<PAGE> 1
VANGUARD
GROWTH AND INCOME
PORTFOLIO
Semiannual Report - June 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to
serving you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS ................. 1
THE MARKETS IN PERSPECTIVE .................... 4
REPORT FROM THE ADVISER ....................... 6
PORTFOLIO PROFILE ............................. 8
PERFORMANCE SUMMARY ........................... 10
FINANCIAL STATEMENTS .......................... 11
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
The U.S. financial markets had a spectacular, though at times bumpy,
ascent during the six months ended June 30, 1998, the first half of Vanguard
Growth and Income Portfolio's fiscal year. The portfolio's return of +18.1%
during the period was lavish both by historical standards and in comparison with
the returns of both our average competing fund and the broad stock market.
The adjacent table presents the six-month total return (capital
change plus reinvested dividends) for the portfolio and its two performance
benchmarks--the average value fund (as calculated by Lipper Analytical Services)
and the Standard & Poor's 500 Composite Stock Price Index. The portfolio's
return is based on an increase in net asset value from $26.19 per share on
December 31, 1997, to $30.21 per share on June 30, 1998, with the latter figure
adjusted for dividends of $0.16 per share paid from net investment income and a
distribution of $0.54 per share paid from net realized capital gains.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1998
- -------------------------------------------------------------
<S> <C>
Vanguard Growth and
Income Portfolio +18.1%
- -------------------------------------------------------------
Average Value Fund +12.6%
- -------------------------------------------------------------
S&P 500 Index +17.7%
- -------------------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
The robust economic growth of the past few years--sustained by remarkably benign
inflation, declining interest rates, and strong consumer spending--showed few
signs of abating during the six months ended June 30. Stock prices wobbled at
times--the S&P 500 Index dropped -1.9% on April 27 alone--but the index advanced
in every month except May. Large-capitalization growth stocks blazed the path:
The large-cap-dominated S&P 500 Index gained +17.7%, more than triple the +4.9%
return of the small-cap Russell 2000 Index. The S&P 500 Index's growth component
earned +23.1% during the half-year, nearly double the +12.1% return of its value
component.
Bond investors also enjoyed solid returns. The Lehman Brothers
Aggregate Bond Index, a good measure of the overall taxable bond market, earned
+3.9%. Long-term bonds, which benefited more than other bonds from declining
interest rates, did even better: The Lehman Long Corporate AA or Better Bond
Index rose +5.2%. Yields on long-term U.S. Treasury bonds declined on balance
during the half-year by about 30 basis points (0.30 percentage point). The yield
on the 30-year Treasury bond ended the period at 5.63%, down from 5.92% on
December 31, 1997, while rates on 3-month T-bills declined by 36 basis points,
from 5.35% to 4.99%. The rate decline stemmed from quiescent inflation--consumer
prices were up just 1.1% during the period--and a conviction among market
participants that one consequence of Asia's continuing economic crisis would be
to keep a lid on inflation and interest rates in the United States.
The Growth and Income Portfolio's +18.1% return was a remarkable 5.5
percentage points above the +12.6% earned by the average value fund and 0.4
percentage points above the formidable standard of the S&P 500 Index. As you
know, the portfolio strives through a computer-driven stock-selection process to
beat the returns achieved by the S&P 500 while maintaining a risk posture that
is similar to that of the Index. Our adviser's method led to especially strong
stock selections in the financial-services, auto & transportation, and
technology sectors.
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Compared with our peers, we benefited from a greater concentration in
large-cap stocks. A heavier weighting in two growth sectors--technology and
health care--helped us significantly in the market climate that prevailed during
the period. Furthermore, our policy of staying fully invested was helpful versus
our competitors, most of whom hold modest cash reserves, which serve as a drag
on performance in a sharply rising stock market. An additional boost versus our
peers came from the portfolio's lower operating costs. The portfolio's expense
ratio (an annualized 0.39% during the period) is 0.81 percentage point below the
expenses charged by the average competing fund.
IN SUMMARY
The stunning returns from financial markets during the first half of Growth and
Income Portfolio's fiscal year marked a continuation of the long-term bull
market for stocks and bonds that began nearly 16 years ago. For perspective, it
may be useful to consider that the portfolio's return for the last six months
was well in excess of the average annual return of 11% for U.S. stocks over the
past seven decades.
