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VANGUARD
PREFERRED STOCK
FUND
Annual Report - October 31, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--some 6,000 highly motivated
men and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it.
That's why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more
than 300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
JOHN C. BOGLE JOHN J. BRENNAN
Chairman President
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CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . 3
REPORT FROM THE ADVISER . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PERFORMANCE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PORTFOLIO PROFILE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
The U.S. economy achieved a rare combination of strong growth and
quiescent inflation during the twelve months ended October 31, 1997, the fiscal
year for Vanguard Preferred Stock Fund. In this ideal environment for financial
assets, long-term interest rates declined and your Fund provided an excellent
return of +12.4%.
Our performance sharply exceeded the returns of both of our primary
comparative standards, as the adjacent table shows. It compares the Fund's total
return (capital change plus reinvested dividends) for the fiscal year with
returns of the average fixed- income mutual fund and the Merrill Lynch Perpetual
Preferred Index, a broad measure of the preferred-stock market.
<TABLE>
<CAPTION>
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TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1997
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<S> <C>
Vanguard Preferred Stock Fund +12.4%
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Average Fixed-Income Fund + 8.4%
- ----------------------------------------------------------
Merrill Lynch Perpetual
Preferred Index + 9.4%
- ----------------------------------------------------------
</TABLE>
The Fund's return is based on an increase in net asset value from $9.67
per share on October 31, 1996, to $10.17 per share on October 31, 1997, with the
latter figure adjusted for the reinvestment of dividends totaling $0.66 per
share from net investment income. As expected, 100% of our income dividends
qualified for the 70% intercorporate dividends-received deduction (DRD). The
Fund's yield at the fiscal year-end was 6.0%.
FISCAL 1997 PERFORMANCE OVERVIEW
Economic conditions during the twelve months ended October 31, 1997, were almost
picture-perfect for investors in U.S. financial assets. Business activity and
corporate profits increased, yet inflation decelerated and long-term interest
rates declined. On balance during the year, the yield on the benchmark 30-year
U.S. Treasury bond fell by 0.49% to 6.15%; short-term interest rates edged up a
bit. This interest-rate environment, along with the splendid economic
fundamentals, elevated the already-high spirits of investors. The stock market,
after reaching record territory in early October, retreated late in the month,
most notably with a -7% plunge on Monday, October 27. Even so, the Standard &
Poor's 500 Composite Stock Price Index returned +32.1% for the year.
The decline in long-term interest rates was a tonic for preferred
stocks, whose prices are extremely sensitive to fluctuations in interest rates.
Your Fund's return of +12.4% nicely surpassed the +8.4% return on the average
fixed-income fund and the +9.4% return on the unmanaged Index. Preferred stocks
performed well despite powerful crosscurrents. On the negative side was anxiety
about whether Congress would agree to a Treasury Department recommendation to
trim the DRD to 50% from 70%, a change that would have reduced the prices of
DRD-eligible preferred stocks. Ultimately, the proposal was not adopted, and
preferred stocks were carried higher by two positive forces. First was the
aforementioned decline in long-term interest rates, which boosted the prices of
fixed-income investments. Second was a shrinkage in the supply of DRD-eligible
preferred stocks.
LONG-TERM PERFORMANCE OVERVIEW
Your Fund's strong results in fiscal 1997 widened its long-term performance edge
over both the average fixed-income mutual fund and the index benchmark.
Hypothetical investments of $10,000 each made ten years ago in your Fund, the
average fixed-income
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fund, and the Merrill Lynch Perpetual Preferred Index would have grown, with all
dividends and capital gains reinvested, to $29,045, $22,256, and $25,111,
respectively.
Our advantage of $6,789 over other fixed-income funds is gratifying.
However, we note that the comparison is flawed to some extent. The scarcity of
"pure" preferred-stock mutual funds forces us to use the broader fixed-income
fund category as a performance benchmark, but it is not an ideal one for two
principal reasons. First, preferred stocks tend to have higher yields and lower
credit quality than most bonds. Second, preferred stocks have longer effective
maturities than most bonds. When interest rates decline, as they have on balance
during the past decade, prices of fixed-income securities rise in proportion to
the length of time until maturity.
