<PAGE> 1
(VANGUARD LOGO)
EQUITY INCOME
FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--
IN OUR VIEW, FOR THE BETTER.
[PHOTO -- SEE EDGAR APPENDIX]
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed
for long-term investors.
(please turn to inside back cover)
- --------------------------------------------------------------------------------
VANGUARD EQUITY INCOME FUND SEEKS HIGH CURRENT INCOME AND RELATIVELY LOW
VOLATILITY, AND HAS THE POTENTIAL FOR REASONABLE CAPITAL GROWTH. THE FUND
EMPHASIZES COMMON STOCKS FROM LARGE, WELL-ESTABLISHED, HIGH-QUALITY U.S.
CORPORATIONS THAT OFFER ABOVE-AVERAGE DIVIDEND YIELDS AND ARE BELIEVED TO HAVE
RELATIVELY ATTRACTIVE LONG-TERM INVESTMENT VALUE.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Common stocks as a group held their own during the twelve months ended
September 30, 1994, Vanguard Equity Income Fund's 1994 fiscal year. However,
sharply rising interest rates took their toll on income-oriented equities,
which ranked among the market's laggards. The net result was a somewhat
disappointing year for the Fund.
In all, the Fund posted a marginally negative total return (capital
change plus income), despite a positive, if modest, return for the Standard &
Poor's 500 Composite Stock Price Index. This Index is a widely used measure of
the performance of the broad stock market, and is dominated by "blue chip"
stocks of America's largest corporations. The performance comparison follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Total Return
------------------
Fiscal Year Ended
September 30, 1994
- -------------------------------------------------------------
<S> <C>
VANGUARD EQUITY INCOME FUND -2.2%
- -------------------------------------------------------------
STANDARD & POOR'S 500 INDEX +3.7%
- -------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $14.62 per share on
September 30, 1993, and $13.16 on September 30, 1994, with the latter figure
adjusted to take into account the reinvestment of four quarterly dividends
totaling $.61 per share from net investment income, and a distribution of $.52
per share from net capital gains realized during the 1993 fiscal year.
THE FISCAL YEAR IN REVIEW
Fiscal 1994 was, in short, an up and down period for stocks as a group, with
prices ending the year about where they began. On balance, the price of the
Standard & Poor's 500 Index edged upward from 459 to 463. The Index's positive
total return, then, was accounted for largely by the dividends it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, they were nearly the reverse of 1993. A year ago, value
stocks (those with above-average yields and below-average market price-to-book
value ratios) were ascendant; this year, growth stocks (those with the opposite
characteristics, and with above-average prospects for consistent earnings
growth) were the better performers. So, just as last year redounded to the
benefit of value investors, so this past year redounded to the benefit of
growth investors.
The reason for this turnabout is not hard to describe: the changing
interest rate environment. During fiscal 1993, the yield on the long-term U.S.
Treasury bond fell from 7.3% to 6.0%, engendering a price rise of +18%. During
fiscal 1994, the yield jumped back to 7.8%, engendering a price decline of
- -21%. Yield-oriented equities are--and always have been--especially sensitive
to these rate changes, since such equities must, in effect, compete with bonds
for investors seeking maximum income.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, there is little evidence of it. The
U.S. Consumer Price Index has risen just 3.0% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at a higher rate.
In an effort to quell inflationary fears, the Federal Reserve has
acted to "tighten" the money
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
1
<PAGE> 4
[CUMULATIVE PERFORMANCE 1990-1994 GRAPH -- SEE EDGAR APPENDIX]
supply and slow economic growth and potential future inflation. Five rate
increases--in February, March, April, May, and again in August--combined to
raise the Federal funds rate (at which banks borrow from one another) from
3.00% to 4.75%. Theory suggests that increases in short-term rates should be
regarded by market participants as a restraint on potential inflation, and thus
cause long-term rates to fall. However, this theory seldom holds true in
practice, and, at least so far in 1994, theory has again been rebutted by
practice.
