VANGUARD(R) GROWTH AND INCOME FUND
SEMIANNUAL
[PHOTO OF SHIP]
JUNE 30, 2000
[A MEMBER OF
THE VANGAURD GROUP(R) LOGO]
<PAGE>
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology,and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is
not the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
o Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
--------------------------------------------------------------------------------
CONTENTS
REPORT FROM THE CHAIRMAN...................1 FUND PROFILE................. 8
THE MARKETS IN PERSPECTIVE.................4 PERFORMANCE SUMMARY..........10
REPORT FROM THE ADVISER....................6 FINANCIAL STATEMENTS.........11
--------------------------------------------------------------------------------
All comparative mutual fund data are from Lipper Inc.or Morningstar, Inc.,
unless otherwise noted.
"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 5000(R)" and "Wilshire 4500" are trademarks of Wilshire
Associates Incorporated.
<PAGE>
REPORT FROM THE CHAIRMAN
During an especially volatile six months in the financial markets, Vanguard
Growth and Income Fund recorded a disappointing -2.0% return, lagging the
results for both its average peer and its unmanaged benchmark index.
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
The adjacent table presents the fund's total return (capital change plus
reinvested dividends) for the six months ended June 30--the first half of the
fund's fiscal year--along with those of the average large-capitalization core
mutual fund and the Standard & Poor's 500 Index, which is dominated by large
companies.
---------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 2000
---------------------------------------------------------
Vanguard Growth and Income Fund -2.0%
---------------------------------------------------------
Average Large-Cap Core Fund* 1.3%
---------------------------------------------------------
S&P 500 Index -0.4%
---------------------------------------------------------
*Derived from data provided by Lipper Inc.
Our total return is based on a change in net asset value from $37.08 per
share on December 31, 1999, to $35.14 per share on June 30, 2000, and is
adjusted for a dividend of $0.17 per share paid from net investment income and a
distribution of $1.07 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
The first half of 2000 was a tumultuous time in financial markets, which were
buffeted by a complex set of crosscurrents. The domestic economy continued to
grow at a strong pace--the production of goods and services during the second
quarter of 2000 was about 6% higher than in the same period last year, even
after adjusting for inflation. Unemployment remained low, hovering around 4% of
the workforce. Elsewhere in the world, growth was picking up from more subdued
levels.
Economic growth is generally good for corporate earnings and, thus, for
stocks. But investors and economic policymakers have worried that the
combination of rapid economic growth and low unemployment would trigger sharply
higher wages and inflation. The Federal Reserve Board, in an effort to slow the
economy's momentum and forestall an inflationary outburst, continued to raise
short-term interest rates during the half-year. The Fed boosted its target for
the federal funds rate three times during the period by a total of 1.0
percentage point (100 basis points). In all, the Fed has raised its target rate
by 175 basis points in the past 12 months.
For most of the first quarter of 2000, a continuing boom in technology
stocks kept the market averages rising, despite the threat of higher interest
rates. But during the second quarter, tech stocks in particular cooled off. The
market may have reacted to evidence that the ideal combination of rapid growth
and low inflation was coming to an end. If the Fed succeeds in slowing the
economy, corporate earnings growth might slow, too. And if earnings growth
slowed, some investors reasoned, technology and telecommunications stocks would
have a tough time maintaining their lofty price/earnings multiples. The split
between the two quarters was evident in the results for the tech-dominated
Nasdaq Composite Index, which rose 12.7% in the first quarter, only to slide
-14.7% in the second. End result? A -3.9% return for the half-year.
1
<PAGE>
The overall U.S. stock market, as measured by the Wilshire 5000 Total
Market Index, posted a -0.7% return for the six months. The small-cap Russell
2000 Index gained 3.0%, outpacing the large-cap S&P 500 Index, which posted a
-0.4% return. Leadership within the market during the period switched back and
forth between growth stocks--those whose prices reflect high expectations for
future profitability--and value stocks, whose low prices in relation to
earnings, book value, and dividends reflect low expectations by the market.
Growth stocks were in front early on, but value stocks performed best in late
March and April. Growth issues bounced back in June, however, and for the full
six months, large-cap growth stocks outpaced large value stocks. For example,
the growth stocks within the S&P 500 Index earned 2.6%, while the value stocks
fell -4.1%.
The Fed's efforts succeeded in pushing up short-term interest rates: The
yield of 3-month U.S. Treasury bills climbed 52 basis points (from 5.33% to
5.85%) during the half-year. But after rising early in the year, yields for
longer-term Treasuries began to fall after the Treasury announced that it would
use rising federal budget surpluses to buy back billions of dollars' worth of
long-term bonds. A shrinking supply of long-term Treasuries caused their prices
to rise and their yields to fall. By June 30, the 30-year Treasury bond's yield
had fallen 58 basis points, from 6.48% to 5.90%. The yield of the 10-year
Treasury note fell 41 basis points, to 6.03%. Yields on high-quality corporate
bonds were flat to slightly higher. But for low-quality corporate "junk" bonds,
prices fell and yields rose as investors worried about increased defaults. The
Lehman Aggregate Bond Index, representing nearly all of the U.S. taxable bond
market, returned 4.0%, consisting of a price increase of 0.4% and an income
return of 3.6% for the six months.
PERFORMANCE OVERVIEW
Vanguard Growth and Income Fund's -2.0% return for the half-year trailed that of
its average peer by 3.3 percentage points and that of the S&P 500 Index by 1.6
percentage points. The fund was hurt by its slight tilt toward value stocks,
which, as noted, lagged growth stocks during the half-year.