Clearly, such superb returns will not continue indefinitely. There
will be bumps along the road from time to time. History teaches that to reap the
rewards of financial markets, investors must endure risks that can be
considerable. We believe that investors with balanced holdings of stocks, bonds,
and cash reserves consistent with their personal financial objectives and
circumstances should be able to "stay the course" toward those objectives. The
quantitatively managed Growth and Income Portfolio has demonstrated for more
than eleven years now that it can be an important piece of such a personal
portfolio. We look forward to reporting to you on our full year's results six
months from now.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 8, 1998
POSTSCRIPT:
We extend a welcome to shareholders of Vanguard/Trustees' Equity Fund-U.S.
Portfolio, which will be reorganized into the Growth and Income Portfolio,
effective August 13, 1998, on a tax-free basis. This reorganization, which
was approved at a special meeting of shareholders of the U.S. Portfolio on
July 31, will add approximately $200 million in assets to the Growth and
Income Portfolio but will have no significant impact on its operations.
August 3, 1998
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Notice to Shareholders
At a special meeting on May 1, 1998, shareholders of Vanguard Growth and Income
Portfolio overwhelmingly approved three proposals. The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the portfolio pays annually by approximately $217,000 at
current asset levels. Approved by 97.73% of the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
54,134,746 428,454 828,361
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</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the Growth and Income Portfolio to participate in Vanguard's interfund
lending program, which allows funds to loan money to each other if--and only
if--it makes good financial sense to do so on both sides of the transaction. The
interfund lending program won't be an integral part of your portfolio's
investment program; it is a contingency arrangement for managing unusual cash
flows. Approved by 95.26% of the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
- ---------------------------------------------
<S> <C> <C>
52,765,643 1,418,711 1,207,207
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</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 94.27% of the shares voted, as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------
FOR AGAINST ABSTAIN
- ---------------------------------------------
<S> <C> <C>
52,219,759 1,819,193 1,352,608
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</TABLE>
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
Six Months Ended June 30, 1998
Blue skies predominated for U.S. financial markets during the first six months
of 1998, and even the occasional clouds had silver linings. The bond market
provided solid returns during the half-year, while the stock market's
performance was extraordinarily strong.
After expanding at a 5.4% annual pace during the first quarter, the U.S. economy
kept steaming along through June, fueled by powerful increases in household
spending. Consumers had reason to be upbeat: plentiful jobs (unemployment fell
to 4.3% of the workforce in May); rising wages (personal income in May was 5.9%
higher than in May 1997); and tame inflation (consumer prices in June were up
only 1.7% from a year before).
The economic push provided by consumers more than compensated for the drag
caused by Asia's severe economic problems. Weakening currencies and business
slowdowns in Asia cut into U.S. exports and lowered the cost of Asian imports,
causing the U.S. trade deficit to hit record levels. Ominously, Asia's problems
appear to be more serious and enduring than many economists expected. Yet for
Americans this "Asian contagion" has a bright side: It serves as an escape valve
for the inflationary pressures that ordinarily would be expected to build up
with the U.S. economy humming along at high speed.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 17.7% 30.2% 23.1%
Russell 2000 Index 4.9 16.5 16.0
MSCI EAFE Index 16.1 6.4 10.3
- -----------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.9% 10.5% 6.9%
Lehman 10-Year Municipal Bond Index 2.6 8.5 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.1% 1.7% 2.5%
- -----------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. EQUITY MARKETS
The mixture of robust economic growth and anemic inflation was a tonic for the
U.S. stock market. Although prices generally rose, there were striking
disparities in returns between large-capitalization and small-cap stocks and
between growth and value stocks. The large-cap-dominated S&P 500 earned 17.7%
during the six months, nearly double the 9.4% return on the rest of the market
(as measured by the Wilshire 4500 Index) and more than triple the 4.9% return on
the small-cap Russell 2000 Index. Within the S&P 500 Index, growth stocks were
up 23.1%, while value stocks rose 12.1%.
A decline in interest rates contributed to the stock market's rise,
as falling rates on bonds tend to make equities more attractive and to boost the
price investors will pay for each dollar of a stock's earnings or dividends. Yet
growth in earnings and dividends--the long-term underpinning of stock
prices--was unimpressive during the first half of 1998.
Corporate earnings estimates were reduced in June, the tenth
consecutive month in which securities analysts have cut their earnings
estimates, according to I/B/E/S International, a financial research group.
