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[PHOTO]
VANGUARD
GROWTH AND INCOME
PORTFOLIO
Semiannual Report
June 30, 1997
[THE VANGUARD GROUP LOGO]
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[PHOTO]
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; 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.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
7
Financial
Statements
8
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
The stock market climbed to new heights during the first half of 1997.
Vanguard Growth and Income Portfolio earned a return of +19.0% during the
six-month period, nicely outpacing the average competing fund but falling a bit
short of our unmanaged market benchmark.
The table below presents the Portfolio's total return (capital change plus
reinvested dividends) and those of the unmanaged Standard & Poor's 500
Composite Stock Price Index and the average value (growth and income) mutual
fund.
The Portfolio's total return is based on an increase in net asset value
from $22.23 per share on December 31, 1996, to $25.33 per share on June 30,
1997, with the latter figure adjusted for dividends of $0.16 per share paid
from net investment income and distributions totaling $0.86 per share paid from
net realized capital gains.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
JUNE 30, 1997
- --------------------------------------------------------------
<S> <C>
Vanguard Growth and Income
Portfolio* +19.0%
- --------------------------------------------------------------
Average Value Fund +16.0%
- --------------------------------------------------------------
S&P 500 Index +20.6%
- --------------------------------------------------------------
</TABLE>
*Known as Vanguard Quantitative Portfolios prior to April 30, 1997.
THE PERIOD IN REVIEW
A nearly perfect climate for common stocks--strong economic growth, rising
corporate profits, and decelerating inflation--prevailed during the six months
ended June 30. While the market's rising tide lifted all boats,
large-capitalization growth stocks rose the most. The record-setting advance
was interrupted by a decline of nearly -10% in the S&P 500 Index during the
seven weeks following February 18. By early May, however, the market had
resumed its ascent into record territory.
Jitters about interest rates and inflation were the apparent causes of the
brief slide. Although the Federal Reserve Board raised its target for the
federal funds rate by a quarter-point to 5.50% on March 25, short-term interest
rates ended the period where they began it (5.17% for 90-day U.S. Treasury
bills). Longer-term rates were up only slightly (less than one-quarter
percentage point) on balance during the first half of 1997. The stock market's
strong rebound in the second quarter stemmed from a combination of factors,
including strong corporate earnings reports, a lessening of inflation fears,
and an easing in interest rates. Whatever their causes, the price fluctuations
served as a clear reminder of the volatility that is very much a part of
investing in stocks.
Our Portfolio's return, while 1.6 percentage points behind the +20.6%
return of the S&P 500 Index, was 3.0 points better than the average competing
fund. The chief reason the Growth and Income Portfolio and most of our
competitors trailed the Index was the market's extreme tilt toward very
large-capitalization growth stocks.
One indication of this bias was that the return on the S&P 500 Index was
nearly double the +10.6% return on the rest of the stock market (as represented
by the Wilshire 4500 Equity Index). Even within the S&P 500 Index there was a
powerful bias toward big stocks: The 25 largest stocks in the Index returned
+26.5% while the 475 others provided a return of +17.6%. In this "bigger was
better" environment, your Portfolio was at a
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disadvantage versus the Index because the average market capitalization of our
holdings ($21.0 billion) was well below that of the S&P 500 Index ($32.9
billion).
The market also favored growth stocks during the period. The growth
component of the S&P 500 Index outpaced the value component by a wide margin
(+24.6% versus +16.5%). Growth stocks represent 44% of our Portfolio, but of
course are defined as 50% of the value of the Standard & Poor's Index. Thus, we
are more heavily weighted toward value stocks (those characterized by
relatively low prices in relation to earnings, dividends, and book value).
Ironically, the Portfolio's edge of 3.0 percentage points over the average
competing fund during the six months was due in part to the market's large-cap
bias, which hurt our performance relative to the Index. Many funds in the value
category invest more heavily than our Portfolio in mid- and
small-capitalization stocks, a factor that hurt their performance relative to
ours. Our lower operating expenses (our annual expense ratio is about 0.40% of
average net assets versus approximately 1.20% for the average value fund) also
helped us to outperform our average competitor.
IN SUMMARY
The extraordinary bull market for U.S. stocks that began almost 15 years ago
has amply demonstrated the rewards of long-term investing. Risk, the
inseparable companion of reward, may not be so apparent after such a period.
