<PAGE> 1
VANGUARD GROWTH
AND INCOME FUND
[PHOTO]
ANNUAL
REPORT
DECEMBER 31, 1998
[THE VANGUARD GROUP LOGO]
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AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 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. This year, our report cover pays homage to three
anniversaries, each of great significance to The Vanguard Group:
- - 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.
- - The 100th birthday, on July 23, 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.
- - The 70th anniversary, on December 28, 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.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
4
REPORT FROM
THE ADVISER
6
FUND PROFILE
8
PERFORMANCE SUMMARY
10
FINANCIAL STATEMENTS
11
REPORT OF
INDEPENDENT ACCOUNTANTS
19
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
Vanguard Growth and Income Fund earned +23.9% during 1998, a year when U.S.
financial markets encountered considerable turbulence en route to yet another
strong performance.
Gains in 1998 were largest for large-capitalization growth stocks,
although the bond and money markets provided returns well in excess of
inflation. The favorable overall environment and the Growth and Income Fund's
emphasis on large-cap stocks resulted in a return greater than 20% for the
fourth consecutive year.
The table at right presents the fund's total return (capital change plus
reinvested dividends) and those of its two comparative standards for the year.
Your fund's gain exceeded that of the average value fund by nearly 7 percentage
points. However, neither the Growth and Income Fund nor our average peer kept up
with the remarkable +28.6% return of our unmanaged benchmark, the Standard &
Poor's 500 Composite Stock Price Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1998
- -------------------------------------------------------
<S> <C>
Vanguard Growth and Income Fund +23.9%
- -------------------------------------------------------
Average Value Fund +17.0%
- -------------------------------------------------------
S&P 500 Index +28.6%
- -------------------------------------------------------
</TABLE>
Our return is based on an increase in net asset value from $26.19 per
share on December 31, 1997, to $30.76 per share on December 31, 1998, adjusted
for dividends totaling $0.33 per share paid from net investment income and
distributions totaling $1.28 per share from net realized capital gains.
FINANCIAL MARKETS IN REVIEW
The U.S. economy grew at a robust pace--more than 3%--during 1998 as it shrugged
off the effects of serious financial problems in Asia, Russia, and Latin
America. Troubles abroad slowed demand for American exports and boosted demand
for imported goods, enlarging the U.S. trade deficit. But the domestic economy
got a powerful push from higher consumer spending, which was encouraged by low
unemployment (4.3% at year-end) and higher wages (up about 4%, well above the
1.6% inflation rate).
The optimism that kept shopping malls and automobile showrooms busy was
also a factor in the financial markets. Stock prices shot up during the first
half of the year, despite news that corporate earnings actually decreased
slightly, and by July 17 the S&P 500 Index had gained +23.3%. But fears that
Asia's financial troubles were spreading worldwide touched off a sharp decline:
Over the following six weeks, the S&P 500 Index fell -19.2%. Declines were much
steeper for smaller stocks: The Russell 2000 Index of small-capitalization
stocks fell nearly -40% from its mid-April peak to its low in October.
The stock market then revived with remarkable speed and vigor. By
year-end, the S&P 500 Index was again in record territory, having gained +28.6%
for the year. This result, however, masked weakness elsewhere in the market. The
Wilshire 4500 Equity Index, which comprises stocks not included in the S&P 500,
increased just +8.6%, while the Russell 2000 Index declined -2.5%. In the entire
market, more stocks declined in price than rose. Among large-cap stocks, there
was a huge gap between returns on
1
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growth and value stocks: The S&P 500's growth component advanced +42.2% during
the year, nearly three times the +14.7% return on its value stocks.
Interest rates declined on balance during 1998. Bond prices, which move
in the opposite direction from rates, generally rose. Price appreciation
accounted for 2 percentage points of the +8.7% total return of the Lehman
Brothers Aggregate Bond Index. Rates fell furthest--roughly 1 percentage
point--for U.S. Treasury securities. Treasury bond prices benefited from a
"flight to quality" as many investors shunned riskier securities.
1998 PERFORMANCE OVERVIEW
Despite your fund's impressive absolute return of +23.9% for 1998, our result
was somewhat disappointing in terms of our objective of beating the return of
the unmanaged S&P 500 Index while maintaining a similar exposure to risk. Our
shortfall was due primarily to our tilt toward value stocks. The S&P 500's value
stocks earned +14.7% as a group during 1998, 27.5 percentage points behind the
growth stocks in the index.