Earnings by the S&P 500 companies were expected to
4
<PAGE> 7
rise by only about 2% for the first half of 1998, I/B/E/S reported. With gains
in prices outstripping increases in earnings and dividends, stock valuations are
at or near all-time highs, an indication that investors expect ideal conditions
to continue.
Technology stocks were the best-performing sector during the first
half of 1998, generating a 32.7% return. Three other sectors of the stock
market--health care, consumer discretionary stocks such as retailers, and auto &
transportation--each provided returns of about 25% for the six months. Companies
involved in energy, chemicals, or other commodity-based businesses were
generally laggards. Prices of many commodities have declined as Asia's economic
funk cuts demand for energy and other industrial materials in the face of
plentiful supplies.
U.S. FIXED-INCOME MARKETS
Investors in fixed-income securities enjoyed a moderate rise in the market value
of their holdings because of declining interest rates. This price appreciation,
added to coupon interest income, resulted in solid total returns. The 3.9% total
return of the Lehman Aggregate Bond Index during the half-year brought its
return for the 12 months ended June 30 to 10.5%, or a very generous 8.8% after
adjustment for inflation.
Yields on 10-year and 30-year U.S. Treasury bonds declined by 29
basis points (0.29 percentage point) to 5.45% and 5.63%, respectively, during
the first half of 1998, with most of the drop occurring during the second
quarter. The yield on 3-month Treasury bills declined 36 basis points to 4.99%.
Mild inflation--consumer prices were up 1.1% for the half-year--enabled rates to
decline despite the economy's strong growth.
Yields on corporate and municipal bonds did not decline as far as
those on Treasury securities because of a large increase in the supply of new
bonds issued by companies and municipalities taking advantage of lower rates to
refinance old debt. Similarly, mortgage-backed securities did not match
Treasuries' performance because of expectations that large numbers of homeowners
would pay off old, higher-coupon mortgage loans and refinance with new,
lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Stock markets in Europe soared while those in Asia and most emerging economies
suffered steep declines in U.S.-dollar terms. The 16.1% overall return from
international markets, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index, masked the divergence between Europe and
other regions.
Europe's markets were up 27.1% when measured in local currencies and
26.5% in U.S. dollars, after adjusting for a slight overall rise in the dollar's
value. Stocks benefited from an upswing in most European economies, from signs
that corporate managers are increasingly focused on shareholder value, and from
optimism concerning next year's planned adoption of the euro as a single
European currency.
In the Pacific, which is dominated by Japan's stock market, stocks
were buffeted by several problems: slowing growth in economic activity;
continued instability in currencies; political upheavals; and widespread worries
about corporate and banking insolvencies. On balance, the region's stocks fell
6.0% in U.S.-dollar terms. Japanese stocks were down 2.5%, but losses were more
severe in the region's smaller markets.
Emerging markets were, on balance, down sharply. Asian stock markets
were hurt by continued weakness in the currency values of several countries, by
Japan's recession, and by a growing conviction that the region's economic
troubles are far from transitory. Venezuela and Mexico, both key oil-producing
nations, were hard hit by falling oil prices.
5
<PAGE> 8
REPORT FROM THE ADVISER
We are pleased to report on our investment results for the six months ended June
30, 1998. Vanguard Growth and Income Portfolio's total return exceeded that of
the unmanaged S&P 500 Index by 0.4 percentage point and outdistanced the return
of the average value (growth and income) fund by 5.5 percentage points. Our
return of 18.1% through the first half of 1998 placed the portfolio in the top
10% of Morningstar's growth-and-income fund group, ranking us 67th out of 672
funds. Long-term comparisons with our peer funds are even more favorable, as
shown in the table at right.
<TABLE>
<CAPTION>
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RANK OF VANGUARD GROWTH AND INCOME PORTFOLIO
AMONG GROWTH AND INCOME FUNDS:
PERIODS ENDED JUNE 30, 1998
- --------------------------------------------
<S> <C>
Last 10 years 8th out of 137
Last 5 years 10th out of 278
Last 3 years 13th out of 445
Last 12 months 15th out of 621
Year to date 67th out of 672
- --------------------------------------------
</TABLE>
Source: Morningstar, Inc.
