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VANGUARD
PREFERRED STOCK
FUND
Semiannual Report -- April 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
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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--more than 7,000 highly motivated
men and women--who form the cornerstone of our operations. We could not survive
long--let alone prosper--without them. That's why we chose this fiscal year's
fund reports 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.
JOHN C. BOGLE JOHN J. BRENNAN
Senior Chairman Chairman & CEO
[PHOTO] [PHOTO]
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CONTENTS
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A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . 4
REPORT FROM THE ADVISER . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PORTFOLIO PROFILE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PERFORMANCE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
An economic environment that featured a salutary combination of declining
interest rates and powerful growth helped propel Vanguard Preferred Stock Fund
to a solid return of +5.0% during the first half of its 1998 fiscal year.
The adjacent table compares the Fund's six-month total return (capital
change plus reinvested dividends) with those of the unmanaged Merrill Lynch
DRD-Eligible Preferred Stock Index and the average fixed-income mutual fund. As
shown here, our return topped those of both of our comparative benchmarks
during the six months ended April 30.
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TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1998
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<S> <C>
Vanguard Preferred Stock Fund +5.0%
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Average Fixed-Income Fund +3.5%
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Merrill Lynch DRD-Eligible Preferred
Stock Index +3.6%
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</TABLE>
Our Fund's return is based on an increase in net asset value from $10.17 per
share on October 31, 1997, to $10.34 per share on April 30, 1998, with the
latter figure adjusted for the reinvestment of dividends totaling $0.33 per
share paid from net investment income. As expected, 100% of our income
dividends qualified for the 70% intercorporate dividends-received deduction
(DRD). The Fund's annualized yield as of April 30, 1998, was 5.2%.
It's important for individual investors to realize that they are not eligible
to use the special corporate tax deduction for preferred stocks and, therefore,
are not fully compensated for the Fund's risks.
THE PERIOD IN REVIEW
The U.S. economy's performance during the six months ended April 30 was, quite
simply, astounding. After growing nearly 4% in 1997, the economy expanded at a
4.8% annual pace in the January-March period, even though a stronger U.S.
dollar and economic turmoil in Asia began to crimp U.S. exports and to boost
sales of imported goods. The nation's unemployment rate fell to 4.3% in April,
its lowest level in more than 28 years. Yet a strong job market and robust
economic growth did not push up prices; key inflation measures actually showed
a slowing in price increases.
Financial markets flourished in this ideal environment. Interest rates
declined by roughly 20 basis points (0.20%) on balance during the six months,
engendering modest price increases in bonds. The yield on the benchmark 30-year
Treasury bond stood at 5.95% at the period's end, down from 6.15% six months
earlier. The Lehman Brothers Aggregate Bond Index, a good measure of the
overall taxable bond market, returned +3.6%. Rates on shorter-term securities
also dipped. The yield on 3-month U.S. Treasury bills was 4.97% on April 30,
nearly one-quarter percentage point below the 5.20% level at which it began the
half-year.
In the stock market, investor confidence--some would say
overconfidence--was evident, as prices surged despite lackluster growth in
corporate profits and uncertainty about how Asia's financial and economic woes
would affect the U.S. economy. The S&P 500 Index rose in every month of the
period, and its six-month total return of +22.5% was equal to approximately two
years' worth of returns at the stock market's long-term annual average of about
+11%.
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Of course, interest rates drive the fixed-income market. Preferred stocks,
which boast long-term maturities, are especially sensitive to rate changes-even
more so than long-term bonds. The positive interest-rate environment during the
six months, along with a decreased supply of preferred stocks that are eligible
for the 70% corporate tax deduction, created an excellent setting for preferred
stocks. The adviser's report on page 6 provides further details on the
preferred stock market.
Vanguard Preferred Stock Fund's return of +5.0% for the half-year was
comfortably ahead of both the +3.5% return of the average fixed-income fund and
the +3.6% return of the Merrill Lynch DRD-Eligible Preferred Stock Index. Our
margin over the unmanaged Index is notable because our Fund incurs operating
expenses and transaction costs that the Index does not.