Some of the same stocks that helped the fund outperform its benchmarks in
1999 hurt it during the first half of 2000. One example was QUALCOMM, which was
the fund's third-largest holding at the start of the half-year. The company's
stock soared more than 2,600% in 1999, but it then declined 66% during the first
six months of 2000. The fund's investment adviser, Franklin Portfolio
Associates, sold some of its QUALCOMM shares in January. Even so, QUALCOMM
remained a larger position in the fund than in the S&P 500 Index. The fund's
largest sector commitment was to technology shares, with an average weighting
during the half-year of 27.1%--slightly less than the tech sector's weighting
within the index. However, the index's holdings in that sector returned about
5%, while the fund's returned -2%.
The adviser's stock picks in other sectors fared better. The fund's
holdings in the consumer-staples, health care, producer-durables, and "other
energy" sectors outpaced returns from those groups in the index.
The fund's strategy of maintaining a risk profile and sector weightings
similar to those of the S&P 500 Index--yet investing in stocks that the adviser
believes are undervalued relative to the market--has served it well in the past,
providing an annualized return higher than those of both its average peer and
the index during the full 13 fiscal years of the fund's existence. Though there
is no guarantee that the Growth and Income Fund will outperform in the future,
we are confident that our low costs and the skillful
2
<PAGE>
management of the Franklin Portfolio Associates team give us a good shot at
providing returns that are superior to those of similar funds.
In no small part, the fund's excellent long-term performance is owed to
John J. Nagorniak, founder of Franklin Portfolio Associates. Mr. Nagorniak, who
retired on June 30, led the development of the quantitative models used in
managing the fund. These models will remain in use, guided by John S. Cone, a
member of the Franklin team since 1982 and a key player in the models'
development. We wish Mr. Nagorniak the best, and on behalf of our fellow
shareholders in Vanguard Growth and Income Fund, we thank him for the energy and
intellect he brought to his work. Mr. Cone, who is president and chief executive
officer of Franklin, will provide continuity to the fund's management, and we're
confident that he and the Franklin team will continue to serve our shareholders
well.
IN SUMMARY
During the first half of 2000, we witnessed very sharp day-to-day price
fluctuations in the stock market, significant swings in investor sentiment, and
sudden shifts in market leadership. All of this volatility, squeezed into a mere
six months, underscored the fact that unpredictability is par for the course in
financial markets. The timing, extent, and duration of such episodes are
impossible to foretell with precision, but investors must be willing to endure
them to reap the long-term rewards of investing.
At Vanguard, we reiterate our long-standing recommendation for navigating
stormy seas toward long-term financial goals. First, create an investment plan
with a balance of stock funds, bond funds, and money market funds suited to your
time horizon, investment objectives, and tolerance for market fluctuations. Once
you have such a diversified plan in place, stick with it. Avoid the impulse to
alter it based on short-term events--whether those be unsettling turbulence in
the market or glittery returns from some particular corner of the market. "Stay
the course" is timeless investment wisdom.
/S/
John J. Brennan
Chairman and Chief Executive Officer
July 18, 2000
--------------------------------------------------------------------------------
IN MEMORY
--------------------------------------------------------------------------------
It is with great sadness that I report the death of John C. Sawhill, an
independent trustee of the fund and a member of The Vanguard Group's board of
directors since 1991. John, an economist who was president and chief executive
officer of The Nature Conservancy, died on May 18 at age 63. He was a senior
lecturer at the Harvard Business School and had formerly served as president of
New York University and as deputy secretary of the U.S. Department of Energy
under President Jimmy Carter. John was a remarkable man who was full of energy,
vigor, and life. His experience and wisdom added a great deal to Vanguard, and
his death is a blow to everyone who knew and loved him. Though John's work on
behalf of our funds was often carried on behind the scenes, he was a dedicated
advocate for the best interests of our shareholders. He will be missed.
3
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 2000
The perpetual tug-of-war in the financial markets ended in a near stalemate
during the first half of 2000, despite lots of back-and-forth movement. On
average, neither stock nor bond prices ended the period far from where they
began it. However, bonds, thanks to their superior income, outpaced stocks in
total return.
Economic signals were conflicting. Growth continued at a rapid pace, and
corporate profits rose smartly. On the other hand, stock prices as the year
began already reflected high levels of optimism, and the market administered
severe punishment to companies that failed to live up to earnings expectations.
Also weighing on the market were concerns that the economy's vigor at a time of
low unemployment would inevitably push labor costs and other prices higher.
Indeed, higher costs for oil and natural gas pushed broad gauges of inflation
higher (the Consumer Price Index gained 2.4% for the six months and 3.7% for the
twelve months ended June 30). Yet core inflation, which excludes energy and food
items, registered a moderate 2.4% gain during the 12 months ended June 30.
The Federal Reserve Board raised short-term interest rates by 0.25
percentage point in February and again in March, before adding a half-point
boost in May. These steps, which followed three quarter-percentage-point
increases in 1999, took the Fed's target for short-term rates to 6.5%.
Thereafter, signs of a slowing in economic activity cropped up, although it was
not certain that the Fed was done trying to throttle down the economic engine.
--------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 2000
-------------------------------
6 MONTHS 1 YEAR 5 YEARS*
--------------------------------------------------------------------------
STOCKS
S&P 500 Index -0.4% 7.2% 23.8%
Russell 2000 Index 3.0 14.3 14.3
Wilshire 5000 Index -0.7 10.0 22.6
MSCI EAFE Index -4.0 17.4 11.6
--------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 4.0% 4.6% 6.3%
Lehman 10 Year Municipal Bond Index 4.0 4.5 6.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.8 5.3 5.2
--------------------------------------------------------------------------
OTHER
Consumer Price Index 2.4% 3.7% 2.5%
--------------------------------------------------------------------------
*Annualized.
