<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT (NO. 33-8553) UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
/X/
Post-Effective Amendment No. 12
/X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 14
/X/
VANGUARD QUANTITATIVE
PORTFOLIOS, INC.
(Exact Name of Registrant as Specified in Charter)
P.O. Box 2600,
Valley Forge, PA 19482
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
Raymond J. Klapinsky, Esquire
P.O. Box 876
Valley Forge, PA 19482
It is proposed that this filing become effective:
April 17, 1998, pursuant to paragraph (b) of Rule 485.
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended December 31, 1997 on March 30, 1998.
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[GRAPHIC OMITTED]
A Member of The Vanguard Group
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PROSPECTUS -- April 17, 1998
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NEW ACCOUNT INFORMATION: Investor Information Department -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: Client Services Department -- 1-800-662-2739
(CREW)
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INVESTMENT Vanguard Growth and Income Portfolio (the "Portfolio"), a
OBJECTIVE AND portfolio of Vanguard Quantitative Portfolios, Inc. (the
POLICIES "Fund"), is an open-end diversified investment company that
seeks to realize a total return (dividend income plus
capital change) greater than the return of the aggregate
U.S. stock market, as measured by the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index").
(Prior to April 30, 1997, this Portfolio was known as
Vanguard Quantitative Portfolios.) The Portfolio will hold
a broadly diversified portfolio of common stocks that in
the aggregate exhibit investment characteristics similar to
those of the S&P 500 Index. There is no assurance that the
Portfolio will achieve its stated objective. Shares of the
Portfolio are neither insured nor guaranteed by any agency
of the U.S. Government, including the FDIC.
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OPENING AN To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need
assistance in completing this Form, please call our
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000,
or $1,000 for Uniform Gifts/Transfers to Minors Act
accounts. The Portfolio is offered on a no-load basis
(i.e. there are no sales commissions or 12b-1 fees).
However, the Portfolio incurs expenses for investment
advisory, management, administrative and distribution
services.
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ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Portfolio has been filed
with the Securities and Exchange Commission. This
Statement is dated April 17, 1998 and has been
incorporated by reference into this Prospectus. A copy may
be obtained without charge by writing to the Fund, by
calling the Investor Information Department at
1-800-662-7447 or visiting the Securities and Exchange
Commission's website (www.sec.gov).
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<PAGE>
TABLE OF CONTENTS
Page
Portfolio Expenses ................... 2
Financial Highlights ................. 2
Yield and Total Return ............... 3
PORTFOLIO INFORMATION
Investment Objective ................. 4
Investment Policies .................. 4
Investment Risks ..................... 5
Who Should Invest .................... 5
Implementation of Policies ........... 6
Page
Investment Limitations ............... 8
Management of the Portfolio .......... 9
Investment Adviser ................... 9
Performance Record ................... 11
Dividends, Capital Gains and
Taxes ............................. 11
The Share Price of the Portfolio ..... 13
General Information .................. 13
Page
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares ................. 15
When Your Account Will Be
Credited .......................... 18
Selling Your Shares .................. 19
Exchanging Your Shares ............... 21
Important Information About
Telephone Transactions ............ 22
Transferring Registration ............ 23
Other Vanguard Services .............. 23
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PORTFOLIO The following table illustrates all expenses and fees that
EXPENSES you would incur as a shareholder of the Portfolio. The
expenses and fees set forth in the table are for the 1997
fiscal year.
Shareholder Transaction Expenses
-----------------------------------------------------------
Sales Load Imposed on Purchases .................... None
Sales Load Imposed on Reinvested Dividends ......... None
Redemption Fees .................................... None
Exchange Fees ...................................... None
Annual Portfolio Operating Expenses
---------------------------------------------------------------
Management & Administrative Expenses ......... 0.21%
Investment Advisory Fees ..................... 0.12
12b-1 Fees ................................... None
Other Expenses
Distribution Costs ......................... 0.02%
Miscellaneous Expenses ..................... 0.01
-----
Total Other Expenses ......................... 0.03
-----
Total Operating Expenses ................. 0.36%
=====
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Portfolio.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period. As noted in the table above, the Portfolio
charges no redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
$ 4 $12 $20 $46
This example should not be considered a representation of
past or future expenses or performance. Actual expenses may
be higher or lower than those shown.
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FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of
the five years in the period ended December 31, 1997, have
been derived from financial statements which were audited
by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. (Please note, Vanguard
Growth and Income Portfolio was previously known as
Vanguard Quantitative Portfolios.) This information should
be read in conjunction with the Fund's financial
statements and notes thereto, which, together with the
remaining portions of the Fund's 1997 Annual Report to
Shareholders, are incorporated by reference in the
Statement of Additional Information and in this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1997 Annual Report to
Shareholders. The Fund's 1997 Annual Report to
Shareholders may be obtained without charge by writing to
the Fund or by calling our Investor Information Department
at 1-800-662-7447.
2
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<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year .................................. $ 22.23 $ 19.95 $ 15.56 $ 16.45
-------- -------- -------- --------
Investment Operations
Net Investment Income ................. .41 .41 .41 .40
Net Realized and Unrealized Gain
(Loss) on Investments ................ 7.15 4.09 5.14 (.50)
-------- -------- -------- --------
Total from Investment
Operations ........................... 7.56 4.50 5.55 (.10)
- ----------------------------------------- -------- -------- -------- --------
Distributions
Dividends from Net Investment
Income ............................... (.42) (.40) (.42) (.39)
Distributions from Realized Capital
Gains ................................ (3.18) (1.82) (.74) (.40)
-------- -------- -------- --------
Total Distributions .................. (3.60) (2.22) (1.16) (.79)
- ----------------------------------------- -------- -------- -------- --------
Net Asset Value, End of Year ........... $ 26.19 $ 22.23 $ 19.95 $ 15.56
========================================= ======== ======== ======== ========
Total Return ........................... 35.59% 23.06% 35.93% (0.61)%
========================================= ======== ======== ======== ========
Ratios/Supplemental Data
Net Assets, End of Year (Millions) ..... $ 2,142 $ 1,285 $ 909 $ 596
Ratio of Total Expenses to Average
Net Assets ............................ 0.36% 0.38% 0.47% 0.48%
Ratio of Net Investment Income to
Average Net Assets .................... 1.74% 1.97% 2.25% 2.50%
Portfolio Turnover Rate ................ 66% 75% 59% 71%
Average Commission Rate Paid ........... $ .0388 $ .0333 N/A N/A
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year .................................. $ 16.30 $ 16.32 $ 13.29 $ 14.14 $ 11.08 $ 9.80
------- ------- ------- -------- ------- -------
Investment Operations
Net Investment Income ................. .40 .44 .47 .49 .43 .36
Net Realized and Unrealized Gain
(Loss) on Investments ................ 1.83 .69 3.47 (.83) 3.10 1.27
------- ------- ------- -------- ------- -------
Total from Investment
Operations ........................... 2.23 1.13 3.94 (.34) 3.53 1.63
- ----------------------------------------- ------- ------- ------- -------- ------- -------
Distributions
Dividends from Net Investment
Income ............................... (.39) (.44) (.47) (.47) (.47) (.35)
Distributions from Realized Capital
Gains ................................ (1.69) (.71) (.44) (.04) -- --
------- ------- ------- -------- ------- -------
Total Distributions .................. ( 2.08) (1.15) (.91) (.51) (.47) (.35)
- ----------------------------------------- ------- ------- ------- -------- ------- -------
Net Asset Value, End of Year ........... $ 16.45 $ 16.30 $ 16.32 $ 13.29 $ 14.14 $ 11.08
========================================= ======= ======= ======= ======== ======== =======
Total Return ........................... 13.83% 7.01% 30.29% (2.44)% 32.00% 16.80%
========================================= ======= ======= ======= ======== ======== =======
Ratios/Supplemental Data
Net Assets, End of Year (Millions) ..... $ 531 $ 416 $ 335 $ 211 $ 175 $ 144
Ratio of Total Expenses to Average Net
Assets ................................ 0.50% 0.40% 0.43% 0.48% 0.53% 0.64%
Ratio of Net Investment Income to
Average Net Assets .................... 2.22% 2.67% 2.95% 3.34% 3.35% 3.38%
Portfolio Turnover Rate ................ 85% 51% 61% 81% 78% 50%
Average Commission Rate Paid ........... N/A N/A N/A N/A N/A N/A
</TABLE>
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YIELD AND From time to time the Portfolio may advertise its yield and
TOTAL RETURN total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day yield"
of the Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts.
The yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Portfolio to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to an investor's account or the
yield reported in the Fund's Annual Report to Shareholders.
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3
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INVESTMENT The Portfolio is an open-end diversified investment
OBJECTIVE company. The objective of the Portfolio is to realize a
total investment return (dividend income plus capital
change) greater than the return of the aggregate U.S.
stock market, as measured by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). There
is no assurance that the Portfolio will achieve its stated
objective.
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INVESTMENT The Portfolio will invest in a broadly diversified
POLICIES portfolio of common stocks. At least 65% of the
The Portfolio uses Portfolio's assets will be invested in securities which
quantitative are included in the S&P 500 Index, while the balance of
techniques to the Portfolio's assets may be invested in common stocks
select common not represented in the Index. Historically, the types
stocks of securities that the Portfolio invests in have provided
capital appreciation and dividend income. The Portfolio is
managed without regard to tax ramifications.
Stocks are selected for the Portfolio so that, in the
aggregate, the investment characteristics of the Portfolio
are similar to those of the S&P 500 Index. These
characteristics include such measures as dividend yield
(before expenses), price-to-earnings ratio, "beta"
(relative volatility), return on equity, and market
price-to-book value ratio. However, while maintaining
aggregate investment characteristics similar to those of
the S&P 500 Index, the Portfolio seeks to invest in
individual common stocks -- including stocks which are not
part of the Index -- which will in the aggregate provide a
higher total return than the Index. Of course, there can be
no assurance that the Portfolio's investment performance
will match or exceed that of the S&P 500 Index.
To select stocks for the Portfolio, the Portfolio's
investment adviser first ranks a broad universe of common
stocks using several quantitative investment models. These
models are based upon such factors as measures of changes
in earnings and of relative value based on present and
historical price-to-earnings ratios and yields, as well as
dividend discount calculations based on corporate cash
flow. Once the ranking of common stocks is completed, the
adviser, using a technique known as "portfolio
optimization," then constructs a portfolio that in the
aggregate resembles the S&P 500 Index, but is weighted
towards the most attractive stocks in the universe of
stocks monitored, as determined by the quantitative models.
The Portfolio seeks to remain fully invested in common
stocks. However, the Portfolio is also authorized to invest
in certain short-term fixed income securities and in stock
index futures contracts and options to a limited extent.
See "Implementation of Policies" for a description of these
and other investment practices of the Portfolio.
The Portfolio is responsible for voting the shares of all
securities it holds.
The investment objective and policies of the Portfolio are
not fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
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4
<PAGE>
INVESTMENT RISKS As a mutual fund investing primarily in common stocks, the
Portfolio is subject to market risk -- i.e., the
The Portfolio is possibility that common stock prices will decline over
subject to market short or even extended periods. The U.S. stock market tends
risk to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to
1997, as measured by the Standard & Poor's 500 Composite
Stock Price Index:
Average Annual U.S. Stock Market Returns (1926-1997)
Over Various Time Horizons
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +13.0 +10.5 +10.9 +10.9
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.9% for all 10-year periods from 1926 to 1997. While
this average return can be used as a guide for setting
reasonable expectations for future stock market returns, it
may not be useful for forecasting future returns in any
particular period, as stock returns are quite volatile from
year to year.
This table of U.S. stock market returns should not be
viewed as a representation of future returns from the
Portfolio or the U.S. stock market. The illustrated returns
represent the historical investment performance, which may
be a poor guide to future returns. Also, stock market
indexes such as the S&P 500 are based upon unmanaged
portfolios of securities, before transaction costs and
other expenses. Such costs will reduce the relative
investment performance of the Portfolio and other "real
world" portfolios.
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WHO SHOULD The Portfolio is designed for investors whose objective is
INVEST to achieve a total return marginally superior to the
return from the S&P 500 Index with reasonable consistency
Investors seeking over time, while minimizing the risk of substantial
a "margin of underperformance during any individual year. Because
superiority" over of the risks associated the with common stock investments,
S&P 500 Index the Portfolio is intended to be a long-term investment
vehicle and is not designed to provide investors with a
means of speculating on short-term market movements.
Investors who engage in excessive account activity generate
additional costs which are borne by all of the Portfolio's
shareholders. In order to minimize such costs the Portfolio
has adopted the following policies. The Portfolio reserves
the right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment
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<PAGE>
or previous excessive trading by the investor.
Additionally, the Portfolio has adopted exchange privilege
limitations as described in the section "Exchange
Privilege Limitations." Finally, the Portfolio reserves
the right to suspend the offering of its shares.
No assurance can be given that the Portfolio will attain
its objective or that shareholders will be protected from
the risk of loss that is inherent in equity investing. All
equity portfolios are influenced by price movements in the
broad equity market. Investors may wish to reduce the
potential risk of investing in the Portfolio by purchasing
shares on a regular, periodic basis (dollar-cost averaging)
rather than making an investment in one lump sum.
Investors should not consider the Portfolio a complete
investment program, but should also maintain holdings in
investments with different risk characteristics, such as
bonds and money market instruments. Investors may also wish
to complement an investment in the Portfolio with other
types of common stock investments.
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IMPLEMENTATION The Portfolio utilizes a variety of investment practices in
OF POLICIES its effort to surpass the total return of the S&P 500 Index.
The Portfolio The Portfolio will invest at least 65% of its assets in
invests primarily securities that are included in the S&P 500 Index (the
in S&P 500 "Index"), and it is expected thatthe aggregate investment
stocks characteristics of the Portfolio will be similar to
those of the Index. The S&P 500 Index measures the total
investment return (capital change plus dividend income)
provided by a universe of 500 common stocks, weighted by
their market value. These 500 securities, most of which
trade on the New York Stock Exchange, represent
approximately 70% of the market value of all U.S. common
stocks. Because of the market-value weighting, the 50
largest companies in the Index currently account for
approximately 50% of the Index.
As of December 31, 1997, the five largest companies in the
Index were: General Electric Company (3.2%), Coca-Cola
Company (2.2%), Microsoft Corporation (2.1%), Exxon
Corporation (2.0%), and Merck & Co., Inc. (1.7%) . The
largest industry categories were: pharmaceutical companies
(9.3%), banks (8.5%), telephone companies (7.1%),
multi-sector companies (5.4%), and computer companies
(4.7%).
The S&P 500 Index is an unmanaged, statistical measure of
stock market performance. As such, it does not reflect the
actual, "real world" costs of investing in common stocks.
By contrast, the Portfolio is actively managed and
therefore incurs the normal costs of a mutual fund,
including brokerage and execution costs, advisory fees,
costs of distribution and administration, and custodial
fees.
Standard & Poor's Corporation chooses the common stocks to
be included in the S&P 500 Index solely on a statistical
basis. Inclusion of a security in the Index in
6
<PAGE>
no way implies an opinion by Standard & Poor's Corporation
as to its attractiveness or appropriateness as an
investment. Standard & Poor's Corporation is neither a
sponsor of nor in any way affiliated with the Portfolio.
The Fund may invest Although it normally seeks to remain substantially fully
in short-term fixed invested in common stocks, the Portfolio may invest
income securities temporarily in certain short-term fixed income
securities. Such securities may be used to invest
uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
The Portfolio may The Portfolio may lend its investment securities to
lend its securities qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans
of securities by the Portfolio will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
The Portfolio may The Portfolio may borrow money, subject to the limits set
borrow money forth on page 8, for temporary or emergency purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities.
Portfolio turnover Although it generally seeks to invest for the long term,
is not expected to the Portfolio retains the right to sell securities
exceed 100% irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of the
Portfolio will not exceed 100%. A turnover rate of 100%
would occur, for example, if all of the securities of the
Portfolio were replaced within one year.
Derivative Derivatives are instruments whose values are linked to or
Investing derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
The Portfolio may The Portfolio may invest in futures contracts and options,
invest in but only to a limited extent. Specifically, the Portfolio
derivative may enter into futures contracts provided that not more
securities than 5% of its assets are required as a futures contract
deposit; in addition, the Portfolio may enter into futures
contracts and options transactions only to the extent that
obligations under such contracts or transactions represent
not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
The Portfolio may use futures contracts for bona fide
"hedging" purposes. In executing a hedge, a manager sells,
for example, stock index futures to protect against a
decline in the stock market. As such, if the market drops,
the value of
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<PAGE>
the futures position will rise, thereby offsetting the
decline in value of the Portfolio's stock holdings.