The chart above depicts the patterns of performance of value stocks
and growth stocks over the past five years. You will note that, while there
were significant variations in the returns of growth and value stocks from one
interim period to the next, over the full period the return on the value index
(+50%) was very close to the return on the growth index (+58%). This outcome
suggests the wisdom of consistently sticking to your objectives, rather than
endeavoring (fruitlessly, I believe) to switch back and forth between these two
market segments in the search for higher returns. Put another way, most
investors would benefit by "staying the course," whether growth stocks or value
stocks--or some combination of the two--best meet their needs.
THE FUND IN FISCAL 1994
In our Annual Report for fiscal 1993, we were able to "point with pride" to the
substantial performance margin the Fund had achieved over the Standard & Poor's
500 Index (+19.2% versus +13.0%). We did, however, give credit where credit was
due, noting that lower yields in the bond market provide impetus to the stock
market, especially for investors who consider the relative yields of stocks
versus bonds in setting their asset allocations. Unfortunately, as often
happens in the fallible world of investing, last year's "credit" became this
year's "debit," and the upward turn in interest rates impeded our return
relative to the Standard & Poor's 500 Index (-2.2% for the Fund versus +3.7%
for the Index).
The clearest manifestation of our shortfall relative to the Index was
our position in utility stocks (telecommunications and electrics) during a year
in which, largely as a result of the interest rate environment, utilities were
the poorest-performing major sector of the market (-12%). Utilities comprise
only 12% of the Standard & Poor's 500 Index, but 30% of the Fund's portfolio.
Despite their disappointing impact on our twelve-month capital return,
utilities are a mainstay of our income return, enabling us to earn the kinds of
yields that are essential to implementing the strategy implied by our equity
income objective. We were also hurt--albeit to a lesser degree--by our
underweightings relative to the Index in the consumer staples and technology
sectors, both of which were among the strongest-performing market sectors.
Our shortfall relative to our second comparative standard--other
equity income funds--was more modest, with the average such fund eking out a
modest positive total return (+1.3%). In essence, the reason for our lag was
that most equity income funds have a different way of going about their work
than does Vanguard Equity Income Fund. The competitive funds tend to rely less
on utility stocks and more on "equity equivalents" (such as lower-grade bonds
and
2
<PAGE> 5
bonds convertible into commonstocks). This table exemplifies these two
different approaches to maintaining income:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Percentage of Net Assets
September 30, 1994
-------------------------------------
Vanguard Equity Average Equity
Diversification Income Fund Income Fund
- ------------------------------------------------------------------
<S> <C> <C>
UTILITY STOCKS 30% 17%
OTHER STOCKS 69 60
EQUITY EQUIVALENTS -- 18
CASH 1 5
---- ----
TOTAL 100% 100%
- ------------------------------------------------------------------
</TABLE>
In fiscal 1993, ours was the more productive strategy, as we outpaced our
competitive group (+19.2% versus +17.3%). In fiscal 1994, just the reverse was
true.
Combining the two years, our cumulative total return was very close to
that of our average competitor. However, our strategy provides a higher gross
yield on our portfolio. When combined with our huge expense ratio advantage,
our net yield is about 48% above that of our average competitor, as this table
shows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Twelve-Month Yield
September 30, 1994
-------------------------------------
Vanguard Equity Average Equity
Income Fund Income Fund
- ------------------------------------------------------------------
<S> <C> <C>
GROSS INCOME 5.0% 4.3%
EXPENSES 0.4 1.2
---- ----
NET INCOME 4.6% 3.1%
- ------------------------------------------------------------------
</TABLE>
We believe this remarkable yield enhancement should be of critical importance
to the investor seeking higher income.
