VANGUARD GROWTH
AND INCOME FUND
SEMIANNUAL
REPORT
JUNE 30, 1999
[A MEMBER OF THE VANGUARD GROUP LOGO(R)]
<PAGE>
AT VANGUARD, WE BELIEVE
THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
o The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
o The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.
o The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
For an update on our Year 2000
preparedness, see page 18.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE>
FELLOW SHAREHOLDER,
[PHOTO]
JOHN J. BRENNAN JOHN C. BOGLE
CHAIRMAN & CEO SENIOR CHAIRMAN
Amid the stock market's broad advance, Vanguard Growth and Income Fund posted a
strong +13.6% return for the six months ended June 30, 1999. Your fund's
first-half return surpassed those of its average peer and its unmanaged index
benchmark.
The adjacent table presents the six-month total return (capital change plus
reinvested dividends) for the fund and its two comparative standards--the
average value fund (as calculated by Lipper) and the Standard & Poor's 500
Index. The fund's return is based on an increase in net asset value from $30.76
per share on December 31, 1998, to $34.80 per share on June 30, 1999, and is
adjusted for dividends of $0.14 per share paid from net investment income.
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TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
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Vanguard Growth and Income Fund +13.6%
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Average Value Fund +11.0%
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S&P 500 Index +12.4%
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THE PERIOD IN REVIEW
The key influences on financial markets during the first half of 1999 were the
surprising strength of the U.S. economy's long-running expansion, promising
corporate earnings, and the increasing signs that a number of shaky foreign
economies were on firmer footing. These factors were responsible for both
broad-based gains in U.S. stocks and increases in interest rates, which sent
bond prices lower.
The overall U.S. stock market, as measured by the Wilshire 5000 Equity
Index, gained +11.8%--equivalent to more than a full year's return based on
historical norms. But the half-year saw a sharp rotation in market leadership.
As the outlook for global economic growth kept improving, there was a notable
revival in cyclical stocks--those of commodity-related companies, machinery
makers, and other firms whose profit prospects are most closely tied to the
economy's ups and downs. This was a welcome change for the cyclicals and other
"value" stocks that had lagged the market not just in the first quarter of 1999
but for much of the last five years. Within the S&P 500, the value stocks--those
characterized by above-average dividend yields and below-average price/earnings
ratios--took the lead. The second-quarter reversal left value stocks ahead for
the full half-year, with a +14.0% return compared to +11.0% for growth stocks.
Small-capitalization stocks also had a strong showing in the second quarter,
nicely outpacing the S&P 500 Index. However, for the half-year the small-cap
Russell 2000 Index trailed the large-cap S&P 500, +9.3% to +12.4%.
Interest rates held steady in January, but rose throughout the rest of the
half-year.By June 30, yields on U.S. Treasury notes and bonds were higher by
roughly 1 percentage point from their year-end 1998 levels. The benchmark
30-year Treasury bond's yield increased 86 basis points (0.86 percentage point),
from 5.10% to 5.96%. The rate rise was less pronounced for short-term
securities, with the 3-month Treasury bill's yield rising 33 basis points, from
4.45% on December 31 to 4.78% on June 30.
1
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PERFORMANCE OVERVIEW
The +13.6% advance of the Growth and Income Fund was a substantial 2.6
percentage points above the +11.0% earned by the average value fund and 1.2
percentage points above the return of the S&P 500 Index, which is a formidable
standard. These are excellent results for our adviser's computer-driven
stock-selection process, which is intended to outdistance the index over the
long term while keeping a similar risk profile. Our adviser, Franklin Portfolio
Associates, had particularly strong selections in the financial-services sector,
where our holdings gained +21% versus a +13% return for the index sector. The
fund also was helped by a lesser weighting (5.0% on average versus 8.6% for the
S&P 500) in consumer staples, a relative laggard during the half-year.
The fund benefited from its slight tilt toward value stocks--a bias that
hurt relative results in 1998. It remains to be seen whether the market's
second-quarter shift toward value stocks and away from large-cap growth stocks
will endure. But as we stated in our annual report six months ago, value and
growth stocks have historically traded places as the market's leaders from time
to time, although their long-term returns are similar.
IN SUMMARY
The superb returns from U.S. stocks during the first half of 1999 were a
continuation of the amazing bull market that began in August 1982. During this
golden period, stocks have gained nearly +20% per year on average, or nearly
double the long-term "normal" return from stocks. While we're grateful for such
largesse, we believe it would be a mistake to expect outsized returns to
continue indefinitely or to forget that the risk of significant downturns is
always present in the stock market.
