VANGUARD
PREFERRED STOCK
FUND
[PHOTO]
SEMIANNUAL
REPORT
APRIL 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE>
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional valueson which our success is
built, including integrity, hardwork, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A Message to Our Shareholders 1
The Markets in Perspective 4
Report From the
Adviser 6
Fund Profile 8
Performance Summary 10
Financial Statements 11
All comparative mutual fund data are from Lipper or Morningstar, unless
otherwise noted.
<PAGE>
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During the first half of Vanguard Preferred Stock Fund's 1999 fiscal year,
interest rates edged higher and prices of fixed-income investments fell. For the
six months ended April 30, 1999, the fund earned +2.6%, topping the return of
our average peer but falling short of our unmanaged benchmark index. The
adjacent table compares the fund's six-month total return (capital change plus
reinvested dividends) with those of the average fixed-income mutual fund and the
Merrill Lynch DRD-Eligible Preferred Stock Index, a broad measure of the
preferred stock market. Our return is based on a change in net asset value from
$10.36 per share on October 31, 1998, to $10.22 per share on April 30, 1999,
with the latter figure adjusted for the reinvestment of dividends totaling $0.28
per share paid from net investment income and a distribution of $0.125 per share
paid from net realized capital gains. As expected, 100% of our income dividends
qualified for the 70% intercorporate dividends-received deduction (DRD), a tax
advantage that is available to corporations but not to individual investors. The
fund's yield as of April 30 was 5.6%.
- -----------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- -----------------------------------------------------------
Vanguard Preferred Stock Fund +2.6%
- -----------------------------------------------------------
Average Fixed-Income Fund +2.4%
- -----------------------------------------------------------
Merrill Lynch DRD-Eligible
Preferred Stock Index +3.5%
- -----------------------------------------------------------
THE PERIOD IN REVIEW
The economic picture brightened considerably during the six months ended April
30, as the U.S. economy steamed ahead and many countries around the world showed
signs of recovery from financial turmoil. This news was good for stocks, but not
quite so good for the bond market, which feared that economic strength would
reawaken its mortal enemy: inflation. The U.S. economy expanded at a 6% annual
pace during the final three months of 1998 and then recorded a growth rate of
4.1% in the January-March period. The growth continues to be driven by American
consumers, who are spending at a record pace. The boost from the consumer sector
has more than offset the drag of a ballooning trade deficit.
A strong job market and low inflation also contributed to the rosy
economic scenario. Unemployment hovered around a decades-low level of 4.3%,
while consumer prices rose just 1.3% during the period.
Though there was little concrete evidence of a resurgence of inflation,
the potential for higher prices troubled the bond market during the latter part
of the half-year. The yield of the benchmark 30-year U.S. Treasury bond ended
the period at 5.66%, 50 basis points higher than its starting point of 5.16% on
October 31, 1998. Long-term Treasury bonds, as measured by the Lehman Brothers
Long U.S. Treasury Bond Index, had a negative return of -3.6%, as a price
decline of -6.6% more than offset the index's +3.0% return from interest income.
At the shorter end of the fixed-income spectrum, rates rose,
1
<PAGE>
though not quite so significantly. The yield of 3-month U.S. Treasury bills was
4.54% on April 30, a bit higher than the 4.32% level at which it began the
half-year.
Stocks soared during the period, powered initially by Internet-related
issues and later by the impressive rebound of cyclical stocks during March and
April. The Standard & Poor's 500 Composite Stock Price Index, which is dominated
by large-capitalization stocks, returned +22.3%. The broadest measure of the
U.S. stock market--the Wilshire 5000 Equity Index--bested the S&P 500, earning a
six-month return of +22.8%.
For bonds, of course, higher interest rates meant lower prices. The
extent to which fixed-income investments fluctuate in response to interest rates
depends largely on maturity; the longer the maturity, the more sensitive a
bond's price is to interest rate changes. Because preferred stocks typically
have no set maturity date, they are even more sensitive to such changes than
long-term bonds. This simple fact of life made the half-year a difficult period
for preferreds. However, the negative impact of rising interest rates was
somewhat dampened by a smaller supply of new preferred stock issues. The
adviser's report on page 6 provides further details on the preferred stock
market.