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TOTAL RETURNS
10 YEARS ENDED OCTOBER 31, 1997
------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ---------------------------------------------------------------------------
<S> <C> <C>
Vanguard Preferred Stock Fund +11.3% $29,045
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Average Fixed-Income Fund + 8.3% $22,256
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Merrill Lynch Perpetual
Preferred Index* + 9.6% $25,111
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</TABLE>
*S&P Preferred Index through March 1989; Merrill Lynch Perpetual Preferred Index
thereafter.
On the other hand, for corporate investors our true margin of
superiority over the average fixed-income fund is understated, because 100% of
the interest income on bonds is taxable at the regular corporate rate, while the
dividends on qualifying preferreds are eligible for the 70% DRD. For a corporate
investor, our +11.3% return over the past decade would have been reduced to
+10.4% after taxes, while the +8.3% return on the average fixed-income fund
would have been reduced by taxes to +5.6%. The substantial after-tax advantage
of 4.8% annually for corporations--nearly a doubling of the rate of return for
individuals--was the "reward" that an investing corporation would have reaped
for accepting the incremental risks associated with preferred stocks.
We emphasize that the generous returns of the past decade are not a
reliable indicator of future returns. Interest rates have receded from levels
much higher than those prevailing today, so it is very unlikely that absolute
returns from fixed-income securities will be as high in the next decade as they
were in the past one.
IN SUMMARY
The bounteous returns provided by U.S. financial markets in fiscal 1997 were
considerably better than we--and, it's safe to say, most market
participants--expected. Surprises--on the downside as well as the upside--are
part and parcel of investing. However, we believe that investors who "stay the
course" toward their long-term investment objectives with balanced portfolios of
stock funds, bond funds, and money market funds are well situated to cope with
the risks and to reap the rewards of financial markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
JOHN C. BOGLE JOHN J. BRENNAN
Chairman of the Board President
November 17, 1997
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1997
U.S. EQUITY MARKETS
The 12-month period ended October 31, 1997, was exceptionally strong for stock
investors, although it wound up on a rather unpleasant note. Over the period,
large-capitalization stocks continued their advance, propelling the S&P 500
Index to a 32.1% gain. Small-cap stocks also fared well, as illustrated by the
29.3% increase of the Russell 2000 Index. These gains stood despite October's
volatile final week, when sharp declines in Asian stock markets led many
investors to question their expectations regarding the U.S. market. While the
domestic market dropped substantially--the Dow Jones Industrial Average fell 554
points, or 7.2%, on October 27--it then rebounded smartly over the next few
days. This quick recovery probably can be attributed to investors' recognition
that three major factors underlying the bull market of recent years were
unaffected by the turmoil in Asia. These factors are solid economic growth;
restrained inflation, at levels not experienced since the 1960s; and impressive
growth in corporate profits.
Among large-cap stocks, the best-performing sectors in fiscal 1997 were
technology and financial services, with increases of 51.1% and 41.4%,
respectively. The surge in technology reflects robust corporate spending on this
industry's products, particularly desktop computers, networking equipment, and
software. Consumer discretionary and cyclical stocks could be considered
laggards by contrast, despite their respective gains of 20.4% and 14.5%.
(Clearly the market has shown amazing growth when a 15%-20% advance over a
one-year period can be viewed as inadequate.)
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<CAPTION>
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AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1997
---------------------------------
1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 32.1% 27.5% 19.9%
Russell 2000 Index 29.3 21.3 18.7
MSCI EAFE Index 4.9 5.1 12.1
- ---------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 8.9% 10.1% 7.5%
Lehman 10-Year Municipal Bond Index 8.7 9.4 7.8
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.6
- ---------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.1% 2.6% 2.6%
- ---------------------------------------------------------------------------------
</TABLE>
While small-company stocks failed to match the outsized advance of the
S&P 500 Index, their performance grew notably stronger in the second half of the
fiscal year. This was evident in both absolute and relative terms: During the
past six months, the Russell 2000 Index rose 27.3%, compared to 15.2% for the
S&P 500. The improved performance of smaller companies cannot be attributed to
any single factor, but is, rather, due to a combination of attractive valuations
and good earnings.