We believe that a balanced investment program--including stock funds, bond
funds, and cash reserves in proportions suited to your time horizon, investment
goals, and risk tolerance--is a time-tested means to gain exposure to the
rewards of investing while moderating the risks. Once you've developed such a
plan for yourself, we suggest that you "stay the course" toward your financial
goals.
/S/ /S/
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 16, 1999
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NOTICE TO SHAREHOLDERS
In the past, the semiannual income dividend that Vanguard Growth and Income Fund
distributed to shareholders at midyear was paid at a "set rate" of $0.15 per
share. If the actual income the fund earned during the period differed from the
set rate, the excess or shortfall was reflected in the December income dividend.
Beginning with the dividend paid in June 1999, the Growth and Income Fund will
distribute income on a "pay as you go" basis, rather than according to a set
rate. The policy change provides for a more even distribution of income by
distributing substantially all of the income earned during the semiannual period
to the fund's shareholders at midyear.
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2
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999
A markedly improved global economic outlook during the first half of 1999 led to
mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises in
Asia, Russia, and some Latin American nations would restrain business activity
worldwide, even in the United States, which has been the world's economic
locomotive. By spring, however, a consensus emerged that global economic
activity was likely to be solid, if not robust. This change in sentiment stemmed
from several factors, including further vigorous growth in the U.S. economy, a
belief that Asia's slump had bottomed out, and moves in Europe to ease monetary
policy to encourage growth.
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
---------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
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BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
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OTHER
Consumer Price Index 1.4% 2.0% 2.3%
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*Annualized.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both of
which had been among Wall Street's wallflowers in recent years.
U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
Large-cap growth stocks, which are generally perceived as less vulnerable
than other stocks to economic slowdowns, continued to lead the market's climb
during the first quarter of the year. During the second quarter, however, value
stocks--especially producers of commodity products such as oil, aluminum, and
chemicals--moved to the front of the pack. Providing support were generally
upbeat corporate profit reports. Indeed, earnings gains were sufficient to send
prices higher despite rising interest rates, which often depress stock prices as
well as bond prices. For the six months, the S&P 500 Index's value stocks posted
a 14.0% return while its growth stocks gained 11.0% as a group.
3
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Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second quarter.
Even so, the cumulative return of the Russell 2000 over the past three years
lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the Russell
2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.
U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage point--a
significant rise for a six-month period. The yield of the 30-year Treasury bond
rose 86 basis points, to 5.96% on June 30 from 5.10% on December 31, 1998. The
yield of the 10-year Treasury rose 113 basis points, to 5.78% from 4.65%. Money
market rates didn't rise as far: Yields on 3-month T-bills increased on balance
by only 33 basis points, to 4.78% on June 30. Bond prices, which move in the
opposite direction from interest rates, fell. The Lehman Aggregate Bond Index, a
benchmark for investment-grade taxable bonds, declined 1.4% on a total-return
basis, as bond prices declined an average of 4.4%, outweighing the 3.0% in
interest income for the period.
INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies during
the six months. However, a pervasive rise in the value of the U.S. dollar
against other currencies reduced returns for U.S. investors (returns from abroad
are augmented when the dollar falls in value against other currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in U.S.
dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the return
from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.
4
<PAGE>
REPORT FROM THE ADVISER
We are pleased to report on our investment results for the six months ended June
30, 1999. Vanguard Growth and Income Fund--and the U.S. stock market in
general--experienced yet another stretch of strongly positive returns. We
continue to be pleasantly surprised by the resiliency of this bull market.
Our return surpassed that of the S&P 500 Index for the half-year. We picked
up ground on the index during the second quarter of 1999 after trailing it
during the first quarter. However, we believe it is more useful to measure our
performance in relation to that of our peers in the Morningstar
growth-and-income funds category over varying periods. We present such a
comparison in the table at right. As you can see, we have outperformed a
significant majority of our competitors over most periods.
------------------------------------------------
RANK OF VANGUARD GROWTH AND INCOME FUND
AMONG GROWTH AND INCOME FUNDS
THROUGH JUNE 30, 1999
------------------------------------------------
Last 10 years 7th out of 144
Last 5 years 35th out of 340
Last 3 years 34th out of 536
Last 1 year 274th out of 759
Year to date 147th out of 799
------------------------------------------------
Source: Morningstar, Inc.