Yet investors disregard risk at their peril. So we hope that the sizable,
sudden fluctuations in the stock market during the first half of 1997
reinforced two key messages that we have repeatedly stressed in these Reports
to you.
The first message, of course, concerns the importance of holding a
balanced portfolio of stock funds, bond funds, and money market funds in
proportions appropriate to your financial situation, tolerance for risk, and
investment objectives. By making it easier to ride out episodes of market
volatility, a balanced portfolio helps investors to adhere to our second
message: Always "stay the course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
July 16, 1997
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1997
U.S. EQUITY MARKETS
As the economy continued to grow while the rate of inflation did not, a robust
market provided solid gains to investors in U.S. common stocks during the first
half of 1997. The best performers were primarily larger-capitalization issues,
although the small-company indexes exhibited some strength in the final two
months of the period. Over the half-year, the Standard & Poor's 500 Composite
Stock Price Index gained 20.6%, fueled by a 10.8% boost since the end of April.
Reflecting the gains among smaller companies, the Russell 2000 Index posted a
10.2% increase for the six-month period, driven by an 11.1% jump in May and a
4.3% rise in June. It was particularly noteworthy that the recent small-cap
gains were led by small growth stocks, the worst segment of the U.S. market
during the past 12 months. This group has surged 17.6% since the end of March,
although at the half-year's end it still lagged the S&P 500 Index by a sizable
margin (5.2% versus 20.6%).
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year, and from a widespread confidence reflected
in increased price/earnings ratios. The strength in earnings, the expectation
that income will continue to increase at an attractive pace, and the further
conviction that inflation is not a problem helped stocks to continue to produce
solid gains in the fiscal period. What's more, earnings have shown not only
good strength but remarkable consistency in beating the consensus forecasts of
Wall Street analysts.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997
------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 20.6% 34.7% 19.8%
Russell 2000 Index 10.2 16.3 17.9
MSCI EAFE Index 11.4 13.2 13.2
- --------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.1% 8.2% 7.1%
Lehman 10-Year Municipal
Bond Index 3.3 8.3 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.5
- --------------------------------------------------------------------------
OTHER
Consumer Price Index 1.1% 2.3% 2.7%
- --------------------------------------------------------------------------
</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the health-care sector (up 31.4%) and the consumer-staples sector (up
23.9%). By contrast, numerous uncertainties for utilities caused the issues in
that sector to lag the broad market, although, on an absolute basis, their 8.2%
return over six months is quite good.
U.S. FIXED-INCOME MARKETS
The modest rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased from
6.42% at the end of December to 6.97% by the middle of April. In the following
weeks, economic reports indicated a slowing in economic growth and further
reduced fears of an increase in inflation. This news helped interest rates fall
to 6.50% by the end of June.
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Fueled by robust consumer spending, the U.S. economy expanded at a
remarkable 5.8% rate in the first three months of 1997. Reflecting the vibrant
economy, the nation's unemployment rate stood at 5.0% in June. Strong economic
growth and tight labor markets have often led to rising inflation because of
increased demand for goods and services. With this in mind, the Federal Reserve
raised its federal funds interest rate target by 0.25% on March 25 in a
"preemptive" strike against mounting inflationary pressures. Observed price
increases have been subdued in recent months, however. Wholesale prices have
fallen in each of the first six months of 1997, and so far this year consumer
prices have risen at a slower pace than last year.
With interest rates very close to year-end levels, bond investors have
fared reasonably well during the past six months, as illustrated by the 3.1%
return of the Lehman Brothers Aggregate Bond Index. Investors who favored
shorter-maturity and lower-quality issues achieved somewhat better returns.
Mortgage-backed securities continued to perform well because refinancing
activity has been reduced to historically low levels as interest rates have
risen. Municipal issues also tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors received fairly good returns over the past six months.
As measured by the broad Morgan Stanley Capital International Europe,
Australasia, Far East Index, foreign markets gained 11.4%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, returning 11.1% in May and 7.5% in June to
U.S. investors. Better tone in the economy, plus strong earnings reported by
export-oriented companies benefiting from the weak yen, gave Japan a
long-awaited boost. For the six months, the Japanese market is up 9.2%. The
competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 17.0% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. For the six months, Europe gained 24.8%
in local currencies, which a strong dollar trimmed to 14.4% for U.S.
investors.
