<PAGE> 1
[VANGUARD PREFERRED STOCK FUND LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Preferred Stock Fund and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD PREFERRED STOCK FUND SEEKS TO PROVIDE THE MAXIMUM DIVIDEND INCOME THAT
QUALIFIES FOR THE INTERCORPORATE DIVIDENDS RECEIVED DEDUCTION UNDER FEDERAL TAX
LAWS. THE FUND INVESTS PRIMARILY IN INVESTMENT-GRADE PREFERRED STOCKS, SELECTED
ON THE BASIS OF SUCH FUNDAMENTAL FACTORS AS YIELD, DIVIDEND COVERAGE, AND ASSET
PROTECTION.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Our 1995 fiscal year, which ended on October 31, presented a sharp contrast to
fiscal 1994. During the prior fiscal year, interest rates rose sharply,
engendering a commensurate drop in the prices of all interest-rate-sensitive
securities, including preferred stocks. During our most recent fiscal year,
long-term interest rates fell steadily, driving prices of preferred stocks and
long-term bonds upward. The net result of this sea change was greatly enhanced
returns to the shareholders of Vanguard Preferred Stock Fund. Indeed, it was
one of the best years in the Fund's nearly 20 years of operations.
The following table presents the return of Vanguard Preferred Stock Fund
compared with that of the unmanaged Merrill Lynch Perpetual Preferred Stock
Index, a broad measure of the preferred stock market comprising some 200
securities with a total market value of $29 billion. This standard, while it
is a crude tool with which to measure the Fund's success, is the best available
benchmark. Here is the comparison:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURN
-------------------
FISCAL YEAR ENDED
OCTOBER 31, 1995
- ----------------------------------------------------------------------
<S> <C>
VANGUARD PREFERRED STOCK FUND +23.8%
- ----------------------------------------------------------------------
MERRILL LYNCH PERPETUAL PREFERRED INDEX +18.0%
- ----------------------------------------------------------------------
</TABLE>
The total return of the Fund is based on net asset values of $8.35 per share on
October 31, 1994, and $9.61 per share on October 31, 1995, with the latter
figure adjusted to take into account the reinvestment of four quarterly
dividend payments totaling $.65 per share from net investment income. As
expected, 100% of our income dividends qualified for the 70% intercorporate
dividends received deduction. The Fund's current dividend yield is 6.9%.
THE YEAR IN REVIEW
Above all, fiscal 1995 can be viewed as a year of recovery in the fixed-income
markets. On balance for the fiscal year, the yield on long-term corporate bonds
(AA utilities) tumbled from 8.8% to 7.2%, a precipitous drop of 160 basis
points, equivalent to a +20% price increase excluding the generous interest
coupon. Yields on preferred stocks moved in a similar manner, falling from 9.0%
to 7.5% during this period.
In my view, a variety of factors contributed to the abrupt decline in
long-term interest rates over the past twelve months. Most importantly, we
should not lose sight of the fact that interest rates had risen virtually
without interruption in the months leading up to the commencement of our 1995
fiscal year, reaching a peak in November 1994. This climb in rates was
engendered largely by investors' fears about a resurgence of inflation. With
the Federal Reserve Board raising the Federal funds rate (the rate at which
banks borrow from one another) an unprecedented seven times in the thirteen
months from February 1994 to February 1995, these inflation fears certainly
seemed well-founded.
Although restrictive monetary policy often fails to deliver the desired
result, in this case the Fed's medicine seemed to work as intended. That is,
U.S. economic growth slowed and inflation concerns gradually dissipated.
Reflecting renewed investor optimism, long-term rates did an about-face
beginning in late January 1995 and began to move steadily lower. By the time
the summer of 1995 began, the Fed relaxed its stern monetary policy and
actually reduced the Federal funds rate by 1/4 of 1% (to 5 3/4%).
The chart on page 2, showing the trend in interest rates during the past
five years, should place the events of the past two fiscal years into a
somewhat longer-run perspective. You will note that the first three years
witnessed a steady downtrend in rates, followed by the abrupt two-year cycle
that I just described. Yet, when all is said and done, yields on long-term
corporate bonds and preferred stocks remain below the levels maintained during
fiscal 1991-92. In other words, despite the "slings and arrows" of the recent
volatile period, the prices of corporate bonds and preferred stocks are higher
than during the early years of the period.