U.S. STOCK MARKETS
Stock prices were quite volatile during the half-year, and large day-to-day
price fluctuations in market averages were commonplace. There also were two
swift shifts in market leadership. The year began with a continuance in the
rapid rise for the "TMT" stocks (technology, media, telecommunications) that
were the market's darlings during 1999. Through mid-March, the surge in these
"new economy" groups left "old economy" stocks far behind. For example, the
Nasdaq Composite Index, which is dominated by tech-related stocks, gained 15.6%
and the Russell 1000 Value Index fell -10.4% during January and February. But in
mid-March, value stocks took charge and TMT stocks slumped. The Russell 1000
Value Index returned 12.1% while the Nasdaq plummeted to a -27.4% return in the
March-May period. But June brought another flip-flop: The value index declined
-4.6%, while the Nasdaq rebounded with a 14.5% return.
4
<PAGE>
When the half-year was over, most broad market indexes had modest
declines. The all-market Wilshire 5000 Index returned -0.7%, the
large-capitalization S&P 500 Index slipped -0.4%, and the Nasdaq fell -3.9%.
Small- and mid-cap stocks did better: The small-cap Russell 2000 Index gained
3.0% and the Wilshire 4500 Completion Index, comprising virtually all the U.S.
stocks outside of the S&P 500, eked out a 0.3% return.
U.S. BOND MARKETS
The Federal Reserve most directly influences interest rates of short-term
securities. The Fed pushed up its target federal funds rate (charged on
overnight loans between banks) by 1 percentage point to 6.5%. But yields of
3-month U.S. Treasury bills rose only half as far (0.52 percentage point, or 52
basis points to 5.85%). And yields actually declined on long-term Treasury
securities, whose prices rose. Big federal budget surpluses are causing a
shrinking supply of Treasury bonds. The 10-year Treasury note's yield fell 41
basis points to 6.03% as of June 30, and the yield of the 30-year Treasury
declined 58 basis points--from 6.48% to 5.90%--during the half-year.
The upshot was an unusual "inversion" in the yield curve. Instead of
sloping upward--with yields increasing along with the maturity of Treasury
securities--the curve descended. The 5.90% yield of 30-year Treasuries on June
30 was 49 basis points below the 6.39% yield on 3-year Treasury notes.
Corporate bonds did not perform as well as Treasuries for two main
reasons: a record level of new offerings and investors' concern that credit
quality might be declining. The rise in yields (and fall in prices) was slight
for higher-quality corporate bonds but more severe for high-yield "junk" bonds.
Investors grew wary of riskier bonds due to an increase in defaults. The Lehman
High Yield Bond Index saw a price decline of -5.7% during the first half of
2000, more than offsetting its six-month income of 4.5%. Tax-exempt municipal
bonds generally outperformed corporates but did not do as well as Treasury
securities. The overall taxable bond market, as measured by the Lehman Aggregate
Bond Index, returned 4.0%, as a price gain of 0.4% augmented a 3.6% income
return.
INTERNATIONAL STOCK MARKETS
International stock markets were generally unprofitable for U.S. investors due
to lack-luster local market performances and a stronger U.S. dollar during the
half-year. Although economic growth in most of Europe appeared to be
strengthening, stocks were hurt by continued economic weakness in Japan and from
expectations of higher interest rates. On the other hand, European stock prices
got some support from an increase in corporate takeovers.
In local currencies, European stocks posted a 1.7% return in the aggregate
and stocks from the Pacific region recorded a modest decline of -2.6%. However,
the dollar's strength diminished those results for U.S. investors, for whom the
Morgan Stanley Capital International (MSCI) Europe Index returned -3.0% and the
MSCI Pacific Free Index returned -5.9%. The MSCI Europe, Australasia, Far East
(EAFE) Index of developed foreign markets registered a -4.0% return for U.S.
investors.
The Select Emerging Markets Free Index fell -9.6% in U.S. dollars, having
declined -3.5% in local currencies. The index was hit by weakness in South
Africa (-15%) and several emerging Asian markets, including Indonesia (-44%),
Thailand (-36%), and the Philippines (-36%). The biggest gains among emerging
markets were in Israel (+27%) and Venezuela (+19%).
5
<PAGE>
REPORT FROM THE ADVISER
We are pleased to report on our investment results for the first six months of
2000. The U.S. stock market continued to be a challenging environment for active
investment managers, as price volatility remained high and style leadership
uncertain. The torrid pace of advances in stock prices slowed during the first
half of this year--both the S&P 500 Index and the broader market fell slightly.
There have been some reassuring signs of rational behavior recently: Certain
"new economy" stocks have been reexamined with respect to future earnings
prospects, or the lack thereof, and the market has reduced these stocks' prices.
Vanguard Growth and Income Fund has underperformed the S&P 500 Index so
far in 2000, with a total return of -2.0% versus -0.4% for the index. However,
for the 12 months ended June 30, we are ahead of the index by 1.5 percentage
points (8.7% versus 7.2%), and for the three years ended June 30, we outpaced
the index by an average of 0.7 percentage point per year (20.4% versus 19.7%).
The fund's negative performance so far this year resulted from poor stock
selection. Some of this shortfall was offset by moderately successful sector and
risk-factor tilts versus the index. For example, our holdings on average had a
slightly smaller capitalization than the benchmark average. This helped because
smaller stocks generally did better than large ones. Also, we were somewhat
aided by being underweighted versus the index in the consumer-staples and
technology sectors, and correspondingly overweighted in utilities and financial
services.