The superior performance of large-capitalization stocks continued
during the half-year and was especially evident in the second quarter. The
Russell 1000 Index, comprising the 1,000 largest stocks as measured by market
capitalization, earned about 7 percentage points more during the second quarter
than the Russell 2000 Index, which consists of the next-largest 2,000 stocks.
The 25 largest stocks in the S&P 500 Index earned about 4 percentage points more
as a group than the entire Index did. Most actively managed portfolios have
trouble matching the S&P 500 Index when its largest components are driving its
performance. Actively managed funds typically perform better against the Index
when the largest stocks are laggards, not leaders.
Our analytical approach to building the portfolio provided us with a
margin of superiority over the Index. We were happy to outperform this tough
benchmark during a period when large stocks dominated the market, since this is
the very situation that should make it harder for us to exceed the S&P 500's
return.
We build and maintain our portfolio by making a series of analytical
measurements on a large universe of securities. In attempting to identify
undervalued stocks, we use three basic types of measures:
- Fundamental momentum measures. These yardsticks are employed to
identify companies whose current and near-term business prospects are
relatively strong.
- Relative value measures. These quantify the attractiveness of a
stock's price in relation to both its own history and such financial
measures as book value, sales, or earnings.
- Future cash flow. These analytical measures identify likely
favorable payoffs in terms of future earnings and dividends for an
investment made today.
Vanguard Growth and Income Portfolio uses these measures of value in
developing investment strategies. We believe that applying a variety of
yardsticks to security selection will help us to deliver consistent results. The
long-term performance comparisons shown in the table above lend credence to our
view. The momentum-based measures did a good job of predicting performance
during the first half of 1998, though our value-based measures did not. Such
patterns occur from time to time and are not out of the ordinary.
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Allow us to reiterate a point we try to make in every shareholder
letter: We are long-term investors. We do not expect to be near the top of a
list of equity funds for every short-term period of comparison. We are, of
course, happy when this is the case; however, our goal is to be at the top of
these lists over the long term. Our investors should have a long-range
perspective and a desire for exposure to the stock market. We expect to be fully
invested in equities as a matter of investment policy. Our goal is to provide
superior equity returns over extended periods.
Our outlook is positive. We have demonstrated our ability to
outperform most active managers in a period that has been difficult for active
management. In periods when active managers outperform an indexing approach, we
believe that we will outperform to a meaningful degree both our peers and
indexing alternatives.
We believe that our past success illustrates the effectiveness of the
Franklin game plan, which is to seek to win while avoiding periods of major
underperformance versus our index benchmark. Our goal with your assets is to be
consistently above average. We believe that consistency builds strong long-term
performance, and that it will continue to make Vanguard Growth and Income
Portfolio an attractive option for equity investors.
John Nagorniak
Franklin Portfolio Associates
July 7, 1998
INVESTMENT PHILOSOPHY
The portfolio reflects a belief that superior long-term investment results can
be achieved by using quantitative methods to select stocks that, in the
aggregate, have risk characteristics similar to the S&P 500 Index but that are
currently undervalued by the market.
7
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PORTFOLIO PROFILE
Growth and Income Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of June
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
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GROWTH AND INCOME S&P 500
- ------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 125 500
Median Market Cap $33.5B $50.0B
Price/Earnings Ratio 21.8x 24.8x
Price/Book Ratio 3.8x 4.5x
Yield 1.2% 1.4%
Return on Equity 18.8% 21.6%
Earnings Growth Rate 16.9% 16.4%
Foreign Holdings 1.8% 1.7%
Turnover Rate 44%* --
Expense Ratio 0.39%* --
Cash Reserves 1.8% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
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[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
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GROWTH AND INCOME S&P 500
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<S> <C> <C>
R-Squared 0.96 1.00
Beta 1.05 1.00
</TABLE>
<TABLE>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Merck & Co., Inc. 3.3%
American International Group, Inc. 2.9
AT&T Corp. 2.9
NationsBank Corp. 2.7
Ford Motor Co. 2.7
Tyco International Ltd. 2.7
AirTouch Communications, Inc. 2.6
Morgan Stanley Dean Witter & Co. 2.4
Dayton Hudson Corp. 2.4
Lucent Technologies, Inc. 2.3
- -------------------------------------------------------
Top Ten 26.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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JUNE 30, 1997 JUNE 30, 1998
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GROWTH AND INCOME GROWTH AND INCOME S&P 500
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<S> <C> <C> <C>
Auto & Transportation 2.5% 3.7% 3.3%
Consumer Discretionary 14.6 13.7 10.2
Consumer Staples 5.8 5.1 10.7
Financial Services 19.7 23.3 18.5
Health Care 12.6 10.1 12.1
Integrated Oils 6.3 4.3 6.5
Other Energy 3.4 1.6 1.0
Materials & Processing 6.3 6.0 5.2
Producer Durables 4.4 5.4 3.5
Technology 12.9 9.2 13.0
Utilities 7.8 12.4 10.3
Other 3.7 5.2 5.7
- ------------------------------------------------------------------------------------------------
</TABLE>
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BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalizations above the median, and the rest
are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%.)
