<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Both the bond market and the stock market turned negative during the six months
ended March 31, the first half of the 1994 fiscal year for Vanguard Equity
Income Fund. In an environment of steadily rising interest rates, the
interest-rate-sensitive stocks that dominate the Fund's portfolio moved sharply
lower. As a result, following its excellent double-digit performance in fiscal
1993, the Fund turned in a negative total return for the first half of fiscal
1994, and one that fell short of its competitive standards.
This table compares the total return (capital change plus income) of
Vanguard Equity Income Fund with that of the unmanaged Standard & Poor's 500
Composite Stock Price Index, a good benchmark for the performance of the large
blue-chip stocks that dominate the U.S. stock market:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Total Return
----------------
Six Months Ended
March 31, 1994
- - -------------------------------------------------------------------------------
<S> <C>
VANGUARD EQUITY INCOME FUND -8.1%
- - -------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX -1.6%
- - -------------------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $14.62 per share on
September 30, 1993, and $12.63 on March 31, 1994, with the latter figure
adjusted to take into account the reinvestment of two quarterly dividends
totaling $.33 per share from net investment income, and a distribution of $.52
per share from net capital gains realized as a result of our operations during
1993. As of March 31, 1994, the Fund's dividend yield was 4.8%.
* SIX-MONTH OVERVIEW
Perhaps the most important development in the financial markets over the past
six months--and surely the most important for Vanguard Equity Income Fund--was
the abrupt reversal in the course of interest rates. After falling fairly
steadily over the past three years, to a twenty-year low of 5.9% on October 15,
1993, the yield on the long-term U.S. Treasury bond began to edge higher in
reaction to a strengthening economy and mounting concerns about inflation. By
the close of the Fund's fiscal period on March 31, 1994, the Treasury yield had
bounced up to 7.1%, its highest level in over a year.
Surprisingly enough, the stock market seemed to take the rate
increases "in its stride" through the early part of the fiscal period. Indeed,
the Standard & Poor's 500 Index hit a new all-time high on February 2, 1994.
But concerns about rising interest rates, engendered by two moves by the
Federal Reserve Board--taking the Federal funds rate from 3.0% to
3.5%--unsettled the market beginning in early February. The long market advance
was interrupted, and stock prices fell -7% during February and March, the
largest such decline over a two-month period since 1990.
If the past six months were difficult for the broad stock market,
they were formidable for Vanguard Equity Income Fund. Our decline of -8.1% was
substantially larger than the -1.6% drop in the Standard & Poor's 500 Index and
the -2.5% decline for the average equity income fund. Our shortfall relative to
the Index was the result of two factors: industry weighting and stock
selection. Our portfolio concentration presented the bigger drag of the two,
with nearly one-third of the Fund's net assets concentrated in the
worst-performing major sector of the stock market, utility stocks (electric and
telecommunication stocks). By comparison, the broad market weighting in these
stocks is only about 12%. Our performance was also negatively impacted by our
stock selections in the consumer cyclical and financial sectors.
I should note that a fund with a yield-oriented objective, such as
Vanguard Equity Income Fund, can reasonably be expected to fare somewhat worse
than stocks as a group during a period of sharply rising interest rates.
Nonetheless, our performance also lagged the returns of other equity income
funds with generally similar investment policies. Although these funds
maintained above-market weightings (18% of net assets on average) in utility
stocks, their commitment was well below that of Vanguard Equity Income Fund.
Furthermore, our performance was hindered relative to competitors by virtue of
our policy to remain fully invested in
1
<PAGE> 2
common stocks. Our competitors, on the other hand, hold something like 20% of
their portfolios in convertibles, preferreds, and cash, each of which generally
performed better than the stock market over the past six months.
* IN SUMMARY
In my Annual Report letter to shareholders six months ago, I noted, "all
yield-oriented strategies entail a portfolio that carries significant
interest-rate risk." I went on to caution, "rates have now descended to their
lowest levels in 20 years, and some retracement is, at the very least,
possible." Clearly this risk of rising interest rates came to pass during the
first half of fiscal 1994.