Most of our shortfall versus the index was concentrated in two sectors:
financial services and health care. We held a larger stake than the index in
financial-services stocks (about 21% of assets during the year versus 17.5% for
the index), and our selections earned about +8%, versus +11% for the S&P 500's
financial-services stocks. Our holdings among health-care stocks earned about
+30% in 1998, an excellent absolute return but well behind the index sector
return of +44%.
Compared with the index, we benefited from a smaller concentration in
consumer-staples stocks, a group that lagged the market during the year. We also
had a slight underweighting (11% on average versus 13% for the index) in
technology stocks, the market's hottest industry group. However, our tech
holdings earned an astounding +107%, compared with the index's +83% return on
these stocks.
Although large-cap growth stocks have been the market's leaders for the
past five years, we don't expect that dominance to last forever. Value stocks
have in the past enjoyed periods of superior relative performance, and we see no
reason to believe that they won't do so again. Thus, we are comfortable with the
Growth and Income Fund's tilt toward large-cap value stocks.
LONG-TERM PERFORMANCE OVERVIEW
The Growth and Income Fund's long-term record is solid, both on an absolute
basis and in relation to peer mutual funds. The table below presents the fund's
returns and those of our comparative standards during the past decade, showing
how an initial $10,000 investment in each would have grown, assuming the
reinvestment of income dividends and capital gain distributions. Growth and
Income's return of +19.0% was 3.3 percentage points per year higher than that of
the average value fund. That seemingly modest margin resulted in a difference of
$13,983 in the ending value of the hypothetical $10,000 investments--a margin
larger than the initial investment. However, because we lagged in 1998, we
surrendered the modest advantage we had held over our target index, falling to a
tiny 0.2% annual deficit.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED
DECEMBER 31, 1998
--------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ---------------------------------------------------------------------
<S> <C> <C>
Vanguard Growth and Income Fund +19.0% $57,099
- ---------------------------------------------------------------------
Average Value Fund +15.7% $43,116
- ---------------------------------------------------------------------
S&P 500 Index +19.2% $57,963
- ---------------------------------------------------------------------
</TABLE>
2
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Vanguard's low costs are at once a major contributor to our advantage
against our peer funds and a modest obstacle in our effort to outperform the S&P
500 Index. During 1998, the fund's operating costs amounted to 0.36% of average
net assets, or 0.84 percentage point lower than the 1.20% expense ratio charged
by the average competitor. This cost differential gives our adviser, Franklin
Portfolio Associates, a nice head start each year in its attempt to outperform
our peers. The index, of course, exists only on paper and has no operating
costs. This gives it an advantage over even our low operating costs and the
"frictional" costs we incur when we buy or sell securities. These costs more
than accounted for the 0.2 percentage point gap between our average annual
return during the decade and that of the index.
We emphasize that our annualized return of +19.0% during the decade was
nearly double the +11% long-term historical average for common stocks. While we
are grateful for these results, they create two potential dangers. The first is
that investors may have unrealistic expectations for future returns. Investors
who base their plans on such assumptions may fall well short of their financial
goals if returns revert to lower levels, as we would expect. The second danger
is that investors may underestimate the risks that are part of investing. In six
of the past ten years, Growth and Income's total return exceeded 20%; in two
other years, the fund earned returns more in keeping with historical norms
(+7.0% in 1992 and +13.8% in 1993). The fund suffered slight declines in only
two years (-2.4% in 1990 and -0.6% in 1994). The stock market is capable of much
steeper declines. Investors who understand that downturns will occur, and are a
risk that must be endured in pursuit of investment rewards, may find it easier
to stay on an even keel when the seas get stormy.
IN SUMMARY
Events during 1998 demonstrated both the risks and rewards of owning stocks. To
help cope with the stock market's fluctuations, we recommend a balanced
investment approach. Select a mix of stock funds, bond funds, and money market
funds in proportions suited to your own investment time horizon, financial
situation, and tolerance for market volatility. Once you've made such a plan,
stick with it. Vanguard Growth and Income Fund offers a sensible approach for
the stock portion of such a balanced portfolio, and we will "stay the course"
in implementing it.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
January 14, 1999
NOTE: You'll observe that we have made a minor change in the name of the Growth
and Income Fund. We replaced the word "portfolio" with "fund" as part of a
broader effort to simplify the names in our fund lineup.
3
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THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1998
[PHOTO]
Financial markets continued to produce solid overall gains during 1998. After
overcoming a sharp, six-week setback in July and August, the S&P 500 Index
gained 28.6% for the year, marking the first time the index had produced returns
of 20% or more in four consecutive years. Bond prices rose as interest rates
generally declined over the year. Returns from overseas stock markets varied
widely, with big gains in Europe, small gains in the Pacific, and losses in most
emerging markets.