We owe our advantage over the average fixed-income fund to several
factors, not the least of which is our low expenses. Our expense ratio
(expenses as a percentage of average net assets) of 0.36% is but one-third of
the 1.04% charged by our average peer, an advantage that gives us a valuable
head start versus our competitors. Our second advantage arose from an important
distinction between our Fund and other fixed-income mutual funds-our strict
focus on preferred stocks. Most funds in our peer group invest in a wide range
of bonds, which generally have higher credit quality and shorter average
maturities than preferred stocks. These quality and maturity differences work
to our relative advantage when the economy is strong and interest rates are
steady or falling, as was the case during the past six months.
Compared with the typical corporate bond, preferred stocks possess lower
credit quality because bonds have priority for claims on interest and
principal. Thus, after-tax yields on preferred stocks are typically higher than
those on bonds. And, as noted earlier, because most preferred stocks have no
stated redemption date, their effective maturities are even longer than those
of long-term bonds, heightening their sensitivity to interest rates. It should
go without saying that this interest rate relationship works the other way too.
When rates are rising, preferred stocks tend to suffer greater price declines
than bonds of all maturities.
IN SUMMARY
Over the past several years-indeed, for most of the 1990s--fixed-income
investors have enjoyed returns that are above their long-term averages, thanks
to a general decline in interest rates. It's safe to say that these good times
cannot last forever and that future returns are likely to be lower than those
earned over the recent past.
A balanced investment program that combines fixed-income funds with stock
funds and money market funds can help investors "stay the course" toward their
investment objectives, whether the financial markets provide smooth or stormy
sailing. For corporations, Vanguard Preferred Stock Fund can play an important
role in the fixed-income portion of an investment portfolio, providing a
relatively high level of income that qualifies for the 70% tax deduction.
<TABLE>
<S> <C>
/a/ JOHN C. BOGLE /s/JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 13, 1998
</TABLE>
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Notice to Shareholders
At a special meeting on May 1, 1998, shareholders of Vanguard Preferred Stock
Fund overwhelmingly approved three proposals. The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes paid each year by some Vanguard funds. Vanguard
Preferred Stock Fund will not realize any tax savings as a result of the
change, but it will benefit from the efficiency of being organized the same
way as other Vanguard funds. Approved by 96.58% of the shares voted, as
follows:
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<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
17,112,009 235,179 370,487
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</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. The change
permits Vanguard Preferred Stock Fund to participate in Vanguard's interfund
lending program, which allows funds to loan money to each other if-and only
if-it makes good financial sense to do so on both sides of the transaction.
The interfund lending program won't be an integral part of your Fund's
investment program; it is a contingency arrangement for managing unusual cash
flows. Approved by 93.28% of the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
16,527,210 674,555 515,910
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</TABLE>
2e. INVESTMENT LIMITATION CHANGES--INDUSTRY CONCENTRATION. The change restates
Vanguard Preferred Stock Fund's industry concentration policy to allow it to
take full advantage of available preferred stock offerings, which occur more
frequently in the financial services and utilities industries. The Fund's new
policy will be to invest more than 25% of assets in financial services
companies and more than 25% of assets in utilities companies. Approved by
93.67% of the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
16,596,625 557,590 563,460
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</TABLE>
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THE MARKETS IN PERSPECTIVE
Six Months Ended April 30, 1998
Financial markets, it is said, don't like surprises. But when the surprises are
positive--remarkably strong economic growth coupled with conspicuously tame
inflation-the markets seem to cope quite nicely. So it was during the half-year
ended April 30, when the good times kept rolling for U.S. stock and bond
markets. The stock market produced half-year returns that would have been
excellent even for a full year. The bond market, helped by lower interest
rates, generated solid returns.
Plentiful jobs--the nation's unemployment rate fell in April to a 28-year
low of 4.3%--and rising wages clearly put American households in a buying mood.