And yet, it seems to me that six months is far too short a period
in which to judge the performance of a mutual fund. Our lifetime record (since
1988) of total return remains fully competitive with that of the average equity
income fund, and we continue to pay a dividend yield that is among the highest
in the group.
In the final analysis, price volatility is simply part and parcel
of investing in the financial markets; so are crosscurrents that favor one
market sector (say, income stocks) and then another. Consistently timing these
ebbs and flows with precision has proven to be impossible. So, provided that
you maintain a balanced portfolio of stocks, bonds, and short-term reserves,
staying the course with Vanguard Equity Income Fund seems the most sensible
judgment.
I look forward to providing you with an in-depth discussion of the
Fund's results in the Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
----------------------
John C. Bogle
Chairman of the Board
April 21, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1994) ARE AS FOLLOWS:
1 YEAR: -0.36% 5 YEARS: +8.77% SINCE INCEPTION (3/21/88): +10.41%
THE FUND'S AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION INCLUDES AN INCOME
RETURN OF +5.47% AND A CAPITAL RETURN OF +4.94%. ALL OF THESE DATA REPRESENT
PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
TOTAL INVESTMENT RETURN
The following table illustrates the results of an investment in VANGUARD EQUITY
INCOME FUND during the period from March 21, 1988, to March 31, 1994, the
lifetime of the Fund. This was a period in which stock prices fluctuated
widely. The results shown should not be considered as a representation of the
dividend income or capital gain or loss that may be realized from an investment
made in the Fund today.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL
PERIOD PER SHARE DATA YEAR-END VALUE INVESTMENT RETURN
- - ------------------------------------------------------------------------------------------------------------------------------------
Annual Percentage Change*
-------------------------
Value with Income
Year Ended Net Asset Income Capital Gains Dividends & Capital Vanguard Equity S&P 500 Vanguard Equity S&P 500
September 30 Value Dividends Distributions Gains Reinvested Income Fund Index Income Fund Index
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (3/88) $10.00 -- -- $10.00 $10,000 $10,000 -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
1988 10.58 $0.24 -- 10.83 10,826 10,314 + 8.3% + 3.1%
- - ------------------------------------------------------------------------------------------------------------------------------------
1989 13.07 0.48 $0.02 13.95 13,949 13,707 + 28.8 + 32.9
- - ------------------------------------------------------------------------------------------------------------------------------------
1990 10.36 0.64 0.03 11.68 11,682 12,441 - 16.2 - 9.2
- - ------------------------------------------------------------------------------------------------------------------------------------
1991 12.14 0.79 0.07 14.77 14,773 16,304 + 26.5 + 31.1
- - ------------------------------------------------------------------------------------------------------------------------------------
1992 12.81 0.65 0.10 16.58 16,584 18,104 + 12.3 + 11.0
- - ------------------------------------------------------------------------------------------------------------------------------------
1993 14.62 0.59 -- 19.76 19,763 20,452 + 19.2 + 13.0
- - ------------------------------------------------------------------------------------------------------------------------------------
1994 (3/31) 12.63 0.33 .52 18.16 18,158 20,134 - 8.1 - 1.6
- - ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME $3.72 + 81.6% +101.3%
- - ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
RATE OF RETURN + 10.4% + 12.3%
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders
on reinvested income dividends and capital gains distributions.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
Investment results for Vanguard Equity Income Fund during the six-month period
ending March 31, 1994, were the mirror image of the prior six-month period--and
then some. In that earlier period, the Fund outperformed the unmanaged Standard
& Poor's 500 Stock Index by 5.4 percentage points, but in the most recent six
months it has given up 6.5 percentage points versus the Index, putting the Fund
back to where it was early in 1993 relative to the Index. The Fund also
underperformed the average equity income fund (by 5.6 percentage points) over
the same period.
* PANIC AMONGST THE DERIVATIVES MANAGERS
It appears to us that the process of this reversal began during the third
quarter of 1993 with the so-called asset allocators. Prior to that time many
such advisers, who manage by rotating money between sectors and classes of
assets, had been favorably disposed toward bonds and high-yield common stocks.