(continued)
1
<PAGE> 4
[FIGURE 2]
I would like to take this opportunity to emphasize yet again that, for
long-term bonds and preferred stocks alike, interest rate volatility translates
directly into price volatility. For preferred stocks, you should know that this
price volatility--for better or for worse--will tend to be more pronounced,
since preferreds generally have longer effective maturities than bonds. To be
sure, this distinction was for the better in fiscal 1995; however, as sure as
the night follows the day, when rates again reverse their course and head
upward, the prices of preferred securities will fall commensurately.
THE FUND IN FISCAL 1995
Following a tough 1994 for all interest-rate-sensitive securities--in
particular, preferred stocks--Vanguard Preferred Stock Fund bounced back nicely
during fiscal 1995. Our Fund's return of +23.8% was extremely generous on an
absolute basis and was also rewarding relative to our customary benchmark
standards. The Merrill Lynch Perpetual Preferred Stock Index achieved a total
return of +18.0%, while the return of the average fixed-income mutual fund, at
+12.5%, was a bit more than one-half our return.
I should note that this competitive peer group of bond funds includes
not only long-term funds, but intermediate-term and short-term funds as well.
On balance, the funds in this peer group maintain maturities averaging only
about nine years. As a result, their decline of -3.2% last year was much
smaller than our -8.5% decline. So, given this fundamental difference in
maturity structure, we try not to make too much of our outperformance relative
to this competitive group, particularly when the financial market tides are so
strongly in our favor.
We were also assisted during the past year by some important dynamics at
work in the preferred stock market. Specifically, the supply of preferreds
eligible for the dividends received deduction has contracted sharply over the
past eighteen months. The reason is that preferred stock financing becomes
relatively more expensive as firms become profitable, since the dividends paid
on preferreds, unlike interest on bonds, cannot be deducted from income before
taxes. As a result, many traditional preferred stock issuers are replacing
their preferred stock with more debt-like financing. This rotation away from
preferreds has also diminished the supply of newly issued preferreds. The net
result of these factors is that the prices of existing preferred stocks have in
essence been bid higher to reflect a lack of supply.
Notwithstanding these favorable market forces, some credit for the
Fund's outperformance must be given to our long-time adviser, Earl E. McEvoy of
Wellington Management Company. Investing in the preferred stock market entails
diligent analysis, since preferred stocks are junior in status to bonds with
regard to claims on both principal and income. What's more, attention must be
given to one of the Fund's primary objectives: qualifying all of its income
dividends for the 70% intercorporate dividends received deduction. Mr. McEvoy
has skillfully navigated the Fund through turbulent waters since 1982, and, on
Vanguard's behalf and yours alike, I congratulate him on a fine fiscal 1995.
A LONGER-TERM PERSPECTIVE
There can be little doubt that long-term shareholders of Vanguard Preferred
Stock Fund have been nicely
2
<PAGE> 5
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended October 31, 1995
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK FUND +23.79% +11.99% +10.98%
AVERAGE FIXED INCOME FUND +12.46 + 9.47 + 8.43
MERRILL LYNCH PREFERRED INDEX* +17.95 +12.58 +11.02
</TABLE>
*Standard & Poor's Preferred Index through March 1989; Merrill Lynch Perpetual
Preferred Index thereafter.
Note: Past performance is not predictive of future performance.
compensated relative to other fixed-income alternatives. The table and the
chart on this page illustrate the Fund's record over the past decade compared
to that of the average fixed-income mutual fund and an unmanaged index of
preferred stocks. Since our customary benchmark, the Merrill Lynch Preferred
Stock Index, has performance history going back only to April 1989, we have
"spliced on" the results of the Standard & Poor's Preferred Index.