(The stock market's big gains, by pumping up millions of families' investment
accounts, certainly didn't dampen spirits either.) With strong spending by
consumers leading the way, the U.S. economy grew at an annual rate of about 4%,
even after adjusting for inflation.
Although most economists believe that sustained growth in excess of 3% is
bound to be inflationary, evidence to support the theory has been scarce of
late. Consumer prices rose just 0.6% during the six months, and the Consumer
Price Index was up a relatively benign 1.4% for the 12 months ended April 30,
1998. Wholesale prices declined 1.2% during the past year. Stiff competitive
pressure, including an increasing flow of imported products and materials,
appears to be keeping the lid on prices, despite the bubbling economy.
Economic troubles in Asia--where currency and banking crises are afflicting
several nations--have resulted in lower prices for many imported goods and are
being blamed by some U.S. companies for cutting into profits. But Asia's
problems haven't spooked U.S. consumers and investors, and have only slightly
slowed the domestic economy's powerful momentum.
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TOTAL RETURNS
PERIODS ENDED APRIL 30, 1998
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6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 41.1% 23.2%
Russell 2000 Index 11.9 42.4 18.5
MSCI EAFE Index 15.6 19.2 10.4
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FIXED INCOME
Lehman Aggregate Bond Index 3.6% 10.9% 6.9%
Lehman 10-Year Municipal Bond Index 2.5 9.0 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
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OTHER
Consumer Price Index 0.6% 1.4% 2.4%
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</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Wall Street sprinted to record heights during the half-year. The gains were
broad-based, although the big blue chip stocks again led the way.
Large-capitalization stocks, as represented by the S&P 500 Index, returned
22.5%, nearly double the 11.9% return on the small-cap Russell 2000 Index.
Lower interest rates supported stock prices by making interest-bearing
investments relatively less attractive to investors looking for a place to put
new cash. The good inflation news helped, too. Even so, the size of the
market's gains was surprising in light of an evident slowing in the growth rate
for corporate profits. Since November, analysts have been reducing their
estimates of future corporate earnings, and actual profits reported
4
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for the January-March quarter were only modestly above those of first-quarter
1997. If corporate earnings growth does not accelerate, stocks may lose some of
their allure.
Health-care stocks were the market's best-performing sector during the
period, as a number of hot-selling new drugs and exciting potential therapies
heightened interest in pharmaceutical companies. Also, some health-maintenance
organization stocks rebounded from depressed levels. The only sectors that
didn't post double-digit gains during the half-year were integrated oil
companies (up 9.5%) and the "other energy" group, which includes oil-services
and exploration firms (down 3.5%). Lower energy prices--a key factor in
inflation's good behavior--explained the weakness in energy stocks.
U.S. FIXED-INCOME MARKETS
Fixed-income investors earned the coupon rates on their bonds during the
half-year, and saw a modest rise in the prices of their holdings, thanks to
declining interest rates. The Lehman Aggregate Bond Index, a good measure of
the overall market for taxable bonds, provided a 3.6% return for the six
months, bringing its total return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.5%. The yield on the benchmark 30-year U.S.
Treasury bond decreased from 6.15% on October 31, 1997, to 5.95% on April 30. A
rate decline of 20 basis points in the face of such strong economic growth was
possible because inflation--the enemy of the fixed-income investor--was so weak
during the six months.
Short-term interest rates also declined, although the Federal Reserve
Board made no policy changes. The yield on 3-month U.S. Treasury bills fell
from 5.20% on October 31 to 4.97% on April 30, at least partly because it
became clear that the federal government would run a sizable budget surplus,
which will reduce the Treasury's need to borrow and, therefore, reduce the
supply of new Treasury securities.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets were even hotter than Wall Street during the first half
of fiscal 1998, while most Asian markets declined in U.S. dollar terms.
Overall, the Morgan Stanley Capital International Europe, Australasia, Far East
Index gained 15.6% in U.S. dollar terms. The Index returned 21.3% in local
currency terms, but a generally stronger U.S. dollar cut the result for U.S.
investors.