In October of last year, however, many of these asset allocators began to fear
a stronger economy and rising interest rates. They proceeded to "dump" (their
term) bonds and high-yield stocks and to buy assets that they thought would
fare better during the expected economic recovery. This rotation contributed to
the rise in interest rates, which ultimately forced highly leveraged hedge
funds and derivatives managers (who had been betting on lower rather than
higher rates) to sell bonds at distressed prices in order to protect their
positions--and the panic was on.
* ROUND UP THE USUAL SUSPECTS
The selling of electric utility and telephone stocks is the usual knee-jerk
reaction to higher interest rates, and caused most of the underperformance of
the Portfolio in the last six months. While it is true that these groups are
subject to poor performance during periods of very high inflation, a return to
that kind of environment seems very unlikely under present world economic and
political conditions, which are much more conducive to low rather than high
inflation.
Moreover, even including the period of runaway inflation and
interest rates in the late 1970s, over the past 20 years the electric utility
and telephone stocks have outperformed the S&P 500 by a significant margin on a
total return basis. This outperformance is in spite of the fact that they have
usually been viewed as dull companies. Their hidden power lies in their
dividends. Large up- front dividends compound rapidly, making these stocks
formidable investments when they are given the opportunity to demonstrate their
power over longer spans of time.
* A TRADITIONAL LOW-RISK EQUITY INCOME PORTFOLIO
Many equity income funds have deviated from traditional equity income
investment practices in recent years. Our relative yield approach has not
changed, and continues to be a low-risk, high-yield, all-common-stock strategy.
This means that we may not parallel the results of the equity income group in
the short run--as certainly happened with a vengeance during the past six
months. However, we are confident that the strategy will continue to produce
competitive returns in the long run. Moreover, just as the outperformance of
Vanguard Equity Income Fund in the middle of 1993 proved to be something of a
"bubble," we believe the underperformance of the last six months will not last,
and the Fund will go back to a more normal relationship to the market.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
April 13, 1994
4
<PAGE> 5
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited)
March 31, 1994
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - -----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.8%)
- - -----------------------------------------------------------------
BANKS--NEW YORK (1.8%)
Bankers Trust New York Corp. 126,800 $ 8,987
J.P. Morgan & Co., Inc. 130,900 8,198
--------
GROUP TOTAL 17,185
--------
- - -----------------------------------------------------------------
BANKS--REGIONAL (2.3%)
Barnett Banks of Florida, Inc. 18,500 816
Boatmen's Bancshares, Inc. 148,000 4,384
CoreStates Financial Corp. 183,100 4,761
First Union Corp. 28,000 1,166
PNC Bank Corp. 340,000 9,052
Wachovia Corp. 38,000 1,207
--------
GROUP TOTAL 21,386
--------
- - -----------------------------------------------------------------
CHEMICAL--BASIC (6.1%)
ARCO Chemical Co. 381,600 16,933
Dow Chemical Co. 334,200 20,094
E.I. du Pont de Nemours & Co. 180,000 9,540
Monsanto Co. 116,800 9,081
Union Carbide Corp. 83,500 1,879
--------
GROUP TOTAL 57,527
--------
- - -----------------------------------------------------------------
CHEMICAL--DIVERSIFIED (.1%)
Minnesota Mining & Manufacturing Co. 12,900 1,279
--------
- - -----------------------------------------------------------------
COMPUTERS & OFFICE EQUIPMENT (2.2%)
International Business Machines Corp. 372,300 20,290
--------
- - -----------------------------------------------------------------
CONGLOMERATE (3.2%)
Hanson PLC ADR 708,200 14,076
Ogden Corp. 720,500 16,031
--------
GROUP TOTAL 30,107
--------
- - -----------------------------------------------------------------
DRUGS (9.7%)
American Home Products Corp. 360,100 20,886
Bristol-Myers Squibb Co. 487,800 25,183
Eli Lilly & Co. 435,000 21,641
Merck & Co., Inc. 53,000 1,577
Upjohn Co. 620,700 16,836
Warner-Lambert Co. 67,800 4,195
--------
GROUP TOTAL 90,318
--------
- - -----------------------------------------------------------------
ELECTRIC--UTILITY (15.0%)
Allegheny Power System, Inc. 419,200 9,537