PERFORMANCE OVERVIEW
Vanguard Preferred Stock Fund's return of +2.6% for the half-year was a hair
ahead of the +2.4% return of the average fixed-income mutual fund. Our return
was nearly a full percentage point behind the +3.5% return of the Merrill Lynch
DRD-Eligible Preferred Stock Index, which is a tough foe in that it does not
incur expenses that real-world mutual funds must incur.
It's important to note that the average fixed-income fund is far from a
perfect counterpart for our fund, which focuses strictly on preferred stocks. As
a group, fixed-income mutual funds invest in bonds with a variety of maturities
and quality ratings. On average, these funds have higher credit quality than
ours--because bonds have a higher claim on interest and principal in
corporations' capital structures than preferred stocks--and shorter average
maturities. During the half-year, these distinctions generally worked against
us, largely because of the decline in interest rates. (Keep in mind that
individual investors, who are not eligible to use the special corporate tax
deduction for preferred stock dividends, are not compensated for the fund's
additional interest rate and credit risks.)
While we expect that the significant differences between our fund and
its competitors will work sometimes to our advantage and sometimes to our
detriment, our cost advantage over similar funds is enduring. In fact, during
the half-year, this advantage accounted for all of our margin of superiority
over the average fixed-income fund. Our expense ratio (annualized expenses as a
percentage of average net assets) was 0.37%, about one-third of the 1.05%
charged by the average fixed-income fund. Competitors must overcome this
significant gap just to match Vanguard Preferred Stock Fund. In essence, low
operating costs provide a valuable head start in our quest to surpass the
results of similar funds.
The past six months have demonstrated the risks inherent in preferred
stocks, whose prices can decline sharply when interest rates rise. Significant
rate increases can have a heavy negative impact on preferreds (as happened in
1994), just as declines in rates (such as we have seen over much of the past
decade) can have quite beneficial effects.
2
<PAGE>
IN SUMMARY
For corporations that are seeking a relatively high level of dividend income
that qualifies for the 70% tax deduction, Vanguard Preferred Stock Fund can play
a valuable part in the fixed-income portion of a balanced investment program. As
we have emphasized in the past, and certainly will in the future, we are
convinced that creating a suitable mix of stock funds, fixed-income funds, and
money market funds--and then sticking with it through good times and bad--is the
surest route to long-term investment success. We look forward to reporting to
you on the full fiscal year six months hence.
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 13, 1999
3
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the
domestic economy's strength and the investing public's confidence in future
growth of the economy and corporate profits. The overall market, as measured by
the Wilshire 5000 Equity Index, rose 22.8% during the six months ended April 30,
while the S&P 500 Index, a proxy for large-capitalization stocks, gained 22.3%.
The midsummer shock of 1998--when the overall stock market fell by more than
20%--seemed to be quickly forgotten by investors. Most apparently overlooked the
fact that corporate earnings were flat to slightly lower, focusing instead on
the potential for future earnings. Investors' confidence was bolstered by the
market's quick rebound from its summer stumble and by a general easing of
monetary policy by the world's central banks. The Federal Reserve Board made
three separate quarter-percentage-point quarter-percentage-point reductions in
short-term interest rates during autumn 1998. Central banks in Europe, Asia, and
Latin America also cut rates. These actions lessened fears that the major
economies would be dragged down by the lingering effects of the economic crisis
that struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by spending
freely, boosting sales of cars, houses, and goods in stores. And why shouldn't
they have been happy? U.S. gross domestic product grew by an annual rate of 4.1%
in the first three months of 1999, and the nation's unemployment rate closed the
period at 4.3%.
Improved prospects for global growth were a key factor in the continuing advance
of technology stocks (up nearly 42% for the six months) and the resurgence of
some value-stock sectors, such as materials & processing (up 27%) and energy
(integrated oil
- --------------------------------------------------------------------------------
Total Returns
Periods Ended April 30, 1999
----------------------------
6 Months 1 Year 5 Years*
- --------------------------------------------------------------------------------
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
27328-1 6/15/1999
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- --------------------------------------------------------------------------------
*Annualized.