Futures contracts The primary risks associated with the use of futures
and options pose contracts and options are: (i) imperfect correlation
certain risks between the change in market value of the stocks held by
the Portfolio and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date. The
risk of imperfect correlation will be minimized by
investing in those contracts whose price fluctuations are
expected to resemble those of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to
close out a futures position will be minimized by entering
into such transactions on a national exchange with an
active and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, relatively small
price movement in a futures contract may result in
immediate and substantial loss (or gain) to the investor.
When investing in futures contracts, the Portfolio will
segregate cash or other liquid portfolio securities in the
amount of the underlying obligation.
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INVESTMENT The Portfolio has adopted limitations on some of its
LIMITATIONS investment policies. Some of these limitations are that the
Portfolio will not:
The Portfolio has (a) with respect to 75% of the value of its total assets,
adopted certain purchase the securities of any issuer (except
fundamental obligations of the United States Government and its
limitations instrumentalities) if as a result the Portfolio would
hold more than 10% of the outstanding voting
securities of the issuer, or more than 5% of the value
of the Portfolio's total assets would be invested in
the securities of such issuer;
(b) borrow money, except that the Portfolio may borrow from
banks (or through reverse repurchase agreements) for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 10% of the value
of the Portfolio's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the
Portfolio's net assets, the Portfolio will not make any
additional investments; and
(c) pledge, mortgage or hypothecate any of its assets to
an extent greater than 5% of its total assets.
A complete list of the Portfolio's investment limitations
can be found in the Statement of Additional Information.
These limitations are fundamental and may be changed only
by approval of a majority of the Portfolio's shareholders.
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8
<PAGE>
MANAGEMENT OF The Portfolio is a member of The Vanguard Group of
THE PORTFOLIO Investment Companies, a family of more than 30 investment
companies with more than 95 distinct investment portfolios
Vanguard and total assets in excess of $360 billion. Through their
administers and jointly-owned subsidiary, The Vanguard Group, Inc.
distributes the ("Vanguard"), the Fund and the other funds in the Group
Fund obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1997, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
0.28% compared to an average of 1.24% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Portfolio and choose
the Fund's Officers. A list of the Directors and Officers
of the Fund and a statement of their present positions and
principal occupations during the past five years can be
found in the Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
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INVESTMENT The Fund employs Franklin Portfolio Associates LLC
ADVISER ("Associates"), Two International Place, Boston, MA
02110, as the Portfolio's investment adviser. Under an
Franklin Portfolio investment advisory agreement with the Fund dated April 1,
Associates manages 1996, Associates manages the investment and reinvestment
the Portfolio's of the Portfolio's assets and continuously reviews,
investments supervises, and directs the Portfolio's investment
program. Associates discharges its responsibilities
subject to the control of the Officers and Directors of
the Fund.
Associates is a professional investment counseling firm
which specializes in the management of common stock
portfolios through the use of quantitative investment
models. Founded in 1982, Associates, a Massachusetts
limited liability company, is a wholly-owned indirect
subsidiary of Mellon Bank Corporation that has no
affiliation to The Franklin/Templeton Group of Funds or
Franklin Resources, Inc. As of December 31, 1997,
Associates provided investment advisory services
9
<PAGE>
with respect to approximately $13.8 billion of client
assets. Associates also serves as adviser to approximately
one-third of the equity investments of Vanguard/Morgan
Growth Fund, another mutual fund member of The Vanguard
Group.
Associates employs proprietary computer models in selecting
individual equity securities and in structuring investment
portfolios for its clients, including the Portfolio. John
J. Nagorniak, President of Associates, has been designated
as the portfolio manager of the Fund, a position he has
held since the Fund's inception in December 1986; he is
responsible for overseeing the application of Associates'
quantitative techniques to the Portfolio's assets. Mr.
Nagorniak and the other investment principals of Associates
are responsible for the ongoing development and enhancement
of Associates' quantitative investment techniques.
The Portfolio pays Associates an advisory fee at the end of
each fiscal quarter, calculated by applying a quarterly
rate, based on the following annual percentage rates, to
the Portfolio's average month-end net assets for the
quarter:
Net Assets Rate
---------------------- ----
First $100 million .30%
Next $650 million .15%
Over $750 million .10%
This fee may be increased or reduced by applying an
adjustment formula based on the investment performance of
the Portfolio relative to the S&P 500 Index. For the year
ended December 31, 1997, the advisory fee represented an
effective annual basis rate of 0.13% of the Portfolio's
average net assets before a decrease of 0.01% based on
performance.
The investment advisory agreement authorizes Associates to
select brokers and dealers to execute purchases and sales
of the Portfolio's securities, and directs Associates to
use its best efforts to obtain the best available price and
most favorable execution with respect to all transactions.
The full range and quality of brokerage services are
considered in making these determinations.
The Portfolio has authorized Associates to pay higher
commissions in recognition of brokerage services felt
necessary for the achievement of better execution, provided
Associates believes this to be in the best interest of the
Portfolio. If more than one broker can obtain the best
available price and favorable execution of a transaction,
then Associates is authorized to choose a broker who, in
addition to executing the transaction, will provide
research services to Associates or the Portfolio. However,
Associates will not pay higher commissions specifically for
the purpose of obtaining research services. The Portfolio
may direct Associates to use a particular broker for
certain transactions in exchange for commission rebates or
research services provided to the Portfolio.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c)
10
<PAGE>
the continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned
because of a change in control of the adviser. Any such
change will only be made upon not less than 30 days' prior
written notice to shareholders of the Portfolio which shall
include substantially the information concerning the
adviser that would have normally been included in a proxy
statement.
- --------------------------------------------------------------------------------
PERFORMANCE The table in this section provides investment results for
RECORD the Portfolio for several periods throughout the Fund's
lifetime. (Please note, Vanguard Growth and Income
Portfolio was previously known simply as Vanguard
Quantitative Portfolios.) The results shown represent
"total return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for
the indicated periods. Also included is comparative
information with respect to the unmanaged Standard &
Poor's 500 Composite Stock Price Index, a widely-used
barometer of stock market activity, and the Consumer Price
Index, a statistical measure of changes in the prices of
goods and services. The tables do not make any allowance
for federal, state or local income taxes, which
shareholders must pay on a current basis.
The results shown should not be considered a representation
of the total return from an investment made in the
Portfolio today. This information is provided to help
investors better understand the Portfolio and may not
provide a basis for comparison with other investments or
mutual funds which use a different method to calculate
performance.
Average Annual Return for
Vanguard Growth and Income Portfolio
Vanguard Consumer
Fiscal Years Growth and S&P 500 Price
Ended 12/31/97 Income Portfolio Index Index
-------------- ---------------- ------- --------
1 Year +35.6% +33.4% +1.7%
3 Years +31.4 +31.2 +2.5
5 Years +20.7 +20.3 +2.6
10 Years +18.3 +18.1 +3.4
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL The Portfolio expects to pay dividends consisting of
GAINS AND TAXES ordinary income on a semi-annual basis. Capital gains
distributions, if any, will be made annually. The
The Portfolio pays Portfolio is managed without regard to tax ramifications.
semi-annual
dividends and any Dividend and capital gains distributions may be
capital gains automatically reinvested or received in cash. See
annually "Choosing a Distribution Option" for a description of
these distribution methods.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Portfolio
may declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
11
<PAGE>
The Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by the Portfolio from net
investment income and net short-term capital gains, whether
received in cash or reinvested in additional shares, will
be taxable to shareholders as ordinary income. For
corporate investors, dividends from net investment income
will generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of the
dividends so qualified depends on the aggregate taxable
qualifying dividend income received by the Fund from
domestic (U.S.) sources.
Distributions paid by the Portfolio from long-term capital
gains, whether received in cash or reinvested in additional
shares, are taxable as long-term capital gains, regardless
of the length of time you have owned shares in the Fund.
Long-term capital gains may be taxed at different rates
depending on how long the Fund held the securities. Capital
gains distributions are made when the Portfolio realizes
net capital gains on sales of portfolio securities during
the year. The Portfolio does not seek to realize any
particular amount of capital gains during a year; rather,
realized gains are a by-product of portfolio management
activities. Consequently, capital gains distributions may
be expected to vary considerably from year to year; there
will be no capital gains distributions in years when the
Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the capital
at work for you in the Portfolio. Also, keep in mind that
if you purchase shares in the Portfolio shortly before the
record date for a dividend or capital gains distribution, a
portion of your investment will be paid to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Portfolio will notify you annually as to the tax status
of dividend and capital gains distributions paid by the
Portfolio.