U.S. STOCK MARKETS
Large-capitalization stocks--especially those of large growth companies--were
the best performers during 1998. The 50 largest stocks within the S&P 500 Index
earned more than 40%, while the return of the other 450 stocks was less than
17%. The stock market as a whole, as measured by the Wilshire 5000 Equity Index,
earned 23.4%. Small-cap stocks, represented by the Russell 2000 Index, declined
2.5% for the year.
The huge gap between returns of large and small stocks was not the only
oddity during the year. Among large stocks there also was a large disparity in
performance between growth and value stocks. Within the S&P 500 Index, growth
stocks rose 42.2%, while value stocks were up 14.7%. The gap of 27.5 percentage
points is the largest in the 23 years that the growth and value components have
been tracked.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1998
---------------------------------
1 YEAR 3 YEARS 5 YEARS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 28.6% 28.2% 24.1%
Russell 2000 Index -2.5 11.6 11.9
MSCI EAFE Index 20.3 9.3 9.5
- ----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 8.7% 7.3% 7.3%
Lehman 10 Year Municipal Bond Index 6.8 6.8 6.4
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.1 5.2 5.1
- ----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.2% 2.4%
- ----------------------------------------------------------------------------
</TABLE>
Stocks rose strongly during the first half of the year. But after hitting
a then-record high on July 17, the S&P 500 Index fell by 19.2% during the
following six weeks. Declines were steeper for most smaller stocks. The Russell
2000 Index fell nearly 40% from its peak in April before climbing back during
the fourth quarter.
The summer slump in stock prices reflected several factors that raised
anxiety among investors and prompted a reconsideration of risk that extended
past stocks to bonds. Among these factors were deteriorating corporate earnings;
Russia's default on its debts; sharp swings in currency exchange rates; and
lingering economic weakness in Asia.
Although these sources of uncertainty remained as the year went on, many
investors reacted not by abandoning stocks, but by selecting large, well-known
stocks they perceived as reliable vehicles for long-term growth. The strong
rebound in prices during the fourth quarter was due in large part to the calming
influence on jittery markets of the Federal Reserve Board's decision to cut
short-term interest rates by 0.75 percentage point.
4
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Technology stocks led the market's advance during 1998, rising 83%.
Investors were attracted by rapid revenue growth and a belief that consumers and
businesses will keep spending freely on computers, software, and computer
services. Speculation also played a role in the surge. Burgeoning activity on
the Internet sent many stocks, even those with no hint of profitability,
skyrocketing. The bulge in Internet stock prices prompted comparisons with such
historic asset "bubbles" as Japan's stock market in the late 1980s and the
tulip-bulb mania in Holland in the 1630s.
Health care and utilities, especially telecommunications providers, also
soared, achieving returns of more than 43%. Both sectors benefited from rising
demand for their products and a perception that they are somewhat protected from
foreign economic troubles and foreign competition. Consumer-related stocks such
as retailers also did well, reflecting strength in consumer spending. Americans
spent almost every after-tax dollar they earned during 1998. Jobs were abundant;
unemployment fell to 4.3% by year-end.
The worst-performing groups were two directly harmed by falling commodity
prices: oil drilling and services firms in the "other energy" category (-36%)
and materials & processing firms (-1%), such as paper, steel, and chemical
makers. Producer-durables companies, such as machinery and aircraft makers, eked
out a 2% return as companies saw falling sales abroad and rising competition at
home from foreign firms.
U.S. BOND MARKETS
The fall in interest rates during 1998 was steepest for U.S. Treasury
securities, which benefited from heightened aversion to risk among investors and
from a slight decrease in supply, thanks to a $70 billion federal budget
surplus. The low inflation rate--consumer prices were up just 1.6%--gave the
Federal Reserve the flexibility to cut short-term rates even though economic
growth was strong.
Yields on long-term Treasury issues fell by roughly 1 percentage point,
and the 30-year Treasury bond's yield was 5.09% on December 31. Lower rates mean
higher bond prices, and the Lehman Brothers Long U.S. Treasury Index earned a
total return of 13.5%, an astounding margin of nearly 12 percentage points over
the inflation rate.
Bonds lacking the unquestioned credit quality of Treasuries did not fare
as well, reflecting a repricing of risk and a "flight to quality" by investors
who began to feel they had been underestimating risk. One result was price
declines that nearly offset the interest earned on high-yield "junk" bonds.