4
<PAGE>
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and still
feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the November-
April period was too much of a good thing. Economists confessed to puzzlement
that the expansion was not triggering an acceleration in wages or consumer
prices. But with oil prices rising, U.S. economic growth expanding at a 4.1%
annual pace, and unemployment at 4.3% of the labor force, the lowest point since
February 1970, bond market participants figured that inflation was bound to
accelerate eventually. (This view gained credence shortly after the period's
end, when the Consumer Price Index was reported to have risen 0.7% in April,
the biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to three-quarters
of a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues,
the strong economy was a tonic. These bonds had suffered considerably during the
market turmoil of summer 1998, as investors feared a global economic downturn
would result in higher defaults by weaker companies. But when economic growth
turned out to be stronger than expected, high-yield bond prices rebounded,
augmenting the bonds' interest income. The Lehman High Yield Index returned 8.3%
during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close. Overall,
the developed markets outside the United States gained 15.4% in U.S.-dollar
terms, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were boosted by
mergers and takeover activity and by signs that corporations were focusing more
intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets,
the bourses that had suffered the biggest declines during 1997 and 1998. The
Pacific region gained 27.4%, despite a continuing recession in Japan, while the
MSCI Select Emerging Markets Free Index rose 30.8%. European stocks were up
nearly 20% in local currencies, but these gains were cut to 10.9% for U.S.
investors because of the dollar's gains against the euro, a common currency
adopted by 11 nations, and other European currencies.
5
<PAGE>
REPORT FROM THE ADVISER
[PHOTO]
For the six- and twelve-month periods ended April 30, 1999, Vanguard Preferred
Stock Fund posted total returns of 2.6% and 5.6%, respectively.
AN OVERVIEW OF THE PERIOD
The fiscal year began November 1, 1998, with the yield of the long-term U.S.
Treasury bond at 5.16%. Six months later, long-term interest rates were higher
by 50 basis points, undermining the investment environment for preferred stocks.
However, the continuing lack of new issuance has been an underlying support for
prices. Although bond prices have fallen over the past six months, prices of
preferred stocks have not declined as severely because demand seems to be
marginally outstripping the limited supply.
Another positive factor was the absence of any proposals to lower the
intercorporate dividends-received deduction (DRD). We know of no current
proposal to reduce the DRD from the existing level of 70%.
MARKET UPDATE
As interest rates have risen, tenders and calls for older preferred issues have
slowed, largely because the issues that were most likely to be retired have
already been extinguished. The economic incentive to eliminate preferred stocks
from an issuer's balance sheet is high because dividends cannot be deducted on
the income statement; interest expenses, however, can be deducted. Thus, retired
preferreds typically are not replaced by new DRD-eligible preferred stocks at
lower dividend rates. This is because the DRD-eligible preferred remains a
relatively expensive financing vehicle for companies.
Risk premiums widened in global capital markets late last summer after
Russia defaulted on some of its debt. Investors demanded higher yields as
compensation for the higher perceived risk. Preferreds felt the shift. Since
that tumultuous period, risk premiums have narrowed in the domestic fixed-income
markets. The current after-tax yield spread for A-rated perpetual utility
preferreds versus 30-year Treasury bonds is 115 basis points, down from 158
basis points six months ago. The 10-year average is 205 basis points. Compared
with municipal bonds, preferreds have averaged 71 basis points of extra
after-tax yield over the past ten years; currently, the spread is a mere 7 basis
points. Thus, based on historical relationships, preferred stocks are expensive
versus Treasuries and municipals.
With the Treasury running a budget surplus, new sources of revenue are
less urgently needed, and the threat of a reduction of the DRD is diminished.
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>
The market is still demanding that new DRD-eligible preferred issues have
protection against a lowering of the 70% tax deduction. The prospectus of a
"DRD-protected issue" states that the dividend will increase if the DRD is
lowered. This is to ensure that the investor is left whole on an after-tax basis
with respect to income. We view this protection as necessary insurance against
tax law changes that could severely hurt prices for preferred stocks. However,
the protection typically expires 18 months after a preferred security is issued.