A capital gain A sale of shares of the Portfolio is a taxable event and
or loss may be may result in a capital gain or loss. A capital gain or
realized upon loss may be realized from an ordinary redemption of shares
exchange or or an exchange of shares between two mutual funds (or two
redemption portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or employer
identification number and by certifying that you are not
subject to backup withholding.
12
<PAGE>
The Portfolio has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in thatstate. In the
opinion of counsel, the shares of the Portfolio are exempt
from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Portfolio.
- --------------------------------------------------------------------------------
THE SHARE PRICE The Portfolio's share price, or "net asset value" per
OF THE PORTFOLIO share, is calculated by divid ing the total assets of the
Portfolio, less all liabilities, by the total number of
shares outstanding. The net asset value is determined as
of the close of the New York Stock Exchange (generally
4:00 p.m. Eastern time) on each day the exchange is open
for trading.
Portfolio securities for which market quotations are
readily available (includes those securities listed on
national securities exchanges, as well as those quoted on
the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such
securities which are not traded on the valuation date are
valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the
exchange where the security is primarily traded. Securities
may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities.
Short-term instruments (those acquired with remaining
maturities of 60 days or less) may be valued at cost, plus
or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on
the basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of
such securities. The prices provided by a pricing service
may be determined without regard to bid or last sale prices
of each security, but take into account institutional-size
transactions in similiar groups of securities as well as
any developments related to specific securities.
Other assets and securities for which no quotations are
readily available or which are restricted as to sale (or
resale) are valued by such methods as the Board of
Directors deems in good faith to reflect fair value.
The share price for the Portfolio can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard Funds.
- --------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of
INFORMATION Incorporation permit the Directors to issue 1,000,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering shares of one
series.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no
13
<PAGE>
preemptive rights. Such shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of Directors can elect 100%
of the Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash are held by CoreStates Bank,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------
14
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account
PURCHASING Registration Form and any required legal documentation,
SHARES indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts, $500 minimum for
an Education IRA). You must open a new Individual
Retirement Account by mail (IRAs may not be opened by
wire) using a Vanguard IRA Adoption Agreement. Your
purchase must be equal to or greater than the $1,000
minimum initial investment requirement, but no more than
$2,000 if you are making a regular IRA contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified retirement plan. If you need assistance with the
forms or have any questions about the Fund, please call
our Investor Information Department (1-800-662-7447).
Note: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
The Portfolio's shares generally are purchased at the
next-determined net asset value after your investment has
been received. The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
Purchase 1) Because of the risks associated with common stock
Restrictions investments, the Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term market movements. Consequently, the
Portfolio reserves the right to reject any specific
purchase (and exchange purchase) request. The
Portfolio also reserves the right to suspend the
offering of shares for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Portfolio. Please be sure your
purchase check is made payable to the Vanguard Group.
Additional Subsequent investments to regular accounts may be made by
Investments mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. Subsequent investments
to IRAs may be made by mail ($100 minimum) or written
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
------------------------------------------------------------
15
<PAGE>
ADDITIONAL INVESTMENTS TO
NEW ACCOUNT EXISTING ACCOUNTS
Purchasing By Mail Please include the amount
Complete and sign the of your initial Additional investments
enclosed Account investment on the should include the
Registration Form registration form, make Invest-by-Mail remittance
your check payable to The form attached to your
Vanguard Group-93 and Fund confirmation
mail to: statements. Please
make your check payable
The Vanguard Group to The Vanguard Group-93,
P.O. Box 2600 write your account number
Valley Forge, PA 19482-2600 on your check and, using
the return envelope
provided, mail to the
address indicated on the
Invest-by-Mail Form.
For express or The Vanguard Group All written requests
registered mail, 455 Devon Park Drive should be mailed to one
send to: Wayne, PA 19087-1815 of the addresses
indicated for new
accounts. Do not send
registered or express
mail to the post office
box address.
------------------------------------------------------------
Purchasing By Wire CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO. 0101 9897
ATTN: VANGUARD
Before Wiring VANGUARD GROWTH AND INCOME PORTFOLIO
Please contact ACCOUNT NUMBER
Client Services ACCOUNT REGISTRATION
(1-800-662-2739)
To assure proper receipt, please be sure your bank includes
the Fund name, the account number Vanguard has assigned to
you and the eight-digit CoreStates number. If you are
opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address
above after completing your wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the
Fund and Custodian Bank are open for business.
------------------------------------------------------------
Purchasing By Telephone exchanges are not permitted to or from
Exchange (from a non-retirement accounts in Vanguard Growth and
Vanguard account) Income Portfolio. (The Fund will accept telephone exchange
requests for retirement accounts only.) You may, however,
purchase shares of the Portfolio by exchange from another
Vanguard Fund account by providing the appropriate
information on your Account Registration Form. The Portfolio
reserves the right to refuse any exchange purchase request.
------------------------------------------------------------
Purchasing By Fund The Fund Express Special Purchase option lets you move money
Express from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment
Special Purchase option, money will be moved automatically from your bank
and Automatic account to your Vanguard account on the schedule (monthly,
Investment bimonthly
16
<PAGE>
[every other month], quarterly, semiannually or annually)
you select. To establish these Fund Express options, please
provide the appropriate information on the Account
Registration Form. We will send you a confirmation of your
Fund Express enrollment; please wait two weeks before using
the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of four distribution options:
DISTRIBUTION
OPTION 1. Automatic Reinvestment Option -- Both dividend and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected for
you automatically unless you specify one of the other
options.
2. Cash Dividend Option -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. Cash Capital Gain Option -- Your capital gains
distributions will be paid in cash and your dividends
will be reinvested in additional Fund shares.
4. All Cash Option -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
If a shareholder has chosen to receive dividend and/or
capital gains distributions in cash, and the postal or
other delivery service is unable to deliver checks to the
shareholder's address of record, we will change the
distribution option so that all dividends and other
distributions are automatically reinvested in additional
shares. We will not pay interest on uncashed distribution
checks.
In addition, an option to invest your cash dividend and/or
capital gains distributions in another Vanguard Fund
account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividend and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Portfolio is required to
distribute net capital gains and dividend income to
Investors should Portfolio shareholders. These distributions are made to all
ask about the shareholders who own Portfolio shares as of the
timing of capital distribution's record date, regardless of how long the
gains and dividend shares have been owned. Purchasing shares just prior to the
distributions record date could have a significant impact on your tax
before investing liability for the year. For example, if you purchase shares
immediately prior to the record date of a sizable capital
gain or income dividend distribution, you will be assessed
taxes on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Portfolio
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or capital gain is
reinvested in additional Portfolio shares.) While the total
value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset
17
<PAGE>
value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfolio's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
semi-annually in June and December. In addition, the
Portfolio may be required to make supplemental dividend or
capital gains distributions at some other time during the
year. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form.
Establishing If you wish to add options later, you may need to provide
Optional Vanguard with additional information and a signature
Services guarantee. Please call our Client Services Department
(1-800-662-2739) for further assistance.
Signature For our mutual protection, we may require a signature
Guarantees guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A signature
guarantee cannot be provided by a notary public.
Certificates Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace
it.
Broker/Dealer If you purchase shares in Vanguard Funds through a
Purchases registered broker/dealer or investment adviser, the
broker/dealer or adviser may charge a service fee.
Cancelling Trades The Portfolio will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic once the
trade request has been received in writing or by telephone.
Electronic You may receive a prospectus for the Fund or any of the
Prospectus Vanguard Funds in an electronic format through Vanguard's
Delivery website at www.vanguard.com. For additional information
please see "Other Vanguard Services -- Computer Access."
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is
ACCOUNT WILL BE credited. If your purchase is made by check, Federal Funds
CREDITED wire or exchange and is received by the close of trading on
the New York Stock Exchange (the "Exchange"), generally 4:00
p.m. Eastern time, your trade date is the day of receipt. If
your purchase is received after the close of the Exchange
your trade date is the next business day. Your shares are
purchased at the net asset value determined on your trade
date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent
bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
- --------------------------------------------------------------------------------
18
<PAGE>
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. (Please see "Important
Redemption Information.") You generally may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed within two business days after
the receipt of the request in Good Order. No interest will
accrue on amounts represented by uncashed redemption checks.
Selling By Mail Requests should be mailed to The Vanguard Group, Vanguard
Growth and Income Portfolio, P.O. Box 1120, Valley Forge, PA
19482-1120. (For express or registered mail, send your
request to The Vanguard Group, Vanguard Growth and Income
Portfolio, 455 Devon Park Drive, Wayne, PA 19087-1815.)