<TABLE>
<CAPTION>
TOTAL RETURN
TEN YEARS ENDED
OCTOBER 31, 1995
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
<S> <C> <C>
VANGUARD PREFERRED STOCK FUND +11.0% $28,336
AVERAGE FIXED INCOME FUND + 8.4% $22,459
MERRILL LYNCH PREFERRED INDEX +11.0 28,442
</TABLE>
I should note that the returns in the table and the chart reflect past
performance and should not be regarded as an indication of future returns.
Indeed, given the lower interest rates that prevail today as compared to a
decade ago, it seems unlikely that future returns will match these historical
results.
Looking at our long-term record relative to the average fixed-income
mutual fund, it is remarkable that we have been able to outpace this
competitive standard by more than two percentage points per year. The result is
that, on a cumulative basis, what may seem like a relatively small margin of
advantage "adds up" over time. Indeed, the cumulative return on a $10,000
initial investment in Vanguard Preferred Stock Fund has provided an excess
return over our competitors of $5,877--nearly 60% of the amount initially
invested.
If that were as far as the comparison went, the Fund's record would
still be an outstanding one. But the story is even more favorable for corporate
investors, since 100% of the interest income on bond funds is taxed at the
regular corporate rate, while the
3
<PAGE> 6
dividends on preferred stocks are eligible for the 70% intercorporate dividends
received deduction. This table illustrates the dramatic after-tax advantage of
preferred stock ownership for corporate investors:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
-------------------------------------------------
TEN YEARS ENDED OCTOBER 31, 1995
-------------------------------------------------
FINAL
AFTER-TAX
VALUE
OF INITIAL
BEFORE- AFTER- INVESTMENT
TAX TAX OF $10,000
- --------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD PREFERRED
STOCK FUND +11.0% +10.1% $26,228
- --------------------------------------------------------------------------
AVERAGE FIXED
INCOME FUND + 8.4% + 5.4% $16,869
- --------------------------------------------------------------------------
</TABLE>
*Assumes both maximum corporate tax rate and dividends received deduction at
applicable levels for each year.
After taking into account the after-tax advantage that redounds to the
corporate investor, the Fund's cumulative advantage of $9,359 over the average
fixed-income fund amounts to over 90% of the initial $10,000 investment. For
the corporate investor, this is, to say the least, a striking difference. It is
rather surprising that this huge difference seems to be so overlooked in the
marketplace. Indeed, Vanguard Preferred Stock Fund is one of only four mutual
funds in this category, in a universe of approximately 8,600 mutual funds.
IN SUMMARY
Vanguard Preferred Stock Fund's basic objectives and strategies remain intact.
We remain committed to investing in a broadly diversified portfolio of
preferred stocks. We also remain committed to maximizing dividend income that
qualifies for the 70% intercorporate dividends received deduction. Looking
forward, it would be unwise, in our view, to expect a repeat of the dramatic
interest-rate-driven total return that we earned during this past fiscal year.
Nonetheless, we will do our utmost to continue to provide a competitive yield
relative to other fixed-income alternatives.
That said, let me be clear that no mutual fund can eliminate the risks
of participation in the financial markets today. As I noted earlier, given
today's relatively low level of interest rates, the risks of investing in
preferred stocks have evidently increased. And yet, perhaps the biggest
long-term risks to investors are: (1) failing to invest in the financial
markets at all; and (2) following an erratic and ever-changing course.
In my Annual Report a year ago, after an extraordinarily sharp decline
in preferred stock prices, I urged you, rather, to "stay the course,"
maintaining your Vanguard Preferred Stock Fund investment as part of a balanced
portfolio of stock funds, bond funds, and money market funds suitable to your
own objectives. It proved wise counsel then; I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
November 28, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURNS
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELD QUOTED IN THE CHAIRMAN'S LETTER
IS CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL
RETURNS FOR THE FUND (PERIODS ENDED SEPTEMBER 30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
--------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD PREFERRED STOCK FUND 12/3/75 +20.85% +12.17% +11.00% +8.94% +2.06%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
SUMMARY RESULTS
<TABLE>
<S> <C>
$100,000 INVESTMENT ON DECEMBER 3, 1975 (10,000 SHARES)
- ------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TAKEN IN CASH
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $156,900
Distributions from Net Realized Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000
Net Asset Value October 31, 1995 (10,000 shares) . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,100
- ------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS TAKEN IN CASH, CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $167,098
Net Asset Value October 31, 1995 (10,970 shares) . . . . . . . . . . . . . . . . . . . . . . . . . $105,421
- ------------------------------------------------------------------------------------------------------------------
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES
Net Asset Value October 31, 1995 (71,174 shares) . . . . . . . . . . . . . . . . . . . . . . . . . $683,979
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
For the six- and twelve-month periods ended October 31, 1995, the Fund posted
total returns of +11.3% and +23.8%, respectively. Long-term interest rates
bottomed two years ago at 5.9%, peaked in November 1994 at 8.2%, and fell back
to 6.2% at the end of October. As a result of this wide swing in long-term
interest rates within the past 24 months, Vanguard Preferred Stock Fund
exhibited a high degree of volatility.