European markets were buoyed by a variety of factors and rose 33.6% in
local-currency terms. The dollar's gains against European currencies diminished
the return for U.S. investors only slightly to a still-exceptional 29.2%. The
markets benefited from signs that the economic slump on the continent is
ending, from evidence that corporate managements are adopting a U.S.-style
emphasis on adding shareholder value, and from increasing confidence that the
planned adoption of the euro--a single European currency--would begin as planned
in January 1999.
The Pacific region's experience was very different. Although some
emerging markets (Malaysia, Thailand, South Korea) rebounded from their lows,
stock returns for the region on balance fell 8.8% in U.S.-dollar terms. Japan,
by far the Pacific Rim's largest market, was beset by economic recession and
dropped 10.0%, while Hong Kong fell 9.6%. Investors in Tokyo were decidedly
unimpressed with the Japanese government's program for reviving the economy and
dealing with the problems of the nation's banking system.
Emerging markets, as a group, returned 5.6% in dollar terms. Gains in
Greece (50.0%), Hungary (30.1%), Brazil (16.6%), and Argentina (13.7%) more
than offset weakness in Asian emerging markets, most notably Indonesia (down a
stunning 61.4%).
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<PAGE> 8
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REPORT FROM THE ADVISER
For the six months ended April 30, 1998, Vanguard Preferred Stock Fund posted
a total return of 5.0%, which exceeded the returns of both of our principal
benchmarks: the average fixed-income mutual fund (3.5%) and the Merrill Lynch
DRD-Eligible Preferred Stock Index (3.6%). For the 12 months ended April 30,
our return was 13.2%, which also surpassed the returns of the average competing
fund (10.1%) and the Index (8.1%).
AN OVERVIEW OF THE PERIOD
The fiscal year began last November with long-term Treasury yields at 6.15% and
short-term rates at 5.20%. Six months later, long-and short-term interest rates
are each lower by approximately 0.20 percentage point (20 basis points). This
downward trend established a favorable environment for preferred stocks. The
continued strength in preferred prices was also due in part to a technical
shortage of new merchandise.
This fiscal year, unlike others recently, did not begin with uncertainty
surrounding a potential reduction of the corporate dividends-received deduction
(DRD). As of now, we know of no proposals to reduce the DRD from the existing
70% rate.
MARKET UPDATE
The half-year saw a continuing rise in the number of tenders and calls for
older preferreds, which issuers are refinancing with cash or with new issues of
non-DRD-eligible trust preferreds. Traditional DRD-eligible preferred-stock
financing remains a relatively expensive means for companies to seek capital.
The concern in the preferred market is this lack of new supply. If cash
flow into the preferred-stock market should accelerate, there will probably be
a short-term shortage of DRD-eligible securities. However, such a situation
would probably cause the yield on preferreds to decline (and prices to rise)
which, in turn, would prompt new issuance. Freddie Mac (the Federal Home Loan
Mortgage Corporation) recently issued a new preferred at a gross yield 90 basis
points below that of 30-year Treasury bonds, a relatively low rate. The
federally sponsored agency was probably able to arbitrage its low-cost
liability into a higher-yielding asset. Other issuers may follow this example
if the shortage of new issuance drives preferred-stock valuations to excessive
levels.
While the federal budget deficit is disappearing--thereby making new
sources of revenue a less-urgent priority for lawmakers--the possible lowering
of the DRD is still a threat. The market is demanding that new DRD-eligible
preferred issues come with protection against such a reduction. The prospectus
of a "DRD-protected issue" states that if the DRD is lowered, the dividend will
increase so that the investor is left whole on an after-tax basis with respect
to income. We view
6
<PAGE> 9
this protection as necessary insurance against a change in tax laws that could
severely hurt prices for preferred stocks. However, the protection usually
expires 18 months after the preferred is issued.
Preferreds have become more expensive versus long-term Treasuries. The
current after-tax yield spread for "a"-rated perpetual utility preferreds
versus the 30-year Treasury is 114 basis points, only about half of the
ten-year average spread of 222 basis points.