U.S. FIXED-INCOME MARKETS
Interest rates fell across the yield curve, rewarding fixed-income investors
with higher total returns. For example, the rates on 1-, 5-, 10-, and 30-year
Treasury issues decreased 0.06%, 0.35%, 0.51%, and 0.49%, respectively, during
the fiscal year. These declines reflected the continuing good news regarding
inflation and the relative dormancy of
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<PAGE> 6
the Federal Reserve. The benefit to investors was illustrated by the 8.9% return
of the Lehman Brothers Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as shown by the 13.7% gain of the Lehman High Yield Bond Index. The
strength of the economy combined with the lack of inflationary pressure produced
an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
The last quarter of the fiscal year proved to be horrible for investments in
Pacific markets, with declines both widespread and pronounced. The Morgan
Stanley Capital International (MSCI) Pacific Index declined by 21.4% in U.S.
dollar terms during the three months and was down 19.7% for the full fiscal
year. Among individual markets (also in U.S. dollar terms), Japan fell 18.4% for
the quarter and 18.1% for the 12 months, while the declines over the same
periods reached 34.3% and 17.5% in Hong Kong and 49.0% and 57.2% in Malaysia.
These markets suffered for a variety of reasons, but concern about future
economic growth was particularly significant.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October. The MSCI
Europe Index posted a gain of 26.0% for the 12 months despite a 4.9% decline in
October. The robust character of the European markets reflects strong earnings
and optimism that the growth will remain solid.
4
<PAGE> 7
REPORT FROM THE ADVISER
For the six- and twelve-month periods ended October 31, 1997, Vanguard
Preferred Stock Fund posted total returns of 7.8% and 12.4%, respectively. For
more details about Fund performance, please see the Message To Shareholders
beginning on page 1.
AN OVERVIEW OF THE YEAR
When the fiscal year began in November 1996, yields on long-term U.S. Treasury
bonds stood at 6.64% and rates on short-term Treasury bills at 5.15%. Twelve
months later, the long-term interest rate is lower by 0.49 percentage point
while short rates are basically unchanged. Thus, the spread between short- and
long-term rates narrowed. The fiscal year also began with uncertainty concerning
a Treasury Department proposal to lower the corporate dividends-received
deduction (DRD) from 70% to 50%. This would have lowered preferred-stock prices
by approximately 8%, the amount necessary to keep the stocks' after-tax yield at
the same level as under the 70% DRD. Although this cloud hung over the market
until July (when President Clinton's budget message omitted any mention of the
DRD), preferred prices rose fairly consistently over the last twelve months. The
rally in preferred prices occurred even though the Federal Reserve Board raised
short-term interest rates by 25 basis points (0.25 percentage point) last March,
a preemptive tightening that did not alarm investors in long-term fixed-income
securities. A lack of new issues of preferred stocks and a continuing strong
demand for the securities overshadowed the various negative factors that
occurred during the year.
MARKET UPDATE
The major recent event affecting DRD-eligible preferred stocks has been the
issuance and acceptance of "trust preferreds." These securities, which are
ineligible for the DRD and thus are not appropriate for your Fund, are viewed by
banking regulators as core capital for banks and by credit-rating agencies as
something akin to equity for nonfinancial issuers. The dividends are
tax-deductible for the issuer of the trust preferred, whereas dividends for
DRD-eligible preferreds are not. Thus, there exists a strong economic incentive
for issuers to "call" or tender for outstanding DRD preferreds and to replace
the capital with a new issue of trust preferred. In an attempt to curb these
"equity-flavored" debt instruments, the Clinton administration originally
proposed to limit the deduction of a trust preferred's dividend. However, this
proposal was shelved last summer. For the moment, the DRD is still at 70%, and
companies can still issue less-expensive trust preferreds. Thus, the preferred
market has strong underlying demand both from buyers of DRD-eligible preferreds
and from companies wanting to retire the relatively more expensive preferred
stock.
5
<PAGE> 8
Although the federal deficit is disappearing and, therefore, new
sources of revenue are less urgently needed, the potential lowering of the DRD
is a constant threat. Investors therefore are demanding that new DRD-eligible
preferred issues carry protection against a lowering of the DRD. The prospectus
of a "DRD-protected issue" states that the dividend will increase if the DRD is
lowered so that the investor's income will remain the same on an after-tax
basis. We view this protection as necessary insurance against a potential for a
change in the tax laws that could severely hurt prices for preferred stocks.