However, high-quality corporate bonds and mortgage-backed securities generally
held up well. The Lehman Aggregate Bond Index, which encompasses Treasury,
mortgage, and high-quality corporate securities and has an intermediate-term
average maturity, earned a solid 8.7%.
Yields on long-term municipal bonds declined only slightly during the
year, and by December 31 were only a tad lower than yields on long-term
Treasuries. This was striking because the interest on municipals is exempt from
federal income tax.
INTERNATIONAL STOCK MARKETS
Europe's stock markets beat even the S&P 500 Index's gaudy return, gaining 28.7%
in U.S.-dollar terms, with about 5% of the gain due to a fall in the dollar
versus most European currencies. Pacific-region stocks rose 2.6%, although it
took a fall in the dollar's value versus the Japanese yen to overcome losses in
local-currency terms. Overall, developed international markets, as measured by
the MSCI EAFE Index, earned 20.3%.
Investors' confidence in emerging markets continued to evaporate in 1998,
and stocks in these markets fell about 25% as a group. The few bright spots
included South Korea (+141%) and the Philippines (+13%), which had suffered big
declines in 1997.
5
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REPORT FROM THE ADVISER
[PHOTO]
We are pleased to report on our investment results for the year ended December
31, 1998. Vanguard Growth and Income Fund's total return of 23.9% amounted to a
handsome gain for our shareholders. However, in relative terms, we could best
label the results a competitive success and an artistic failure. We placed in
the upper third of value (growth and income) funds, but we lagged the fund's
performance target--the S&P 500 Index--by a considerable margin, as did most of
our brethren. The table at right shows how we ranked for the 1-, 3-, 5-, and
10-year periods ended December 31 in comparison with all the growth-and-income
funds that were in operation through each period.
<TABLE>
<CAPTION>
- ------------------------------------------------
RANK OF VANGUARD GROWTH AND INCOME FUND
AMONG GROWTH AND INCOME FUNDS
THROUGH DECEMBER 31, 1998
- ------------------------------------------------
<S> <C>
Last 10 years 10th out of 142
Last 5 years 60th out of 321
Last 3 years 74th out of 493
Last 1 year 228th out of 706
- ------------------------------------------------
</TABLE>
Source: Morningstar, Inc.
Large-capitalization stocks dominated investment results in 1998. The
largest 50 stocks in the S&P 500 Index as of December 31, 1997, had a total
return of approximately 41% during 1998; the other 450 returned approximately
17%. The index as a whole gained 28.6%. When results are skewed to the few
largest names, actively managed portfolios have an extremely difficult time
outperforming the index. The average value fund's 17.0% return during 1998 makes
the point. Likewise, when the largest components of the index are laggards,
managed money performs better.
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 analytical 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 gauges identify likely favorable
payoffs in terms of future earnings and dividends for an investment made today.
Vanguard Growth and Income Fund uses these barometers of value and
momentum to select investments. 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 analytical models to uncover
attractively valued securities, and we think the long-term performance
comparisons shown in the table above lend credence to our view.
During 1998, our momentum modeling was a positive influence on our
return, but both of our value-based measurements detracted from our performance
compared with the index. Our experience was consistent with results from the
overall market, where large, high-quality growth stocks dominated other market
segments. "Value" investing was particularly lackluster
6
<PAGE> 9
during the year. The market during 1998 was ruled by stocks with earnings and
price momentum. Our blend of momentum and value measures did a poor job of
helping us to select securities that would outperform the overall market during
1998.
Holdings that contributed most to our returns versus the S&P 500 Index
included Lucent Technologies, Ford, and Tyco International. Holdings that
detracted from relative performance, either because they performed poorly or
because our stake in them was smaller than the market's, included Thermo
Electron, Microsoft, and HEALTHSOUTH.
We 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-term 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.