The redemption price of shares will be the Fund's net asset
value next determined after Vanguard has received all
required documents in Good Order.
------------------------------------------------------------
Definition of Good Good Order means that the request includes the following:
Order
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners exactly as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that may be
required in the case of estates, corporations, trusts and
certain other accounts.
6. Any certificates that you are holding for the account.
If you have questions about this definition as it pertains
to your request, please call our Client Services Department
(1-800-662-2739).
------------------------------------------------------------
Selling By To sell shares by telephone, you or your pre-authorized
Telephone representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
Please Note: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 15 calendar
days following any expedited address change to your
account. An expedited address change is one that is made by
telephone or in writing, without the signatures of all
account owners. Please see "Important Information About
Telephone Transactions".
------------------------------------------------------------
Selling By Fund If you select the Fund Express Automatic Withdrawal option,
Express money will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
Automatic have selected. The Special Redemption option lets you move
Withdrawal money from your Vanguard account to your bank account on
& Special an "as needed" basis. To establish these Fund Express
Redemption options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express service; please wait two weeks before
using the service.
------------------------------------------------------------
19
<PAGE>
Selling by You may sell shares by making an exchange into another
Exchange Vanguard Fund account. Exchanges may be made only by mail;
telephone exchanges between non-retirement accounts are not
accepted for the Portfolio.
------------------------------------------------------------
Important Shares purchased by check or Fund Express may be redeemed at
Redemption any time. However, your redemption proceeds will
Information not be paid until payment for the purchase is collected,
which may take up to ten calendar days.
------------------------------------------------------------
Delivery of Redemption requests received by telephone prior to the close
Redemption of trading on the Exchange are processed on the day of
Proceeds receipt and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset value
next determined after your request has been received by
Vanguard in Good Order. The Portfolio reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
------------------------------------------------------------
Vanguard's Average If you make a redemption from a qualifying account, Vanguard
Cost Statement will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Statements and Reports" for additional information.
------------------------------------------------------------
Low Balance fee Due to the relatively high cost of maintaining smaller
and Minimum accounts, the Fund will automatically deduct a $10 annual
Account Balance fee in either June or December from non-retirement accounts
Requirement with balances falling below $2,500 ($500 for Uniform
Gifts/Transfers to Minors Act accounts). The fee generally
will be waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, the Portfolio reserves the right to liquidate
any non-retirement account that is below the minimum
initial investment amount of $3,000. If at any time your
total investment does not have a value of at least $3,000,
you may be
20
<PAGE>
notified that your account is below the Portfolio's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets (i.e.,
a decline in a Portfolio's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Growth and Income Portfolio for those of
other available Vanguard funds. Exchanges to or from
Vanguard Growth and Income Portfolio may be made only by
mail. Telephone exchanges between non-retirement accounts
are not accepted for the Portfolio.
Exchanging By Mail Please be sure to include on your exchange request the name
and account number of your current Fund, the name of the
Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to The Vanguard Group, Vanguard
Growth and Income Portfolio, P.O. Box 1120, Valley Forge,
PA 19482-1120. (For express or registered mail, send your
request to The Vanguard Group, Vanguard Growth and Income
Portfolio, 455 Devon Park Drive, Wayne, PA 19087-1815.)
------------------------------------------------------------
Exchanging Online You may use your personal computer to exchange shares of
most Vanguard funds by accessing our website
(www.vanguard.com). To establish this service for your
account, you must first register through the website. We
will then send to you, by mail, an account access password
that will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or sell through
online exchange are Vanguard Index Trust, Vanguard Balanced
Index Fund, Vanguard International Equity Index Fund,
Vanguard REIT Index Portfolio, Vanguard Total International
Portfolio, and Vanguard Growth and Income Portfolio
(formerly known as Vanguard Quantitative Portfolios). These
funds do permit online exchanges within IRAs and other
retirement accounts.
------------------------------------------------------------
Important Exchange Before you make an exchange, you should consider the
Information following:
o Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
o An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
o Exchanges by telephone are accepted only if the
registrations and the taxpayer identification numbers of
the two accounts are identical.
o To exchange into an account with a different registration
(including a different name, address, or taxpayer
identification number), you must provide Vanguard with
written instructions that include the guaranteed
signatures of all current account owners.
21
<PAGE>
o The shares to be exchanged must be on deposit and not held
in certificate form.
o New accounts are not currently accepted in
Vanguard/Windsor Fund.
o The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has
received all required documentation in Good Order.
o When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Portfolio reserves the right to
revise or terminate its provisions, limit the amount of, or
reject any exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------
EXCHANGE The Portfolio's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Portfolio and increase transaction costs,
the Portfolio has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive if
limited to two substantive exchange redemptions (at least 30
days apart) from the Portfolio during any twelve month
period. "Substantive" means either a dollar amount or a
series of movements between Vanguard funds that Vanguard
determines, in its sole discretion, could have an adverse
impact on the management of the Portfolio. Notwithstanding
these limitations, the Portfolio reserves the right to
reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire or Fund
INFORMATION Express redemptions) by telephone is automatically
ABOUT TELEPHONE established on your account unless you request in writing
TRANSACTIONS that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. Security Check. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name and
address used in the registration; and (iv) the Social
Security or employer identification number listed on the
account.
2. Payment Policy. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record only.
22
<PAGE>
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if such
procedures are followed, you will bear the risk of any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Portfolio
REGISTRATION shares to another person by completing a transfer form and
sending it to: The Vanguard Group, Attention: Transfer
Department, P.O. Box 1110, Valley Forge, PA 19482-1110. The
request must be in Good Order. To obtain a transfer form and
complete instructions, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account during
the calendar year, using the average cost, single category
method. This service is available for most taxable accounts
opened since January 1, 1986. In general, investors who
redeemed shares from a qualifying Vanguard account may
expect to receive their Average Cost Statement along with
their Portfolio Summary Statement. Please call our Client
Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end. To
keep the Fund's cost as low as possible (so that you and
other shareholders can keep more of the Fund's investment
earnings), Vanguard attempts to eliminate duplicate
mailings to the same address. When we find that two or more
Fund shareholders have the same last name and address, we
send just one Fund report to that address--instead of
mailing separate reports to each shareholder. If you want
us to send separate reports, however, you may notify our
Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at 1-800-662-7447.
Vanguard Direct With Vanguard's Direct Deposit Service, most U.S.
Deposit Service Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
Vanguard Automatic Vanguard's Automatic Exchange Service allows you to move
Exchange Service money automatically among your Vanguard Fund accounts. For
instance, the service can be used
23
<PAGE>
to "dollar cost average" from a money market portfolio into
a stock or bond fund or to contribute to an IRA or other
retirement plan. Please contact our Client Services
Department at 1-800-662-2739 for additional information.
Vanguard Fund Vanguard's Fund Express allows you to transfer money
Exchange Service between your Portfolio account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You may
elect this service on the Account Registration Form or call
our Investor Information Department (1-800-662-7447) for a
Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
Vanguard Dividend Vanguard's Dividend Express allows you to transfer your
Express dividend and/or capital gains distributions automatically
from your Portfolio account, one business day after the
Portfolio's payable date, to your account at a bank, savings
and loan association, or a credit union that is a member of
the Automated Clearing House (ACH) system. You may elect
this service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
Vanguard Vanguard's Tele-Account is a convenient, automated service
Tele-Account(R) that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TM) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent
dividend or capital gains payment. In addition, you may
perform investment exchanges of Vanguard Fund shares and
redemptions by check using Tele-Account. To contact
Vanguard's Tele-Account service, dial 1-800-ON-BOARD
(1-800-662-6273). A brochure offering detailed operating
instructions is available from our Investor Information
Department (1-800-662-7447).
Vanguard Online Use your personal computer to learn more about Vanguard's
www.vanguard.com funds and services; keep in touch with your Vanguard
accounts; map out a long-term investment strategy; initiate
certain transactions; and ask questions, make suggestions,
and send messages to Vanguard.
Our education-oriented website provides timely news and
information about Vanguard's funds and services; an online
"university" that offers a variety of mutual fund classes;
and easy-to-use, interactive tools to help you create your
own investment and retirement strategies.