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[PHOTO]
REPORT FROM THE ADVISER
We are pleased to report our investment results for the six months
ended June 30, 1997. The Portfolio's total return lagged that of the unmanaged
Standard & Poor's 500 Composite Stock Price Index but exceeded that of the
average general value (growth and income) fund.
Our return of 19.0% during the first half of the year placed the
Portfolio in the top 25% of Morningstar's growth and income fund group, ranking
125th out of 566 funds. Long-term comparisons are even more favorable, as the
table below shows.
Our results in the first half of the year lagged the S&P 500 Index
mainly due to the continued dominance of the largest securities. The largest 25
stocks, by market capitalization, in the S&P 500 Index on December 31, 1996,
had a total return of 26.5% in the ensuing six months. The full Index itself
returned "only" 20.6%. Most actively managed portfolios have trouble matching
the Index when its largest components are driving performance.
<TABLE>
<CAPTION>
- --------------------------------------------
RANK OF VANGUARD GROWTH AND INCOME PORTFOLIO
AMONG GROWTH AND INCOME FUNDS
THROUGH JUNE 30, 1997
- --------------------------------------------
<S> <C>
Last 10 years 12th out of 126
Last 5 years 26th out of 224
Last 3 years 57th out of 349
Last 1 year 115th out of 536
Year to date 125th out of 566
- --------------------------------------------
</TABLE>
Source: Morningstar, Inc.
We build and maintain our Portfolio by making a series of analytical
measurements on a large universe of securities. Our attempts to identify
undervalued securities use three basic types of yardsticks:
- Fundamental momentum measures. These analytical methods are directed
toward identifying 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.
Vanguard Growth and Income Portfolio uses these measures of value in
developing investment strategies. We believe that using multiple measures to
select securities will help to deliver consistent results and that the
long-term performance comparisons lend credence to our view. Each method of
determining value contributed to our above-peer-group performance in the first
half of 1997.
As mentioned in our Report to you six months ago, we have slightly
increased the "bets" we make versus the S&P 500 Index by taking moderately
larger positions in individual securities relative to their weightings in the
Index. We believe this will cause only a negligible increase in the volatility
of our returns versus those of the Index.
We repeat a point we try to make in every shareholder report: We are
long-term investors. We do not expect to be near the top of a list of equity
funds for every short-term period of comparison. We are, of course, happy when
this is the case. Our goal, however, is to be at the top of these lists over
the long term. Our
INVESTMENT PHILOSOPHY
The Portfolio 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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investors should have a long-range perspective and a desire for exposure to
equities. We expect to be fully invested as a matter of investment policy. Our
goal is to provide superior equity returns over extended periods.
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 that our past success illustrates the effectiveness of the
Franklin game plan, which is to seek 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 that it will continue
to make Vanguard Growth and Income Portfolio an attractive option for equity
investors.
John Nagorniak
Franklin Portfolio Associates
July 8, 1997
6
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
GROWTH AND INCOME PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 10, 1986-JUNE 30, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------
GROWTH AND INCOME PORTFOLIO 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
1997* 18.3 0.7 19.0 20.6
- ----------------------------------------------
</TABLE>
*Six months ended June 30, 1997.
See Financial Highlights table on page 13 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Portfolio 12/10/86 33.65% 19.78% 11.50% 3.03% 14.53%
- -------------------------------------------------------------------------------------------
</TABLE>
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[PHOTO]
FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Portfolio'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 Portfolio's Net Assets. Finally, Net Assets are divided by the outstanding
shares of the Portfolio 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 Portfolio'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 Portfolio 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 Portfolio's
investments and their cost, and reflects the gains (losses) that would be
realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------
COMMON STOCKS (94.7%)(1)
- ---------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (2.4%)