----------------------------------------------------
RANK OF VANGUARD GROWTH AND INCOME FUND
AMONG LARGE VALUE FUNDS
THROUGH JUNE 30, 20
----------------------------------------------------
Last 6 months 328th out of 694
Last 1 year 48th out of 682
Last 3 years 9th out of 514
Last 5 years 6th out of 349
Last 10 years 5th out of 133
----------------------------------------------------
Source: Morningstar, Inc.
In terms of individual holdings, the biggest positive contributors to
performance relative to the index included PepsiCo, Pfizer (which completed its
acquisition of Warner-Lambert), and Adobe Systems (an example of the kind of
sell-shovels-to-gold miners company that survived the sell-off in Internet
stocks). Being underweighted in Yahoo!, which performed poorly during the
half-year, also helped us. These successful positions were offset by holdings
that hurt us, such as Adaptec, QUALCOMM (a big winner for the fund last year),
Georgia-Pacific (an underperformer in the laggard paper group), and WorldCom
(whose stock bounced back recently in anticipation of the termination of its
proposed merger with Sprint).
The table above compares the performance of the Growth and Income Fund to
that of its peers in the large value funds category, as reported by fund
analysts Morningstar, Inc.
We continue to manage the fund by making a series of analytical
measurements on a large universe of securities--currently about 4,000 U.S.
stocks. Each of the dozens of measures we use focuses on a single intuitive
characteristic of attractive stocks, with most measures falling into one of
three categories:
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
6
<PAGE>
o Fundamental momentum: These measures seek to identify companies whose
near-term business prospects are relatively strong.
o Relative value: These measures quantify the attractiveness of a stock's
current price in relation to its own history, its peers, and the market with
respect to such measures as earnings, sales, and book value.
o Future cash flow: These measures screen for value by trying to identify
companies with likely favorable patterns of future earnings and dividend-paying
capability.
We then use a blend of these various measures to select investments that
we hope will generate consistently positive results over time. Our experience
reinforces our belief in the efficacy of picking stocks through a structured
approach that uses fundamental investment concepts, applied in a disciplined and
quantitative way. We also apply a structured approach to building the entire
portfolio. We construct the Growth and Income Fund so that it broadly resembles
the S&P 500 Index in terms of industry weightings and other risk
characteristics. But instead of exactly replicating the index, we select the
stocks we feel are most attractive.
In the first half of 2000, our fundamental momentum measures have, in
aggregate, done the best job in discriminating between the stock market's
winners and losers. However, there were sharp swings in effectiveness between
the momentum and value techniques during the past six months. January and
February saw a continuation of the hypergrowth, momentum-driven market of 1999.
Then in March we saw a sharp transition, and for a time value-oriented measures
performed best. In June, the momentum measures rebounded, although our value
criteria remained useful. Value investors are, of course, hoping for an extended
period of value dominance, and their time in the sun may be coming soon. We will
continue, however, to use a blend of styles to select stocks, because we believe
this promotes consistency in investment results.
We are long-term investors with a goal of providing superior equity
returns over an extended investment horizon. We believe our record illustrates
the effectiveness of our game plan, which is to seek to provide above-average
results in most periods and under a variety of equity market conditions,
including periods when it is particularly difficult for active managers to
outpace market indexes.
John S. Cone, CFA, President and Chief Executive Officer
Franklin Portfolio Associates LLC
July 11, 2000
7
<PAGE>
FUND PROFILE
GROWTH AND INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS INVESTMENT FOCUS
----------------------------------------------- -------------------------------
GROWTH AND INCOME S&P 500
----------------------------------------------- [GRID]
Number of Stocks 165 500
Median Market Cap $80.0B $94.9B MARKET CAP LARGE
Price/Earnings Ratio 21.3x 28.7x STYLE BLEND
Price/Book Ratio 4.0x 5.2x
Yield 0.9% 1.1%
Return on Equity 22.8% 24.5%
Earnings Growth Rate 18.2% 17.3%
Foreign Holdings 1.4% 1.2%
Turnover Rate 70%* --
Expense Ratio 0.39%* --
Cash Investments 0.1% --
*Annualized.
TEN LARGEST HOLDINGS
VOLATILITY MEASURES (% OF TOTAL NET ASSETS)
----------------------------------------------- -------------------------------
GROWTH AND INCOME S&P 500 Cisco Systems, Inc. 4.8%
----------------------------------------------- Intel Corp. 4.1
R-Squared 0.97 1.00 Microsoft Corp. 3.6
Beta 1.02 1.00 Pfizer, Inc. 3.2
Citigroup, Inc. 2.5
Johnson & Johnson 2.4
Exxon Mobil Corp. 2.4
Wal-Mart Stores, Inc. 2.2
Nortel Networks Corp. 2.2
General Electric Co. 2.1
-------------------------------
Top Ten 29.5%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
--------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 2000
---------------------------------------------------
GROWTH AND INCOME GROWTH AND INCOME S&P 500
---------------------------------------------------
Auto & Transportation 2.3% 3.1% 1.6%
Consumer Discretionary 15.1 11.4 11.8
Consumer Staples 5.1 4.6 5.7
Financial Services 19.5 15.2 13.4
Health Care 9.4 10.4 11.7
Integrated Oils 5.3 5.6 4.5
Other Energy 0.2 1.1 1.8
Materials & Processing 2.9 1.3 2.2
Producer Durables 3.9 6.3 2.9
Technology 16.9 27.3 29.9
Utilities 13.2 8.8 8.6
Other 6.2 4.9 5.9
--------------------------------------------------------------------------------
8
<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 INVESTMENTS. 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 35%.) 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.