We remain concerned about the excesses that we see in the marketplace. The
market environment continues to be extreme. The steep increase in stock-price
volatility that occurred last autumn has not abated. We would regard any
lessening of volatility as a welcome sign of future stability.
Stocks of larger companies dominated investment results in 1998. This trend
continued into the first part of 1999, but appeared to reverse in the second
quarter. Evidence over long periods of time suggests that exposure to both
large- and small-capitalization stocks is an efficient posture for investors.
We build and maintain our portfolio by making a series of analytic
measurements on a large universe of securities. In attempting to identify
undervalued stocks, we use three basic types of measures:
o Fundamental momentum measures. These analytical yardsticks are employed
to identify companies whose current and near-term business prospects are
relatively strong.
o 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.
o Future cash flow. These analytical gauges identify likely favorable
payoffs in terms of future earnings and dividends for an investment made today.
Vanguard Growth and Income Fund uses these measures of value and momentum
to select investments because we believe that applying a variety of yardsticks
will help us to deliver consistent results.Our experience reinforces our belief
in the efficacy of an approach that combines analytic models to uncover
attractively valued securities.
Our momentum measures had, until very recently, been more fruitful than our
value-based measurements. However, paying attention to value measures has worked
better in the past few months. Our
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INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by using quantitative methods to select stocks that, in the aggregate,
have risk characteristics similar to the S&P 500 Index but that are currently
undervalued by the market.
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5
<PAGE>
experience suggests that paying attention to both momentum and value can produce
consistency over the long term. Such consistency is one of our objectives in
managing the fund.
Holdings that contributed the most to our returns versus the S&P 500 Index
during the first half of the year included Vodafone AirTouch, Morgan Stanley
Dean Witter, and Tyco International. Detracting from our relative performance
were our holding in Cardinal Health and our underweighting in two large
technology stocks--Cisco Systems and IBM--that performed well during the
half-year.
In July, we appointed John S. Cone, C.F.A., as comanger of the fund. Mr.
Cone has been associated with Franklin Portfolio Associates since its founding
in 1982.
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. Naturally, we're
happy when this is the case; however, our goal is to be among the leaders in
these lists over the long term. Investors in Vanguard Growth and Income Fund
should have a long-term perspective and a desire for exposure to the stock
market. Our investment policy is to be fully invested in equities. Our goal is
to provide superior equity returns over extended periods.
We believe that our record illustrates the effectiveness of our game
plan--seeking to provide superior performance while avoiding periods of major
shortfalls versus our benchmark index. 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 the Vanguard Growth and Income
Fund an attractive option for equity investors.
John Nagorniak
Franklin Portfolio Associates LLC
July 8, 1999
6
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PERFORMANCE SUMMARY
GROWTH AND INCOME FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
TOTAL INVESTMENT RETURNS: DECEMBER 10, 1986-JUNE 30, 1999
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GROWTH AND INCOME FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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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
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GROWTH AND INCOME FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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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 22.6 1.3 23.9 28.6
1999* 13.1 0.5 13.6 12.4
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*Six months ended June 30, 1999.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
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10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
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Growth and Income Fund 12/10/1986 19.22% 27.22% 15.89% 2.83% 18.72%
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7
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FUND PROFILE
GROWTH AND INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
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GROWTH AND INCOME S&P 500
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Number of Stocks 127 500
Median Market Cap $55.5B $70.1B
Price/Earnings Ratio 27.0x 29.6x
Price/Book Ratio 4.4x 5.2x
Yield 0.8% 1.2%
Return on Equity 19.0% 22.4%
Earnings Growth Rate 13.8% 14.8%
Foreign Holdings 4.4% 1.8%
Turnover Rate 53%* --
Expense Ratio 0.40%* --
Cash Reserves 0.9% --
*Annualized.
