<PAGE> 1
VANGUARD
EQUITY INCOME FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major
asset classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in
history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
Income Yields (January 1)
--------------------------------------------------------
1973 1983 1993 (12/31)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- --------------------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
--------------------------------------------------------
1973 1981 1993 (12/31)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- --------------------------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(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:
Stocks as a group benefited from an auspicious investment environment during
our 1993 fiscal year, which ended on September 30. Higher yielding common
stocks did even better than the overall market, and Vanguard Equity Income Fund
provided an excellent total return of +19.2%.
The table below compares the Fund's total return (capital
change plus income) with that of the unmanaged Standard & Poor's 500 Composite
Stock Price Index, a broad indicator of the performance of large "blue chip"
stocks. Our favorable margin of 6.2 percentage points represents the best
annual advantage we have enjoyed in our five-and-one-half-year history.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Total Return
------------------
Fiscal Year Ended
September 30, 1993
- ---------------------------------------------------------------------------
<S> <C>
VANGUARD EQUITY INCOME FUND +19.2%
- ---------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +13.0%
- ---------------------------------------------------------------------------
</TABLE>
The Fund's total return is based on the increase in our net asset value from
$12.81 per share on September 30, 1992, to $14.62 on September 30, 1993, with
the latter figure adjusted to take into account four quarterly dividends
totaling $.59 per share from net investment income.
THE YEAR IN REVIEW
Fiscal 1993 was a good, if not spectacular, year for common stocks as a group.
It was a year in which stock prices advanced with relative consistency,
inch-by-inch, step-by-step, resulting in a +13.0% return for the Standard &
Poor's 500 Index, nicely above its long-term historical average (since 1926) of
+10.3%.
The precipitating factor in the advance almost certainly
was the decline in long-term interest rates. The yield on the 30-year U.S.
Treasury bond fell spasmodically throughout the fiscal year, dropping from 7.3%
at the outset to 6.0% at its conclusion. This decline of 1.3% (130 basis
points) resulted in a price increase of roughly 17% on Treasury bonds during
the year.
[PICTURE -- SEE EDGAR APPENDIX]
Lower yields in the bond market provide impetus to stock
prices, since one factor that investors consider in setting their asset
allocations is the relative yield of stocks vs. bonds. With stock prices
rising, the dividend yield on stocks (the Standard & Poor's 500 Index) declined
during the fiscal year, from 3.0% to 2.7%, enough, in and of itself, to add
some +10% to the prices of stocks in the Index. This valuation change, combined
with the dividend yield, was the dominant factor driving the total return of
+13.0% achieved by the Standard & Poor's 500 Index.
The stock market exhibited a striking bias during the year
toward companies that provide above-average dividend yields and below-average
price-earnings ratios--precisely the type of stocks that compose our portfolio.
It is hardly surprising, then, that these so-called "value" stocks
substantially surpassed "growth" stocks, which provide lower yields but
presumably richer
1
<PAGE> 4
[CUMULATIVE PERFORMANCE -- SEE EDGAR APPENDIX]
prospects for earnings growth. The dichotomy, however, was little short of
astonishing: value stocks provided a return of +22.5% for the twelve-month
fiscal period, while growth stocks provided a return of +3.6%.
This disparity in growth and value stock returns is a far
cry from the congruency I described to you in my Annual Report one year
ago--and indeed quite the reverse of the clear leadership that growth stocks
enjoyed during the three previous years. The chart above contrasts the
cumulative returns of the Standard & Poor's/BARRA Growth Index and Value Index
during the full five-year period. You will note that the relationship has now
come "full circle," with the Growth Index edging just slightly ahead of its
Value counterpart.
The swings in the market's favoritism toward one style of
investing or another--largely, if not completely, unpredictable--are what
investing is all about. Surely, it is substantial evidence that investors
should not abandon the particular investment style that best suits their needs
just because of a few years of relative underperformance.