INVESTMENT GOALS AND STRATEGY
The investment goals and strategy of the Fund are consistent with those put in
place at its inception in 1975. Namely, the Fund aims to provide sustainable,
tax-advantaged income through investment in investment-grade preferreds.
Relatively high-quality preferred stocks are purchased with the goal of
qualifying all of the Fund's dividends for the 70% corporate DRD. We achieved
total qualification in fiscal 1997, as we have in all previous years, and we
expect to qualify again in fiscal 1998. The risk to the Fund's net asset value
from the lowering of the DRD can be mitigated marginally through investment in
DRD-protected securities. The risk posed by rising long-term interest rates is a
constant. However, we can attempt to control income risk and variability by
investing in the securities of high-quality companies with call protection.
Income stability should also be strengthened by broad diversification. As of
October 31, 1997, the Fund held preferred stocks from 51 issuers.
The Fund's credit-quality breakdown is as follows: cash and Treasuries,
3%; Aa- rated securities, 24%; A, 51%; Baa, 22%. Forty-three percent of Vanguard
Preferred Stock Fund is concentrated in the electric utility industry, with 28
issuers. We continue to believe that the risks and rewards from investing
approximately half of the Fund's assets in the utility industry are favorably
balanced. To provide industry diversification, we also seek to own securities
issued by high-quality financial service companies.
Earl E. McEvoy, Senior Vice President
Wellington Management Company, LLP
November 7, 1997
INVESTMENT PHILOSOPHY
This Fund is managed in the interest of corporations able to use the 70%
"intercorporate dividends-received" deduction under federal tax law. The adviser
believes that the Fund can provide a relatively high and sustainable level of
income that qualifies for the deduction by investing primarily in
dividend-paying, high-quality, preferred stocks. (Note: Individual investors are
unable to use this tax deduction and are, therefore, not compensated for the
interest-rate and credit risks inherent in the Fund.)
6
<PAGE> 9
PERFORMANCE SUMMARY
Preferred Stock Fund
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely so that an investment in the Fund
could lose money.
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1977-OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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PREFERRED STOCK FUND MERRILL LYNCH
FISCAL CAPITAL INCOME TOTAL INDEX*
YEAR RETURN RETURN RETURN TOTAL RETURN
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1978 -6.7% 8.3% 1.6% -2.2%
1979 -12.2 8.1 -4.1 -4.9
1980 -9.1 10.3 1.2 -3.4
1981 -10.9 11.4 0.5 -3.7
1982 17.5 18.6 36.1 27.0
1983 1.5 11.9 13.4 16.6
1984 -6.9 12.5 5.6 5.3
1985 9.7 14.2 23.9 23.4
1986 20.7 11.9 32.6 37.9
1987 -17.8 7.2 -10.6 -3.8
1988 0.5 11.9 12.4 8.7
1989 8.6 7.2 15.8 14.5
1990 -4.6 8.9 4.3 -3.1
1991 10.2 10.6 20.8 28.8
1992 2.9 8.4 11.3 13.5
1993 7.2 8.4 15.6 10.4
1994 -15.2 6.7 -8.5 -5.0
1995 15.1 8.7 23.8 18.0
1996 0.6 7.4 8.0 7.4
1997 5.2 7.2 12.4 9.4
- -------------------------------------------------------------------
</TABLE>
*S&P Preferred Index through March 1989; Merrill Lynch Perpetual Preferred
Index thereafter.