VOLATILITY MEASURES
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GROWTH AND INCOME S&P 500
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R-Squared 0.97 1.00
Beta 1.03 1.00
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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JUNE 30, 1998 JUNE 30, 1999
---------------------------------------------
GROWTH AND INCOME GROWTH AND INCOME S&P 500
---------------------------------------------
Auto & Transportation ................ 3.7% 2.3% 2.5%
Consumer Discretionary ............... 13.7 15.1 12.8
Consumer Staples ..................... 5.1 5.1 7.8
Financial Services ................... 23.3 19.6 16.5
Health Care .......................... 10.1 9.4 11.1
Integrated Oils ...................... 4.3 5.4 5.1
Other Energy ......................... 1.7 0.2 1.4
Materials & Processing ............... 6.7 2.9 3.5
Producer Durables .................... 4.6 4.0 3.5
Technology ........................... 9.2 16.9 18.9
Utilities ............................ 12.4 12.9 11.3
Other ................................ 5.2 6.2 5.6
INVESTMENT FOCUS
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[GRID]
STYLE BLEND
MARKET CAP LARGE
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
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Tyco International Ltd. 3.7%
Lucent Technologies, Inc. 3.2
Microsoft Corp. 2.7
Intel Corp. 2.7
Vodafone AirTouch PLC ADR 2.6
Wal-Mart Stores, Inc. 2.6
American International Group, Inc. 2.3
Merck & Co., Inc. 2.2
AT&T Corp. 2.1
Morgan Stanley Dean Witter & Co. 2.1
- ----------------------------------------------------
Top Ten 26.2%
<PAGE>
BETA. A measure of the magnitude of a fund'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 fund 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 fund'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 fund.
EXPENSE RATIO. The percentage of a fund'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 fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund 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 fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund'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 fund 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 fund, 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 fund, 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 fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund'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 fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund'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 fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund'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. Funds 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 fund's income from interest and dividends. The yield,
expressed as a percentage of the fund'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.
<PAGE>
FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.
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MARKET
VALUE*
GROWTH AND INCOME FUND SHARES (000)
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COMMON STOCKS (97.7%)(1)
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AUTO & TRANSPORTATION (2.3%)
TRW, Inc. 932,100 $ 51,149
Ford Motor Co. 867,700 48,971
O FDX Corp. 710,200 38,528
Genuine Parts Co. 322,100 11,274
Union Pacific Corp. 116,600 6,799
---------
156,721
---------
CONSUMER DISCRETIONARY (14.8%)
Wal-Mart Stores, Inc. 3,701,400 178,593
O Viacom Inc. Class B 3,210,100 141,244
Home Depot, Inc. 2,005,400 129,223
O America Online, Inc. 776,900 85,847
Carnival Corp. 1,508,800 73,177
Dayton Hudson Corp. 994,600 64,649
Eastman Kodak Co. 693,000 46,951
Whirlpool Corp. 592,700 43,860
Gannett Co., Inc. 549,800 39,242
Newell Rubbermaid, Inc 772,351 35,914
R.R. Donnelley & Sons Co. 864,400 32,037
Hasbro, Inc. 895,200 25,010
O Tricon Global Restaurants, Inc. 446,000 24,140
O Staples, Inc. 772,800 23,909
Knight Ridder 400,000 21,975
Fortune Brands, Inc. 430,800 17,824
May Department Stores Co. 267,900 10,950
Kimberly-Clark Corp. 174,100 9,924
O Kmart Corp. 447,900 7,362
VF Corp. 138,800 5,934
---------
1,017,765
---------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
CONSUMER STAPLES (5.0%)
The Quaker Oats Co. 1,201,100 $ 79,723
ConAgra, Inc. 2,599,600 69,214
Anheuser-Busch Cos., Inc. 667,800 47,372
Albertson's, Inc. 850,400 43,849
SuperValu Inc. 1,239,800 31,847
General Mills, Inc. 286,000 22,987
UST, Inc. 596,600 17,451
O Safeway, Inc. 327,000 16,187
Philip Morris Cos., Inc. 315,300 12,671
---------
341,301
---------
FINANCIAL SERVICES (19.1%)
American International
Group, Inc. 1,350,762 158,124
Morgan Stanley Dean
Witter & Co. 1,407,355 144,254
Bank of America Corp. 1,753,371 128,544
Fleet Financial Group, Inc. 2,812,700 124,814
Citigroup, Inc. 2,443,500 116,066
Freddie Mac 1,294,900 75,104