Preferreds have also become expensive versus municipal bonds. Compared
with muni bonds, preferreds have provided an average of 87 basis points of
extra after-tax yield over the last ten years. Today, however, their after-tax
yields are 13 basis points lower than yields on municipals.
INVESTMENT GOALS AND STRATEGY
The Fund's investment goals and strategy are consistent with those put in place
at its start in 1975. The Fund's objective is to provide sustainable,
tax-advantaged income by holding 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 year 1997, as we have in all previous years, and we expect to qualify
in fiscal 1998.
The risk to the Fund's net asset value from a reduction in the DRD can be
mitigated marginally through investment in DRD-protected securities. The risk
to the Fund from rising long-term interest rates is constant. However, we can
attempt to control income risk and variability by investing in the securities
of high-quality companies whose preferred stocks come with call protection.
Stability of income should also be strengthened by the Fund's broad
diversification; it owned preferred stocks of 48 issuers as of April 30, 1998.
The Fund's credit-quality breakdown is as follows: cash and Treasuries
(4%), aa (25%), a (52%), and baa (19%). As of April 30, 39% of the Fund is
concentrated in the electric-utility industry through securities of 26
utilities. This represents our largest industry exposure, though the weighting
is down 5 percentage points since October 31, 1997. The market is engineering a
gradual diversification away from utilities and toward financial services.
Because there are high-quality banks, insurers, brokerage firms, and other
financial-service issuers in the market, this transition is not causing a
reduction in the overall credit quality of the Fund's holdings or the market in
general.
Earl E. McEvoy, Senior Vice President
Wellington Management Company, LLP
May 7, 1998
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.)
7
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PORTFOLIO PROFILE
Preferred Stock Fund
This Profile provides a snapshot of the Fund's characteristics as of April 30,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
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PORTFOLIO CHARACTERISTICS
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PREFERRED MERRILL LYNCH
STOCK INDEX*
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<S> <C> <C>
Number of Stocks 62 67
Yield 5.2% 5.4%
Average Coupon 6.5% 7.3%
Average Quality a1 a2
Turnover Rate 42%** -
Expense Ratio 0.36%** -
Cash Reserves 1.1% -
</TABLE>
*Merrill Lynch DRD-Eligible Preferred Stock Index.
**Annualized.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
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<S> <C>
Treasury/Agency 4.1%
aaa 0.0
aa 24.9
a 52.3
baa 18.7
ba 0.0
b 0.0
Not Rated 0.0
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Total 100.0%
</TABLE>
<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 20.5
6.0 to 7.0 53.3
7.0 to 8.0 23.3
8.0 to 9.0 0.0
9.0 to 10.0 0.0
Greater than 10.0 0.0
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Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
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<S> <C>
Travelers Group Inc. 4.9%
Federal Home Loan Mortgage Corp. 4.6
Republic New York Corp. 4.6
J. P. Morgan & Co., Inc. 4.5
Fleet Financial Group 4.3
ABN-AMRO North America 4.0
Heller Financial, Inc. 3.9
Baltimore Gas & Electric Co. 3.7
Florida Power & Light Co. 3.4
Bear, Stearns Cos., Inc. 3.4
- - --------------------------------------------
Top Ten 41.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF PREFERRED STOCKS)
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APRIL 30, 1997 APRIL 30, 1998
--------------------------------------------
PREFERRED STOCK PREFERRED STOCK
--------------------------------------------
<S> <C> <C>
Auto & Transportation 4.6% 0.5%
Consumer Discretionary 0.0 0.0
Consumer Staples 2.4 0.0
Financial Services 47.0 59.4
Health Care 0.0 0.0
Integrated Oils 0.0 0.0
Other Energy 0.0 0.0
Materials & Processing 0.0 0.2
Producer Durables 0.0 0.0
Technology 0.2 0.5
Utilities 45.8 39.4
Other 0.0 0.0
- - ----------------------------------------------------------------------------
</TABLE>
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<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 indicating the
most creditworthy issuers.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
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 more diversified it is, and the less susceptible 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. (The average for stock mutual funds is
about 30%.) 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 period. 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. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the Fund
could lose money.