See Financial Highlights table on page 14 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: OCTOBER 31, 1987-OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED AVERAGE MERRILL LYNCH
STOCK FIXED-INCOME PERPETUAL PREFERRED
FUND FUND INDEX
---- ---- -----
<S> <C> <C> <C>
1987 10 10000 10000 10000
1988 01 10800 10555 10513
1988 04 10709 10607 10422
1988 07 10755 10768 10502
1988 10 11237 11145 10867
1989 01 11485 11244 11092
1989 04 11564 11380 11119
1989 07 12652 12069 11726
1989 10 13014 12106 12208
1990 01 12859 12022 11463
1990 04 12867 11950 11266
1990 07 13703 12612 12094
1990 10 13571 12366 11820
1991 01 14351 12881 12809
1991 04 15108 13504 13894
1991 07 15330 13815 14150
1991 10 16398 14533 15230
1992 01 17198 14949 15964
1992 04 17227 15130 16213
1992 07 18160 15859 16930
1992 10 18258 15957 17280
1993 01 18868 16489 17588
1993 04 19667 16957 18271
1993 07 20275 17395 18688
1993 10 21099 17795 19092
1994 01 21194 18012 19487
1994 04 19732 17230 18217
1994 07 19888 17375 18479
1994 10 19315 17217 18139
1995 01 19908 17439 18786
1995 04 21478 18128 19918
1995 07 22704 18787 20725
1995 10 23911 19325 21395
1996 01 24518 19982 22068
1996 04 24061 19578 21961
1996 07 24715 19811 22289
1996 10 25833 20495 22978
1997 01 26368 20792 23474
1997 04 26943 20902 23872
1997 07 28478 21849 24769
*1997 10 29045 22256 25172
</TABLE>
<TABLE>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock Fund 12.44% 9.73% 11.25% $29,045
Average Fixed-Income Fund 8.41 6.84 8.33 22,256
Merrill Lynch Perpetual
Preferred Index* 9.36 7.76 9.64 25,111
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</TABLE>
*S&P Preferred Index through March 1989; Merrill Lynch Perpetual Preferred Index
thereafter.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- ------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Fund 12/3/1975 14.91% 9.21% 2.23% 8.51% 10.74%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
7
<PAGE> 10
PORTFOLIO PROFILE
PREFERRED STOCK FUND
This Profile provides a snapshot of the Fund's characteristics as of October
31, 1997, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------
PREFERRED MERRILL LYNCH
STOCK INDEX*
- --------------------------------------------------------
<S> <C> <C>
Number of Stocks 67 248
Yield 6.0% 6.9%
Average Coupon 6.8% 8.3%
Average Quality A2 A3
Turnover Rate 34% --
Expense Ratio 0.37% --
Cash Reserves 1.2% --
</TABLE>
*Merrill Lynch Perpetual Preferred Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY COUPON (% OF PORTFOLIO)
- ----------------------------------------
<S> <C>
Less than 4.0% 0.2%
4.0 to 5.0 2.7
5.0 to 6.0 4.2
6.0 to 7.0 55.1
7.0 to 8.0 34.0
8.0 to 9.0 3.8
9.0 to 10.0 0.0
Greater than 10.0 0.0
- ----------------------------------------
TOTAL 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 3.4%
Aa 23.4
A 48.4
Baa 22.2
Ba --
B --
Not Rated 2.6
TOTAL 100.0%
- -----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------
<S> <C>
Travelers Group Inc. 4.4%
Duke Energy Corp. 4.4
Heller Financial, Inc. 4.4
J. P. Morgan & Co., Inc. 4.3
Morgan Stanley Group, Inc. 4.0
Baltimore Gas & Electric Co. 4.0
Ford Motor Co. 3.8
Federal Home Loan Mortgage Corp. 3.7
South Carolina Electric & Gas Co. 3.4
Florida Power & Light Co. 3.0
- ------------------------------------------
TOP TEN TOTAL 39.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF PREFERRED STOCK)
- ----------------------------------------------------------------------------------------------
OCTOBER 31, 1996 OCTOBER 31, 1997
-----------------------------------------------
PREFERRED STOCK PREFERRED STOCK
-----------------------------------------------
<S> <C> <C>
Auto & Transportation . . . . . . . . . 3.9% 4.5%
Consumer Discretionary . . . . . . . . 0.0 0.0
Consumer Staples . . . . . . . . . . . 2.5 0.0
Financial Services . . . . . . . . . . 41.1 50.7
Health Care . . . . . . . . . . . . . . 0.0 0.0
Integrated Oils . . . . . . . . . . . . 0.0 0.0
Other Energy . . . . . . . . . . . . . 0.5 0.0
Materials & Processing . . . . . . . . 0.0 0.2
Producer Durables . . . . . . . . . . . 0.0 0.0
Technology . . . . . . . . . . . . . . 0.0 0.1
Utilities . . . . . . . . . . . . . . . 43.2 44.5
Other . . . . . . . . . . . . . . . . . 8.8 0.0
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 11
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies make their judgment after appraising an issuer's ability
to meet its obligations. Quality is graded on a scale, with Aaa or AAA
indicating the most creditworthy bond issuers.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments--after
adjusting for cash held as collateral for futures contracts.