INVESTMENT GOALS AND STRATEGY
The fund's investment goals and strategy are consistent with those put in place
at its inception in 1975. We purchase relatively high-quality preferred stocks
with the goal of qualifying all of the fund's dividends for the 70%
intercorporate DRD. We achieved total qualification in fiscal 1998, as we have
in all previous years, and we will attempt to do so again in fiscal 1999.
Another objective is to provide sustainable, tax-advantaged income through
holdings in investment-grade preferreds. The risk to the fund's net asset value
from any future lowering of the DRD can be mitigated marginally through
investment in DRD-protected securities. The risk to the fund from rising
long-term interest rates--preferreds without a stated maturity perform very
poorly in such an environment--is constant and cannot be hedged. We expect rates
to rise slightly because the global economies seem to be recovering. However,
with inflation expected to be 2% or lower, rate increases should not be
substantial. Market psychology is shifting from an expectation that the Federal
Reserve will act to ease interest rates to anticipation that the Fed action will
instead tighten credit conditions.
We attempt to control income risk and variability by investing in the
securities of high-quality companies with call protection. Stability of income
should also be strengthened by broad diversification. On April 30, the fund
owned preferreds from 48 issuers.
At the end of the fiscal half-year, the fund's quality breakdown, using
Moody's Investors Service ratings, was as follows: cash, 3%; aa, 26%; a, 56%;
baa, 15%. High-quality financial-service issuers are our largest sector,
accounting for about 51% of assets. About 43% of the fund's assets are
concentrated in the electric utility industry, representing 26 issuers. Our
commitment to utilities is up slightly from about 42% of assets six months ago.
Earl E. McEvoy, Senior Vice President
Wellington Management Company, llp
May 12, 1999
7
<PAGE>
FUND PROFILE
PREFERRED STOCK FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
- -------------------------------------------------------------------
PREFERRED MERRILL LYNCH
STOCK INDEX*
- -------------------------------------------------------------------
Number of Stocks 75 34
Yield 5.6% 7.0%
Average Coupon 6.4% 7.4%
Average Quality a2 a2
Turnover Rate 11%** --
Expense Ratio 0.37%** --
Cash Reserves 3.1% --
*Merrill Lynch DRD-Eligible Preferred Stock Index.
**Annualized.
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
Treasury/Agency 0.0%
aaa 0.0
aa 25.7
a 56.3
baa 15.0
ba 0.0
b 0.0
Not Rated 3.0
- ----------------------------------------------
Total 100.0%
DISTRIBUTION BY COUPON (% OF PORTFOLIO)
- ----------------------------------------------
Under 4% 0.3%
4%-5% 7.3
5%-6% 21.6
6%-7% 47.5
7%-8% 23.3
8%-9% 0.0
9%-10% 0.0
Over 10% 0.0
- ----------------------------------------------
Total 100.0%
<PAGE>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------
Federal Home Loan Mortgage Corp. 8.0%
Citigroup, Inc. 4.7
Alabama Power Co. 4.6
Fleet Financial Group 4.2
Baltimore Gas & Electric Co. 4.1
J. P. Morgan & Co., Inc. 3.9
Florida Power & Light Co. 3.7
Heller Financial, Inc. 3.5
Republic New York Corp. 3.4
South Carolina Electric & Gas Co. 3.4
- -----------------------------------------------
Top Ten 43.5%
SECTOR DIVERSIFICATION (% OF PREFERRED STOCKS)
- --------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
-------------------------------------------
PREFERRED STOCK PREFERRED STOCK
-------------------------------------------
Auto & Transportation........... 0.5% 0.0%
Consumer Discretionary.......... 0.0 0.0
Consumer Staples................ 0.0 1.5
Financial Services.............. 59.4 52.1
Health Care..................... 0.0 0.0
Integrated Oils................. 0.0 0.0
Other Energy.................... 0.0 1.3
Materials & Processing.......... 0.2 0.5
Producer Durables............... 0.0 0.0
Technology...................... 0.5 0.4
Utilities....................... 39.4 44.2
Other........................... 0.0 0.0
- --------------------------------------------------------------------------------
8
<PAGE>
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
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 fund'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 fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
DISTRIBUTION BY COUPON. A breakdown of the securities in a fund 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 fund'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 fund'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 fund 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 fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is the rate of return an investor would receive if
the securities were held to their maturity dates.