A LONGER-TERM PERSPECTIVE
We would emphasize that, while a mutual fund's results during a single year--or
even two years--are important to consider, the most critical factor in
evaluating a mutual fund is its long-term record. The table that follows and
the chart at the top of page 4 show the total returns earned during Vanguard
Equity Income Fund's lifetime, beginning on March 31, 1988.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Total Returns
----------------------------------
March 31, 1988, to
September 30, 1994
- ------------------------------------------------------------------
Cumulative Average Annual
- ------------------------------------------------------------------
<S> <C> <C>
VANGUARD EQUITY INCOME FUND 97% +11.0%
- ------------------------------------------------------------------
AVERAGE EQUITY INCOME FUND 90% +10.4%
STANDARD & POOR'S 500 INDEX 120 +12.9
- ------------------------------------------------------------------
</TABLE>
These results, of course, should not be considered a precursor of either
absolute or relative future returns, which may be better or worse than those of
the past.
It seems to me that the most relevant comparison for Fund shareholders
is how we perform compared to other funds with objectives similar to ours. As
the table shows, despite a rather trying 1994, our long-term advantage remains
in place. Nonetheless, this advantage reflects, virtually in its entirety, the
substantial expense ratio edge we provide (an annual margin averaging about
0.6% during the full period) rather than superior management by Newell
Associates, the Fund's adviser since inception. Our view is that, however
difficult--and difficult it is--to attain performance superiority in a highly
efficient marketplace and among the skilled professional portfolio managers of
the mutual fund industry, superior performance is the goal.
In this context, your Board of Directors has carefully evaluated the
Fund's recent and lifetime returns, and has examined the strategy followed by
Newell Associates, as well as its implementation. We have come to the
conclusion that we should retain Newell as the Fund's principal manager, but
introduce two new investment advisers to manage a minority proportion of the
Fund's assets. After a comprehensive search of investment advisers by the
Vanguard staff, we will retain Anthony E. Spare, of Spare, Kaplan, Bischel &
Associates, and John A. Levin, of John A. Levin & Company, each of whom will
manage $100 million of the Fund's assets (about 22% of the total), beginning on
February 28, 1995. The notice accompanying this Annual Report provides
additional information about the change approved by the Board.
(continued)
3
<PAGE> 6
[CUMULATIVE PERFORMANCE MARCH 31, 1988, TO SEPTEMBER 30, 1994
GRAPH -- SEE EDGAR APPENDIX]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1994
- -----------------------------------------------------------------------
1 Year 5 Years Since Inception*
- -----------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD EQUITY INCOME FUND -2.19% +6.74% +11.03%
AVERAGE EQUITY INCOME FUND +1.33 +8.15 +10.39
STANDARD & POOR'S 500 INDEX +3.68 +9.12 +12.89
</TABLE>
FISCAL PERIODS
* Inception, March 21, 1988. Performance data begins on March 31, 1988,
to show competitive data.
Note: Past performance is not predictive of future performance.
IN SUMMARY
One year ago, I concluded my letter to you by stating: "While the Fund reaped
the benefit of lower interest rates during the past fiscal year, rates have now
descended to their lowest level in 20 years, and some retrenchment is, at the
very least, possible." This situation has come to pass, and, as a result, the
investment outlook seems more favorable today. The probabilities now suggest
that the bond market will be less volatile during fiscal 1995, and that the
worst of the recent rate increase may be behind us. If so, a better environment
for equity income funds--at least in relative terms--would lie ahead.
It is worth reemphasizing that investing in stocks is risky. This is,
in essence, why stocks offer higher reward potential than bonds and short-term
reserves. The greatest risk is faced by short-term investors who react to
transitory market trends. The lowest risk and the highest rewards--at least in
the past--have been achieved by long-term investors who have "stayed the
course" with a sound investment appoach that is consistent with their own
objectives.
We too intend to stay the course with the consistent objectives and
policies that we have established for Vanguard Equity Income Fund. The Fund
provides sound participation in a diversified list of common stocks selected
primarily to produce a yield that is well above that of stocks as a group. As
part of a balanced portfolio of mutual funds--including stock funds, bond
funds, and money market funds--Vanguard Equity Income Fund should be a suitable
investment in helping you to adhere to the investment course you have chosen to
follow.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
October 10, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED SEPTEMBER 30,
1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
--------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD EQUITY INCOME FUND 3/21/88 -2.19% +6.74% +10.63% +5.41% +5.22%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
Vanguard Equity Income Fund moderately outperformed the average equity income
fund during the past three months, and rose substantially more than both the
equity income fund group and the Standard and Poor's 500 Stock Index during the
past six months. Over the past twelve months, the Fund underperformed the
Index and the average equity income fund. (See Chairman's letter for details.)