Long-term interest rates are well below levels when President Clinton
was elected three years ago. Thus, the long-term investor in Vanguard Preferred
Stock Fund, who has endured a change in the Presidency and two changes in
Congress, has achieved high real rates of tax-advantaged income and a gain in
net asset value. The Fund's dividend has stayed fairly constant during the ups
and downs in interest rates, as would be expected with a long-term financial
asset.
The past twelve months have been especially rewarding. The environment
for preferreds has been favorable during this time period for two reasons.
First, interest rates have fallen, enabling preferreds to appreciate. Second,
the generation of healthy corporate cash flow has induced issuers to call or
tender for their preferred stock.
This increase in tenders is the result of corporations wanting to lower
their costs by restructuring their balance sheets. Last quarter, Ford Motor
Company announced that it was going to redeem $2 billion of preferred stock.
The Fund's investment in Ford Holdings, the second largest preferred stock
issuer in the portfolio, is non-callable unless Ford Motor spins it off.
Unfortunately, Ford announced that it was going to pursue such an exercise to
relieve itself of the expensive preferred financing.
During the past fiscal year, several preferred stock issuers have called
or tendered for their preferred stock and replaced it with more debt-like
financing, whose interest payments can be deducted on their income statements.
Preferred stocks have rallied as the supply of preferreds that are eligible for
the dividends received deduction (DRD) diminished. Utility companies continue
to be very active in this endeavor, since they are trying to lower costs to
compete in a deregulated environment.
MARKET UPDATE
The domestic economy would have to slide into an economic recession or a
particular industry would need to suffer a large negative event (unfavorable
litigation, sharp drop in share price, accounting change) to increase the
issuance of DRD preferred stock. That is, corporations typically need an
unpleasant shock to their balance sheets before they will use the preferred
market for equity capital. If a company needs equity capital and believes the
share price of its common stock is low, then it may issue preferred stock. At
the moment, with reasonably lofty share prices, preferred stock issuance
appears overly expensive as a source of funds.
It is also worth noting that, as part of its budget proposal, the
Clinton Administration has proposed a reduction in the DRD from 70% to 50%. If
enacted, this reduction would be expected to negatively impact the price of
the securities held in our portfolio. What will ultimately happen with this
proposal is unclear, but we are watching new developments carefully.
INVESTMENT GOALS AND STRATEGY
The investment goals and strategy of the Fund remain consistent with those
which were put in place when the Fund was started in 1975. One of the primary
goals is to qualify all of the Fund's dividends for the 70% intercorporate
dividends received deduction. We achieved total qualification in fiscal 1995,
as we have in all previous years, and expect to do the same in fiscal 1996.
Another objective is to provide sustainable, tax-advantaged income through
investment-grade preferreds. Sustainable income is achieved by investing in the
securities of high-quality companies with call protection. Stability of income
is also strengthened by broad diversification. There are 65 preferred stock
issuers currently owned in the Fund.
The Fund's quality breakdown, using Standard & Poor's ratings, is as
follows: Cash (2%), AA (7%), A (44%), BBB (47%). There are no below-investment-
6
<PAGE> 9
grade securities in the portfolio. Fifty-four percent of Vanguard Preferred
Stock Fund, a decrease of 3% in the last six months, is concentrated in the
electric and gas utility industry, with 42 such issuers. High-quality
industrial issuers are becoming more difficult to find; however, if preferred
stocks become relatively inexpensive equity capital, new issuers will appear.