As this percentage rises, a portfolio's returns are likely to be more volatile
because they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days and is annualized, or projected forward for
the coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 10, 1986-JUNE 30, 1998
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GROWTH AND INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------
<S> <C> <C> <C> <C>
1986 -3.1% 0.0% -3.1% -3.3%
1987 1.8 2.2 4.0 5.3
1988 13.1 3.7 16.8 16.6
1989 27.6 4.4 32.0 31.7
1990 -5.7 3.3 -2.4 -3.1
1991 26.4 3.9 30.3 30.5
1992 4.2 2.8 7.0 7.6
1993 11.4 2.4 13.8 10.1
1994 -3.1 2.5 -0.6 1.3
1995 33.1 2.8 35.9 37.6
1996 20.9 2.2 23.1 23.0
1997 33.5 2.1 35.6 33.4
1998* 17.5 0.6 18.1 17.7
- -------------------------------------------------------
</TABLE>
*Six months ended June 30, 1998.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------
INCEPTION 10 YEARS
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Portfolio 12/10/1986 34.58% 22.91% 15.77% 2.97% 18.74%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10
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FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by asset type (common stocks, preferred stocks,
bonds, etc.) and by industry sector. Other assets are added to, and liabilities
are subtracted from, the value of Total Investments to calculate the portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the portfolio's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the portfolio's
investments and their cost, and reflects the gains (losses) that would be
realized if the portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO SHARES (000)
- -----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.3%)(1)
- -----------------------------------------------------------------
AUTO & TRANSPORTATION (3.5%)
- - AMR Corp. 235,600 $ 19,614
Dana Corp. 183,400 9,812
- - FDX Corp. 77,100 4,838
Ford Motor Co. 1,858,500 109,651
--------
143,915
--------
CONSUMER DISCRETIONARY (13.2%)
- - Abercrombie & Fitch Co. 306,418 13,482
- - AccuStaff, Inc. 105,500 3,297
Black & Decker Corp. 40,000 2,440
- - Costco Cos., Inc. 251,400 15,854
Dayton Hudson Corp. 1,974,000 95,739
Deluxe Corp. 485,500 17,387
The Walt Disney Co. 437,400 45,954
- - Fruit of the Loom, Inc. 95,000 3,153
Gannett Co., Inc. 465,100 33,051
Home Depot, Inc. 931,600 77,381
IKON Office Solutions, Inc. 977,900 14,241
Knight Ridder 316,000 17,400
Newell Co. 581,500 28,966
Rubbermaid, Inc. 381,900 12,674
- - Ryan's Family Steak
Houses, Inc. 256,200 2,626
Tribune Co. 266,500 18,339
VF Corp. 29,200 1,504
- - Viacom Inc. Class B 421,000 24,523
Wal-Mart Stores, Inc. 1,389,700 84,424
Whirlpool Corp. 318,400 21,890
--------
534,325
--------
CONSUMER STAPLES (5.0%)
Albertson's, Inc. 850,400 44,061
The Coca-Cola Co. 161,300 13,791
Adolph Coors Co. Class B 146,900 4,995
Dole Food Co. 172,300 8,561
Interstate Bakeries Corp. 159,200 5,283
Philip Morris Cos., Inc. 567,300 22,337
Procter & Gamble Co. 229,868 20,932
The Quaker Oats Co. 1,008,700 55,415
SuperValu Inc. 538,900 23,914
Universal Corp. 47,900 1,790
--------
201,079
--------
FINANCIAL SERVICES (22.4%)
H.F. Ahmanson & Co. 384,100 27,271
Allstate Corp. 720,800 65,998
American International
Group, Inc. 800,175 116,826
Associates First Capital