SOME OLD FAVORITES STAGE A COMEBACK
A large part of the outperformance of Vanguard Equity Income Fund during the
past six months came from two old Wall Street favorite groups--drug stocks and
tobacco stocks--as they began to recover from health-care reform and
competitive pricing scares. Chemical stocks also made a strong contribution,
continuing to revive from the effects of the recent recession.
DARK CLOUDS OF RISING INTEREST RATES
AND DEREGULATION . . .
Twelve-month performance is a very different picture from the one we presented
at the end of the 1993 fiscal year, when Vanguard Equity Income Fund was up
+19.2% for the twelve-month period versus +13.0% for the Standard & Poor's 500
Stock Index and +17.3% for the average equity income fund. However, interest
rates were largely responsible for both results. Long-term bond rates were
falling in 1993, causing interest-rate-sensitive stocks to rise, and rates have
been rising this year, causing such stocks to decline. The Fund is more heavily
weighted in interest-rate-sensitive stocks than either the S&P 500 or the
average equity income fund. The telephone and electric utility groups were also
hurt by threats of increased competition resulting from deregulation at both
the state and federal levels.
. . . BUT WITH A SILVER LINING
We think that the stock price reaction in the electric utilities and in many of
the telephone stocks has been overdone, and that at current price levels the
clouds over these stocks have a silver lining. Over the past twenty years, the
telephones and electrics have acquitted themselves well versus the S&P 500
Index, and at lower volatility and risk levels. Most of their success has been
due to the large dividends they pay. Currently, the electrics have an average
yield roughly three times that of the S&P 500, and the telephones about double.
These large dividends compound rapidly, like interest payments on fixed-income
investments, but with an added virtue--they grow over time. In the coming
competitive environment, these dividends (and also the stocks paying them) are
likely to grow in the range of 2% to 4% per year, which, combined with current
yields between 5% and 8%, would roughly equal the long-term rate of return on
the S&P 500 Index. And this is without benefit from the rebound potential that
depressed stocks typically have.
PORTFOLIO MANAGEMENT ACTIVITY
There are many electric utility companies that appear well situated to succeed
in the coming competitive environment. As a result of the recent sell-off, some
of them have become attractive for purchase for the first time in many months,
or even years. During the past six months, we have been making selective
purchases among these companies.
The drug stocks, long the darlings of Wall Street, experienced a major
decline starting in 1992, which was triggered essentially by competitive
pricing pressures. Some of the companies in this group experienced price
declines as large as those of the electric utilities. In a few cases, drug
stocks briefly reached yield levels similar to the electrics. We used this
opportunity to continue to increase the Portfolio's position in the drugs from
7% at the beginning of the year to over 12% at the close.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
October 14, 1994
6
<PAGE> 9
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD EQUITY INCOME FUND since inception through September 30, 1994. During
the period illustrated, stock prices fluctuated widely; these results should
not be considered a representation of the dividend income or capital gain or
loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Percentage Change*
Value with Income --------------------------------
September 30 Net Asset Capital Gains Income Dividends & Capital Vanguard Equity S&P 500
Fiscal Year Value Distributions Dividends Gains Reinvested Income Fund Index