- --------------------------------------------------------------------------------
24
<PAGE>
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
-----------------
The Vanguard Group P R O S P E C T U S
P.O. Box 2600
Valley Forge, PA 19482
Investor Information APRIL 17, 1998
Department:
1-800-662-7447 (SHIP) FORMERLY KNOWN AS
VANGUARD
Client Services QUANTITATIVE
Department: PORTFOLIOS
1-800-662-2739 (CREW)
Tele-Account for
24-Hour Access:
1-800-662-6273 (ON-BOARD)
Telecommunication Service
for the Hearing-Impaired:
1-800-662-2738
Transfer Agent:
The Vanguard Group, Inc.
P.O. Box 2600
Valley Forge, PA 19482
P093
<PAGE>
PART B
VANGUARD QUANTITATIVE PORTFOLIOS, INC.
STATEMENT OF ADDITIONAL INFORMATION
April 17, 1998
This Statement is not a prospectus but should be read in conjunction with
the Fund's Prospectus for Vanguard Growth and Income Portfolio (the
"Portfolio") dated April 17, 1998. (Prior to April 30, 1997, the Portfolio was
known as Vanguard Quantitative Portfolios.) To obtain the Prospectus please
call:
Investor Information Department
1-800-662-7447
TABLE OF CONTENTS
Page
-----
Investment Policies ................................................... B-1
Investment Limitations ................................................ B-5
Yield and Total Return ................................................ B-7
Purchase of Shares .................................................... B-7
Redemption of Shares .................................................. B-7
Management of the Fund ................................................ B-8
Investment Advisory Services .......................................... B-11
Portfolio Transactions ................................................ B-12
Financial Statements .................................................. B-13
Performance Measures .................................................. B-14
General Information ................................................... B-16
INVESTMENT POLICIES
Futures Contracts. The Portfolio may enter into futures contracts, options,
and options on futures contracts for the purpose of simulating full investment
and reducing transaction costs. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government agency. Assets committed to futures
contracts will be segregrated at the Portfolio's custodian bank to the extent
required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold," or "selling" a contract
previously purchased) in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.
B-1
<PAGE>
Futures traders are required to make a good faith margin deposit in cash
or government securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold with margin
deposits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolio
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations
in the prices of underlying securities. The Portfolio intends to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Portfolio require that all of
its futures transactions constitute bona fide hedging transactions except to
the extent that the aggregate initial margins and premiums required to
establish any non-hedging positions do not exceed five percent of the value of
the Fund's portfolio. The Portfolio will only sell futures contracts to protect
securities it owns against price declines or purchase contracts to protect
against an increase in the price of securities it intends to purchase. As
evidence of this hedging interest, the Portfolio expects that approximately 75%
of its futures contract purchases will be "completed," that is, equivalent
amounts of related securities will have been purchased or are being purchased
by the Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this
exposure. While the Portfolio will incur commission expenses in both opening
and closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, the Portfolio will
not enter into futures contracts to the extent that its outstanding obligations
to purchase securities under these contracts would exceed 20% of the
Portfolio's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may
be closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when
B-2
<PAGE>
it may be disadvantageous to do so. In addition, the Portfolio may be required
to make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to hedge effectively.
The Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. Additionally, the Portfolio
bears the risk that the Adviser will incorrectly predict future market trends.
However, because the futures strategies of the Portfolio are engaged in only
for hedging purposes, the Adviser does not believe that the Portfolio is
subject to the risks of loss frequently associated with futures transactions.
The Portfolio would presumably have sustained comparable losses if, instead of
the futures contract, it had invested in the underlying security and sold it
after the decline.
Use of futures transactions by the Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
are different than the portfolio securities being hedged. It is also possible
that the Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the Adviser will incorrectly predict stock market trends.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and
subjecting some futures traders to substantial losses.
Federal Tax Treatment of Futures Contracts. The Portfolio is required for
federal income tax purposes to recognize as income for each taxable year its
net unrealized gains and losses on certain futures contracts as of the end of
the year as well as those actually realized during the year. In most cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Furthermore, sales of
futures contracts which are intended to hedge against a change in the value of
securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. The Portfolio may be required to defer the recognition of
losses on futures contracts to the extent of any unrecognized gains on related
positions held by the Portfolio.
B-3
<PAGE>
In order for the Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies, or other income derived with respect to
the Portfolio's business of investing in securities. Any net gain realized from
the closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement.
The Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the distributions.
Repurchase Agreements. The Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers to generate net investment income
from its excess cash balances. A repurchase agreement is an agreement under
which the Portfolio acquires a money market instrument (generally a security
issued by the U.S. Government or an agency thereof, a banker's acceptance or a
certificate of deposit) from a Federal Reserve member bank with minimum assets
of at least $2 billion or a registered securities dealer, subject to resale to
the seller at an agreed upon price and date (normally, the next business day).
A repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the period
the instrument is held by the Portfolio and is unrelated to the interest rate
on the underlying instrument. In these transactions, the securities acquired by
the Portfolio (including accrued interest earned thereon) must have a total
value in excess of the value of the repurchase agreement and are held by the
Portfolio's custodian bank until repurchased. The Fund's Board of Directors
will monitor the Portfolio's repurchase agreement transactions and will
establish guidelines and standards for review of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement with the Portfolio. No
more than an aggregate of 15% of the Portfolio's net assets, at the time of
investment, will be invested in repurchase agreements having maturities longer
than seven days and securities subject to legal or contractual restrictions on
resale, for which there are no readily available market quotations. From time
to time, the Fund's Board of Directors may determine that certain restricted
securities known as Rule 144A securities are liquid and not subject to the 15%
limitation described above.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Portfolio's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
Lending of Securities. The Portfolio may lend its securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its portfolio
securities, the Portfolio attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Portfolio. The Portfolio may lend its portfolio
securities to qualified brokers, dealers, banks or
B-4
<PAGE>
other financial institutions, so long as the terms, the structure and the
aggregate amount of such loans are not inconsistent with the Investment Company
Act of 1940 (the "1940 Act"), or the Rules and Regulations or interpretations
of the Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, a letter of credit issued by a domestic U.S.
bank, or securities issued or guaranteed by the United States Government having
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e. the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time, and (d) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Portfolio's
Board of Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors. In addition, voting rights may
pass with the loaned securities, but if a material event will occur affecting
an investment on loan, the loan must be called and the securities voted.
INVESTMENT LIMITATIONS
The following restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Portfolio or, if less, 67% of the shares represented at a meeting of
shareholders at which the holders of 50% or more of the shares are represented.
The Portfolio may not under any circumstances:
1) Invest for the purpose of exercising control over the management of
any company;
2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio would hold
more than 10% of the outstanding voting securities of the issuer, or more
than 5% of the value of the Portfolio's total assets would be invested in the
securities of such issuer;
3) Invest in securities of other investment companies, except as may be
acquired as part of a merger, consolidation or acquisition of assets
approved by the Portfolio's shareholders or otherwise to the extent
permitted by Section 12 of the 1940 Act. The Portfolio will invest only in
investment companies which have investment objectives and investment
policies consistent with those of the Portfolio;
4) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment securities;
5) Purchase or otherwise acquire any security if, as a result more than
15% of its net assets would be invested in securities that are illiquid
(including the Portfolio's investment in The Vanguard Group, Inc.);
B-5
<PAGE>
6) Borrow money, except that the Portfolio may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Portfolio's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Portfolio's net assets, the
Portfolio will not make any additional investments;
7) Invest in commodities or real estate, although the Portfolio may use
stock futures contracts or options for hedging purposes only, and provided
that not more than 5% of the Portfolio's assets are required as a futures
contract deposit and not more than 20% of the Portfolio's assets are
committed to futures contracts and options transactions, and, may purchase
and sell securities of companies which deal in real estate, or interests
therein;
8) Purchase securities on margin or sell any securities short, except
that the Portfolio may invest in futures contracts and options transactions
as set forth above in (7);
9) Purchase or retain any security if (i) one or more Officers, Directors
or partners of the Portfolio or its investment adviser individually own or
would own, directly or beneficially, more than 1/2 of 1% of the securities
of such issuer, and (ii) in the aggregate such persons own or would own
more than 5% of such securities;
10) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (6) above) which are publicly distributed, and (ii) by lending
its securities to banks, brokers, dealers and other financial institutions
so long as such loans are not inconsistent with the 1940 Act or the Rules
and Regulations or interpretations of the Securities and Exchange
Commission thereunder;
11) Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 5% of its total assets;
12) Invest directly in interests in oil, gas or other mineral exploration
or development programs;
13) Invest more than 25% of the value of its total assets in any one
industry; or
14) Purchase or sell options or warrants or engage in arbitrage
operations except as described above in (7).