9
<PAGE>
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 an investment in the fund could
lose money.
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1978-APRIL 30, 1999
- --------------------------------------------------------------------------------
PREFERRED STOCK FUND MERRILL LYNCH
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
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 12.3
- --------------------------------------------------------------------------------
PREFERRED STOCK FUND MERRILL LYNCH
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
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 1.9 6.1 8.0 6.4
1999** -0.1 2.7 2.6 3.5
- --------------------------------------------------------------------------------
*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, 1999.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- --------------------------------------------------------------------------------
10 YEARS
------------------------
INCEPTION 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
DATE
- --------------------------------------------------------------------------------
Preferred Stock Fund 12/3/1975 5.26% 9.73% 2.91% 8.03% 10.94%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
10
<PAGE>
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (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 berealized if the fund were to sell all of its
investments at their statement-date values.
- --------------------------------------------------------------------------------
MARKET
VALUE*
PREFERRED STOCK FUND SHARES (000)
- --------------------------------------------------------------------------------
PREFERRED STOCKS (96.9%)
- --------------------------------------------------------------------------------
CONSUMER STAPLES (1.4%)
(1) Ocean Spray Cranberries, Inc.
6.25% 45,000 $ 4,837
Stokely-Van Camp Corp. 5.00% 27,670 488
-------
5,325
-------
FINANCIAL SERVICES (50.6%)
BANKS--NEW YORK CITY (10.7%)
The Chase Manhattan Corp. 4.96% 250,000 12,500
J. P. Morgan & Co., Inc. 6.625% 275,000 14,884
Republic New York Corp. 5.715% 250,000 12,875
BANKS--OUTSIDE NEW YORK CITY (13.0%)
(1) ABN-AMRO North America 6.59% 11,000 11,720
Comerica, Inc. 6.84% 150,000 7,819
Fleet Financial Group 6.75% 231,000 13,109
Fleet Financial Group 7.25% 100,000 2,666
(1) LaSalle National Bank 6.46% 2,000 2,136
PNC Bank Corp. 6.05% 125,000 6,445
Wells Fargo & Co. 6.59% 100,000 5,213
DIVERSIFIED FINANCIAL SERVICES(7.0%)
Citigroup, Inc. 6.365% 330,000 17,655
Household International Inc. 5.00% 43,480 1,973
Household International Inc. $4.30 82,950 6,750
Household International Inc. 8.25% 5,600 158
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
FINANCE COMPANIES (3.6%)
Heller Financial, Inc. 6.687% 125,000 $ 13,312
FINANCIAL--MISCELLANEOUS (11.2%)
Federal Home Loan Mortgage
Corp. 5.00% 400,000 19,800
Federal Home Loan Mortgage
Corp. 5.10% 100,000 4,962
Federal Home Loan Mortgage
Corp. 6.14% 100,000 5,400
Federal National Mortgage
Assn. 6.45% 100,000 5,275
MBNA Corp. 7.50% 250,000 6,844
INSURANCE--PROPERTY-CASUALTY (2.2%)
(1) Hillbrook Insurance Co. 5.90% 75 8,074
SECURITIES BROKERS & SERVICES (2.9%)
Morgan Stanley Dean Witter Co.,
7.75% 200,000 10,800
-------
190,370
-------
MATERIALS & PROCESSING (0.5%)
E.I. du Pont de Nemours & Co.
3.50% 12,300 824
E.I. du Pont de Nemours & Co.