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (3/88) $10.00 -- -- $10.00 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1988 10.58 -- $0.24 10.83 + 8.3% + 3.1%
- -----------------------------------------------------------------------------------------------------------------------------------
1989 13.07 $0.02 0.48 13.95 +28.8 + 32.9
- -----------------------------------------------------------------------------------------------------------------------------------
1990 10.36 0.03 0.64 11.68 -16.2 - 9.2
- -----------------------------------------------------------------------------------------------------------------------------------
1991 12.14 0.07 0.79 14.77 +26.5 + 31.1
- -----------------------------------------------------------------------------------------------------------------------------------
1992 12.81 0.10 0.65 16.58 +12.3 + 11.0
- -----------------------------------------------------------------------------------------------------------------------------------
1993 14.62 -- 0.59 19.76 +19.2 + 13.0
- -----------------------------------------------------------------------------------------------------------------------------------
1994 13.16 .52 0.61 19.33 - 2.2 + 3.7
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +93.3% +112.0%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +10.6% + 12.2%
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
7
<PAGE> 10
Financial Statements
September 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.2%)
- ----------------------------------------------------------------------------------------
BASIC MATERIALS (6.2%)
ARCO Chemical Co. 318,900 $ 15,786
Dow Chemical Co. 259,500 20,306
E.I. du Pont de Nemours & Co. 90,600 5,255
Monsanto Co. 91,600 7,362
Union Camp Corp. 123,200 6,052
Weyerhaeuser Co. 21,400 954
---------
GROUP TOTAL 55,715
---------
- ----------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (.7%)
Thomas & Betts Corp. 80,700 5,467
Westinghouse Electric Corp. 39,400 512
---------
Group Total 5,979
---------
- ----------------------------------------------------------------------------------------
CONSUMER CYCLICAL (8.9%)
Deluxe Corp. 34,100 1,001
The Dun & Bradstreet Corp. 269,100 15,473
Eastman Kodak Co. 333,150 17,241
JohnH. Harland Co. 216,000 4,536
Kmart Corp. 1,067,900 19,089
McGraw-Hill, Inc. 55,700 4,080
Melville Corp. 75,300 2,683
National Service Industries, Inc. 57,500 1,524
J.C. Penney Co., Inc. 59,000 3,046
Sears, Roebuck & Co. 44,700 2,146
Woolworth Corp. 519,400 9,025
---------
GROUP TOTAL 79,844
---------
- ----------------------------------------------------------------------------------------
CONSUMER STAPLES (6.9%)
American Brands, Inc. 579,500 21,007
Clorox Co. 106,000 5,525
H.J. Heinz Co. 122,000 4,468
Philip Morris Cos., Inc. 409,500 25,031
Tambrands, Inc. 158,300 5,897
---------
GROUP TOTAL 61,928
---------
- ----------------------------------------------------------------------------------------
DIVERSIFIED (3.1%)
Hanson PLC ADR 625,000 11,328
Minnesota Mining & Manufacturing Co. 40,800 2,254
Ogden Corp. 699,400 14,687
---------
GROUP TOTAL 28,269
---------
- ----------------------------------------------------------------------------------------
ENERGY (15.4%)
Amoco Corp. 154,500 9,154
Atlantic Richfield Co. 218,300 22,021
Chevron Corp. 487,200 20,280
Exxon Corp. 360,300 20,762
Mobil Corp. 287,300 22,733
Royal Dutch Petroleum Co. 61,700 6,625
Sun Co., Inc. 206,300 5,931
Texaco, Inc. 391,100 23,466
USX-Marathon Group 460,300 8,170
---------
Group Total 139,142
---------
- ----------------------------------------------------------------------------------------
FINANCIAL (13.9%)
Aetna Life & Casualty Co. 222,400 10,314
H.F. Ahmanson & Co. 531,800 11,101
American Express Co. 357,800 10,868
American General Corp. 271,700 7,370
Banc One Corp. 48,000 1,434
Bankers Trust New York Corp. 132,500 8,844