DISTRIBUTION BY COUPON. A breakdown of the securities in a portfolio according
to coupon rate--the interest rate that an issuer promises to pay, expressed as
an annual percentage of face value. Securities with unusually high coupon rates
may be subject to call risk, the possibility that they will be redeemed (or
"called") early by the issuer.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the less susceptible it is to a price decline stemming from the problems
of a particular company.
SECTOR DIVERSIFICATION. The percentage of preferred stocks from issuers in each
of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has
invested in its ten largest holdings. As this percentage rises, a portfolio's
returns are likely to be more volatile because they are more dependent on the
fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year.
9
<PAGE> 12
FINANCIAL STATEMENTS
October 31, 1997
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 (preferred stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted
from, the value of Total Investments to calculate the Fund's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the Fund to arrive
at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends
or capital gains as of the statement date. Any Accumulated Net Realized Losses,
and any cumulative excess of distributions over net income or net realized
gains, will appear as negative balances. Unrealized Appreciation (Depreciation)
is the difference between the market value of the Fund's investments and their
cost, and reflects the gains (losses) that would be realized if the Fund were
to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
PREFERRED STOCK FUND SHARES (000)
- --------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS (96.2%)
AUTO & TRANSPORTATION (4.3%)
Ford Motor Co. 8.25% 425,000 $ 12,086
General Motors Corp. 7.92% 66,300 1,749
-----------
13,835
-----------
FINANCIAL SERVICES (48.7%)
Banks-New York City (7.8%)
Bankers Trust New York Corp.
7.50% 150,000 3,825
J. P. Morgan & Co., Inc. 6.625% 250,000 13,625
- - Republic New York Corp. 5.715% 150,000 7,549
BANKS-OUTSIDE NEW YORK CITY (14.0%)
ABN-AMRO North America
6.59% 8,000 8,720
BankBoston Corp. 7.875% 180,000 4,669
Comerica, Inc. 6.84% 150,000 7,988
Fleet Financial Group, Inc. 6.75% 145,000 7,540
Fleet Financial Group, Inc. 7.25% 50,000 1,331
LaSalle National Bank 6.46% 2,000 2,168
PNC Bank Corp. 6.05% 125,000 6,665
Wells Fargo & Co. 6.59% 100,000 5,551
FINANCE COMPANIES (9.1%)
Beneficial Corp. $4.30 82,950 5,910
Beneficial Corp. 5.00% 40,000 1,600
Heller Financial, Inc. 6.687% 125,000 13,938
Household International, Inc.
7.35% 300,000 7,725
FINANCIAL-MISCELLANEOUS (8.4%)
Federal Home Loan Mortgage
Corp. 6.125% 150,000 7,650
Federal Home Loan Mortgage
Corp. 6.14% 80,000 4,080
Federal National Mortgage Assn.
6.45% 165,800 8,663
MBNA Corp. 7.50% 250,000 6,563
INSURANCE-LIFE (1.0%)
W.R. Berkley Corp. 7.375% 117,725 3,039
INSURANCE-PROPERTY-CASUALTY (4.4%)
Travelers Group Inc. 6.365% 275,000 14,231
SECURITIES BROKERS & SERVICES (4.0%)
Morgan Stanley Group, Inc.
5.91% 40,000 1,990
Morgan Stanley Group, Inc.
7.75% 200,000 10,800
-----------
155,820
-----------
MATERIALS & PROCESSING (0.2%)
E.I. du Pont de Nemours & Co.
3.50% 12,300 756
-----------
TECHNOLOGY (0.1%)
International Business Machines
Corp. 7.50% 16,000 439
-----------
UTILITIES-ELECTRIC (42.9%)
Alabama Power Co. 6.40% 200,000 5,050
Arizona Public Service Co. 7.25% 150,000 3,806
Baltimore Gas & Electric Co.
6.70% 39,700 4,337
Baltimore Gas & Electric Co.