Ford Motor Co. 775,600 $ 29,279
- - Halter Marine Group, Inc. 13,502 324
Union Pacific Corp. 103,000 7,262
- - Yellow Corp. 78,200 1,740
---------
38,605
---------
CONSUMER DISCRETIONARY (13.1%)
- - AccuStaff, Inc. 94,000 2,227
- - Costco Cos., Inc. 342,900 11,273
Dayton-Hudson Corp. 768,100 40,853
Deluxe Corp. 106,400 3,631
The Walt Disney Co. 261,600 20,993
- - Federated Department Stores 258,600 8,986
Gannett Co., Inc. 52,400 5,175
- - HFS Inc. 261,000 15,138
Home Depot, Inc. 344,200 23,728
King World Productions, Inc. 350,500 12,268
Knight-Ridder, Inc. 157,200 7,713
Liz Claiborne, Inc. 73,600 3,432
NIKE, Inc. Class B 24,400 1,424
- - Robert Half International, Inc. 12,100 570
Russell Corp. 95,100 2,817
- - Ryan's Family Steak Houses, Inc. 431,700 3,670
Service Corp. International 212,500 6,986
TJX Cos., Inc. 250,200 6,599
Tribune Co. 237,400 11,410
Wal-Mart Stores, Inc. 368,200 12,450
- - Woolworth Corp. 587,000 14,088
---------
215,431
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CONSUMER STAPLES (5.5%)
The Coca-Cola Co. 358,900 24,226
Adolph Coors Co. Class B 83,200 2,194
Gillette Co. 55,600 5,268
Great Atlantic & Pacific
Tea Co., Inc. 100,400 2,730
Interstate Bakeries 70,900 4,205
Philip Morris Cos., Inc. 567,300 25,174
Procter & Gamble Co. 85,184 12,032
SuperValu Inc. 430,100 14,839
---------
90,668
---------
FINANCIAL SERVICES (18.6%)
Aegon NV ARS 62,209 4,358
H.F. Ahmanson & Co. 289,500 12,449
Allstate Corp. 70,800 5,168
American International
Group, Inc. 380,050 56,770
Automatic Data Processing, Inc. 133,300 6,265
Banc One Corp. 78,200 3,788
BankAmerica Corp. 612,400 39,538
Bankers Trust New York Corp. 75,400 6,560
CIGNA Corp. 212,900 37,790
Conseco Inc. 15,800 585
The Dun & Bradstreet Corp. 201,700 5,295
First Chicago NBD Corp. 83,350 5,043
First Union Corp. 58,000 5,365
Golden West Financial Corp. 6,200 434
Green Tree Financial Corp. 113,100 4,029
J.P. Morgan & Co., Inc. 146,300 15,270
Morgan Stanley, Dean Witter,
Discover and Co. 341,055 14,687
NationsBank Corp. 214,900 13,861
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
PNC Bank Corp. 143,800 $ 5,986
- - Providian Financial Corp. 143,200 4,600
SouthTrust Corp. 9,000 372
Torchmark Corp. 30,600 2,180
Travelers Group Inc. 888,700 56,044
---------
306,437
---------
HEALTH CARE (11.9%)
Abbott Laboratories 303,240 20,241
- - ALZA Corp. 296,600 8,601
American Home Products Corp. 159,800 12,225
Amgen, Inc. 128,700 7,473
- - Beverly Enterprises, Inc. 258,300 4,197
Cardinal Health, Inc. 63,900 3,658
Columbia/HCA Healthcare Corp. 235,100 9,242
- - HEALTHSOUTH Corp. 208,000 5,187
Johnson & Johnson 638,800 41,123
Merck & Co., Inc. 573,900 59,399
Shared Medical Systems Corp. 55,300 2,972
U.S. Surgical Corp. 332,600 12,389
- - Wellpoint Health Networks Inc.
Class A 192,200 8,817
---------
195,524
---------
INTEGRATED OILS (6.0%)
Atlantic Richfield Co. 176,200 12,422
Exxon Corp. 544,800 33,505
Pennzoil Co. 286,200 21,966
Phillips Petroleum Co. 75,900 3,321
Royal Dutch Petroleum Co. ADR 275,600 14,986
Texaco Inc. 53,500 5,818
USX-Marathon Group 210,600 6,081
---------
98,099
---------
OTHER ENERGY (3.2%)
Baker Hughes, Inc. 192,800 7,459
Burlington Resources, Inc. 483,200 21,321
Halliburton Co. 126,300 10,009
Helmerich & Payne, Inc. 78,300 4,512
- - Western Atlas, Inc. 125,000 9,156
---------
52,457
---------
MATERIALS & PROCESSING (6.7%)
Archer-Daniels-Midland Co. 461,680 10,850
Avery Dennison Corp. 241,800 9,702
Centex Corp. 268,700 10,916
Crown Cork & Seal Co., Inc. 112,100 5,990
Dow Chemical Co. 249,700 21,755
Martin Marietta Materials, Inc. 71,847 2,326
Moore Corp. Ltd. 586,700 11,551
Nucor Corp. 86,500 4,887
Phelps Dodge Corp. 71,200 6,065
Praxair, Inc. 107,400 6,014
Sigma-Aldrich Corp. 44,400 1,551
USX-U.S. Steel Group 526,400 18,457
---------
110,064
---------
PRODUCER DURABLES (4.2%)
Caterpillar, Inc. 114,000 12,241
Dover Corp. 30,200 1,857
Ingersoll-Rand Co. 387,100 23,903
Lockheed Martin Corp. 69,478 7,195
Oakwood Homes Corp. 100,200 2,405
Raychem Corp. 204,900 15,239
Snap-On Inc. 131,100 5,162
Thomas & Betts Corp. 21,200 1,114
---------
69,116
---------
TECHNOLOGY (12.2%)
- - Compaq Computer Corp. 571,900 56,761
- - CompUSA, Inc. 61,600 1,324
General Dynamics Corp. 124,900 9,368
Hewlett-Packard Co. 219,000 12,264
Intel Corp. 356,100 50,410
Lucent Technologies, Inc. 313,731 22,608
- - NCR Corp. 16,006 476
- - Oracle Corp. 254,900 12,825
- - Seagate Technology 34,300 1,207
- - Storage Technology Corp. 42,800 1,905
- - Sun Microsystems, Inc. 479,200 17,820
- - Tech Data Corp. 264,400 8,296
- - Western Digital Corp. 142,000 4,491
---------
199,755
---------
UTILITIES (7.4%)
- - AirTouch Communications, Inc. 318,800 8,727
Bell Atlantic Corp. 82,000 6,222
Consolidated Edison Co.
of New York, Inc. 101,600 2,991
Entergy Corp. 514,800 14,093
Houston Industries, Inc. 930,400 19,945
Northern States Power Co. 240,800 12,461
PP&L Resources Inc. 447,500 8,922
PacifiCorp 720,300 15,847
Peoples Energy Corp. 45,100 1,688
Public Service Enterprise