The above-mentioned investment limitations are considered at the time the
investment securities are purchased. Notwithstanding these limitations, the
Portfolio may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of any company which
will be wholly owned by the Portfolio and one or more other investment
companies and is primarily engaged in the business of providing, at-cost,
management, administrative, distribution or related services to the Portfolio
and other investment companies. See "The Vanguard Group." As a non-fundamental
policy, the Portfolio will not invest more than 5% of its total assets in the
securities of companies that, together with their predecessors, have been in
continuous operation for less than three years.
B-6
<PAGE>
YIELD AND TOTAL RETURN
The yield of the Portfolio for the 30-day period ended December 31, 1997
was +1.60%.
The average annual total return of the Portfolio for the 1-, 5- and 10-year
periods ended December 31, 1997 was +35.59%, +20.74% and +18.33%, respectively.
Total return is computed by finding the average compounded rates of return over
the one-, five- and ten-year periods set forth above that would equate an
initial amount invested at the beginning of the periods to the ending redeemable
value of the investment. Note: Prior to April 30, 1997, the Portfolio was known
as Vanguard Quantitative Portfolios.
PURCHASE OF SHARES
The Portfolio reserves the right in its sole discretion: (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Portfolio, and (iii)
to reduce or waive the minimum investment for or any other restrictions on
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the
Portfolio's shares.
REDEMPTION OF SHARES
The Portfolio may suspend redemption privileges or postpone the date of
payment: (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for the Portfolio to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
No charge is made by the Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
The Portfolio has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the
Portfolio at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Commission. Redemptions in excess of the
above limits may be paid, in whole or in part, in investment securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Portfolio. If redemptions are paid in investment securities, such securities
will be valued as set forth in the Prospectus under "The Share Price of the
Portfolio" and a redeeming shareholder would normally incur brokerage expenses
if he converted these securities to cash.
The Portfolio has authorized Charles Schwab & Co., Inc. ("Schwab") to
accept on its behalf purchase and redemption orders under certain terms and
conditions. Schwab is also authorized to designate other intermediaries to
accept purchase and redemption orders on the Portfolio's behalf subject to those
terms and conditions. Under this arrangement, the Portfolio will be deemed to
have received a purchase or redemption order when Schwab or, if applicable,
Schwab's authorized designee, accepts the order in accordance with the
Portfolio's instructions. Customer orders that are properly transmitted to the
Portfolio by Schwab, or if applicable, Schwab's authorized designee, will be
priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Portfolio's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Portfolio's
net asset value calculated at the close of trading that day.
B-7
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of Directors and
Officers of the Fund and a statement of their present positions and principal
occupations during the past five years. The mailing address of the Directors
and Officers of the Fund is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Director*
Senior Chairman and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group; Director of The Mead
Corporation, General Accident Insurance, and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Director*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, (DOB: 9/28/1935) Director
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 Corporation.
BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Director
Director of The Great Atlantic and Pacific Tea Company, IKON Office
Solutions, Inc., Raytheon Company, Knight-Ridder, Inc., Massachusetts
Mutual Life Insurance Co., and Ladies Professional Golf Association;
Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Director
President Emeritus of The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc., and National Steel
Corporation.
BURTON G. MALKIEL, (DOB: 8/28/1932) Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England
Telecommunications Company.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Director
Chairman, President, Chief Executive Officer, and Director of NACCO
Industries, Inc.; Director of The BFGoodrich Company and The Standard
Products Company.
JOHN C. SAWHILL, (DOB: 6/12/1936) Director
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co., and President of New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company, and NACCO Industries.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Director
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and Kmart
Corporation.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company, and The Mead Corporation; and Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, (DOB: 3/22/1937) Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, (DOB: 9/13/1946) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ------------------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
B-8
<PAGE>
The Vanguard Group. Vanguard Growth and Income Portfolio is a portfolio of
Vanguard Quantitative Portfolios, Inc., a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at
cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on
an at-cost basis to several of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's net expenses which are allocated among
the Funds under methods approved by the Board of Directors (Trustees) of each
Fund. In addition, each Fund bears its own direct expenses such as legal,
auditing and custodian fees.
The Fund's Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any
external adviser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to
Rule 17j-1 under the Investment Company Act of 1940. The Code is designed to
prevent unlawful practices in connection with the purchase or sale of
securities by persons associated with Vanguard. Under Vanguard's Code of Ethics
certain Officers and employees of Vanguard who are considered access persons
are permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At December 31, 1997,
the Fund had contributed capital of $138,000 to Vanguard, representing 0.6% of
Vanguard's capitalization. The Funds' Service Agreement provides for the
following arrangement: (a) each Vanguard Fund may invest up to .40% of its
current assets in Vanguard, and (b) there is no other limitation on the amount
that each Vanguard Fund may contribute to Vanguard's capitalization.
Management. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1997, the Portfolio's share of Vanguard's actual
net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $3,537,000.
Distribution. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of Vanguard, acts as Sales Agent for the shares of the Funds in
connection with any sales made directly to investors in the states of Florida,
Missouri, New York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
B-9
<PAGE>
One half of the distribution expenses of a marketing and promotional
nature is allocated among the Funds based upon relative net assets. The
remaining one half of those expenses is allocated among the Funds based upon
each Fund's sales for the preceding 24 months relative to the total sales of
the Funds as a Group, provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets. During the year ended December 31,
1997, the Portfolio paid approximately $381,000 of the Group's distribution and
marketing expenses which represented an effective annual rate of .02 of 1% of
the Portfolio's average net assets.
Investment Advisory Services. Vanguard provides investment advisory
services to Vanguard Money Market Reserves, Vanguard Treasury Fund, Vanguard
Admiral Funds, Vanguard Municipal Bond Fund, several Portfolios of Vanguard
Fixed Income Securities Fund, Vanguard Institutional Index Fund, Vanguard Bond
Index Fund, several Portfolios of Vanguard Variable Insurance Fund, Vanguard
California Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New
Jersey Tax-Free Fund, Vanguard New York Tax-Free Fund, Vanguard Ohio Tax-Free
Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust, Vanguard International Equity Index Fund, the REIT Index
Portfolio of Vanguard Specialized Portfolios, the Total International Portfolio
of Vanguard STAR Fund, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, a portion of Vanguard/Windsor II, a portion
of Vanguard/Morgan Growth Fund, as well as several indexed separate accounts.
These services are provided on an at-cost basis from a money management staff
employed directly by Vanguard. The compensation and other expenses of this
staff are paid by the Funds using these services.
Director/Trustee Compensation
The individuals in the table on page 11 serve as Directors/Trustees of all
Vanguard Funds, and each Fund pays a proportionate share of the
Directors'/Trustees' compensation. The Funds employ their Officers on a shared
basis, as well. However, Officers are compensated by The Vanguard Group, Inc.,
not the Funds.
Independent Directors/Trustees. The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--in
three ways:
o The independent Directors/Trustees receive an annual fee for their
service to the Funds, which is subject to reduction based on absences from
scheduled Board meetings.
o The independent Directors/Trustees are reimbursed for the travel and
other expenses that they incur in attending Board meetings.
o Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen
years of service. This annual fee is paid for ten years following
retirement, or until the Directors'/Trustees' death.
"Interested" Directors/Trustees. The Funds' interested
Directors/Trustees--Messrs. Bogle and Brennan--receive no compensation for
their service in that capacity. However, they are paid in their role as
Officers of The Vanguard Group, Inc.
Compensation Table. The following table provides compensation details for
each of the Directors. For the Portfolio, we list the amounts paid as
compensation and accrued as retirement benefits by the Fund for each Director.
In addition, the table shows the total amount of benefits that we expect each
Director/Trustee to receive from all Vanguard Funds upon retirement, and the
total amount of compensation paid to each Director/Trustee by all Vanguard
Funds. All information shown is for the fiscal year ended December 31, 1997.
B-10
<PAGE>
VANGUARD GROWTH AND INCOME PORTFOLIO
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued As Annual Benefits From All Vanguard Funds
Names of Directors From Fund Part of Fund Expenses Upon Retirement Paid to Directors(2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 429 $ 62 $15,000 $70,000
Robert E. Cawthorn ............ $ 429 $ 52 $13,000 $70,000
Bruce K. MacLaury ............. $ 455 $ 58 $12,000 $65,000
Burton G. Malkiel ............. $ 431 $ 41 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 429 $ 33 $15,000 $70,000
John C. Sawhill ............... $ 429 $ 39 $15,000 $70,000
James O. Welch, Jr. ........... $ 429 $ 48 $15,000 $70,000
J. Lawrence Wilson ............ $ 429 $ 34 $15,000 $70,000
</TABLE>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no
compensation for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for his or her service as Director or Trustee of 35 Vanguard
Funds (34 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
The Fund employs Franklin Portfolio Associates LLC ("Associates") under an
advisory agreement dated April 1, 1996, to manage the investment and
reinvestment of the Portfolio's assets and to continuously review, supervise
and administer the Portfolio's investment program. Associates discharges its
responsibilities subject to control of the Officers and Directors of the Fund.