THE FUND IN FISCAL 1993
Vanguard Equity Income Fund gave a fine account of itself during 1993 relative
to our two principal measurement standards: the Standard & Poor's 500 Index and
the average equity income mutual fund. First, our gain of +19.2% was about
half-again as large as the +13.0% gain in the Standard & Poor's 500 Index
(albeit, as noted above, less than the +22.5% gain in the Value Index). Our
performance success was largely borne of four major factors: (1) our heavy
representation in utility stocks (35% of net assets vs. 12% for the Index)
during a year in which utilities produced just short of double the gain in the
overall stock market; (2) our larger-than-average position in the
market-leading basic materials group, along with the selection of some
particularly superior performers in that area; (3) outstanding stock selection
in the financial services group, which was a strong performer for the market
and much stronger for the Fund; (4) our far-below-average representation in the
consumer staples stocks, which were to provide many of the year's greatest (9%
of net assets at year end vs. 22% for the Index) disappointments. The problems
were largely manifested in sharp price declines in drug stocks and in "name
brand" stocks. The report on page 6 from our adviser provides further details.
Our second performance standard is the average equity
income mutual fund. Since the policies of these funds vary widely, their
average return is only a rough proxy. Our +19.2% return outpaced this standard,
which provided a total return of +17.3%. Except for our larger allocation to
utilities, our industry weightings in common stocks are quite similar. The
principal difference lies in portfolio construction. We hold almost entirely
common stocks, while competitors invest substantially in securities that are
convertible into common stocks. The following table presents the portfolio
allocations.
2
<PAGE> 5
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Portfolio Allocation
---------------------------------------
Vanguard Equity Average Equity
Income Fund Income Fund
<S> <C> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS 96.0% 75.3%
BONDS AND PREFERREDS 0.0 6.5
CONVERTIBLES 0.0 10.1
CASH 4.0 8.1
- ----------------------------------------------------------------------------
100.0% 100.0%
- ----------------------------------------------------------------------------
</TABLE>
The table shows that Vanguard Equity Income Fund could be described as
"pristine" in its investment policies. With our Fund, "what you
see is what you get." It is not at all clear that the use of non-equities by
many competitors gives them a lower risk profile than ours, since many of these
non-equity securities are rated from just above investment-grade (Baa by
Moody's Investors Services) to "junk" (Ba or lower). What is clear, however, is
that we gain a noteworthy advantage from the fact that our expenses are so much
lower than those of our competitors. Indeed, in the past year the average
competitor's expense ratio (operating expenses as a percentage of average net
assets) was 1.31%, an astonishing 200% above our expense ratio of 0.40%. This
table illustrates the yield impact of these expenses:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Comparative Yield
----------------------------------------
Twelve Months Ended
September 30, 1993
----------------------------------------
Vanguard Equity Average Equity
Income Fund Income Fund
<S> <C> <C>
- ------------------------------------------------------------------------
GROSS INCOME 4.44% 4.41%
EXPENSES 0.40 1.31
- ------------------------------------------------------------------------
NET INCOME 4.04% 3.10%
- ------------------------------------------------------------------------
</TABLE>
As the table shows, our competitors provide a gross yield virtually identical
to ours, but, because of high expenses, a net yield that is well below
ours. Put another way, Vanguard Equity Income Fund provides a 30%
"extra dividend" simply because of lower costs, and with no apparent increase
in risk. We think that our shareholders are entitled to no less.
A FIVE-AND-ONE-HALF-YEAR
RETROSPECTIVE
Vanguard Equity Income Fund began operations in March 1988, and we have
now passed the five-year mark in our history. The chart at the top of
page 4 compares the Fund's record with those of our two measurement
standards described previously, and reflects performance that is fine relative
to competitive funds, but a bit short of the results turned in by the Standard
& Poor's 500 Index. This table summarizes the results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Total Returns
---------------------------------------------
March 31, 1988 to
September 30, 1993
---------------------------------------------
Cumulative Average Annual
<S> <C> <C>
- -----------------------------------------------------------------------------
VANGUARD EQUITY INCOME +101.9% +13.6%
- -----------------------------------------------------------------------------
AVERAGE EQUITY INCOME FUND + 88.0% +12.2%
STANDARD & POOR'S 500 INDEX +112.1 +14.6
- -----------------------------------------------------------------------------
</TABLE>
We regard these results as fully satisfactory. However, they should
not be considered a precursor of possible future returns, which may be better
or worse than those of the past.