Baltimore Gas & Electric Co. 325,900 7,536
Consolidated Edison Co. of New York, Inc. 279,800 8,149
FPL Group, Inc. 509,800 16,887
Northern States Power Co. of Minnesota 134,900 5,514
Oklahoma Gas & Electric Co. 321,700 11,139
Pacificorp 921,000 16,233
Pennsylvania Power and Light Co. 192,200 4,421
Potomac Electric Power Co. 364,900 8,028
Public Service Enterprise Group Inc. 570,300 15,897
SCE Corp. 876,200 14,457
Scana Corp. 111,400 5,083
Texas Utilities Co. 385,400 14,404
Union Electric Corp. 76,600 2,700
--------
GROUP TOTAL 139,985
--------
- - -----------------------------------------------------------------
ELECTRIC EQUIPMENT (.1%)
Westinghouse Electric Corp. 69,400 833
--------
- - -----------------------------------------------------------------
ELECTRIC INSTRUMENTS (.5%)
Thomas & Betts Corp. 80,700 5,003
--------
- - -----------------------------------------------------------------
FINANCIAL SERVICES (3.8%)
H.F. Ahmanson & Co. 639,700 10,795
American Express Co. 397,900 10,992
Great Western Financial Corp. 844,300 13,509
--------
GROUP TOTAL 35,296
--------
- - -----------------------------------------------------------------
FOOD--PACKAGED (.4%)
Borden, Inc. 105,400 1,410
H.J. Heinz Co. 63,100 2,114
--------
GROUP TOTAL 3,524
--------
- - -----------------------------------------------------------------
HOUSEHOLD PRODUCTS (.6%)
Clorox Co. 115,000 5,764
--------
- - -----------------------------------------------------------------
INSURANCE--DIVERSIFIED (4.3%)
Aetna Life & Casualty Co. 246,400 13,090
American General Corp. 276,700 7,644
CIGNA Corp. 327,000 19,415
--------
GROUP TOTAL 40,149
--------
- - -----------------------------------------------------------------
INSURANCE--PROPERTY & CASUALTY (1.0%)
Continental Corp. 397,900 9,002
--------
- - -----------------------------------------------------------------
MEDICAL SERVICES (.1%)
Baxter International, Inc. 44,000 995
--------
- - -----------------------------------------------------------------
NATURAL GAS--DIVERSIFIED (2.6%)
Arkla, Inc. 506,200 3,417
Consolidated Natural Gas Co. 323,500 12,940
NICOR, Inc. 165,000 4,207
Pacific Enterprises 199,100 4,032
--------
GROUP TOTAL 24,596
--------
- - -----------------------------------------------------------------
PAPER & FOREST PRODUCTS (.7%)
Union Camp Corp. 123,200 5,452
Weyerhaeuser Co. 31,400 1,358
--------
GROUP TOTAL 6,810
--------
- - -----------------------------------------------------------------
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - -----------------------------------------------------------------
<S> <C> <C>
PETROLEUM--DOMESTIC (5.0%)
Amoco Corp. 164,500 $ 8,739
Atlantic Richfield Co. 228,300 21,689
Sun Co., Inc. 221,300 7,165
USX-Marathon Group 537,300 8,865
--------
GROUP TOTAL 46,458
--------
- - -----------------------------------------------------------------
PETROLEUM--INTERNATIONAL (11.3%)
Chevron Corp. 243,600 20,524
Exxon Corp. 348,200 21,893
Mobil Corp. 352,000 26,180
Royal Dutch Petroleum Co. 99,100 9,848
Texaco, Inc. 431,100 27,159
--------
GROUP TOTAL 105,604
--------
- - -----------------------------------------------------------------
PHOTOGRAPHY (2.0%)
Eastman Kodak Co. 412,450 18,302
PUBLISHING (2.8%)
The Dun & Bradstreet Corp. 285,100 16,750
John H. Harland Co. 210,700 4,714
McGraw-Hill, Inc. 69,700 4,557
--------
GROUP TOTAL 26,021
--------
- - -----------------------------------------------------------------
RETAIL--GENERAL MERCHANDISE (3.6%)
Kmart Corp. 1,092,900 19,809
J.C. Penney Co., Inc. 59,000 3,119
Sears, Roebuck & Co. 73,700 3,169
Woolworth Corp. 519,400 7,856
--------
GROUP TOTAL 33,953
--------
- - -----------------------------------------------------------------
RETAIL--SPECIAL LINES (.2%)
McKesson Corp. 37,100 2,207
--------
- - -----------------------------------------------------------------
TELECOMMUNICATIONS (14.7%)
Ameritech Corp. 587,400 22,395
Bell Atlantic Corp. 364,900 18,884
BellSouth Corp. 368,200 21,263
GTE Corp. 774,500 24,009
NYNEX Corp. 641,900 22,146
Pacific Telesis Group 203,100 10,688
U.S. West Corp. 453,700 18,488
--------
GROUP TOTAL 137,873
--------
- - -----------------------------------------------------------------
TOBACCO (4.3%)
American Brands, Inc. 619,500 18,740
Philip Morris Cos., Inc. 425,000 21,569
--------
GROUP TOTAL 40,309
--------
- - -----------------------------------------------------------------
TOILETRY & COSMETICS (.4%)
Tambrands, Inc. 98,300 3,785
--------
- - -----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $910,104) 924,561