We still believe that the financial health of the utility industry is
strong enough to merit holding slightly more than one-half the Fund's assets in
this sector as we look for opportunities from non-utility issuers.
Respectfully,
Earl E. McEvoy, Senior Vice President
Portfolio Manager
Wellington Management Company
November 9, 1995
7
<PAGE> 10
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD PREFERRED STOCK FUND since inception through October 31, 1995. During
the period illustrated, stock prices fluctuated widely; these results should
not be considered a representation of the dividend income or capital gain or
loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- ---------------------------------------------------------------------------------------------------------------------
Preferred Merrill Lynch
Stock Fund Preferred
Value with Income ----------------------------- Index**
October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total ------------
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/75) $10.00 -- -- $10.00 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
1976 10.41 -- $ .41 10.84 + 4.1% + 4.3% + 8.4% +15.0%
- ---------------------------------------------------------------------------------------------------------------------
1977 10.18 $.48 .85 12.05 + 2.5 + 8.7 + 11.2 + 10.5
- ---------------------------------------------------------------------------------------------------------------------
1978 9.39 .11 .83 12.24 - 6.7 + 8.3 + 1.6 - 2.2
- ---------------------------------------------------------------------------------------------------------------------
1979 8.24 -- .80 11.74 - 12.2 + 8.1 - 4.1 - 4.9
- ---------------------------------------------------------------------------------------------------------------------
1980 7.49 -- .84 11.88 - 9.1 + 10.3 + 1.2 - 3.4
- ---------------------------------------------------------------------------------------------------------------------
1981 6.67 -- .86 11.95 - 10.9 + 11.4 + 0.5 - 3.7
- ---------------------------------------------------------------------------------------------------------------------
1982 7.84 -- 1.01 16.26 + 17.5 + 18.6 + 36.1 + 27.0
- ---------------------------------------------------------------------------------------------------------------------
1983 7.96 -- .89 18.44 + 1.5 + 11.9 + 13.4 + 16.6
- ---------------------------------------------------------------------------------------------------------------------
1984 7.41 -- .93 19.48 - 6.9 + 12.5 + 5.6 + 5.3
- ---------------------------------------------------------------------------------------------------------------------
1985 8.13 -- .93 24.14 + 9.7 + 14.2 + 23.9 + 23.4
- ---------------------------------------------------------------------------------------------------------------------
1986 9.76 .05 .84 32.01 + 20.7 + 11.9 + 32.6 + 37.9
- ---------------------------------------------------------------------------------------------------------------------
1987 8.02 -- .775 28.61 - 17.8 + 7.2 - 10.6 - 3.8
- ---------------------------------------------------------------------------------------------------------------------
1988 7.94 .12 .895 32.14 + 0.5 + 11.9 + 12.4 + 8.7
- ---------------------------------------------------------------------------------------------------------------------
1989 8.62 -- .525 37.23 + 8.6 + 7.2 + 15.8 + 14.5
- ---------------------------------------------------------------------------------------------------------------------
1990 8.22 -- .745 38.82 - 4.6 + 8.9 + 4.3 - 3.1
- ---------------------------------------------------------------------------------------------------------------------
1991 9.06 -- .78 46.91 + 10.2 + 10.6 + 20.8 + 28.8
- ---------------------------------------------------------------------------------------------------------------------
1992 9.32 -- .725 52.23 + 2.9 + 8.4 + 11.3 + 13.5
- ---------------------------------------------------------------------------------------------------------------------
1993 9.99 -- .705 60.35 + 7.2 + 8.4 + 15.6 + 10.4
- ---------------------------------------------------------------------------------------------------------------------
1994 8.35 .14 .70 55.25 - 15.2 + 6.7 - 8.5 - 5.0
- ---------------------------------------------------------------------------------------------------------------------
1995 9.61 -- .65 68.40 + 15.1 + 8.7 + 23.8 + 18.0
- ---------------------------------------------------------------------------------------------------------------------
LIFETIME + 584.0% +511.7%
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 10.1% + 9.5%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
** Standard & Poor's Preferred Stock Index through 1989; Merrill Lynch
Perpetual Preferred Index thereafter.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
8
<PAGE> 11
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
October 31, 1995
<TABLE>
<CAPTION>
Rating(1) Market
(Standard Value
& Poor's) Shares (000)+
- --------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS (98.3%)
- --------------------------------------------------------
CONSUMER CYCLICAL (2.3%)
McDonald's Corp. 7.72% AA 265,000 $ 6,956
-----------
- --------------------------------------------------------
ENERGY (.4%)
Phillips Gas Co. 9.32% BBB- 50,000 1,319
-----------
- --------------------------------------------------------
FINANCIAL (41.3%)
H.F. Ahmanson & Co.