A few words about our comparison with the Standard & Poor's 500 Index:
First, by most measures, the Fund carries somewhat less risk (i.e., less
volatility) than the Index, which, over time, may well be reflected in slightly
lower returns. Second, unlike the Index, which exists "on paper," the Fund is a
"real world" operating entity. So, we have to deal with such frictional costs
as operating expenses (very low, as noted above, but not "zero"), the costs of
engaging in portfolio transactions (although our turnover is among the lowest
of all equity income funds), and the need for a cash position (small, and also
one of the lowest among our competitors). Taking all of these factors into
account, we hope you share our favorable appraisal of the Fund's returns.
(continued)
3
<PAGE> 6
[CUMULATIVE PERFORMANCE -- SEE EDGAR APPENDIX]
IN SUMMARY
During the past fiscal year, the assets of Vanguard Equity Income Fund crossed
the $1 billion mark for the first time, rising from $778 million at the start
of the period to $1.106 billion at its conclusion. Some 10,000 new shareholders
have joined us, bringing our total roll to 54,420 shareholders. Even as we
believe that the Fund's shares are somewhat less risky than the overall stock
market, all yield-oriented strategies entail a portfolio that carries
significant interest-rate risk. That is, while the Fund reaped the benefits of
lower interest rates during the past fiscal year, rates have now descended to
their lowest levels in 20 years, and some retracement is, at the very least,
possible.
"The financial markets giveth and the financial markets taketh away"
is a biblical-like way of summarizing this conclusion. Nonetheless, "timing"
the markets is an inevitably fallible endeavor, and we believe that--provided
your overall investment program is soundly balanced--you should stay the
course, hewing to your objectives just as do the Fund and its investment
adviser.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
October 25, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Returns--The average annual total returns for the Fund
(periods ended September 30, 1993) are as follows:
<TABLE>
<S> <C> <C>
1 YEAR: +19.17% 5 YEARS: +12.79% SINCE INCEPTION (3/21/88): +13.11%
</TABLE>
The Fund's average annual total return since inception includes a capital
return of +7.49% and an income return of +5.62%. 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
Investment conditions have been more favorable for high-yielding common stock
portfolios during 1993 than they had been for most of the past five years.
Consequently, Vanguard Equity Income Fund outperformed the market by a
substantial margin during the Fund's 1993 fiscal year. The Fund also fared well
compared with the average equity income fund. (See Chairman's letter for more
information on comparative results.)
THE LARGE GROWTH STOCK VOGUE
FALTERS
In the 1992 Annual Report for Vanguard Equity Income Fund, we noted that for
several years investors had been avoiding high-yield stocks and buying large
growth company stocks. Investors seemed to believe that they had found a
sure-fire, low-risk way to improve the growth potential of their portfolios. The
prices of these favored stocks soared to unrealistic heights, providing the
driving force behind the performance of the S&P 500 Stock Index. Vanguard Equity
Income Fund was largely left out of this action because most of these stocks did
not have dividend yields high enough to justify inclusion in your portfolio. The
result was a significant performance gap between the Fund and the S&P 500 Index
during the 1989 to 1991 period.
In early 1992, the growth potential of many of the favorite stocks came
into question; as their prices faltered, the results of the S&P 500 also
weakened. In September 1992, we stated it was too early to know whether the
fading performance of the large growth companies was just a temporary relapse or
the beginning of a new investment thesis. Now, it seems quite probable that the
across-the-board large company growth stock leadership has ended; however, it
has not yet been replaced by a coherent new investment theory. Investors are
still interested in small growth stocks, but otherwise individual stock picking
and looking for ways to replace the dwindling yields in fixed-income investments
seem to be the main investment themes.
HELPING TO CLOSE THE PERFORMANCE GAP
Vanguard Equity Income Fund has been helped a good deal by investors' search
for higher yields. That quest has resulted in "buying interest" for many of the
groups--such as the banks, electric utilities, natural gas, oil, and
telephones--that we bought for the Fund in recent years when they were out of
favor with investors. The resulting price strength in these stocks helped to
close the performance gap which developed when the large growth stocks were in
their heyday.
PORTFOLIO MANAGEMENT ACTIVITY
Declines in the prices of large capitalization growth stocks were quite
dramatic, and in some cases resulted in yields which rivaled those of
traditional high income stocks. The most opportunities came in the drug group,
which we increased to 7.1% of total net assets from 3.0% in September 1992. We
also moved to 3.2% of assets in the tobacco stocks. Increases in the more
traditional petroleum and telephone groups were smaller.