Corp. 487,084 37,445
Automatic Data
Processing, Inc. 273,300 19,917
Banc One Corp. 1,251,800 69,866
BankAmerica Corp. 878,200 75,909
Bankers Trust Corp. 39,900 4,631
Conseco Inc. 647,100 30,252
Dow Jones & Co., Inc. 130,000 7,248
The Dun & Bradstreet Corp. 1,544,700 55,802
Freddie Mac 963,800 45,359
Fannie Mae 207,200 12,587
First Union Corp. 256,100 14,918
General Re Corp. 96,200 24,387
Marsh & McLennan Cos., Inc. 135,000 8,159
Morgan Stanley Dean
Witter & Co. 1,071,855 97,941
NationsBank Corp. 1,452,600 111,124
Norwest Corp. 210,500 7,867
Travelers Group Inc. 1,263,700 76,612
--------
910,119
--------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO SHARES (000)
- -----------------------------------------------------------------
<S> <C> <C>
HEALTH CARE (9.7%)
Abbott Laboratories 384,680 $ 15,724
American Home Products Corp. 448,600 23,215
- - Beverly Enterprises, Inc. 323,600 4,470
Cardinal Health, Inc. 810,700 76,003
- - Genentech, Inc. Special
Common Stock 87,400 5,932
Guidant Corp. 151,800 10,825
- - HEALTHSOUTH Corp. 1,053,000 28,102
Johnson & Johnson 538,800 39,736
Merck & Co., Inc. 992,600 132,760
- - PharMerica, Inc. 147,305 1,777
United Healthcare Corp. 889,400 56,477
--------
395,021
--------
INTEGRATED OILS (4.1%)
Amoco Corp. 190,800 7,942
Ashland, Inc. 312,900 16,153
Chevron Corp. 296,400 24,620
Coastal Corp. 332,100 23,185
Exxon Corp. 700,200 49,933
Mobil Corp. 193,200 14,804
Pennzoil Co. 321,300 16,266
Sun Co., Inc. 377,600 14,656
--------
167,559
--------
OTHER ENERGY (1.6%)
Baker Hughes, Inc. 222,500 7,690
Helmerich & Payne, Inc. 107,900 2,401
Schlumberger Ltd. 773,400 52,833
--------
62,924
--------
MATERIALS & PROCESSING (5.8%)
Archer-Daniels-Midland Co. 2,925,264 56,677
Avery Dennison Corp. 346,300 18,614
Barrick Gold Corp. 689,000 13,220
Crown Cork & Seal Co., Inc. 631,900 30,015
Dow Chemical Co. 611,400 59,115
Fluor Corp. 275,500 14,051
The BFGoodrich Co. 141,400 7,017
The Mead Corp. 243,700 7,737
Nucor Corp. 352,500 16,215
Union Camp Corp. 208,700 10,357
--------
233,018
--------
PRODUCER DURABLES (5.2%)
Caterpillar, Inc. 1,060,500 56,074
Centex Corp. 788,600 29,770
Dover Corp. 576,000 19,728
Ingersoll-Rand Co. 484,950 21,368
Lockheed Martin Corp. 447,000 47,326
Parker Hannifin Corp. 302,400 11,529
Raychem Corp. 274,600 8,118
Thomas & Betts Corp. 346,400 17,060
--------
210,973
--------
TECHNOLOGY (8.9%)
- - Apple Computer, Inc. 1,695,900 48,651
Compaq Computer Corp. 1,249,900 35,466
Computer Sciences Corp. 9,000 576
- - EMC Corp. 577,200 25,866
General Dynamics Corp. 390,400 18,154
Intel Corp. 184,900 13,706
Lucent Technologies, Inc. 1,134,562 94,381
- - Microsoft Corp. 652,600 70,725
Motorola, Inc. 329,300 17,309
- - Oracle Corp. 971,250 23,856
- - Tech Data Corp. 296,800 12,725
--------
361,415
--------
UTILITIES (11.9%)
AT&T Corp. 2,044,200 116,775
- - AirTouch Communications,
Inc. 1,781,400 104,101
American Electric Power
Co., Inc. 155,800 7,069
Baltimore Gas & Electric Co. 40,800 1,267
Bell Atlantic Corp. 1,239,800 56,566
BellSouth Corp. 269,300 18,077
DTE Energy Co. 746,900 30,156
FPL Group, Inc. 402,700 25,370
Houston Industries, Inc. 1,145,100 35,355
PP&L Resources Inc. 327,300 7,426
Public Service Enterprise
Group, Inc. 998,900 34,400
Southern Co. 495,500 13,719
- - Tele-Communications, Inc.