8.40% BBB- 240,000 6,270
Aon Corp. 8.00% AA- 300,000 7,650
Bank of Boston
7.875% BBB- 280,000 7,140
8.60% BBB- 100,000 2,587
BankAmerica 7.875% A- 156,500 4,030
Bankers Trust New York
Corp. 7.50% A- 175,000 4,244
Beneficial Corp. $4.30 A- 42,550 2,574
The Chase Manhattan
Corp. 8.32% BBB+ 150,000 3,862
Chemical Banking Corp.
7.50% BBB+ 150,000 3,769
8.375% BBB+ 275,000 7,081
Citicorp
7.50% A- 100,000 2,500
7.75% A- 125,000 3,219
8.30% A- 275,000 7,116
Federal Home Loan
Mortgage Corp. 7.90% Aa3* 150,000 3,900
First Chicago Corp. 8.45% BBB+ 12,000 314
First Interstate
Bancorp 9.00% BBB 275,000 7,219
First Maryland Bancorp
7.875% BBB+ 250,000 6,250
Ford Holdings 8.00% A 475,000 12,053
Great Western Financial
Corp. 8.30% BBB- 325,000 8,287
Household International, Inc.
7.35% A- 400,000 10,050
8.25% A- 50,000 1,350
Mellon Bank 8.20% BBB+ 200,000 5,100
Republic New York Corp.
7.25% A+ 25,000 638
7.75% A+ 50,000 1,262
TransAmerica 8.50% BBB+ 48,700 1,266
U.S. Bancorp 8.125% BBB+ 150,000 3,825
Wells Fargo & Co. 9.00% BBB 150,000 3,919
----------
GROUP TOTAL 127,475
----------
- --------------------------------------------------------
UTILITIES (54.3%)
Alabama Power Co.
6.40% A 200,000 $ 4,875
7.60% A 125,000 3,172
Arizona Public Service
7.25% BBB- 225,000 5,484
Arkansas Power & Light Co.
$1.96 BBB- 60,000 1,500
$2.40 BBB- 25,000 638
Atlanta Gas Light Co. 7.70% A- 100,000 2,550
Baltimore Gas & Electric Co.
6.70% A 39,700 4,049
6.99% A 25,000 2,600
7.125% A 40,000 4,142
Commonwealth Edison Co.
$7.24 BBB- 50,000 4,600
Connecticut Light &
Power Co. 5.28% BBB 8,000 292
Consolidated Edison
Co. of New York
4.65% (Series C) A 10,000 680
Delmarva Power & Light Co.
6.75% A- 20,000 2,000
7.75% A- 160,000 4,414
Detroit Edison Co.
7.75% BBB 225,000 5,681
Duke Power Co.
6.375% A+ 80,000 1,970
7.00% A+ 50,000 5,175
7.85% A+ 25,000 2,903
Florida Power & Light Co.
6.75% A+ 10,000 1,034
6.98% A+ 75,000 7,761
Gulf Power Co. 5.44% A 5,500 457
Idaho Power Co. 7.07% A- 25,000 2,639
Illinois Power Co. 7.75% BBB- 50,000 2,500
Indiana Michigan Power Co.
7.08% BBB 15,000 1,463
Louisiana Power & Light
4.16% BBB- 7,000 396
4.44% BBB- 6,000 362
8.00% BBB- 30,000 754
Louisville Gas & Electric Co.