$ 4.50 12,025 1,028
-------
1,852
-------
OTHER ENERGY (1.2%)
Apache Corp. 5.68% 50,000 4,670
-------
TECHNOLOGY (0.4%)
International Business Machines
Corp. 7.50% 57,500 1,560
-------
11
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
PREFERRED STOCK FUND SHARES (000)
- --------------------------------------------------------------------------------
UTILITIES--ELECTRICAL (42.8%)
Alabama Power Co. 5.20% 700,000 $ 17,500
Baltimore Gas & Electric Co.
6.70% 39,700 4,440
Baltimore Gas & Electric Co.
6.97% 10,900 1,228
Baltimore Gas & Electric Co.
6.99% 35,000 4,042
Baltimore Gas & Electric Co.
7.125% 52,000 5,774
Duke Energy Corp. 6.375% 23,200 654
Duke Energy Corp. 7.00% 3,362 368
Duke Energy Corp. 7.04% 1,558 175
Duke Energy Corp. 7.85% 20,544 2,284
Duquesne Light Co. 3.75% 4,200 144
Duquesne Light Co. 4.10% 6,710 247
Duquesne Light Co. 4.15% 9,160 342
Florida Power & Light Co. 6.75% 20,000 2,209
Florida Power & Light Co. 6.98% 105,000 11,647
Idaho Power Co. 7.07% 25,000 2,776
Illinois Power Co. 7.75% 28,400 1,555
Indianapolis Power & Light 5.65% 75,000 7,688
Monongahela Power Co. 7.73% 50,000 5,719
PECO Energy Co. $7.48 50,000 5,553
PP&L Resources, Inc. 6.75% 85,000 9,350
PSI Energy Inc. 4.160% 4,050 77
PSI Energy Inc. 4.32% 8,890 171
PSI Energy Inc. 6.875% 40,000 4,480
Pacific Gas & Electric Co. 4.36% 11,800 238
Pacific Gas & Electric Co. 5.00% 39,800 913
Pacific Gas & Electric Co. 7.04% 210,000 6,392
PacifiCorp 7.48% 75,000 8,297
PacifiCorp $1.280 7,036 176
Potomac Electric Power Co.
$2.280 37,000 1,602
Potomac Electric Power Co.
$2.460 35,000 1,634
Puget Sound Energy 7.45% 240,000 6,630
San Diego Gas & Electric Co.
$1.70 140,000 3,885
Sierra Pacific Power Co. 7.80% 200,000 5,573
South Carolina Electric & Gas Co.
6.52% 115,000 12,851
Southern California Edison Co.
4.08% 18,300 351
Southern California Edison Co.
4.24% 34,400 686
Southern California Edison Co.
6.45% 5,000 523
Texas Utilities Electric Co. $1.805 8,300 220
Texas Utilities Electric Co. $1.875 112,800 3,032
Texas Utilities Electric Co. $4.76 3,786 320
Texas Utilities Electric Co. $4.84 5,500 455
Texas Utilities Electric Co. $7.98 45,000 5,130
Union Electric Co. $7.64 34,000 3,855
Virginia Electric & Power Co.
$6.98 60,000 6,746
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
West Penn Power Co. 4.20% 5,000 $ 389
Wisconsin Power & Light Co. 6.20% 18,500 1,998
Wisconsin Public Service Corp.
6.88% 10,000 1,100
-------
161,419
-------
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $346,576) 365,196
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.1%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999
(COST $11,637) $11,637 11,637
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $358,213) 376,833
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
Other Assets--Note C 1,376
Liabilities (1,251)
------
125
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 36,868,352 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $376,958
================================================================================
NET ASSET VALUE PER SHARE $10.22
- --------------------------------------------------------------------------------
*See Note A in Notes to Financial Statements.
(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, 1999, the
aggregate value of these securities was $26,767,000,
representing 7.1% of net assets.