6.99% 35,000 3,909
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------
<S> <C> <C>
Baltimore Gas & Electric Co. 7.125% 40,000 $ 4,521
Commonwealth Edison Co. $7.24 50,000 4,900
Duke Energy Corp. 6.375% 97,900 2,515
Duke Energy Corp. 7.00% 50,000 5,409
Duke Energy Corp. 7.04% 30,000 3,367
Duke Energy Corp. 7.85% 25,000 2,902
Entergy Louisiana Inc. 4.16% 7,000 436
Entergy Louisiana Inc. 4.44% 6,000 399
Entergy Mississippi Inc. 4.92% 10,000 797
Florida Power & Light Co. 6.75% 10,000 1,094
Florida Power & Light Co. 6.98% 75,000 8,618
Gulf Power Co. 5.44% 5,500 489
Idaho Power Co. 7.07% 25,000 2,874
Illinois Power Co. 7.75% 25,000 1,388
Monongahela Power Co. 7.73% 50,000 5,681
Oklahoma Gas & Electric Co.
5.34% 5,950 527
PECO Energy Co. $7.48 50,000 5,677
PSI Energy Inc. 6.875% 40,000 4,360
Pacific Gas & Electric Co. 4.36% 11,800 209
Pacific Gas & Electric Co. 5.00% 39,800 851
Pacific Gas & Electric Co. 7.04% 150,000 4,069
Pennsylvania Power & Light Co.
6.75% 85,000 9,159
Puget Sound Energy, Inc. 7.45% 240,000 6,480
San Diego Gas & Electric Co.
6.80% 140,000 3,815
Savannah Electric & Power Co.
6.64% 140,000 3,561
Sierra Pacific Power Co. 7.80% 200,000 5,854
South Carolina Electric & Gas Co.
6.52% 100,000 10,775
Southern California Edison Co.
4.24% 14,200 261
Southern California Edison Co.
5.80% 10,800 262
Texas Utilities Electric Co. $4.76 3,786 284
Texas Utilities Electric Co. 7.50% 52,000 1,410
Texas Utilities Electric Co. $7.98 45,000 5,091
Union Electric Co. $7.64 33,000 3,822
Virginia Electric & Power Co. $6.98 60,000 6,762
West Penn Power Co. 4.20% 5,000 333
Wisconsin Public Service Corp.
6.88% 10,000 1,102
-----------
137,156
-----------
- --------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $288,842) 308,006
- --------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (2.6%)
- --------------------------------------------------------------------
U.S. TREASURY BOND
6.50%, 11/15/26
(COST $7,637) $8,000 $ 8,338
- --------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.9%)
- --------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.66%, 11/3/97
(COST $2,684) 2,684 2,684
- --------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $299,163) 319,028
- --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
Other Assets--Note C 1,855
Liabilities (764)
-----------
1,091
- --------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------
Applicable to 31,473,167 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $320,119
====================================================================
NET ASSET VALUE PER SHARE $10.17
====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security. New issue that has not paid a dividend as of
October 31, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note A $300,691 $9.55
Undistributed Net Investment
Income--Note A 1,393 .04
Accumulated Net Realized Losses (1,830) (.05)
Unrealized Appreciation--Note E 19,865 .63
- --------------------------------------------------------------------
NET ASSETS $320,119 $10.17
====================================================================
</TABLE>
11
<PAGE> 14
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
YEAR ENDED OCTOBER 31, 1997
(000)
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $19,980
Interest 604
-----------
Total Income 20,584
-----------
EXPENSES
Investment Advisory Fee--Note B 406
The Vanguard Group--Note C
Management and Administrative 591
Marketing and Distribution 67
Custodian Fees 5
Auditing Fees 9
Shareholders' Reports 20
Annual Meeting and Proxy Costs 1
-----------
Total Expenses 1,099
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 19,485
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 2,495
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 13,731
- ------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $35,711
==========================================================================================
</TABLE>
12
<PAGE> 15
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
that is 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>
- ----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
YEAR ENDED OCTOBER 31,
--------------------------------
1997 1996
(000) (000)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 19,485 $ 21,355
Realized Net Gain 2,495 1,305
Change in Unrealized Appreciation (Depreciation) 13,731 (552)
-------------------------------
Net Increase in Net Assets Resulting from Operations 35,711 22,108
-------------------------------
DISTRIBUTIONS
Net Investment Income (20,291) (20,847)
Realized Capital Gain -- --
-------------------------------
Total Distributions (20,291) (20,847)
-------------------------------
NET EQUALIZATION CHARGES--NOTE A -- (370)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 86,381 56,872
Issued in Lieu of Cash Distributions 14,827 15,200
Redeemed (82,208) (95,268)
-------------------------------
Net Increase (Decrease) from Capital Share Transactions 19,000 (23,196)
- ---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 34,420 (22,305)
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 285,699 308,004
-------------------------------
End of Year $320,119 $285,699
===============================================================================================================
(1) Shares Issued (Redeemed)