Class A 443,800 17,059
- - WorldCom, Inc. 361,900 17,530
--------
484,870
--------
OTHER (5.0%)
Cooper Industries, Inc. 468,700 25,749
Harris Corp. 84,300 3,767
McDermott International, Inc. 158,400 5,455
Tenneco, Inc. 253,700 9,656
- - Thermo Electron Corp. 1,486,500 50,820
Tyco International Ltd. 1,724,200 108,625
--------
204,072
--------
- -----------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $3,077,990) 3,909,290
- -----------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------
FACE
AMOUNT
(000)
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.0%)
- -----------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
(2) 5.109%, 9/17/1998 $ 2,900 2,869
REPURCHASE AGREEMENT
Collateralized by U.S.
Government
Obligations in a Pooled
Cash Account
5.67%, 7/1/1998 120,645 120,645
- -----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $123,513) 123,514
- -----------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(COST $3,201,503) 4,032,804
- -----------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
FACE
AMOUNT
(000)
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.7%)
- -----------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 71,376
Liabilities (44,167)
----------
27,209
- -----------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------
Applicable to 134,402,320 outstanding
$.001 par value shares
(unlimited authorization) $4,060,013
=================================================================
NET ASSET VALUE PER SHARE $30.21
=================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
(1) The combined market value of common stocks and index
futures contracts represents 98.2% of net assets. See
Note E in Notes to Financial Statements.
(2) Security segregated as initial margin for open futures
contracts.
<TABLE>
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,113,973 $23.17
Undistributed Net
Investment Income 148 --
Accumulated Net
Realized Gains 112,508 .84
Unrealized Appreciation--Note E
Investment Securities 831,301 6.18
Futures Contracts 2,083 .02
- -----------------------------------------------------------------
NET ASSETS $4,060,013 $30.21
=================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the portfolio during
the reporting period, and details the operating expenses charged to the
portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any Net
Gain (Loss) realized on the sale of investments, and the increase or decrease in
the Unrealized Appreciation (Depreciation) on investments during the period. If
the portfolio invested in futures contracts during the period, the results of
these investments are shown separately.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
SIX MONTHS ENDED JUNE 30, 1998
(000)
- ---------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 22,971
Interest 3,695
--------
Total Income 26,666
--------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,811
Performance Adjustment --
The Vanguard Group--Note C
Management and Administrative 3,601
Marketing and Distribution 381
Taxes (other than income taxes) 109
Custodian Fees 7
Auditing Fees 4
Shareholders' Reports 34
Annual Meeting and Proxy Costs 10
Trustees' Fees and Expenses 3
--------
Total Expenses 5,960
Expenses Paid Indirectly--Note C (137)
--------
Net Expenses 5,823
- ---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 20,843
- ---------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 106,095
Futures Contracts 7,955
- ---------------------------------------------------------------------------------------------
REALIZED NET GAIN 114,050
- ---------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 334,818
Futures Contracts 1,496
- ---------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 336,314
- ---------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $471,207
=============================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the portfolio's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the portfolio's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
portfolio, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
---------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1998 DEC. 31, 1997
(000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 20,843 $ 29,457
Realized Net Gain 114,050 227,268
Change in Unrealized Appreciation (Depreciation) 336,314 234,178
---------------------------------
Net Increase in Net Assets Resulting from Operations 471,207 490,903
---------------------------------
DISTRIBUTIONS
Net Investment Income (20,782) (29,804)
Realized Capital Gain (52,786) (226,698)
---------------------------------
Total Distributions (73,568) (256,502)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,737,757 825,200
Issued in Lieu of Cash Distributions 70,087 245,739
Redeemed (287,279) (448,946)
---------------------------------
Net Increase from Capital Share Transactions 1,520,565 621,993
- ------------------------------------------------------------------------------------------------------------------------
Total Increase 1,918,204 856,394
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,141,809 1,285,415
---------------------------------
End of Period $4,060,013 $2,141,809
========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 60,378 31,457
Issued in Lieu of Cash Distributions 2,384 9,936
Redeemed (10,148) (17,430)
---------------------------------
Net Increase in Shares Outstanding 52,614 23,963
========================================================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the portfolio's Total Return
