. 225,600 11,336
- - Input/Output, Inc. 344,000 6,364
Intel Corp. 82,200 10,758
Lucent Technologies, Inc. 16,431 760
- - Microsoft Corp. 41,700 3,445
Moore Corp. Ltd. 437,700 8,918
Pitney Bowes, Inc. 37,000 2,017
- - Storage Technology Corp. 42,800 2,038
- - Sun Microsystems, Inc. 415,200 10,639
- - Western Digital Corp. 2,800 159
- - Xerox Corp. 35,000 1,842
------------
88,951
------------
TRANSPORT & SERVICES (1.4%)
- - AMR Corp. 78,600 6,927
CSX Corp. 160,600 6,785
Union Pacific Corp. 60,100 3,613
- - USAir Group, Inc. 9,300 217
- - Yellow Corp. 78,200 1,124
18,666
UTILITIES (8.7%)
AT&T Corp. 256,100 11,140
Bell Atlantic Corp. 224,000 14,504
BellSouth Corp. 364,400 14,713
Consolidated Natural Gas Co. 6,800 376
Entergy Corp. 313,700 8,705
GTE Corp. 387,400 17,627
NorAm Energy Corp. 208,600 3,207
PacifiCorp 143,800 2,948
Peoples Energy Corp. 45,100 1,528
Public Service Enterprise
Group Inc. 271,800 7,407
Sprint Corp. 519,200 20,703
Unicom Corp. 351,000 9,521
------------
112,379
------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS (1.2%)
- - Accustaff, Inc. 94,000 1,986
Loews Corp. 63,600 5,994
- - Robert Half International, Inc. 12,100 416
Service Corp. International 258,200 7,230
------------
15,626
------------
- ---------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $966,917) 1,229,239
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (4.7%)
- ---------------------------------------------------------------------------------------
U.S. Treasury Bill--Note E
5.25%, 3/20/97 $ 2,000 1,979
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97 57,948 57,948
- ---------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $59,927) 59,927
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(COST $1,026,844) 1,289,166
- ---------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- ---------------------------------------------------------------------------------------
Other Assets--Note C 8,937
Liabilities (12,688)
------------
(3,751)
------------
- ---------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------
Applicable to 57,824,798 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,285,415
------------
=======================================================================================
NET ASSET VALUE PER SHARE $22.23
=======================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income Producing Security.
(1)The combined market value of common stocks and
S&P 500 Index futures contracts represents 99.5%
of net assets.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note A $ 971,415 $16.80
Undistributed Net Investment
Income--Notes A and D 434 .01
Accumulated Net Realized
Gains--Note D 50,674 .87
Unrealized Appreciation--Note E
Investment Securities 262,322 4.54
Futures Contracts 570 .01
- ---------------------------------------------------------------------------------------
NET ASSETS $1,285,415 $22.23
=======================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
QUANTITATIVE PORTFOLIOS
YEAR ENDED DECEMBER 31, 1996
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 23,253
Interest 2,642
-------------
Total Income 25,895
-------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,646
Performance Adjustment (429)
The Vanguard Group--Note C
Management and Administrative 2,549
Marketing and Distribution 246
Taxes (other than income taxes) 76
Custodian Fees 22
Auditing Fees 9
Shareholders' Reports 55
Annual Meeting and Proxy Costs 16
Directors' Fees and Expenses 3
-------------
Total Expenses 4,193
Expenses Paid Indirectly--Note C (104)
-------------
Net Expenses 4,089
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 21,806
- --------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 126,372
Futures Contracts 5,671
- --------------------------------------------------------------------------------------
REALIZED NET GAIN 132,043
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 76,337
Futures Contracts 844
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 77,181
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $231,030
======================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
QUANTITATIVE PORTFOLIOS
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 21,806 $ 16,680
Realized Net Gain 132,043 54,270
Change in Unrealized Appreciation (Depreciation) 77,181 150,960
-------------------------------
Net Increase in Net Assets Resulting from
Operations 231,030 221,910
-------------------------------
DISTRIBUTIONS
Net Investment Income (21,371) (17,520)
Realized Capital Gain (96,032) (31,764)
-------------------------------
Total Distributions (117,403) (49,284)
-------------------------------
NET EQUALIZATION CREDITS--Note A -- 1,046
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 352,761 204,633
Issued in Lieu of Cash Distributions 112,927 47,452
Redeemed (203,347) (112,359)
-------------------------------
Net Increase from Capital Share Transactions 262,341 139,726
- --------------------------------------------------------------------------------------
Total Increase 375,968 313,398
- --------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 909,447 596,049
End of Year $1,285,415 $909,447
======================================================================================
(1)Shares Issued (Redeemed)
Issued 16,557 11,067
Issued in Lieu of Cash Distributions 5,223 2,450
Redeemed (9,549) (6,226)
-------------------------------
Net Increase in Shares Outstanding 12,231 7,291
======================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
QUANTITATIVE PORTFOLIOS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.95 $15.56 $16.45 $16.30 $16.32
- -------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .41 .41 .40 .40 .44
Net Realized and Unrealized Gain (Loss)
on Investments 4.09 5.14 (.50) 1.83 .69