- - -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - -----------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (.5%)
- - -----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.49%, 4/4/94
(Cost $4,183) $4,183 $ 4,183
- - -----------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $914,287) 928,744
- - -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- - -----------------------------------------------------------------
Other Assets--Note C 20,410
Liabilities (13,446)
--------
6,964
- - -----------------------------------------------------------------
NET ASSETS (100%)
- - -----------------------------------------------------------------
Applicable to 74,068,851 outstanding
$.001 par value shares (authorized
1,000,000,000 shares) $935,708
- - -----------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.63
=================================================================
+See Note A to Financial Statements.
- - -----------------------------------------------------------------
AT MARCH 31, 1994, NET ASSETS CONSISTED OF:
- - -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $897,409 $12.12
Undistributed Net Investment Income 8,494 .11
Accumulated Net Realized Gains 15,348 .21
Unrealized Appreciation of
Investments--Note E 14,457 .19
- - -----------------------------------------------------------------
NET ASSETS $935,708 $12.63
- - -----------------------------------------------------------------
</TABLE>
6
<PAGE> 7
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1994
(000)
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,482
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426
- - ----------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . 24,908
- - ----------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . . . . . . . 768
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . $1,046
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . 115 1,161
Taxes (other than income taxes)--Note A . . . . . . . . . . . . . . . . ------- 43
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 97
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . 7
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 3
- - ----------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . 2,093
- - ----------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . 22,815
- - ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . 15,568
- - ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . (123,454)
- - ----------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . $ (85,071)
==========================================================================================================
</TABLE>
7
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MARCH 31, 1994 September 30, 1993
(000) (000)
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . $ 22,815 $ 41,157
Realized Net Gain . . . . . . . . . . . . . . . 15,568 38,518
Change in Unrealized Appreciation (Depreciation) (123,454) 88,744
- - ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . (85,071) 168,419
- - ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . (24,542) (41,029)
Realized Net Gain . . . . . . . . . . . . . . . (38,665) --
- - ------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (63,207) (41,029)
- - ------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A . . . (728) 2,515
- - ------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . 122,762 236,217
-- In Lieu of Cash Distributions . . . 58,130 36,956
-- Exchange . . . . . . . . . . . . . . 119,139 182,470
Redeemed -- Regular . . . . . . . . . . . . . . . (90,923) (98,397)
-- Exchange . . . . . . . . . . . . . . (230,760) (158,383)
- - ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions . . . . . . . . . . . (21,652) 198,863
- - ------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . (170,658) 328,768
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . 1,106,366 777,598
End of Period (3) . . . . . . . . . . . . . . . $ 935,708 $ 1,106,366
============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . $.33 $.59
Realized Net Gain . . . . . . . . . . . . . $.52 --
- - ------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . 17,523 31,288
Issued in Lieu of Cash Distributions . . . . 4,336 2,735
Redeemed . . . . . . . . . . . . . . . . . . (23,487) (19,041)
- - ------------------------------------------------------------------------------------------------------------
(1,628) 14,982
- - ------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . $ 8,494 $ 10,949