Issued 8,822 6,073
Issued in Lieu of Cash Distributions 1,514 1,634
Redeemed (8,395) (10,239)
-------------------------------
Net Increase (Decrease) in Shares Outstanding 1,941 (2,532)
===============================================================================================================
</TABLE>
13
<PAGE> 16
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. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 9.67 $9.61 $8.35 $9.99 $9.32
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .63 .69 .66 .66 .690
Net Realized and Unrealized Gain (Loss) on Investments .53 .04 1.25 (1.46) .685
---------------------------------------------------------------
Total from Investment Operations 1.16 .73 1.91 (.80) 1.375
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.66) (.67) (.65) (.70) (.705)
Distributions from Realized Capital Gains -- -- -- (.14) --
---------------------------------------------------------------
Total Distributions (.66) (.67) (.65) (.84) (.705)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.17 $9.67 $9.61 $8.35 $9.99
===============================================================================================================================
TOTAL RETURN 12.44% 8.04% 23.79% -8.45% 15.56%
===============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $320 $286 $308 $305 $392
Ratio of Total Expenses to Average Net Assets 0.37% 0.39% 0.52% 0.51% 0.53%
Ratio of Net Investment Income to Average Net Assets 6.41% 7.23% 7.43% 7.27% 6.77%
Portfolio Turnover Rate 34% 31% 20% 27% 45%
Average Commission Rate Paid $.0600 $.0600 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
Vanguard Preferred Stock 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: Securities are valued at 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: Prior to November 1996, the Fund followed 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, was credited or
charged to undistributed net investment income. As a result, undistributed
income per share was unaffected by capital share transactions. As of November
1, 1996, the Fund has discontinued equalization accounting and has reclassified
accumulated net equalization credits of $1,837,000 from undistributed net
investment income to paid in capital. This reclassification has no effect on
the Fund's net assets, results of operations, or net asset value per share.
4. 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.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
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. Wellington Management Company, LLP provides investment advisory
services to the Fund for a fee calculated at an annual percentage rate of
average net assets. For the year ended October 31, 1997, the advisory fee
represented an effective annual rate of 0.13% of the Fund's average net assets.
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. At October 31, 1997, the Fund had contributed capital of $21,000 to
Vanguard (included in Other Assets), representing 0.1% of Vanguard's
capitalization. The Fund's Trustees and officers are also Directors and
officers of Vanguard.
D. During the year ended October 31, 1997, the Fund purchased
$109,118,000 of investment securities and sold $94,997,000 of investment
securities, other than U.S. government securities and temporary cash
investments. Purchases and sales of U.S. government securities were $10,816,000
and $5,333,000, respectively.
At October 31, 1997, the Fund had available a capital loss
carryforward of $1,778,000 to offset future net capital gains through October
31, 2003.
E. At October 31, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$19,865,000, consisting of unrealized gains of $19,875,000 on securities that
had risen in value since their purchase and $10,000 in unrealized losses on
securities that had fallen in value since their purchase.
15
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
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, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 3, 1997
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD PREFERRED STOCK FUND
This information for the fiscal year ended October 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
16
<PAGE> 19
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Chairman of the Board and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group.
JOHN J. BRENNAN
President, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co.,
The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co., and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
MANAGING DIRECTOR AND CHIEF FINANCIAL OFFICER.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 20
THE VANGUARD
FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
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INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
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TAX-EXEMPT MONEY MARKET FUNDS
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Vanguard State Tax-Free Funds (CA, NJ, NY, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
Q380-10/97 - (C) 1997 Vanguard Marketing Corporation, Distributor
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
http://www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
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