7.45% AA- 25,000 634
Mississippi Power Co.
7.25% A 140,000 3,395
Mississippi Power & Light
8.36% BBB- 20,000 2,040
Monongahela Power 7.73% A 50,000 5,400
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Rating(1) Market
(Standard Value
& Poor's) Shares (000)+
- --------------------------------------------------------
<S> <C> <C>
Montana Power Co.
6.875% BBB 50,000 $ 5,104
Oklahoma Gas &
Electric Co. 5.34% AA- 5,700 462
Pacific Gas & Electric Co.
7.04% A- 150,000 4,013
Pacificorp 7.92% A- 150,000 3,825
PECO Energy Co. 7.48% BBB 50,000 5,187
Pennsylvania Power &
Light Co. 6.75% BBB+ 85,000 8,513
Potomac Electric Power Co.
$3.82 A- 25,000 1,275
PSI Energy Inc. 7.44% BBB 400,000 10,200
Public Service Co. of
Colorado 7.15% BBB 16,000 1,540
Public Service Electric
& Gas 4.18% BBB+ 10,000 590
Public Service of Oklahoma
4.24% A 4,300 282
San Diego Gas & Electric Co.
6.80% A 140,000 3,619
Savannah Electric & Power Co.
6.64% A 84,000 1,974
Sierra Pacific Power Co.
7.80% BBB+ 200,000 5,638
Southern California Edison
7.36% A 150,000 3,769
Texas Utilities Electric Co.
$1.805 BBB- 80,000 2,050
$2.05 BBB- 75,000 1,959
7.50% BBB- 75,000 1,931
7.98% BBB- 45,000 4,680
Union Electric Power Co.
$7.64 A+ 29,000 3,132
Virginia Electric & Power Co.
$6.98 A- 45,000 4,657
Washington Natural Gas Co.
7.45% BBB- 240,000 5,880
West Penn Power Co.
4.20% A 5,000 321
Wisconsin Public Service Co.
6.88% AA 10,000 1,034
-----------
GROUP TOTAL 167,195
-----------
- --------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $296,259) 302,945
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (.8%)
- --------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.89%, 11/1/95
(Cost $2,367) $2,367 $ 2,367
- --------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(Cost $298,626) 305,312
- --------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.9%)
- --------------------------------------------------------
Other Assets--Note C 3,985
Liabilities (1,293)
----------
2,692
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS (100%)
- --------------------------------------------------------
<S> <C>
Applicable to 32,064,376 outstanding shares
of beneficial interest (unlimited
authorization--no par value) $308,004
- --------------------------------------------------------
NET ASSET VALUE PER SHARE $9.61
========================================================
</TABLE>
+ See Note A to Financial Statements.
(1)Unaudited.
* Rated by Moody's.
<TABLE>
<CAPTION>
- --------------------------------------------------------
AT OCTOBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $303,050 $9.45
Undistributed Net
Investment Income 3,898 .12
Accumulated Net
Realized Losses--Note D (5,630) (.17)
Unrealized Appreciation
of Investments--Note D 6,686 .21
- --------------------------------------------------------
NET ASSETS $308,004 $9.61
- --------------------------------------------------------
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
October 31, 1995
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,429
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,774
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . . . . . . 707
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . . . . $658
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 81 739
----
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . . . . 33
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . . . 9
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,544
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,230
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,927)
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . 44,868
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . . . $63,171
===================================================================================================================
11
</TABLE>
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
OCTOBER 31, 1995 October 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 22,230 $ 25,847
Realized Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . (3,927) (1,651)
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 44,868 (56,384)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 63,171 (32,188)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (21,652) (27,337)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . -- (5,497)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (21,652) (32,834)
- -------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . . . . . (631) (419)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . . 34,008 84,895
--In Lieu of Cash Distributions . . . . . . . . . . . . . . 15,335 24,009
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . 22,948 64,165
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . . (63,754) (83,477)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . (46,564) (110,928)
- -------------------------------------------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions . . . . . . . . (38,027) (21,336)
- -------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . 2,861 (86,777)
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 305,143 391,920
- -------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $308,004 $305,143
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $.650 $.700
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . -- $.140
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,474 16,241
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 1,745 2,636
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,694) (21,553)