Barnett Banks of Florida, Inc. 18,500 819
Boatmen's Bancshares, Inc. 138,000 4,278
CIGNA Corp. 287,000 17,686
Continental Corp. 366,500 4,948
CoreStates Financial Corp. 183,100 4,875
First Union Corp. 82,500 3,568
Great Western Financial Corp. 734,600 14,141
Lincoln National Corp. 74,600 2,788
Mellon Bank Corp. 11,200 630
J.P. Morgan & Co., Inc. 137,900 8,377
NBD Bancorp, Inc. 67,000 1,918
NationsBank, Inc. 13,400 657
PNC Bank Corp. 318,000 8,228
U.S. Bancorp 15,000 383
Wachovia Corp. 69,100 2,228
---------
GROUP TOTAL 125,455
---------
- ----------------------------------------------------------------------------------------
HEALTH CARE (12.4%)
American Home Products Corp. 364,100 21,846
Baxter International, Inc. 104,100 2,928
Bristol-Myers Squibb Co. 487,800 27,987
Eli Lilly & Co. 435,000 25,176
Merck & Co., Inc. 268,600 9,535
Upjohn Co. 552,000 18,837
Warner-Lambert Co. 67,800 5,441
---------
GROUP TOTAL 111,750
---------
- ----------------------------------------------------------------------------------------
TECHNOLOGY (1.5%)
International Business Machines Corp. 191,800 13,330
---------
- ----------------------------------------------------------------------------------------
UTILITIES (30.2%)
Allegheny Power System, Inc. 356,200 7,169
Ameritech Corp. 517,400 20,825
Baltimore Gas & Electric Co. 302,900 6,967
Bell Atlantic Corp. 342,900 18,174
BellSouth Corp. 263,300 14,679
Central & South West Corp. 128,000 2,848
Consolidated Edison Co. of New York, Inc. 215,300 5,356
Consolidated Natural Gas Co. 333,500 12,965
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Dominion Resources, Inc. 86,600 $ 3,226
Duke Power Co. 92,700 3,615
FPL Group, Inc. 472,800 15,366
GTE Corp. 719,500 21,855
NICOR, Inc. 165,000 4,001
NYNEX Corp. 566,900 21,826
NorAm Energy Corp. 416,200 2,705
Northern States Power Co. of Minnesota 129,400 5,467
Oklahoma Gas & Electric Co. 195,300 6,591
Pacific Enterprises 199,100 4,231
Pacific Telesis Group 200,100 6,153
Pacificorp 876,000 14,783
Pennsylvania Power and Light Co. 208,800 4,176
Potomac Electric Power Co. 338,900 6,524
Public Service Enterprise Group Inc. 346,600 9,098
SCE Corp. 628,600 8,172
Scana Corp. 120,200 5,334
Southern New England Telecom Corp. 13,600 457
TECO Energy, Inc. 189,300 3,644
Texas Utilities Co. 363,400 11,856
U.S. West Corp. 431,200 16,709
Union Electric Corp. 86,600 3,031
Wisconsin Energy Corp. 152,100 3,860
---------
GROUP TOTAL 271,663
---------
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $835,156) 893,075
- ----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.4%)
- ----------------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
-------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 4.85%, 10/3/94
(Cost $3,895) $3,895 3,895
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $839,051) 896,970
- ----------------------------------------------------------------------------------------
<CAPTION>
Market
Value
(000)+
- ----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.4%)
- ----------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 12,579
Liabilities (8,926)
-----------
3,653
- ----------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------
Applicable to 68,421,520 outstanding
$ .001 par value shares
(authorized 1,000,000,000 shares) $900,623
- ----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.16
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------
Amount Per
(000) Share
------- ------
<S> <C> <C>
Paid in Capital $825,165 $12.06
Undistributed Net Investment Income 8,969 .13
Accumulated Net Realized Gains 8,570 .12
Unrealized Appreciation of Investments--Note E 57,919 .85
- ----------------------------------------------------------------------------------------
NET ASSETS $900,623 $13.16
- ----------------------------------------------------------------------------------------
</TABLE>
+ See Note A to Financial Statements.