<TABLE>
<CAPTION>
PREFERRED STOCK FUND
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1977 APRIL 30, 1998
- - ---------------------------------------------------------
PREFERRED STOCK FUND MERRILL LYNCH
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN 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 8.8
1998** 1.7 3.3 5.0 3.6
- - ---------------------------------------------------------
</TABLE>
*S&P Preferred Index through March 1989; Merrill Lynch Perpetual Preferred
Index through January 1997; Merrill Lynch DRD-Eligible Preferred Stock Index
thereafter.
**Six months ended April 30, 1998.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- - --------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Fund 12/3/1975 14.46% 9.35% 2.72% 8.15% 10.87%
- - --------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
10
<PAGE> 13
================================================================================
FINANCIAL STATEMENTS
April 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (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)
- - --------------------------------------------------------------------
PREFERRED STOCKS (95.7%)
- - --------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (0.5%)
General Motors Corp. 7.92% 66,300 $ 1,736
-----------
FINANCIAL SERVICES (56.9%)
BANKS--NEW YORK CITY (10.2%)
Bankers Trust New York Corp.
7.50% 150,000 3,778
J. P. Morgan & Co., Inc. 6.625% 290,000 15,968
Republic New York Corp. 5.715% 310,000 16,120
BANKS--OUTSIDE NEW YORK CITY (14.5%)
(1) ABN-AMRO North America
6.59% 13,000 14,185
Comerica, Inc. 6.84% 150,000 7,997
Fleet Financial Group 6.75% 218,000 12,317
Fleet Financial Group 7.25% 100,000 2,725
(1) LaSalle National Bank 6.46% 2,000 2,160
PNC Bank Corp. 6.05% 125,000 6,419
Wells Fargo & Co. 6.59% 100,000 5,391
FINANCE COMPANIES (6.3%)
Beneficial Corp. $4.30 82,950 6,470
Beneficial Corp. 5.00% 40,000 1,900
Heller Financial, Inc. 6.687% 125,000 13,649
FINANCIAL--MISCELLANEOUS (9.1%)
- Federal Home Loan Mortgage
Corp. 5.00% 250,000 12,094
Federal Home Loan Mortgage
Corp. 6.14% 80,000 4,230
Federal National Mortgage
Assn. 6.45% 165,800 8,829
MBNA Corp. 7.50% 250,000 6,750
INSURANCE--PROPERTY--CASUALTY (7.1%)
(1) Hillbrook Insurance Co. 5.90% 75 7,730
Travelers Group Inc. 6.365% 310,000 17,205
SECURITIES BROKERS & SERVICES (9.7%)
- Bear, Stearns Cos., Inc. 5.72% 235,000 11,779
Donaldson, Lufkin & Jenrette
Inc. 5.30% 231,400 11,645
Morgan Stanley Group, Inc.
7.75% 200,000 10,575
-----------
199,916
-----------
MATERIALS & PROCESSING (0.2%)
E.I. du Pont de Nemours & Co.
3.50% 12,300 809
- - --------------------------------------------------------------------
TECHNOLOGY (0.4%)
International Business
Machines Corp. 7.50% 57,500 1,578
-----------
UTILITIES--ELECTRIC (37.7%)
Alabama Power Co. 6.40% 200,000 5,125
Arizona Public Service 7.25% 150,000 3,778
Baltimore Gas & Electric Co.
6.70% 39,700 4,399
Baltimore Gas & Electric Co.
6.99% 35,000 3,992
Baltimore Gas & Electric Co.