We believe that our past success demonstrates the effectiveness of the
Franklin game plan, which is to seek to provide superior performance while
avoiding periods of major underperformance 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
January 11, 1999
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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FUND PROFILE
GROWTH AND INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 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 137 500
Median Market Cap $41.0B $60.3B
Price/Earnings Ratio 23.3x 28.0x
Price/Book Ratio 3.9x 4.9x
Yield 1.1% 1.3%
Return on Equity 19.1% 22.5%
Earnings Growth Rate 12.7% 17.2%
Foreign Holdings 0.0% 1.6%
Turnover Rate 47% --
Expense Ratio 0.36% --
Cash Reserves 0.8% --
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
GROWTH AND INCOME S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.03 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
AT&T Corp. 3.5%
Merck & Co., Inc. 3.4
AirTouch Communications, Inc. 3.4
Intel Corp. 3.3
American International Group, Inc. 3.0
BankAmerica Corp. 2.8
Tyco International Ltd. 2.7
Wal-Mart Stores, Inc. 2.6
Lucent Technologies, Inc. 2.5
Cardinal Health, Inc. 2.4
- -------------------------------------------------------
Top Ten 29.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------
GROWTH AND INCOME GROWTH AND INCOME S&P 500
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation ............ 5.4% 2.5% 2.5%
Consumer Discretionary ........... 11.8 14.8 12.0
Consumer Staples ................. 6.0 4.6 9.8
Financial Services ............... 20.8 17.0 16.2
Health Care ...................... 10.3 13.1 12.5
Integrated Oils .................. 5.9 3.3 5.2
Other Energy ..................... 3.3 0.0 0.9
Materials & Processing ........... 10.7 3.0 3.7
Producer Durables ................ 4.7 4.2 3.2
Technology ....................... 9.7 15.1 16.6
Utilities ........................ 10.9 17.5 11.7
Other ............................ 0.5 4.9 5.7
- --------------------------------------------------------------------------------------------------
</TABLE>
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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 past year. 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.
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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.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: DECEMBER 10, 1986-DECEMBER 31, 1998
- -------------------------------------------------------------
GROWTH AND INCOME FUND 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 22.6 1.3 23.9 28.6
- -------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: DECEMBER 31, 1988-DECEMBER 31, 1998
- -----------------------------------------------------------
Growth And Average Value S&P 500 Index
Income Fund Fund
<S> <C> <C> <C>
1988 12 10000 10000 10000
1989 03 10740 10589 10709
1989 06 11661 11332 11654
1989 09 12924 12321 12902
1989 12 13200 12323 13169
1990 03 12864 11981 12772
1990 06 13564 12539 13576
1990 09 11715 10985 11710
1990 12 12877 11770 12760
1991 03 14728 13394 14613
1991 06 14583 13304 14580
1991 09 15401 14201 15359
1991 12 16778 15166 16647
1992 03 16357 15054 16227
1992 06 16398 15016 16535
1992 09 16809 15593 17057
1992 12 17954 16474 17916
1993 03 19067 17143 18698
1993 06 19401 17210 18789
1993 09 20101 18008 19275
1993 12 20436 18322 19721
1994 03 19593 17668 18973
1994 06 19462 17540 19053
1994 09 20337 18530 19985
1994 12 20311 18179 19982
1995 03 22178 19577 21927
1995 06 24268 21101 24020
1995 09 26426 22914 25929
1995 12 27609 23875 27490
1996 03 29238 25067 28966
1996 06 30253 25827 30266
1996 09 31104 26910 31202
1996 12 33976 28867 33802
1997 03 34594 29030 34708