- -------------------------------------------------------------------------------------------------------------------
(4,475) (2,676)
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . . $ 3,898 $ 3,951
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . $8.35 $9.99 $9.32 $9.06 $8.22
--------- -------- -------- ------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .660 .660 .690 .749 .765
Net Realized and Unrealized Gain (Loss)
on Investments. . . . . . . . . . . . . . 1.250 (1.460) .685 .236 .855
--------- -------- -------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS . . 1.910 (.800) 1.375 .985 1.620
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.650) (.700) (.705) (.725) (.780)
Distributions from Realized Capital Gains . -- (.140) -- -- --
--------- -------- -------- ------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . (.650) (.840) (.705) (.725) (.780)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . $9.61 $8.35 $9.99 $9.32 $9.06
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . +23.79% -8.45% +15.56% +11.34% +20.83%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . $308 $305 $392 $187 $90
Ratio of Expenses to Average Net Assets . . . . .52% .51% .53% .58% .63%
Ratio of Net Investment Income
to Average Net Assets. . . . . . . . . . . . 7.43% 7.27% 6.77% 7.43% 7.96%
Portfolio Turnover Rate . . . . . . . . . . . . 20% 27% 45% 33% 18%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard Preferred Stock Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Market values for securities are based upon the
latest quoted bid prices. Temporary cash investments are valued at cost
which approximates market 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. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares
issued and redeemed, equivalent to undistributed net investment income per
share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income pershare is
unaffected by Fund share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by a custodian
bank until maturity of each repurchase agreement. Provisions of each
agreement require that the market value of the collateral is sufficient in
the event of default; however, in the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities
sold. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
B. Under the terms of a contract which expires May 31, 1996, the Fund pays
Wellington Management Company a basic investment advisory fee calculated at an
annual percentage rate of the average net assets of the Fund. For the year
ended October 31, 1995, the investment advisory fee represented an effective
annual rate of .24 of 1% of Fund average net assets.
C. The Vanguard Group, Inc. 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. At October 31, 1995, the Fund had contributed capital of $38,000 to
Vanguard (included in Other Assets), representing .2% of Vanguard's
capitalization. The Fund's trustees and officers are also directors and
officers of Vanguard.
D. During the year ended October 31, 1995, the Fund made purchases of
$59,239,000 and sales of $95,060,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At October 31, 1995, the Fund had available realized capital losses of
$5,578,000 to offset future net capital gains of $1,651,000 through October 31,
2002, and $3,927,000 through October 31, 2003.
At October 31, 1995, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $6,686,000, of which $8,278,000 related
to appreciated securities and $1,592,000 related to depreciated securities.
14
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Preferred Stock 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 Preferred Stock Fund (the "Fund") at October 31, 1995, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the respective periods presented, 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 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1995
SPECIAL 1995 TAX INFORMATION
(UNAUDITED) FOR VANGUARD
PREFERRED STOCK FUND
Corporate shareholders should note that for the fiscal year ended October 31,
1995, 100% of the dividend income qualifies for the intercorporate dividends
received deduction.
15
<PAGE> 18
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
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. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
<TABLE>
<S> <C>
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
</TABLE>
16
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q380-10/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 20
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile"
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appear at the top of pages one through four.
A line chart of the Month-End Yields of Merrill Lynch Perpetual Preferred Index
and AA Utility Bonds for the fiscal years 1991 through 1995 appears at the
upper left of page two.
Line charts illustrating cumulative performance between Vanguard Preferred
Stock Fund, Merrill Lynch Perpetual Preferred Index and Average Fixed Income
Fund, average Annual Total Returns for the period October 31, 1985, to October
31, 1995 appears at the top of page three.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page five.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages six & seven.
A running head featuring a cannon and battleships in the background appears at
the top of page eight.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages nine through fifteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page sixteen.
A running head featuring birds flying and ship in the background appears at the
top of the inside back cover.