7.125% 40,000 4,572
Duke Energy Corp. 7.00% 3,362 364
Duke Energy Corp. 7.04% 1,558 174
Duke Energy Corp. 7.85% 20,544 2,328
Entergy Louisiana Inc. 4.16% 7,000 495
Entergy Louisiana Inc. 4.44% 6,000 435
Entergy Mississippi Inc. 4.92% 10,000 804
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
MARKET
VALUE*
PREFERRED STOCK FUND SHARES (000)
- - --------------------------------------------------------------------
<S> <C> <C>
Florida Power & Light Co. 6.75% 10,000 1,130
Florida Power & Light Co. 6.98% 95,000 10,829
Idaho Power Co. 7.07% 25,000 2,775
Illinois Power Co. 7.75% 28,400 1,574
Indianapolis Power & Light Co.
5.65% 90,000 8,843
Monongahela Power Co. 7.73% 50,000 5,700
PECO Energy Co. $7.48 50,000 5,762
PP&L Resources, Inc. 6.75% 85,000 9,223
PSI Energy Inc. 6.875% 40,000 4,430
Pacific Gas & Electric Co. 4.36% 11,800 230
Pacific Gas & Electric Co. 5.00% 39,800 889
Pacific Gas & Electric Co. 7.04% 150,000 4,144
Puget Sound Energy Inc. 7.45% 240,000 6,750
San Diego Gas & Electric Co.
6.80% 140,000 3,937
Savannah Electric & Power Co.
6.64% 140,000 3,570
Sierra Pacific Power Co. 7.80% 200,000 5,498
South Carolina Electric & Gas
Co. 6.52% 100,000 11,150
Southern California Edison Co.
4.24% 14,200 269
Southern California Edison Co.
5.80% 10,800 271
Texas Utilities Electric Co. $1.875 52,000 1,385
Texas Utilities Electric Co. $4.76 3,786 314
Texas Utilities Electric Co. $7.98 45,000 5,169
Union Electric Co. $7.64 33,000 3,801
Virginia Electric & Power Co.
$6.98 60,000 6,849
West Penn Power Co. 4.20% 5,000 377
Wisconsin Public Service Corp.
6.88% 10,000 1,129
-----------
132,464
-----------
- - --------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $315,645) 336,503
- - --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
FACE
AMOUNT
(000)
- - --------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (3.2%)
- - --------------------------------------------------------------------
<S> <C> <C>
U.S.Treasury Bond
6.50%, 11/15/2026 $ 1,000 1,065
U.S. Treasury Note
6.125%, 8/15/2007 10,000 10,267
- - --------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $11,333) 11,332
- - --------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.9%)
- - --------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 5/1/1998
(COST $3,156) 3,156 3,156
- - --------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $330,134) 350,991
- - --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
====================================================================
Other Assets-Note C $ 1,706
Liabilities (1,128)
-----------
578
- - --------------------------------------------------------------------
NET ASSETS (100%)
- - --------------------------------------------------------------------
Applicable to 34,015,367 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $351,569
====================================================================
NET ASSET VALUE PER SHARE $10.34
====================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- Non-Income-Producing Security. New issue that has not paid a dividend as
of April 30, 1998.