Bank One Corp. 1,090,100 64,929
MBNA Corp. 1,745,400 53,453
Lehman Brothers Holdings, Inc. 816,900 50,852
J.P. Morgan & Co., Inc. 361,900 50,847
SunTrust Banks, Inc. 670,000 46,523
Marsh & McLennan Cos., Inc. 598,200 45,164
Wells Fargo Co. 1,054,700 45,088
Transamerica Corp. 428,200 32,115
Golden West Financial Corp. 307,300 30,115
Wachovia Corp. 325,200 27,825
Fannie Mae 402,400 27,514
10
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Associates First Capital Corp. 540,300 $ 23,942
The Chase Manhattan Corp. 268,028 23,218
Deluxe Corp. 405,600 15,793
Merrill Lynch & Co., Inc. 164,400 13,142
National City Corp. 131,900 8,639
Jefferson-Pilot Corp. 111,800 7,400
BB&T Corp. 151,700 5,565
---------
1,319,030
---------
HEALTH CARE (9.2%)
Merck & Co., Inc. 2,058,000 152,292
Cardinal Health, Inc. 2,010,950 128,952
Johnson & Johnson 1,180,500 115,689
Pharmacia & Upjohn, Inc. 1,931,500 109,733
Abbott Laboratories 817,680 37,204
Allergan, Inc. 310,300 34,443
American Home Products Corp. 417,800 24,024
Aetna Inc. 208,900 18,683
Warner-Lambert Co. 179,700 12,467
---------
633,487
---------
INTEGRATED OILS (5.2%)
Royal Dutch Petroleum Co. ADR 1,860,700 112,107
Mobil Corp. 909,800 90,070
Exxon Corp. 867,100 66,875
Coastal Corp. 1,466,800 58,672
Enron Corp. 282,000 23,054
USX-Marathon Group 309,400 10,075
---------
360,853
---------
OTHER ENERGY (0.2%)
Apache Corp. 207,400 8,089
Anadarko Petroleum Corp. 180,900 6,659
---------
14,748
---------
MATERIALS & PROCESSING (2.9%)
Dow Chemical Co. 417,400 52,958
Georgia Pacific Group 1,049,400 49,715
Barrick Gold Corp. 1,032,500 20,005
The BFGoodrich Co. 390,200 16,584
Louisiana-Pacific Corp. 624,400 14,830
Archer-Daniels-Midland Co. 760,427 11,739
Owens Corning 332,300 11,423
Alcan Aluminium Ltd. 259,600 8,291
Air Products & Chemicals, Inc. 203,700 8,199
Placer Dome, Inc. 294,900 3,484
---------
197,228
---------
PRODUCER DURABLES (3.9%)
Ingersoll-Rand Co. 1,381,350 89,270
O Solectron Corp. 726,700 48,462
Honeywell, Inc. 415,000 48,088
Centex Corp. 1,200,000 45,075
O Applied Materials, Inc. 365,500 27,001
Pulte Corp. 348,100 8,028
---------
265,924
---------
TECHNOLOGY (16.5%)
Lucent Technologies, Inc. 3,276,924 220,988
O Microsoft Corp. 2,082,000 187,770
Intel Corp. 3,155,400 187,746
Hewlett-Packard Co. 1,356,900 136,368
O EMC Corp. 1,154,400 63,492
- --------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
O Seagate Technology Inc. 2,222,400 $ 56,949
O Oracle Corp. 1,516,775 56,310
O Unisys Corp. 1,426,900 55,560
O General Instrument Corp. 905,700 38,492
O Compuware Corp. 1,085,600 34,536
O Dell Computer Corp. 735,000 27,195
O Cisco Systems, Inc. 320,000 20,580
O Gateway, Inc. 339,900 20,054
International Business
Machines Corp. 141,200 18,250
O 3Com Corp. 528,900 14,115
---------
1,138,405
---------
UTILITIES (12.6%)
Vodafone AirTouch PLC ADR 921,650 181,565
AT&T Corp. 2,612,329 145,801
PG&E Corp. 2,591,100 84,211
Comcast Corp. Class A Special 2,044,100 78,570
Bell Atlantic Corp. 1,107,200 72,383
Southern Co. 2,336,800 61,925
Public Service Enterprise
Group, Inc. 1,289,700 52,717
O MCI WorldCom, Inc. 525,000 45,183
Texas Utilities Co. 956,800 39,468
Central & South West Corp. 1,187,100 27,748
BellSouth Corp. 590,000 27,656
Reliant Energy, Inc. 799,600 22,089
FPL Group, Inc. 350,500 19,146
Consolidated Natural Gas Co. 173,100 10,516
Dominion Resources, Inc. 42,800 1,854
---------
870,832
OTHER (6.0%)
Tyco International Ltd. 2,700,400 255,863
General Electric Co. 491,100 55,494
Johnson Controls, Inc. 506,000 35,072
O Thermo Electron Corp. 1,604,900 32,198
Loews Corp. 270,000 21,364
McDermott International, Inc. 542,400 15,323
---------
415,314
---------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
Cost $5,002,354) 6,731,608
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTs (1.7%)(1)
- --------------------------------------------------------------------------------
U.S. Treasury Bill
(2) 4.61%-4.64%, 9/16/1999 $ 5,400 5,347
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.87%, 7/1/1999 108,674 108,674
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $114,021) 114,021
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.4%)
(Cost $5,116,375) 6,845,629
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME FUND (000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.6%)
- --------------------------------------------------------------------------------
Other Assets--Note C $ 80,545
Liabilities (36,678)
---------
43,867
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 197,969,666 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $6,889,496
================================================================================
NET ASSET VALUE PER SHARE $34.80
================================================================================
* See Note A in Notes to Financial Statements.