and shows net investment income and expenses as percentages of average net
assets. These data will help you assess: the variability of the portfolio's net
income and total returns from year to year; the relative contributions of net
income and capital gains to the portfolio's total return; how much it costs to
operate the portfolio; and the extent to which the portfolio tends to distribute
capital gains. The table also shows the Portfolio Turnover Rate, a measure of
trading activity. A turnover rate of 100% means that the average security is
held in the portfolio for one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $26.19 $22.23 $19.95 $15.56 $16.45 $16.30
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .41 .41 .41 .40 .40
Net Realized and Unrealized Gain (Loss)
on Investments 4.56 7.15 4.09 5.14 (.50) 1.83
-----------------------------------------------------------------------
Total from Investment Operations 4.72 7.56 4.50 5.55 (.10) 2.23
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.42) (.40) (.42) (.39) (.39)
Distributions from Realized Capital Gains (.54) (3.18) (1.82) (.74) (.40) (1.69)
-----------------------------------------------------------------------
Total Distributions (.70) (3.60) (2.22) (1.16) (.79) (2.08)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $30.21 $26.19 $22.23 $19.95 $15.56 $16.45
===================================================================================================================================
TOTAL RETURN 18.11% 35.59% 23.06% 35.93% -0.61% 13.83%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,060 $2,142 $1,285 $909 $596 $531
Ratio of Total Expenses to
Average Net Assets 0.39%* 0.36% 0.38% 0.47% 0.48% 0.50%
Ratio of Net Investment Income to
Average Net Assets 1.35%* 1.74% 1.97% 2.25% 2.50% 2.22%
Portfolio Turnover Rate 44%* 66% 75% 59% 71% 85%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth and Income Portfolio is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The portfolio consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest
quoted sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The portfolio intends to continue to qualify
as a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The portfolio, along with other members of
The Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES CONTRACTS: The portfolio uses S&P 500 Index futures
contracts to a limited extent, with the objectives of maintaining full exposure
to the stock market while maintaining liquidity. The portfolio may purchase or
sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the portfolio and
the prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices.
The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date.
Security transactions are accounted for on the date securities are bought or
sold. Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold.
B. Franklin Portfolio Associates provides investment advisory services to the
portfolio for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
relative to the S&P 500 Index. For the six months ended June 30, 1998, the
advisory fee represented an effective annual basic rate of 0.12% of the
portfolio's average net assets with no adjustment required based on performance.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the portfolio under methods approved by the Board of Trustees. At June 30,
1998, the portfolio had contributed capital of $728,000 to Vanguard (included in
Other Assets), representing 1.0% of Vanguard's capitalization. The portfolio's
Trustees and officers are also Directors and officers of Vanguard.
Vanguard has asked the portfolio's investment adviser to direct
certain security trades, subject to obtaining the best price and execution, to
brokers who have agreed to rebate to the portfolio part of the commissions
generated. Such rebates are used solely to reduce the portfolio's administrative
expenses. For the six months ended June 30, 1998, directed brokerage
arrangements reduced the portfolio's expenses by $137,000 (an annual rate of
0.01% of average net assets).
D. During the six months ended June 30, 1998, the portfolio purchased
$2,058,232,000 of investment securities and sold $649,909,000 of investment
securities, other than U.S. government securities and temporary cash
investments.
E. At June 30, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $831,301,000, consisting
of unrealized gains of $892,039,000 on securities that had risen in value since
their purchase and $60,738,000 in unrealized losses on securities that had
fallen in value since their purchase.
At June 30, 1998, the aggregate settlement value of open futures
contracts expiring in September 1998 and the related unrealized appreciation
were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(000)
---------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 270 $77,153 $2,083
- ----------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"STANDARD & POOR'S(R)," "S&P(R)," "S&P 500(R)," "STANDARD & POOR'S 500," AND
"500" ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. FRANK RUSSELL
COMPANY IS THE OWNER OF TRADEMARKS AND COPYRIGHTS RELATING TO THE
RUSSELL INDEXES. "WILSHIRE 4500" AND "WILSHIRE 5000" ARE
TRADEMARKS OF WILSHIRE ASSOCIATES.
<PAGE> 22
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q932-6/1998
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Corporation, Distributor.
All rights reserved.
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FUND INFORMATION
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complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