1997 06 40432 33224 40768
1997 09 45285 36639 43821
1997 12 46068 36854 45080
1998 03 52404 40883 51368
1998 06 54412 41042 53064
1998 09 47334 36606 47786
1998 12 57099 43116 57963
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1998
---------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and Income Fund 23.94% 22.81% 19.03% $57,099
Average Value Fund 16.99 18.67 15.73 43,116
S&P 500 Index 28.58 24.06 19.21 57,963
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund 12/10/1986 23.94% 22.81% 16.24% 2.79% 19.03%
- -----------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
December 31, 1998
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME FUND SHARES (000)
- ----------------------------------------------------------
COMMON STOCKS (97.5%)(1)
<S> <C> <C>
AUTO & TRANSPORTATION (2.5%)
- - AMR Corp. 1,163,400 $ 69,077
Dana Corp. 266,200 10,881
Ford Motor Co. 794,100 46,604
Genuine Parts Co. 10,600 354
Southwest Airlines Co. 36,600 821
-----------
127,737
-----------
CONSUMER DISCRETIONARY (14.5%)
- - ADVO, Inc. 5,100 135
Bob Evans Farms, Inc. 4,300 112
Dayton Hudson Corp. 1,905,000 103,346
Deluxe Corp. 282,600 10,332
The Walt Disney Co. 508,800 15,264
R.R. Donnelley & Sons Co. 122,100 5,349
Eastman Kodak Co. 943,300 67,918
- - Federated Department
Stores, Inc. 235,400 10,255
- - Fred Meyer Inc. 20,700 1,247
Gannett Co., Inc. 1,320,400 85,166
Home Depot, Inc. 1,990,400 121,788
- - Interim Services, Inc. 3,400 79
- - Kmart Corp. 1,241,400 19,009
Knight Ridder 318,800 16,299
Lowe's Cos., Inc. 17,000 870
Media General, Inc. Class A 15,800 837
Newell Co. 833,400 34,378
Rubbermaid, Inc. 381,900 12,006
- - Ryan's Family Steak Houses, Inc. 75,100 929
TJX Cos., Inc. 22,400 650
Tribune Co. 273,200 18,031
VF Corp. 69,200 3,244
- - Viacom Inc. Class B 826,900 61,191
Wal-Mart Stores, Inc. 1,634,700 133,126
Whirlpool Corp. 440,500 24,393
-----------
745,954
-----------
CONSUMER STAPLES (4.5%)
Albertson's, Inc. 850,400 54,160
Anheuser-Busch Cos., Inc. 572,800 37,590
The Coca-Cola Co. 115,200 7,704
General Mills, Inc. 136,000 10,574
Procter & Gamble Co. 122,368 11,174
The Quaker Oats Co. 988,700 58,828
The Seagram Co. Ltd. 495,000 18,810
SuperValu Inc. 1,239,800 34,714
-----------
233,554
-----------
FINANCIAL SERVICES (16.6%)
Allstate Corp. 1,256,500 48,532
American International
Group, Inc. 1,627,862 157,292
- - AmeriCredit Corp. 5,400 74
Bank One Corp. 1,842,600 94,088
BankAmerica Corp. 2,365,371 142,218
Capital One Financial Corp. 121,200 13,938
The Chase Manhattan Corp. 218,028 14,839
Citigroup, Inc. 1,096,100 54,257
Conseco Inc. 792,500 24,221
Dun & Bradstreet Corp. 586,000 18,496
Fannie Mae 252,400 18,678
Fidelity National Financial, Inc. 2,299 70
Fleet Financial Group, Inc. 591,500 26,433
Freddie Mac 662,600 42,696
Jefferson-Pilot Corp. 111,800 8,385
Lehman Brothers Holdings, Inc. 816,900 35,995
Marsh & McLennan Cos., Inc. 797,600 46,610
Morgan Stanley Dean
Witter & Co. 1,187,355 84,302
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
SunTrust Banks, Inc. 289,700 $ 22,162
Washington Mutual, Inc. 93,912 3,586
-----------
856,872
-----------
HEALTH CARE (12.7%)
Abbott Laboratories 384,680 18,849
Allergan, Inc. 280,300 18,149
American Home Products Corp. 1,809,900 101,920
Cardinal Health, Inc. 1,654,950 125,569
Guidant Corp. 69,000 7,607
HBO & Co. 18,000 516
- - HEALTHSOUTH Corp. 1,053,000 16,256
Johnson & Johnson 578,000 48,480
Merck & Co., Inc. 1,200,400 177,284
Pfizer, Inc. 263,300 33,028
Pharmacia & Upjohn, Inc. 525,700 29,768
- - Trigon Healthcare, Inc. 5,800 216
United Healthcare Corp. 1,032,500 44,462
Warner-Lambert Co. 462,400 34,767
-----------
656,871
-----------
INTEGRATED OILS (3.2%)
Ashland, Inc. 332,900 16,104
Coastal Corp. 1,186,900 41,467
Enron Corp. 728,300 41,559