o Non-Income-Producing Security.
(1) The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts. After giving effect to futures
investments, the fund's effective common stock and temporary cash
investment positions represent 99.1% and 0.3%, respectively, of net assets.
See Note E in Notes to Financial Statements.
(2) Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid in Capital $5,038,762 $25.45
Undistributed Net
Investment Income 1,344 .01
Accumulated Net
Realized Gains 117,321 .59
Unrealized Appreciation--
Note E
Investment Securities 1,729,254 8.74
Futures Contracts 2,815 .01
- --------------------------------------------------------------------------------
NET ASSETS $6,889,496 $34.80
================================================================================
12
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
SIX MONTHS ENDED JUNE 30, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 37,974
Interest 3,491
Security Lending 275
---------
Total Income 41,740
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,800
Performance Adjustment (309)
The Vanguard Group--Note C
Management and Administrative 8,661
Marketing and Distribution 611
Custodian Fees 13
Auditing Fees 6
Shareholders' Reports 154
Trustees' Fees and Expenses 5
---------
Total Expenses 11,941
Expenses Paid Indirectly--Note C (137)
---------
Net Expenses 11,804
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 29,936
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 125,981
Futures Contracts 9,830
- --------------------------------------------------------------------------------
REALIZED NET GAIN 135,811
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 607,563
Futures Contracts (2,373)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 605,190
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $770,937
================================================================================
13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 29,936 47,107
Realized Net Gain 135,811 102,254
Change in Unrealized Appreciation
(Depreciation) 605,190 593,025
--------------------------------
Net Increase in Net Assets
Resulting from Operations 770,937 742,386
--------------------------------
DISTRIBUTIONS
Net Investment Income (27,554) (48,169)
Realized Capital Gain -- (171,988)
--------------------------------
Total Distributions (27,554) (220,157)
--------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 1,485,871 2,901,578
Issued in Lieu of Cash Distributions 25,926 209,301
Issued in Exchange for Net Assets of
Trustees'-U.S. Portfolio--Note F -- 186,395
Redeemed (526,184) (800,812)
--------------------------------
Net Increase from Capital
Share Transactions 985,613 2,496,462
- --------------------------------------------------------------------------------
Total Increase 1,728,996 3,018,691
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 5,160,500 2,141,809
--------------------------------
End of Period $6,889,496 $5,160,500
================================================================================
1Shares Issued (Redeemed)
Issued 45,581 100,722
Issued in Lieu of Cash Distributions 774 7,069
Issued in Exchange for Net Assets of Trustees'-
U.S. Portfolio--Note F -- 6,578
Redeemed (16,130) (28,413)
--------------------------------
Net Increase in Shares Outstanding 30,225 85,956
================================================================================
14
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $30.76 $26.19 $22.23 $19.95 $15.56 $16.45
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .32 .41 .41 .41 .40
Net Realized and Unrealized Gain (Loss)
on Investments 4.02 5.86 7.15 4.09 5.14 (.50)
-------------------------------------------------------------------------
Total from Investment Operations 4.18 6.18 7.56 4.50 5.55 (.10)
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.33) (.42) (.40) (.42) (.39)
Distributions from Realized Capital Gains -- (1.28) (3.18) (1.82) (.74) (.40)
-------------------------------------------------------------------------
Total Distributions (.14) (1.61) (3.60) (2.22) (1.16) (.79)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $34.80 $30.76 $26.19 $22.23 $19.95 $15.56
================================================================================================================================
TOTAL RETURN 13.61% 23.94% 35.59% 23.06% 35.93% -0.61%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $6,889 $5,161 $2,142 $1,285 $909 $596
Ratio of Total Expenses to
Average Net Assets 0.40%* 0.36% 0.36% 0.38% 0.47% 0.48%
Ratio of Net Investment Income to
Average Net Assets 1.00%* 1.27% 1.74% 1.97% 2.25% 2.50%
Portfolio Turnover Rate 53%* 47% 66% 75% 59% 71%
================================================================================================================================
*Annualized.