Group Inc. 889,900 22,248
Unicom Corp. 351,000 7,810
---------
120,954
---------
OTHER (3.5%)
Cooper Industries, Inc. 214,800 10,686
General Electric Co. 690,600 45,148
Trinity Industries, Inc. 38,800 1,232
---------
57,066
---------
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,157,466) 1,554,176
- ---------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.1%)
- ---------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
(2)5.28%, 9/18/97 $ 2,150 2,126
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.93%, 7/1/97 97,104 97,104
- ---------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $99,231) 99,230
- ---------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(COST $1,256,697) 1,653,406
- ---------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO (000)
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.8%)
- ---------------------------------------------------------
<S> <C>
Other Assets--Note C $ 23,286
Liabilities (36,355)
---------
(13,069)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 64,753,947 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,640,337
=========================================================
NET ASSET VALUE PER SHARE $25.33
=========================================================
</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 98.4%
of net assets.
(2)Security segregated as initial margin for open
futures contracts.
ADR--American Depository Receipt.
ARS--American Registered Share.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,135,232 $17.53
Undistributed Net
Investment Income 3,966 .06
Accumulated Net
Realized Gains 103,744 1.60
Unrealized Appreciation--Note E
Investment Securities 396,709 6.13
Futures Contracts 686 .01
- -------------------------------------------------------------
NET ASSETS $1,640,337 $25.33
=============================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. 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 Portfolio invested in futures contracts during the period,
the results of these investments are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
SIX MONTHS ENDED JUNE 30, 1997
(000)
- ----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 14,373
Interest 2,024
--------
Total Income 16,397
--------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 998
Performance Adjustment (257)
The Vanguard Group--Note C
Management and Administrative 1,697
Marketing and Distribution 173
Taxes (other than income taxes) 53
Custodian Fees 1
Auditing Fees 4
Shareholders' Reports 29
Annual Meeting and Proxy Costs 1
Directors' Fees and Expenses 2
--------
Total Expenses 2,701
Expenses Paid Indirectly--Note C (58)
--------
Net Expenses 2,643
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 13,754
- ----------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 96,453
Futures Contracts 8,601
- ----------------------------------------------------------------------
REALIZED NET GAIN 105,054
- ----------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 134,387
Futures Contracts 116
- ----------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 134,503
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $253,311
======================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Portfolio'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 Portfolio'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 Portfolio, 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>
- -------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
------------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1997 DEC. 31, 1996
(000) (000)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 13,754 $ 21,806
Realized Net Gain 105,054 132,043
Change in Unrealized Appreciation (Depreciation) 134,503 77,181
---------------------------------
Net Increase in Net Assets Resulting from Operations 253,311 231,030
---------------------------------
DISTRIBUTIONS
Net Investment Income (10,222) (21,371)
Realized Capital Gain (51,984) (96,032)
---------------------------------
Total Distributions (62,206) (117,403)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 254,041 352,761
Issued in Lieu of Cash Distributions 59,914 112,927
Redeemed (150,138) (203,347)
---------------------------------
Net Increase from Capital Share Transactions 163,817 262,341
- -------------------------------------------------------------------------------------------
Total Increase 354,922 375,968
- -------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,285,415 909,447
End of Period $1,640,337 $1,285,415
===========================================================================================
(1)Shares Issued (Redeemed)
Issued 10,780 16,557
Issued in Lieu of Cash Distributions 2,591 5,223
Redeemed (6,442) (9,549)
---------------------------------
Net Increase in Shares Outstanding 6,929 12,231
===========================================================================================