9
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
September 30, 1994
(000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,074
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616
- ----------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 47,690
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . . . . 1,470
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . $2,339
Marketing and Distribution . . . . . . . . . . . . . . . . . . 214 2,553
------
Taxes (other than income taxes)--Note A . . . . . . . . . . . . . 79
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . 12
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 15
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 113
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 14
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . 6
- ----------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 4,262
- ----------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 43,428
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . 8,790
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . (79,992)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . $(27,774)
=======================================================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 1994 September 30, 1993
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,428 $ 41,157
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,790 38,518
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . (79,992) 88,744
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . (27,774) 168,419
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,802) (41,029)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,665) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . (82,467) (41,029)
- ------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--NOTE A . . . . . . . . . . . . . . . . . (1,606) 2,515
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . . 175,953 236,217
-- In Lieu of Cash Distributions . . . . . . . . . . . . . . . 74,878 36,956
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 151,508 182,470
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . . (188,962) (98,397)
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . (307,273) (158,383)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . . (93,896) 198,863
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . (205,743) 328,768
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106,366 777,598
- -----------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 900,623 $1,106,366
=============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $.61 $.59
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . $.52 --
- -----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,186 31,288
Issed in Lieu of Cash Distributions . . . . . . . . . . . . . . 5,633 2,735
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,094) (19,041)
- ------------------------------------------------------------------------------------------------------------------------------
(7,275) 14,982
- -----------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . . . . . $ 8,969 $ 10,949
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . $14.62 $12.81 $12.14 $10.36 $13.07
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .59 .59 .59 .65 .73
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . . (.92) 1.81 .83 1.99 (2.77)
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . (.33) 2.40 1.42 2.64 (2.04)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.61) (.59) (.65) (.79) (.64)
Distributions from Realized Capital Gains . . . . . . . (.52) -- (.10) (.07) (.03)
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (1.13) (.59) (.75) (.86) (.67)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . $13.16 $14.62 $12.81 $12.14 $10.36
==================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . -2.19% +19.17% +12.26% +26.46% -16.25%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $901 $1,106 $778 $518 $353
Ratio of Expenses to Average Net Assets . . . . . . . . . . .43% .40% .44% .46% .48%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . 4.41% 4.39% 4.74% 5.52% 5.67%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 18% 15% 13% 9% 5%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
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 year ended September 30, 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
September 30, 1994, the Fund had contributed capital of $142,000 to Vanguard
(included in Other Assets), representing .7% of Vanguard's capitalization. The
Fund's officers and directors are also officers and directors of Vanguard.
Vanguard has requested the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended September 30, 1994, directed
brokerage arrangements reduced the Fund's expenses by $116,000 (an annual rate
of .01 of 1% of average net assets).
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (continued)
D. During the year ended September 30, 1994, the Fund made purchases of
$169,274,000 and sales of $260,607,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At September 30, 1994, unrealized appreciation for financial reporting
and Federal income tax purposes aggregated $57,919,000 of which $108,507,000
related to appreciated securities and $50,588,000 related to depreciated
securities.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Equity Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Equity Income Fund (the "Fund") at September 30, 1994, the results of
its operations, the changes in its net assets and the financial highlights for
each of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstateent. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 26, 1994
14
<PAGE> 17
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD EQUITY INCOME FUND
Corporate shareholders should note that for the fiscal year ended September 30,
1994, 100% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
15
<PAGE> 18
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.
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 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., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric 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 Chief Executive Officer 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
16
<PAGE> 19
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent
with each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders
of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
[ETERNAL TRIANGLE -- SEE EDGAR APPENDIX]
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
TAXABLE MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
TAXABLE INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
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 Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
(THE VANGUARD GROUP LOGO)
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q650-9/94
<PAGE> 21
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through the
sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through four.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting the indexed values of the Standard & Poor's Growth
Index and the Standard & Poor's Value Index for the fiscal years 1990 to 1994
appears at the upper-left of page two.
A cumulative performance line chart for the period March 31, 1988, to
September 30, 1994, including average annual total returns, appears on page 4.
A running head featuring a coiled rope appears on page five.
A running head featuring a map and telescope appears on page six.
A running head featuring a lantern appears on page seven.
A running head featuring a log book and pen appears on pages eight through
fifteen.
A running head featuring a compass appears on page sixteen.
At the bottom of the back cover there appears a triangle with the sides
labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover of
the report.