Exxon Corp. 747,100 54,632
Mobil Corp. 127,900 11,143
-----------
164,905
-----------
MATERIALS & PROCESSING (3.0%)
Archer-Daniels-Midland Co. 2,668,927 45,872
Barrick Gold Corp. 689,000 13,436
Dow Chemical Co. 359,900 32,728
Fluor Corp. 415,700 17,693
The BFGoodrich Co. 390,200 13,998
Louisiana-Pacific Corp. 624,400 11,434
Owens Corning 141,800 5,025
Placer Dome, Inc. 1,153,900 13,270
-----------
153,456
-----------
PRODUCER DURABLES (4.1%)
Centex Corp. 920,000 41,457
- - Champion Enterprises, Inc. 3,500 96
Dover Corp. 167,800 6,146
HON Industries, Inc. 6,200 148
Honeywell, Inc. 440,000 33,138
Ingersoll-Rand Co. 1,291,350 60,613
- - Lexmark International Group,
Inc. Class A 3,400 342
Lockheed Martin Corp. 447,000 37,883
Pulte Corp. 179,300 4,987
Thomas & Betts Corp. 274,500 11,889
United Technologies Corp. 145,000 15,769
-----------
212,468
-----------
TECHNOLOGY (14.7%)
- - Apple Computer, Inc. 2,725,000 111,555
- - Cisco Systems, Inc. 79,875 7,413
Computer Sciences Corp. 15,600 1,005
- - Compuware Corp. 5,300 414
- - Dell Computer Corp. 53,400 3,908
EG&G, Inc. 207,300 5,766
- - EMC Corp. 577,200 49,062
- - General Instrument Corp. 880,700 29,889
Intel Corp. 1,445,400 171,370
Lucent Technologies, Inc. 1,194,962 131,446
- - Microsoft Corp. 646,600 89,675
- - Oracle Corp. 1,736,050 74,867
- - Seagate Technology 1,997,200 60,415
- - Tellabs, Inc. 96,500 6,616
- - Unisys Corp. 466,900 16,079
-----------
759,480
-----------
UTILITIES (17.1%)
- - AirTouch Communications, Inc. 2,409,100 173,756
AT&T Corp. 2,383,000 179,321
Baltimore Gas & Electric Co. 4,900 151
Bell Atlantic Corp. 1,399,300 74,163
BellSouth Corp. 538,600 26,863
Central & South West Corp. 928,400 25,473
Dominion Resources, Inc. 422,500 19,752
DTE Energy Co. 746,900 32,023
Energy East Corp. 5,900 333
FPL Group, Inc. 410,900 25,322
Houston Industries, Inc. 1,607,400 51,638
- - MCI WorldCom, Inc. 571,200 40,984
- - Niagara Mohawk Power Corp. 367,500 5,926
PG&E Corp. 1,209,900 38,112
Public Service Enterprise
Group, Inc. 1,259,700 50,388
SBC Communications Inc. 68,200 3,657
Sempra Energy 396,800 10,069
Southern Co. 2,660,100 77,309
- - Tele-Communications-
TCI Group A 583,800 32,291
U S West, Inc. 231,051 14,932
-----------
882,463
-----------
OTHER (4.6%)
- - Berkshire Hathaway, Inc. Class B 10,101 23,737
Crane Co. 6,150 186
Loews Corp. 106,400 10,454
McDermott International, Inc. 580,400 14,329
- - Thermo Electron Corp. 2,909,200 49,275
Tyco International Ltd. 1,874,200 141,385
-----------
239,366
-----------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $3,911,436) 5,033,126
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (3.7%)(1)
- ----------------------------------------------------------
U.S. TREASURY BILL
(2) 4.38%, 3/18/1999 $ 3,864 3,866
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.76%, 1/4/1999 126,444 126,444
4.77%, 1/4/1999--Note G 63,090 63,090
- ----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $193,399) 193,400
- ----------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(COST $4,104,835) 5,226,526
- ----------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-1.2%)
- ----------------------------------------------------------
Other Assets--Note C $ 30,604
Liabilities--Note G (96,630)
-----------
(66,026)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 167,744,376 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $5,160,500
==========================================================
NET ASSET VALUE PER SHARE $30.76
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -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 99.2% and 2.0%, respectively, of net assets.
See Note F in Notes to Financial Statements.
(2) Security segregated as initial margin for open futures contracts.