9
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: DECEMBER 10, 1986-JUNE 30, 2000
----------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <S> <C> <C> <C> <C>
GROWTH AND INCOME FUND S&P 500 GROWTH AND INCOME FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
----------------------------------------------- -----------------------------------------------------
1986 -3.1% 0.0% -3.1% -3.3% 1994 -3.1% 2.5% -0.6% 1.3%
1987 1.8 2.2 4.0 5.3 1995 33.1 2.8 35.9 37.6
1988 13.1 3.7 16.8 16.6 1996 20.9 2.2 23.1 23.0
1989 27.6 4.4 32.0 31.7 1997 33.5 2.1 35.6 33.4
1990 -5.7 3.3 -2.4 -3.1 1998 22.6 1.3 23.9 28.6
1991 26.4 3.9 30.3 30.5 1999 24.9 1.1 26.0 21.0
1992 4.2 2.8 7.0 7.6 2000* -2.5 0.5 -2.0 -0.4
1993 11.4 2.4 13.8 10.1
----------------------------------------------- -----------------------------------------------------
</TABLE>
*Six months ended June 30, 2000.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Growth and Income Fund 12/10/1986 8.70% 23.78% 15.38% 2.54% 17.92%
--------------------------------------------------------------------------------
10
<PAGE>
FINANCIAL STATEMENTS
JUNE 30, 2000 (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, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. 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>
-------------------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
MARKET MARKET
VALUE* VALUE*
GROWTH AND INCOME FUND SHARES (000) SHARES (000)
-------------------------------------------------------------------------- ----------------------------------------------------
COMMON STOCKS (98.8%)(1) o Clear Channel
-------------------------------------------------------------------------- Communications, Inc. 255,900 $ 19,192
Tribune Co. 528,700 18,505
AUTO & TRANSPORTATION (3.1%) New York Times Co. Class A 445,700 17,605
Ford Motor Co. 1,928,900 $ 82,943 Carnival Corp. 822,900 16,046
o AMR Corp. 2,107,600 55,720 May Department Stores Co. 434,700 10,433
Delta Air Lines, Inc. 1,059,200 53,556 Darden Restaurants Inc. 576,100 9,361
Southwest Airlines Co. 1,248,700 23,647 R.R. Donnelley & Sons Co. 412,900 9,316
Burlington Northern Santa Fe Corp. 907,600 20,818 o AutoZone Inc. 336,500 7,403
Kansas City Southern Industries, Inc. 211,800 18,784 Circuit City Stores, Inc. 214,500 7,119
o FedEx Corp. 437,700 16,633 The Stanley Works 260,200 6,180
Union Pacific Corp. 355,000 13,202 Springs Industries Inc. Class A 119,300 3,818
o Visteon Corp. 252,557 3,062 ----------
--------- 1,056,932
288,365 ----------
CONSUMER DISCRETIONARY (11.3%) --------- CONSUMER STAPLES (4.5%)
Wal-Mart Stores, Inc. 3,565,500 205,462 PepsiCo, Inc. 2,789,700 123,967
Home Depot, Inc. 2,573,600 128,519 Anheuser-Busch Cos., Inc. 1,190,700 88,930
o America Online, Inc. 1,828,300 96,443 Philip Morris Cos., Inc. 2,068,900 54,955
o Viacom Inc. Class B 1,227,067 83,671 ConAgra, Inc. 2,238,100 42,664
Gannett Co., Inc. 921,400 55,111 Ralston-Ralston Purina Group 1,588,200 31,665
o Yahoo!, Inc. 438,700 54,344 o Safeway, Inc. 495,000 22,337
Sears, Roebuck & Co. 1,634,700 53,332 SuperValu Inc. 1,037,600 19,779
Kimberly-Clark Corp. 824,700 47,317 Hershey Foods Corp. 373,800 18,129
Omnicom Group Inc. 437,200 38,938 UST, Inc. 670,900 9,854
Eastman Kodak Co. 622,700 37,051 The Quaker Oats Co. 123,100 9,248
Lowe's Cos., Inc. 758,400 31,142 ----------
Knight Ridder 528,800 28,125 421,528
Whirlpool Corp. 592,700 27,635 ----------
o Federated Department FINANCIAL SERVICES (15.0%)
Stores, Inc. 759,300 25,626 Citigroup, Inc. 3,842,400 231,505
Interpublic Group of Cos., Inc. 447,400 19,238 Bank of America Corp. 2,635,071 113,308
FleetBoston Financial Corp. 3,324,200 113,023
Morgan Stanley Dean
Witter & Co. 1,267,210 105,495
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MARKET MARKET
VALUE* VALUE*
GROWTH AND INCOME FUND SHARES (000) SHARES (000)
------------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc. 1,063,100 $ 100,529 PRODUCER DURABLES (6.2%)
American International Group, Inc. 738,352 86,756 Nortel Networks Corp. 2,956,000 $ 201,747
Fannie Mae 1,513,600 78,991 The Boeing Co. 2,472,700 103,390
MBNA Corp. 2,690,700 72,985 Emerson Electric Co. 1,236,000 74,624
J.P. Morgan & Co., Inc. 558,300 61,483 o Applied Materials, Inc. 800,000 72,500
KeyCorp 2,981,800 52,554 Dover Corp. 736,700 29,882
Marsh & McLennan Cos., Inc. 478,900 50,015 Northrop Grumman Corp. 331,900 21,988
Merrill Lynch & Co., Inc. 401,500 46,173 Caterpillar, Inc. 641,800 21,741
Golden West Financial Corp. 1,111,800 45,375 o KLA-Tencor Corp. 258,900 15,162
Bear Stearns Co., Inc. 962,000 40,043 Pulte Corp. 541,600 11,712