(1) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At April 30,
1998, the aggregate value of these securities was $24,075,000,
representing 6.8% of net assets.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- - --------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- - --------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $326,956 $ 9.61
Undistributed Net
Investment Income 240 .01
Accumulated Net Realized Gains 3,516 .10
Unrealized Appreciation--Note E 20,857 .62
- - --------------------------------------------------------------------
NET ASSETS $351,569 $10.34
====================================================================
</TABLE>
12
<PAGE> 15
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
SIX MONTHS ENDED APRIL 30, 1998
(000)
- - ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 9,830
Interest 421
---------
Total Income 10,251
---------
EXPENSES
Investment Advisory Fee--Note B 221
The Vanguard Group--Note C
Management and Administrative 310
Marketing and Distribution 43
Custodian Fees 2
Auditing Fees 5
Shareholders' Reports 13
Annual Meeting and Proxy Costs 3
---------
Total Expenses 597
- - ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 9,654
- - ----------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 5,346
- - ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 992
- - ----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $15,992
========================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined
on a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in
the Fund, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and
Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1998 OCT. 31, 1997
(000) (000)
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 9,654 $ 19,485
Realized Net Gain 5,346 2,495
Change in Unrealized Appreciation (Depreciation) 992 13,731
----------- ----------
Net Increase in Net Assets Resulting from Operations 15,992 35,711
----------- ----------
DISTRIBUTIONS
Net Investment Income (10,807) (20,291)
Realized Capital Gain -- --
----------- ----------
Total Distributions (10,807) (20,291)
----------- ----------
CAPITAL SHARE TRANSACTIONS(1)
Issued 57,116 86,381
Issued in Lieu of Cash Distributions 8,072 14,827
Redeemed (38,923) (82,208)
----------- ----------
Net Increase from Capital Share Transactions 26,265 19,000
- - -------------------------------------------------------------------------------------------
Total Increase 31,450 34,420
- - -------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 320,119 285,699
----------- ----------
End of Period $351,569 $320,119
===========================================================================================
(1)Shares Issued (Redeemed)
Issued 5,520 8,822
Issued in Lieu of Cash Distributions 786 1,514
Redeemed (3,764) (8,395)
----------- ----------
Net Increase in Shares Outstanding 2,542 1,941
===========================================================================================
</TABLE>
14
<PAGE> 17
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 Securities and Exchange Commission
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
FOR A SHARE OUTSTANDING SIX MONTHS ENDED YEAR ENDED OCTOBER 31,
THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.17 $ 9.67 $9.61 $8.35 $9.99 $9.32
- - ----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .30 .63 .69 .66 .66 .690
Net Realized and Unrealized Gain (Loss)
on Investments .20 .53 .04 1.25 (1.46) .685
--------------------------------------------------------
Total from Investment Operations .50 1.16 .73 1.91 (.80) 1.375
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.33) (.66) (.67) (.65) (.70) (.705)
Distributions from Realized Capital Gains -- -- -- -- (.14) --
--------------------------------------------------------
Total Distributions (.33) (.66) (.67) (.65) (.84) (.705)
- - ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.34 $10.17 $9.67 $9.61 $8.35 $9.99
================================================================================================================
TOTAL RETURN 4.96% 12.44% 8.04% 23.79% -8.45% 15.56%
================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $352 $320 $286 $308 $305 $392
Ratio of Total Expenses to
Average Net Assets 0.36%* 0.37% 0.39% 0.52% 0.51% 0.53%
Ratio of Net Investment Income to
Average Net Assets 5.71%* 6.41% 7.23% 7.43% 7.27% 6.77%
Portfolio Turnover Rate 42%* 34% 31% 20% 27% 45%
Average Commission Rate Paid --** $.0600 $.0600 N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**The Fund had no transactions on which commissions were charged.
15
<PAGE> 18
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: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid
and asked prices. Prices are taken from the primary market in which each
security trades. Bonds are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. 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. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group, transfers uninvested cash balances to a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. 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 six months ended April 30, 1998, 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 April 30, 1998,
the Fund had contributed capital of $20,000 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 six months ended April 30, 1998, the Fund purchased $81,869,000
of investment securities and sold $59,630,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases and
sales of U.S. government securities were $13,580,000 and $10,659,000,
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 April 30, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $20,857,000, consisting
of unrealized gains of $21,336,000 on securities that had risen in value since
their purchase and $479,000 in unrealized losses on securities that had fallen
in value since their purchase.
16
<PAGE> 19
================================================================================
TRUSTEES AND OFFICERS
================================================================================
JOHN C. BOGLE
Senior 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
Chairman, 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 ," "S&P ," "S&P 500 ," "Standard & Poor's 500," and "500"
are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell
Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of
Wilshire Associates.
<PAGE> 20
================================================================================
VANGUARD FAMILY OF FUNDS
================================================================================
STOCK FUNDS
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Wellington Fund
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be obtained directly from The Vanguard Group.
Q382-4/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