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
SIX MONTHS ENDED ------------------------------------------------
For a Share Outstanding Throughout Each Period MARCH 31, 1994 1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . $14.62 $12.81 $12.14 $10.36 $13.07 $10.58
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . .30 .59 .59 .65 .73 .76
Net Realized and Unrealized Gain (Loss) on Investments . . . (1.44) 1.81 .83 1.99 (2.77) 2.23
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . (1.14) 2.40 1.42 2.64 (2.04) 2.99
- - -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . (.33) (.59) (.65) (.79) (.64) (.48)
Distributions from Realized Capital Gains . . . . . . . . . . (.52) -- (.10) (.07) (.03) (.02)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . (.85) (.59) (.75) (.86) (.67) (.50)
- - -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . $12.63 $14.62 $12.81 $12.14 $10.36 $13.07
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . -8.12% +19.17% +12.26% +26.46% -16.25% +28.85%
- - -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . $936 $1,106 $778 $518 $353 $267
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . .42%* .40% .44% .46% .48% .44%
Ratio of Net Investment Income to Average Net Assets . . . . . 4.56%* 4.39% 4.74% 5.52% 5.67% 6.01%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . 23%* 15% 13% 9% 5% 8%
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
Vanguard Equity Income Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at
the latest quoted sales prices as of 4:00 PM on the valuation date;
securities not traded are valued at the mean of the latest quoted
bid and asked prices. Securities not listed are valued at the
latest quoted bid prices. Temporary cash investments are valued at
cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital
shares issued and redeemed, equivalent to undistributed net
investment income per share on the date of the transaction, is
credited or charged to undistributed income. As a result,
undistributed income per share is unaffected by Fund share sales or
redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which
is invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of
each repurchase agreement. Provisions of the agreement ensure that
the market value of the collateral is sufficient in the event of
default; however, in the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining
realized gains and losses on sales of investment securities are
those of specific securities sold. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
* B. Under the terms of a contract which expires April 30, 1995, the Fund pays
Newell Associates an advisory fee calculated at an annual percentage rate of
average net assets. For the six months ended March 31, 1994, the advisory fee
represented an effective annual rate of .15 of 1% of average net assets.
* C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
March 31, 1994, the Fund had contributed capital of $160,000 to Vanguard
(included in Other Assets), representing .8% of Vanguard's capitalization. The
Fund's officers and directors are also officers and directors of Vanguard.
* D. During the six months ended March 31, 1994, the Fund made purchases of
$117,304,000 and sales of $140,469,000 of investment securities other than U.S.
Government securities and temporary cash investments.
* E. At March 31, 1994, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $14,457,000 of which $77,965,000 related
to appreciated securities and $63,508,000 related to depreciated securities.
10
<PAGE> 11
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
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 Company
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.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
11
<PAGE> 12
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund-Money Market Portfolio
Vanguard State Tax-Free Funds (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund-U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund-International Portfolio
The Vanguard Group * Vanguard Financial Center
Valley Forge, PA 19482
New Account Information: 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q652-03/94
VANGUARD
EQUITY INCOME FUND
[PHOTO -- SEE EDGAR APPENDIX]
SEMI-ANNUAL REPORT
MARCH 31, 1994
<PAGE> 13
EDGAR Appendix
The back cover of the printed version of this report features the flags
of The United States of America and Vanguard flying from a halyard.