PNC Financial Services Group 727,500 34,102 Danaher Corp. 236,600 11,697
Household International, Inc. 781,600 32,485 Cummins Engine Co., Inc. 333,700 9,093
MGIC Investment Corp. 520,800 23,696 Pall Corp. 366,100 6,773
American General Corp. 361,500 22,051 ---------
SunTrust Banks, Inc. 407,300 18,609 580,309
First Data Corp. 369,200 18,322 ---------
Providian Financial Corp. 191,800 17,262 TECHNOLOGY (26.9%)
National City Corp. 812,200 13,858 COMMUNICATIONS TECHNOLOGY (7.6%)
Wachovia Corp. 239,300 12,982 o Cisco Systems, Inc. 7,034,200 447,111
Franklin Resources Corp. 377,500 11,467 Lucent Technologies, Inc. 1,514,024 89,706
--------- Motorola, Inc. 2,094,231 60,864
1,403,069 o QUALCOMM, Inc. 897,100 53,826
--------- Scientific-Atlanta, Inc. 324,200 24,153
HEALTH CARE (10.3%) o ADC Telecommunications, Inc. 262,800 22,042
Pfizer, Inc. 6,291,250 301,980 o 3Com Corp. 338,400 19,500
Johnson & Johnson 2,193,500 223,463 COMPUTER SERVICES SOFTWARE & SYSTEM (7.2%)
Merck & Co., Inc. 2,478,000 189,877 o Microsoft Corp. 4,235,900 338,872
Abbott Laboratories 1,948,480 86,829 Oracle Corp. 2,252,550 189,355
Pharmacia Corp. 1,468,918 75,925 o Veritas Software Corp. 836,100 94,492
Cardinal Health, Inc. 534,950 39,586 Sabre Holdings Corp. 600,300 17,109
UnitedHealth Group Inc. 374,600 32,122 Adobe Systems, Inc. 92,700 12,051
Bausch & Lomb, Inc. 194,500 15,049 o Compuware Corp. 1,150,200 11,933
--------- o Citrix Systems, Inc. 448,900 8,501
964,831
--------- COMPUTER TECHNOLOGY (5.5%)
INTEGRATED OILS (5.6%) o Network Appliance, Inc. 1,935,100 155,776
Exxon Mobil Corp. 2,805,068 220,198 o EMC Corp. 1,661,100 127,801
Royal Dutch Petroleum Co. ADR 2,159,800 132,963 International Business
Kerr-McGee Corp. 928,000 54,694 Machines Corp. 1,036,800 113,594
USX-Marathon Group 1,740,100 43,611 o Apple Computer, Inc. 761,400 39,878
Occidental Petroleum Corp. 1,553,400 32,718 Hewlett-Packard Co. 229,800 28,696
Chevron Corp. 316,700 26,860 Electronic Data Systems Corp. 612,000 25,245
Coastal Corp. 154,000 9,375 o Seagate Technology Inc. 415,900 22,875
---------
520,419 ELECTRONICS--SEMICONDUCTORS/COMPONENTS (6.6%)
--------- Intel Corp. 2,869,700 383,643
OTHER ENERGY (1.0%) Texas Instruments, Inc. 1,190,600 81,779
Apache Corp. 581,600 34,205 o Conexant Systems, Inc. 870,300 42,318
Transocean Sedco Forex Inc. 459,500 24,554 o Xilinx, Inc. 460,300 38,004
Tosco Corp. 503,900 14,267 o National Semiconductor Corp. 509,200 28,897
o Rowan Cos., Inc. 461,700 14,024 o Advanced Micro Devices, Inc. 350,000 27,037
Ashland, Inc. 304,900 10,690 o Analog Devices, Inc. 192,400 14,622
--------- ---------
97,740 2,519,680
--------- ---------
MATERIALS & PROCESSING (1.3%) UTILITIES (8.7%)
Georgia Pacific Group 986,900 25,906 BellSouth Corp. 3,266,100 139,217
Dow Chemical Co. 632,700 19,100 o WorldCom, Inc. 2,815,900 129,179
Weyerhaeuser Co. 358,600 15,420 AT&T Corp. 3,319,529 104,980
Sherwin-Williams Co. 627,500 13,295 o Comcast Corp.-Special Class A 2,233,400 90,453
Air Products & Chemicals, Inc. 347,300 10,701 TXU Corp. 2,624,400 77,420
Praxair, Inc. 263,700 9,872 FPL Group, Inc. 1,218,400 60,311
PPG Industries, Inc. 215,700 9,558 Public Service Enterprise
Nucor Corp. 240,800 7,992 Group, Inc. 1,511,000 52,318
Louisiana-Pacific Corp. 281,800 3,065
o Inco Ltd. 143,300 2,203
Worthington Industries, Inc. 65,600 689
---------
117,801
---------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C>
MARKET MARKET
VALUE* VALUE*
SHARES (000) (000)
--------------------------------------------------------------------- ----------------------------------------------------
Reliant Energy, Inc. 1,258,400 $ 37,201 OTHER ASSETS AND LIABILITIES (0.1%)
American Electric Power Co., Inc. 712,260 21,101 ----------------------------------------------------
PG&E Corp. 819,600 20,183 Other Assets--Note C $ 27,841
GPU, Inc. 697,700 18,882 Liabilities (17,884)
Southern Co. 679,000 15,829 ----------
o NEXTEL Communications, Inc. 255,000 15,603 9,957
Consolidated Edison Inc. 346,800 10,274 ----------------------------------------------------
Unicom Corp. 264,000 10,214 NET ASSETS (100%)
Pinnacle West Capital Corp. 291,200 9,864 ----------------------------------------------------
Peoples Energy Corp. 34,400 1,114 Applicable to 266,278,583 outstanding
--------- $.001 par value shares of beneficial interest
814,143 (unlimited authorization) $9,357,873
--------- ====================================================
OTHER (4.9%) NET ASSET VALUE PER SHARE $35.14
General Electric Co. 3,795,000 201,135 ====================================================
Minnesota Mining & Manufacturing Co. 1,360,600 112,250 *See Note A in Notes to Financial Statements.