<TABLE>
<CAPTION>
- --------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note H $4,053,149 $24.16
Overdistributed Net
Investment Income (1,038) (.01)
Accumulated Net Realized
Losses--Note E (18,490) (.11)
Unrealized Appreciation--
Notes F and H
Investment Securities 1,121,691 6.69
Futures Contracts 5,188 .03
- --------------------------------------------------------
NET ASSETS $5,160,500 $30.76
========================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31, 1998
(000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 53,186
Interest 7,148
Security Lending 60
- -----------------------------------------------------------------------------------------------------------------------------
Total Income 60,394
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 4,045
Performance Adjustment (300)
The Vanguard Group--Note C
Management and Administrative 8,600
Marketing and Distribution 910
Taxes (other than income taxes) 94
Custodian Fees 15
Auditing Fees 12
Shareholders' Reports 101
Annual Meeting and Proxy Costs 32
Trustees' Fees and Expenses 7
- -----------------------------------------------------------------------------------------------------------------------------
Total Expenses 13,516
Expenses Paid Indirectly--Note D (229)
- -----------------------------------------------------------------------------------------------------------------------------
Net Expenses 13,287
- -----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 47,107
- -----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 91,965
Futures Contracts 10,289
- -----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 102,254
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 588,424
Futures Contracts 4,601
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 593,025
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $742,386
=============================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 47,107 $ 29,457
Realized Net Gain 102,254 227,268
Change in Unrealized Appreciation (Depreciation) 593,025 234,178
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 742,386 490,903
DISTRIBUTIONS
Net Investment Income (48,169) (29,804)
Realized Capital Gain (171,988) (226,698)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (220,157) (256,502)
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,901,578 825,200
Issued in Lieu of Cash Distributions 209,301 245,739
Issued in Exchange for Net Assets of Trustees'-U.S. Portfolio--Note H 186,395 --
Redeemed (800,812) (448,946)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 2,496,462 621,993
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase 3,018,691 856,394
NET ASSETS
Beginning of Year 2,141,809 1,285,415
=============================================================================================================================
End of Year $5,160,500 $2,141,809
=============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 100,722 31,457
Issued in Lieu of Cash Distributions 7,069 9,936
Issued in Exchange for Net Assets of Trustees'-U.S. Portfolio--Note H 6,578 --
Redeemed (28,413) (17,430)
=============================================================================================================================
Net Increase in Shares Outstanding 85,956 23,963
=============================================================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $26.19 $22.23 $19.95 $15.56 $16.45
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .41 .41 .41 .40
Net Realized and Unrealized Gain (Loss) on Investments 5.86 7.15 4.09 5.14 (.50)
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.18 7.56 4.50 5.55 (.10)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.33) (.42) (.40) (.42) (.39)
Distributions from Realized Capital Gains (1.28) (3.18) (1.82) (.74) (.40)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.61) (3.60) (2.22) (1.16) (.79)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $30.76 $26.19 $22.23 $19.95 $15.56
============================================================================================================================
TOTAL RETURN 23.94% 35.59% 23.06% 35.93% -0.61%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $5,161 $2,142 $1,285 $909 $596
Ratio of Total Expenses to Average Net Assets 0.36% 0.36% 0.38% 0.47% 0.48%
Ratio of Net Investment Income to Average Net Assets 1.27% 1.74% 1.97% 2.25% 2.50%
Portfolio Turnover Rate 47% 66% 75% 59% 71%
============================================================================================================================
</TABLE>
16
<PAGE> 19
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 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 year ended December
31, 1998, the advisory fee represented an effective annual basic rate of 0.11%
of the fund's average net assets before a decrease of $300,000 (0.01%) 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 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 December 31, 1998, the fund had contributed capital of $854,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.2% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
D. 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 administrative expenses. For the year ended
December 31, 1998, directed brokerage arrangements reduced the fund's expenses
by $227,000 (an annual rate of 0.01% of average net assets). The fund's
custodian has also agreed to reduce its fees when the fund maintains cash on
deposit in the non-interest-bearing custody account. For the year ended December
31, 1998, the custody fee offset arrangement reduced expenses by $2,000.
E. During the year ended December 31, 1998, the fund purchased $3,915,144,000 of
investment securities and sold $1,659,147,000 of investment securities, other
than U.S. government securities and temporary cash investments.
For federal tax purposes, capital gains required to be distributed in
December 1998 included net gains realized through October 31, 1998.
Subsequently, the fund realized capital losses of $12,645,000, which are
available to offset future net capital gains.
F. At December 31, 1998, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,121,691,000,
consisting of unrealized gains of $1,288,293,000 on securities that had risen
in value since their purchase and $166,602,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1998, the aggregate settlement value of open futures
contracts expiring in March 1999 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 $84,071 $5,188
- -------------------------------------------------------------------------------------------------
</TABLE>
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
G. The market value of securities on loan to broker/dealers at December 31,
1998, was $61,498,000, for which the fund held cash collateral of $63,090,000.
Cash collateral received is invested in repurchase agreements.
H. 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.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
[PHOTO]
To the Shareholders and Trustees of
Vanguard Growth and Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Growth and Income Fund (the "Fund") at December 31, 1998, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 1999
19
<PAGE> 22
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD GROWTH AND INCOME FUND
This information for the fiscal year ended December 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $170,033,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended December
1998, all of which is designated as a 20% rate gain distribution.
For corporate shareholders, 100% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
20
<PAGE> 23
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.
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.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck 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.
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> 24
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.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q930-02/16/1999
(C) 1999 Vanguard Marketing Corporation, Distributor. All rights reserved.