- --------------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
Paid in Capital $357,088 $ 9.68
Undistributed Net
Investment Income 591 .01
Accumulated Net Realized Gains 659 .02
Unrealized Appreciation--
Note F 18,620 .51
- --------------------------------------------------------------------------------
NET ASSETS $376,958 $10.22
================================================================================
12
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
- --------------------------------------------------------------------------------
Preferred Stock Fund
Six Months Ended April 30, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $10,852
Interest 220
-------
Total Income 11,072
-------
EXPENSES
Investment Advisory Fee--Note B 238
The Vanguard Group--Note C
Management and Administrative 391
Marketing and Distribution 41
Custodian Fees 6
Auditing Fees 1
Shareholders' Reports 12
-------
Total Expenses 689
Expenses Paid Indirectly--Note D (3)
-------
Net Expenses 686
-------
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,386
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 742
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES(1,298)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $9,830
================================================================================
13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
PREFERRED STOCK FUND
--------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $10,386 $19,843
Realized Net Gain 742 6,265
Change in Unrealized Appreciation (Depreciation) (1,298) 53
----------------------------
Net Increase in Net Assets Resulting from
Operations 9,830 26,161
----------------------------
DISTRIBUTIONS
Net Investment Income (10,223) (20,808)
Realized Capital Gain (4,518) --
----------------------------
Total Distributions (14,741) (20,808)
----------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 58,192 130,539
Issued in Lieu of Cash Distributions 11,572 15,646
Redeemed (68,649) (90,903)
-----------------------------
Net Increase from Capital Share Transactions 1,115 55,282
- --------------------------------------------------------------------------------
Total Increase (Decrease) (3,796) 60,635
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 380,754 320,119
----------------------------
End of Period $376,958 $380,754
================================================================================
1Shares Issued (Redeemed)
Issued 5,664 12,503
Issued in Lieu of Cash Distributions 1,135 1,509
Redeemed (6,685) (8,731)
----------------------------
Net Increase in Shares Outstanding 114 5,281
================================================================================
15
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
FOR A SHARE OUTSTANDING SIX MONTHS ENDED YEAR ENDED OCTOBER 31,
THROUGHOUT EACH PERIOD APRIL 30, 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.36 $10.17 $9.67 $9.61 $8.35 $9.99
INVESTMENT OPERATIONS
Net Investment Income .280 .58 .63 .69 .66 .66
Net Realized and Unrealized Gain (Loss)
on Investments (.015) .22 .53 .04 1.25 (1.46)
-------------------------------------------------------------------
Total from Investment Operations .265 .80 1.16 .73 1.91 (.80)
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.280) (.61) (.66) (.67) (.65) (.70)
Distributions from Realized Capital Gains (.125) -- -- -- -- (.14)
-------------------------------------------------------------------
Total Distributions (.405) (.61) (.66) (.67) (.65) (.84)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.22 $10.36 $10.17 $9.67 $9.61 $8.35
==============================================================================================================================
TOTAL RETURN 2.60% 8.00% 12.44% 8.04% 23.79% -8.45%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $377 $381 $320 $286 $308 $305
Ratio of Total Expenses to
Average Net Assets 0.37%* 0.36% 0.37% 0.39% 0.52% 0.51%
Ratio of Net Investment Income to
Average Net Assets 5.52%* 5.60% 6.41% 7.23% 7.43% 7.27%
Portfolio Turnover Rate 11%* 39% 34% 31% 20% 27%
==============================================================================================================================
</TABLE>
*Annualized.
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. Securities for
which market quotations are not readily available are valued by methods deemed
by the Board of Trustees to represent fair value.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
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, 1999, 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. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 1999, the fund had contributed capital of $63,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.09% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.
D. The fund's custodian bank has agreed to reduce its fees when the fund
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended April 30, 1999, custodian fee offset arrangements reduced
expenses by $3,000.
E. During the six months ended April 30, 1999, the fund purchased $20,064,000 of
investment securities and sold $20,607,000 of investment securities, other than
U.S. government securities and temporary cash investments. Sales of U.S.
government securities were $11,391,000.
F. At April 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $18,620,000, consisting
of unrealized gains of $19,736,000 on securities that had risen in value since
their purchase and $1,116,000 in unrealized losses on securities that had fallen
in value since their purchase.
16
<PAGE>
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson*Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J.HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of
the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the Russell
Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire
Associates.
<PAGE>
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
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.
Q382-06/14/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