Tyco International Ltd. 1,570,800 74,417 oNon-income-producing security.
Loews Corp. 408,500 24,510 (1)The fund invests a portion of its cash reserves
The Seagram Co. Ltd. 312,500 18,125 in equity markets through the use of index futures
Johnson Controls, Inc. 316,000 16,215 contracts. After giving effect to futures
Textron, Inc. 190,500 10,347 investments, the fund's effective common stock and
Brunswick Corp. 247,900 4,106 temporary cash investment positions represent 99.9%
--------- and 0.0%, respectively, of net assets.
461,105 See Note E in Notes to Financial Statements.
--------- (2)Security segregated as initial margin for open
--------------------------------------------------------------------- futures contracts.
TOTAL COMMON STOCKS ADR--American Depositary Receipt.
(COST $7,558,907) 9,245,922
--------------------------------------------------------------------- ----------------------------------------------------
FACE AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
AMOUNT ----------------------------------------------------
(000) AMOUNT PER
--------------------------------------------------------------------- (000) SHARE
TEMPORARY CASH INVESTMENTS (1.1%)(1) ----------------------------------------------------
--------------------------------------------------------------------- Paid in Capital $7,465,400 $28.03
U.S. TREASURY BILL Overdistributed Net
(2)5.674%, 7/3/2000 $ 5,400 5,338 Investment Income (920) --
REPURCHASE AGREEMENT Accumulated Net Realized Gains 207,063 .78
Collateralized by U.S. Government Unrealized Appreciation
Obligations in a Pooled (Depreciation)--Note E
Cash Account Investment Securities 1,687,015 6.33
6.71%, 7/3/2000 96,656 96,656 Futures Contracts (685) --
--------------------------------------------------------------------- ----------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS NET ASSETS $9,357,873 $35.14
(COST $101,994) 101,994 ====================================================
---------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $7,660,901) 9,347,916
---------------------------------------------------------------------
</TABLE>
13
<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, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 58,852
Interest 4,451
Security Lending 1
-----------
Total Income 63,304
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 3,676
Performance Adjustment 1,333
The Vanguard Group--Note C
Management and Administrative 11,892
Marketing and Distribution 722
Custodian Fees 52
Auditing Fees 6
Shareholders' Reports 133
Trustees' Fees and Expenses 6
-----------
Total Expenses 17,820
Expenses Paid Indirectly--Note C (555)
-----------
Net Expenses 17,265
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 46,039
--------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 212,861
Futures Contracts (40)
--------------------------------------------------------------------------------
REALIZED NET GAIN 212,821
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (426,531)
Futures Contracts (3,814)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (430,345)
--------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(171,485)
================================================================================
14
<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.
<TABLE>
<CAPTION>
<S> <C> <C>
----------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 2000 DEC. 31, 1999
(000) (000)
----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 46,039 $ 69,471
Realized Net Gain 212,821 569,667
Change in Unrealized Appreciation (Depreciation) (430,345) 989,796
----------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (171,485) 1,628,934
DISTRIBUTIONS ----------------------------
Net Investment Income (44,989) (70,403)
Realized Capital Gain (268,275) (288,660)
----------------------------
Total Distributions (313,264) (359,063)
CAPITAL SHARE TRANSACTIONS1 ----------------------------
Issued 1,960,634 3,205,474
Issued in Lieu of Cash Distributions 293,209 338,671
Redeemed (1,227,605) (1,158,132)
----------------------------
Net Increase from Capital Share Transactions 1,026,238 2,386,013
----------------------------------------------------------------------------------------------------
Total Increase 541,489 3,655,884
----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 8,816,384 5,160,500
End of Period $9,357,873 $8,816,384
====================================================================================================
1Shares Issued (Redeemed)
Issued 55,469 94,634
Issued in Lieu of Cash Distributions 7,981 9,544
Redeemed (34,944) (34,150)
----------------------------
Net Increase in Shares Outstanding 28,506 70,028
====================================================================================================
</TABLE>
15
<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>
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $37.08 $30.76 $26.19 $22.23 $19.95 $15.56
---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .33 .32 .41 .41 .41
Net Realized and Unrealized Gain (Loss)
on Investments (.88) 7.60 5.86 7.15 4.09 5.14
-------------------------------------------------------
Total from Investment Operations (.70) 7.93 6.18 7.56 4.50 5.55
DISTRIBUTIONS -------------------------------------------------------
Dividends from Net Investment Income (.17) (.33) (.33) (.42) (.40) (.42)
Distributions from Realized Capital Gains (1.07) (1.28) (1.28) (3.18) (1.82) (.74)
-------------------------------------------------------
Total Distributions (1.24) (1.61) (1.61) (3.60) (2.22) (1.16)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $35.14 $37.08 $30.76 $26.19 $22.23 $19.95
=========================================================================================================
TOTAL RETURN -2.02% 26.04% 23.94% 35.59% 23.06% 35.93%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $9,358 $8,816 $5,161 $2,142 $1,285 $909
Ratio of Total Expenses to
Average Net Assets 0.39%* 0.37% 0.36% 0.36% 0.38% 0.47%
Ratio of Net Investment Income to
Average Net Assets 1.02%* 1.04% 1.27% 1.74% 1.97% 2.25%
Portfolio Turnover Rate 70%* 54% 47% 66% 75% 59%
=========================================================================================================
*Annualized.