The Portfolio pays Associates a fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Portfolio's average month-end net assets for the
quarter:
Net Assets Rate
---------------------- ----------
First $100 million 0.30%
Next $650 million 0.15%
Over $750 million 0.10%
The Basic Fee paid to Associates may be increased or decreased by applying
an adjustment formula based on the Portfolio's investment performance. Such
formula provides for an increase or decrease in the Basic Fee in an amount
equal to .20% per annum (.05% per quarter) of the first $100 million of average
month-end net assets of the Portfolio, and .10% per annum (.025% per quarter)
of average month-end net assets over $100 million, if the Portfolio's
investment performance for the thirty-six months preceding the end of the
quarter is six percentage points or more above or below, respectively, the
investment record of the Standard & Poor's 500 Composite Stock Price Index (the
"S&P Index") for the same period; or by an amount equal to .10% per annum
(.025% per quarter) of the first $100 million of average month-end net assets
and .05% per annum (.0125% per quarter) of average month-end net assets over
$100 million, if the Portfolio's
B-11
<PAGE>
investment performance for such thirty-six months is three or more but less
than six percentage points above or below, respectively, the investment record
of the S&P Index for the same period.
For example, if the average net assets of the Portfolio were $100 million
or less, and its investment performance for the preceding three-year period was
more than six percentage points above the S&P Index, the total fee would be
0.50% of average net assets, consisting of the Basic Fee of 0.30%, and an
Incentive Fee or 0.20%. Conversely, if performance were six percentage points
below the S&P, the total fee would be 0.10% of net assets-- the Basic Fee of
0.30%, adjusted for a penalty of 0.20%. Above assets levels of $100 million,
both the Basic Fee and the Incentive Fee are reduced, as described above.
The present agreement continues until March 31, 1999. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
contract of "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of considering such
approval. In addition, the question of continuance of the agreement may be
presented to the shareholders of the Portfolio; in such event, continuance
shall be effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of the Portfolio. The agreement is automatically
terminated if assigned, and may be terminated without penalty at any time (1)
either by vote of the Board of Directors of the Fund or by vote of the
Portfolio's outstanding voting securities on 60 days' written notice to
Associates, or (2) by Associates upon 90 days' written notice to the Portfolio.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
(i) The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or
as an additional adviser;
(ii) A change in the terms of an advisory agreement; and
(iii) The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior
written notice to shareholders, which shall include the information concerning
the adviser that would have normally been included in a proxy statement.
During the years ended December 31, 1995, 1996 and 1997, the Portfolio
paid investment advisory fees of approximately $1,280,000, $1,646,000, and
$2,231,000 before a decrease of $244,000 based on performance, respectively.
Description of Associates. Associates is a Delaware corporation and is a
wholly-owned indirect subsidiary of Mellon Bank Corporation that has no
affiliation to The Franklin/Templeton Group of Funds or Franklin Resources,
Inc.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the
approval of the Fund's Board of Directors) to select the brokers or dealers
that will execute the purchases and sales of portfolio securities for the
Portfolio and directs the Adviser to use its best efforts to obtain the best
available price and most favorable execution as to all transactions for the
Portfolio. The Adviser has undertaken to execute each investment transaction at
a price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
B-12
<PAGE>
In placing portfolio transactions, the Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Portfolio
and/or the Adviser. The Adviser considers such information useful in the
performance of its obligations under the agreement, but is unable to determine
the amount by which such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of
Section 28(e) of the Securities Exchange Act of 1934 by providing that, subject
to the approval of the Portfolio's Board of Directors, the Adviser may cause
the Fund to pay a broker-dealer which furnishes brokerage and research services
at a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction; provided that such commission
is deemed reasonable in terms of either that particular transaction or the
overall responsibilities of the Adviser to the Fund.
Currently, it is the Portfolio's policy that the Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Portfolio.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Portfolio. However,
the Adviser has informed the Portfolio that it will not pay higher commission
rates specifically for the purpose of obtaining research services.
Since the Portfolio does not market its shares through intermediary
brokers or dealers, it is not the Portfolio's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be through
such firms. However, the Portfolio may place portfolio orders with qualified
broker-dealers who recommend the Portfolio to other clients, or who act as
agent in the purchase of the Portfolio's shares for their clients, and may,
when a number of brokers and dealers can provide comparable best price and
execution on a particular transaction, consider the sale of the Portfolio
shares by a broker or dealer in selecting among qualified broker-dealers.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of these other clients services by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the Fund and
such other clients in a manner deemed equitable by the Adviser. During the
years ended December 31, 1995, 1996 and 1997 the Fund paid $527,912, $1,563,135
and $2,018,001 in brokerage commissions, respectively.
FINANCIAL STATEMENTS
The Fund's Financial Statements as of and for the year ended December 31,
1997, appearing in the Vanguard Growth and Income Portfolio's 1997 Annual
Report to Shareholders, and the report thereon of Price Waterhouse LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information.
B-13
<PAGE>
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Quantitative Portfolios, may from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.
Standard and Poor's 500 Composite Stock Price Index -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
Standard & Poor's MidCap 400 Index -- is composed of 400 medium sized domestic
stocks.
Standard & Poor's SmallCap 600/BARRA Value Index -- contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
Standard & Poor's SmallCap 600/BARRA Growth Index -- contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
Russell 1000 Value Index -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
Wilshire 5000 Equity Index -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
Morgan Stanley Capital International EAFE Index -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia, Asia, and the Far East.
Goldman Sachs 100 Convertible Bond Index -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Salomon Brothers GNMA Index -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
Salomon Brothers High-Grade Corporate Bond Index -- consists of publicly-
issued, non-convertible corporate bonds rated Aa or Aaa. It is a value-
weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
Lehman Long-Term Treasury Bond Index -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
Merrill Lynch Corporate & Government Bond Index -- consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
B-14
<PAGE>
Lehman Corporate (Baa) Bond Index -- all publicly-offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
Bond Buyer Municipal Bond Index -- is a yield index on current-coupon high
grade general-obligation municipal bonds.
Standard & Poor's Preferred Index -- is a yield index based upon the average
yield for four high grade, non-callable preferred stock issues.
NASDAQ Industrial Index -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
Composite Index -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
Composite Index -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard and Poor's
Telephone Index).
Lehman Long-Term Corporate AA or Better Bond Index -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar- denominated,
SEC-registered corporate debt rated AA or AAA.
Lehman Brothers Aggregate Bond Index -- is a market-weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index --
is a market-weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between 5
and 10 years. The index has a market value of over $700 billion.
Lehman Brothers Long (10+) Government/Corporate Index -- is a market-weighted
index that contains individually priced U.S. Treasury, agency and corporate
securities rated BBB- or better with maturities greater than 10 years. The
index has a market value of over $900 billion.
B-15
<PAGE>
GENERAL INFORMATION
Description of Shares and Voting Rights. The Fund is a diversified
open-end investment company established under Maryland law. Under Amended and
Restated Articles of Incorporation dated September 2, 1986, the Directors of
the Fund are permitted to issue 1,000,000,000 shares of common stock, with a
$.001 par value. The Board of Directors has the power to designate one or more
classes ("portfolios") of shares of common stock and to classify or reclassify
any unissued shares with respect to such Portfolios. Currently the Fund is
offering shares of one Portfolio.
The Fund's shares are fully paid and non-assessable, and have no
preference as to conversion, exchange, dividends, retirement or other features.
The shares have no pre-emptive rights. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Directors can elect 100% of the Directors if they choose to do
so. A shareholder is entitled to one vote for each full share held (and a
fractional vote for each fractional share held), then standing in his name on
the books of the Fund. On any matter submitted to a vote of shareholders, all
shares of the Fund then issued and outstanding and entitled to vote,
irrespective of the class, shall be voted in the aggregate and not by class
except (i) when required by the Investment Company Act of 1940, shares shall be
voted by individual class, and (ii) when the matter does not affect any
interest of a particular class, then only shareholders of the affected class or
classes shall be entitled to vote thereon.
B-16