----------------------------------------------------------
Total from Investment Operations 4.50 5.55 (.10) 2.23 1.13
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.40) (.42) (.39) (.39) (.44)
Distributions from Realized Capital
Gains (1.82) (.74) (.40) (1.69) (.71)
----------------------------------------------------------
Total Distributions (2.22) (1.16) (.79) (2.08) (1.15)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.23 $19.95 $15.56 $16.45 $16.30
=======================================================================================================
TOTAL RETURN 23.06% 35.93% -0.61% 13.83% 7.01%
=======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,285 $909 $596 $531 $416
Ratio of Total Expenses to Average
Net Assets 0.38% 0.47% 0.48% 0.50% 0.40%
Ratio of Net Investment Income to
Average Net Assets 1.97% 2.25% 2.50% 2.22% 2.67%
Portfolio Turnover Rate 75% 59% 71% 85% 51%
Average Commission Rate Paid $.0333 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Quantitative Portfolios is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Bonds, and temporary cash investments
acquired more than 60 days to maturity, are valued using the latest bid prices
or using valuations based on 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: Prior to January 1996, the Fund followed 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, was credited or charged to
undistributed net investment income. As a result, undistributed income per
share was unaffected by capital share transactions. As of January 1, 1996, the
Fund has discontinued equalization accounting and has reclassified accumulated
net equalization credits of $6,114,000 from undistributed net investment income
to paid in capital. This reclassification has no effect on the Fund's net
assets, results of operations, or net asset value per share.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
5. FUTURES: The Fund uses S&P 500 Index futures contracts to a limited
extent, with the objectives of maintaining full exposure to the stock market
while maintaining liquidity. The Fund may purchase or sell futures contracts to
achieve a desired level of investment, whether to accommodate portfolio
turnover or cash flows from capital share transactions. 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 at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
17
<PAGE> 20
B. Under a contract that expires March 31, 1998, the Fund pays Franklin
Portfolio Associates an investment advisory fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the S&P 500 Index. For the year
ended December 31, 1996, the advisory fee represented an effective annual basic
rate of 0.15% of the Fund's average net assets before a decrease of $429,000
(0.04%) based on performance. The basic fee reflects a fee waiver of $31,000
for the period January 1, 1996, to March 31, 1996.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At December 31,
1996, the Fund had contributed capital of $116,000 to Vanguard (included in
Other Assets), representing 0.6% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended December 31, 1996, these arrangements reduced the Fund's expenses by
$104,000 (0.01% of average net assets).
D. During the year ended December 31, 1996, the Fund purchased $954,200,000 of
investment securities and sold $796,547,000 of investment securities, not
counting U.S. government securities and temporary cash investments. Gains of
$3,388,000 on securities held for less than one year are treated as ordinary
income for tax purposes and have been included in income dividends to
shareholders; accordingly, such gains have been reclassified from accumulated
net realized gains to undistributed net investment income.
E. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $262,322,000,
consisting of unrealized gains of $274,141,000 on securities that had risen in
value since their purchase and $11,819,000 in unrealized losses on securities
that had fallen in value since their purchase.
At December 31, 1996, the aggregate settlement value of open S&P 500 Index
futures contracts expiring through March 1997, the unrealized appreciation on
those contracts, and the market value of U.S. Treasury bills deposited as
initial margin for those contracts were $50,254,000, $570,000, and $1,979,000,
respectively. Unrealized appreciation on open futures contracts is required to
be treated as realized gain for federal income tax purposes.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
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, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, 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 at December 31, 1996 by
correspondence with the custodian and, with respect to unsettled securities
transactions, the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
19
<PAGE> 22
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD QUANTITATIVE PORTFOLIOS
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $105,420,000 as capital gain dividends (from net
long-term capital gains), of which $67,486,000 was distributed to shareholders
in December 1996 and $37,934,000 will be distributed in March 1997.
For corporate shareholders, 44.7% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
20
<PAGE> 23
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
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 Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, 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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[VANGUARD LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard Funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 24
[PHOTO]
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 Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q930-12/96