</TABLE>
16
<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, 2000, the advisory fee represented an effective annual basic rate
of 0.08% of the fund's average net assets before an increase of $1,333,000
(0.03%) based on performance.
17
<PAGE>
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 June 30, 2000, the fund had contributed capital of $1,787,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.80% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
The fund has asked its 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. The
fund's custodian bank has also agreed to reduce its fees when the fund maintains
cash on deposit in the non-interest-bearing custody account. For the six months
ended June 30, 2000, these arrangements reduced the fund's expenses by $553,000
and $2,000, respectively. The total expense reduction represented an effective
annual rate of 0.01% of the fund's average net assets.
D. During the six months ended June 30, 2000, the fund purchased $3,922,911,000
of investment securities and sold $3,111,753,000 of investment securities, other
than U.S. government securities and temporary cash investments.
E. At June 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,687,015,000,
consisting of unrealized gains of $2,113,101,000 on securities that had risen in
value since their purchase and $426,086,000 in unrealized losses on securities
that had fallen in value since their purchase.
At June 30, 2000, the aggregate settlement value of open futures contracts
expiring in September 2000 and the related unrealized appreciation were:
--------------------------------------------------------------------------------
(000)
----------------------------------
Aggregate
Number of Settlement Unrealized
Futures Contracts Long Contracts Value Depreciation
--------------------------------------------------------------------------------
S&P 500 Index 270 $99,097 $(685)
--------------------------------------------------------------------------------
18
<PAGE>
THE VANGUARD(R) FAMILY OF FUNDS
<TABLE>
<CAPTION>
STOCK FUNDS
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
500 Index Fund Growth Index Fund* Strategic Equity Fund
Calvert Social Index(TM) Fund* Health Care Fund Tax-Managed Capital
Capital Opportunity Fund Institutional Developed Markets Appreciation Fund*
Convertible Securities Fund Index Fund Tax-Managed Growth and
Developed Markets Index Fund Institutional Index Fund* Income Fund*
Emerging Markets Stock International Growth Fund Tax-Managed International Fund*
Index Fund* International Value Fund Tax-Managed Small-Cap Fund*
Energy Fund Mid-Cap Index Fund* Total International Stock Index Fund
Equity Income Fund Morgan(TM) Growth Fund Total Stock Market Index Fund*
European Stock Index Fund* Pacific Stock Index Fund* U.S. Growth Fund
Explorer(TM) Fund PRIMECAP Fund U.S. Value Fund
Extended Market Index Fund* REIT Index Fund Utilities Income Fund
Global Equity Fund Selected Value Fund Value Index Fund*
Gold and Precious Metals Fund Small-Cap Growth Index Fund* Windsor(TM) Fund
Growth and Income Fund Small-Cap Index Fund* Windsor(TM) II Fund
Growth Equity Fund Small-Cap Value Index Fund*
BALANCED FUNDS
---------------------------------------------------------------------------------------------------------
Asset Allocation Fund LifeStrategy(R) Growth Fund STAR(TM) Fund
Balanced Index Fund LifeStrategy(R) Income Fund Tax-Managed Balanced Fund
Global Asset Allocation Fund LifeStrategy(R) Moderate Wellesley(R) Income Fund
LifeStrategy(R) Conservative Growth Fund Wellington(TM) Fund
Growth Fund
BOND FUNDS
---------------------------------------------------------------------------------------------------------
Admiral(TM) Intermediate-Term Intermediate-Term Bond Index Fund Preferred Stock Fund
Treasury Fund Intermediate-Term Corporate Fund Short-Term Bond Index Fund
Admiral(TM) Long-Term Intermediate-Term Tax-Exempt Fund Short-Term Corporate Fund*
Treasury Fund Intermediate-Term Treasury Fund Short-Term Federal Fund
Admiral(TM) Short-Term Treasury Limited-Term Tax-Exempt Fund Short-Term Tax-Exempt Fund
Fund Long-Term Bond Index Fund Short-Term Treasury Fund
GNMA Fund Long-Term Corporate Fund State Tax-Exempt Bond Funds
High-Yield Corporate Fund Long-Term Tax-Exempt Fund (California, Florida,
High-Yield Tax-Exempt Fund Long-Term Treasury Fund Massachusetts, New Jersey,
Inflation-Protected Securities New York, Ohio, Pennsylvania)
Fund Total Bond Market Index Fund*
Insured Long-Term Tax-Exempt
Fund
MONEY MARKET FUNDS
---------------------------------------------------------------------------------------------------------
Admiral(TM) Treasury Money State Tax-Exempt Money Market Tax-Exempt Money Market Fund
Market Fund Funds (California, New Jersey, Treasury Money Market Fund
Federal Money Market Fund New York, Ohio, Pennsylvania)
Prime Money Market Fund*
VARIABLE ANNUITY PLAN
---------------------------------------------------------------------------------------------------------
Balanced Portfolio High-Grade Bond Portfolio Money Market Portfolio
Diversified Value Portfolio High Yield Bond Portfolio REIT Index Portfolio
Equity Income Portfolio International Portfolio Short-Term Corporate Portfolio
Equity Index Portfolio Mid-Cap Index Portfolio Small Company Growth Portfolio
Growth Portfolio
</TABLE>
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
19
<PAGE>
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. Noted in parentheses is the year in which the trustee joined the
Vanguard board.
TRUSTEES
JOHN J. BRENNAN (1987) 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 (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) 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 (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Quantitative Equity Group.
<PAGE>
[SHIP GRAPHIC]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
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 082000
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