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth and Income Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: 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 fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Futures Contracts: The fund uses S&P 500 Index futures contracts to a
limited extent, with the objectives of maintaining full exposure to the stock
market while maintaining liquidity. The fund may purchase or sell futures
contracts to achieve a desired level of investment, whether to accommodate fund
turnover or cash flows from capital share transactions. The primary risks
associated with the use of futures contracts are imperfect correlation between
changes in market values of stocks held by the fund and the prices of futures
contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
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 LLC provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
for the preceding three years relative to the S&P 500 Index. For the six months
ended June 30, 1999, the advisory fee represented an effective annual basic rate
of 0.09% of the fund's average net assets before a decrease of $309,000 (0.01%)
based on performance.
16
<PAGE>
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 1999, the fund had contributed capital of $994,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 1.4% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
Vanguard has asked the fund'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 fund part of the commissions generated. Such rebates are
used solely to reduce the fund's management and administrative expenses. For the
six months ended June 30, 1999, these arrangements reduced the fund's expenses
by $137,000.
D. During the six months ended June 30, 1999, the fund purchased $2,537,106,000
of investment securities and sold $1,555,087,000 of investment securities, other
than U.S. government securities and temporary cash investments.
E. At June 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,729,254,000,
consisting of unrealized gains of $1,796,007,000 on securities that had risen in
value since their purchase and $66,753,000 in unrealized losses on securities
that had fallen in value since their purchase.
At June 30, 1999, the aggregate settlement value of open futures contracts
expiring in September 1999 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
-----------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- --------------------------------------------------------------------------------
S&P 500 Index 270 $93,265 $2,815
- --------------------------------------------------------------------------------
F. On August 13, 1998, the fund acquired the net assets of Vanguard Trustees'
Equity Fund-U.S. Portfolio ("Trustees-U.S. Portfolio") pursuant to an agreement
approved by the shareholders of Trustees'-U.S. Portfolio on July 31, 1998. The
acquisition was accomplished by a tax-free exchange of 6,577,635 of the Growth
and Income Fund's capital shares for the 4,850,642 outstanding Trustees'-U.S.
Portfolio shares. Trustees'-U.S. Portfolio's net assets of $186,395,000,
including $36,784,000 of unrealized appreciation, were combined with the Growth
and Income Fund's net assets of $4,097,538,000, resulting in combined net assets
of $4,283,933,000 on August 13, 1998.
17
<PAGE>
NOTICE TO SHAREHOLDERS ABOUT Y2K
As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.
OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated and
thoroughly tested and are ready for the date change. As for the external systems
that connect with ours, we have been working for many months with clients,
business partners, and providers of products and services to assess their
compliance. We have analyzed the external services we require and have developed
contingency plans-- including provision for alternative providers where
appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their accounts
via our website or automated telephone systems, which offer much greater service
capacity and efficiency. This will also help our live representatives to provide
a higher level of service to those with specific transaction or other
service-related needs.
WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records will
not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com), you
can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare our
systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.
18
<PAGE>
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
- --------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund
Windsor II Fund
BALANCED FUNDS
- --------------------------------------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
- --------------------------------------------------------------------------------
Admiral Intermediate-Term Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida, Massachusetts,
New Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
Admiral Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
- --------------------------------------------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
19
<PAGE>
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer,
and Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson
& Johnson; Director of Johnson & JohnsonoMerck
Consumer Pharmaceuticals Co., Women First
HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and
Women's Research and Education Institute.
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, Banco Bilbao
Gestinova, 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., NACCO Industries, and Newfield
Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer 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>
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
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[THE VANGUARD GROUP(R) LOGO]
POST OFFICE BOX 2600
VALLEY FORGE, PENNSYLVANIA 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q932-08/12/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