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
This table summarizes the Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio'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 Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio 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 Portfolio for one year. Finally, the table lists the Portfolio'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>
- ---------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.23 $19.95 $15.56 $16.45 $16.30 $16.32
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .41 .41 .40 .40 .44
Net Realized and Unrealized Gain (Loss)
on Investments 3.91 4.09 5.14 (.50) 1.83 .69
-----------------------------------------------------------
Total from Investment Operations 4.12 4.50 5.55 (.10) 2.23 1.13
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.40) (.42) (.39) (.39) (.44)
Distributions from Realized Capital Gains (.86) (1.82) (.74) (.40) (1.69) (.71)
-----------------------------------------------------------
Total Distributions (1.02) (2.22) (1.16) (.79) (2.08) (1.15)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $25.33 $22.23 $19.95 $15.56 $16.45 $16.30
===============================================================================================================
TOTAL RETURN 19.00% 23.06% 35.93% -0.61% 13.83% 7.01%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,640 $1,285 $909 $596 $531 $416
Ratio of Total Expenses to
Average Net Assets 0.38%* 0.38% 0.47% 0.48% 0.50% 0.40%
Ratio of Net Investment Income to
Average Net Assets 1.91%* 1.97% 2.25% 2.50% 2.22% 2.67%
Portfolio Turnover Rate 82%* 75% 59% 71% 85% 51%
Average Commission Rate Paid $.0373 $.0333 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth and Income Portfolio (formerly 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 Portfolio 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 Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Portfolio 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 Portfolio 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 Portfolio 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).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Franklin Portfolio Associates provides investment advisory services to the
Portfolio for a 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 six months ended June 30, 1997, the
advisory fee represented an effective annual basic rate of 0.14% of the
Portfolio's average net assets before a decrease of $257,000 (an annual rate of
0.04%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Portfolio under methods
14
<PAGE> 17
approved by the board of directors. At June 30, 1997, the Portfolio had
contributed capital of $119,000 to Vanguard (included in Other Assets),
representing 0.6% of Vanguard's capitalization. The Portfolio's directors and
officers are also directors and officers of Vanguard.
Vanguard has asked the Portfolio'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 Portfolio part of the commissions generated.
Such rebates are used solely to reduce the Portfolio's administrative expenses.
For the six months ended June 30, 1997, these arrangements reduced the
Portfolio's expenses by $58,000 (an annual rate of 0.01% of average net
assets).
D. During the six months ended June 30, 1997, the Portfolio purchased
$651,118,000 of investment securities and sold $556,935,000 of investment
securities, other than U.S. government securities and temporary cash
investments.
E. At June 30, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $396,709,000,
consisting of unrealized gains of $405,793,000 on securities that had risen in
value since their purchase and $9,084,000 in unrealized losses on securities
that had fallen in value since their purchase.
At June 30, 1997, the aggregate settlement value of open futures contracts
expiring in September 1997 and the unrealized appreciation were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(000)
---------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- ---------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 135 $60,092 $686
- ---------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
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.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder,
Inc., and Massachusetts Mutual Life Insurance Co.; Trustee Emerita of
Wellesley College.
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 Investor Group.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[THE VANGUARD GROUP 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
http://www.vanguard.com [email protected]
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 you invest or send money. Prospectuses may
be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 19
[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 Growth and Income Portfolio
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 International Value 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)
Q932-6/97