The size of these portfolio changes was certainly not heroic compared
with the annual turnover in many mutual funds. However, our Relative Yield
Strategy is by nature a low-turnover, slow-rotation investment approach.
Turnover last year was 15%. In part, this is due to the time it takes for
over-valued stocks to decline enough to be useful in a high-yield common stock
portfolio, and then to rise again to sale levels. The group rotation we have
described, of which the strategy has tried to take advantage, has been in
progress for more than a year and undoubtedly will require more time to
complete. We believe that this low turnover characteristic is very advantageous
to the Vanguard Equity Income Fund. It is one of the ways in which the Fund is
able to keep costs low and to preserve returns for the benefit of shareholders.
Respectfully,
Roger D. Newell, Chairman
Newell Associates October 11, 1993
6
<PAGE> 9
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 September 30, 1993, 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>
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
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME $3.39 +97.6% +104.5%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +13.1% +13.8%
- ------------------------------------------------------------------------------------------------------------------------------------
</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
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
September 30, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.4%)
- -------------------------------------------------------------------
AUTOS & TRUCKS (.1%)
Dana Corp. 28,700 $ 1,657
--------
- -------------------------------------------------------------------
BANKS--NEW YORK (1.4%)
Bankers Trust New York Corp. 98,600 7,888
J.P. Morgan & Co., Inc. 90,900 7,124
--------
GROUP TOTAL 15,012
--------
- -------------------------------------------------------------------
BANKS--REGIONAL (1.2%)
Barnett Banks of Florida, Inc. 18,500 832
PNC Bank Corp. 340,000 10,455
Wachovia Corp. 38,000 1,487
--------
GROUP TOTAL 12,774
--------
- -------------------------------------------------------------------
CHEMICAL--BASIC (5.7%)
ARCO Chemical Co. 383,100 15,899
Dow Chemical Co. 349,200 20,384
E.I. du Pont de Nemours & Co. 184,500 8,579
Hercules, Inc. 9,400 857
Monsanto Co. 181,200 11,869
Union Carbide Corp. 289,000 5,563
--------
GROUP TOTAL 63,151
--------
- -------------------------------------------------------------------
CHEMICAL-DIVERSIFIED (.1%)
Minnesota Mining &
Manufacturing Co. 12,900 1,327
--------
- -------------------------------------------------------------------
COMPUTERS & OFFICE EQUIPMENT (1.4%)
International Business
Machines Corp. 372,300 15,636
--------
- -------------------------------------------------------------------
CONGLOMERATE (2.9%)
Hanson PLC ADR 778,200 14,299
Ogden Corp. 720,500 18,103
--------
GROUP TOTAL 32,402
--------
- -------------------------------------------------------------------
DRUGS (7.1%)
American Home Products Corp. 273,200 16,631
Bristol-Myers Squibb Co. 441,400 24,829
Eli Lilly & Co. 425,000 21,250
Upjohn Co. 552,700 15,752
--------
GROUP TOTAL 78,462
--------
- -------------------------------------------------------------------
ELECTRIC--UTILITY (16.0%)
Allegheny Power System, Inc. 219,600 12,243
Baltimore Gas & Electric Co. 325,900 8,636
Consolidated Edison Co. of
New York, Inc. 324,800 11,733
FPL Group, Inc. 549,800 21,648
Northern States Power Co.
of Minnesota 134,900 6,256
Oklahoma Gas & Electric Co. 331,700 12,646
Pacificorp 921,000 18,075
</TABLE>
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------
<S> <C> <C>
Pennsylvania Power and Light Co. 192,200 $ 5,814
Potomac Electric Power Co. 389,900 11,161
Public Service Enterprise
Group Inc. 600,300 21,086
SCE Corp. 921,800 21,547
SCANA Corp. 121,400 6,161
Texas Utilities Co. 385,400 17,680
Union Electric Corp. 76,600 3,380
--------
GROUP TOTAL 178,066
--------
- -------------------------------------------------------------------
ELECTRIC EQUIPMENT (.4%)
Westinghouse Electric Corp. 339,700 4,416
--------
- -------------------------------------------------------------------
ELECTRIC INSTRUMENTS (.5%)
Thomas & Betts Corp. 80,700 5,054
--------
- -------------------------------------------------------------------
FINANCIAL SERVICES (4.0%)
H.F. Ahmanson & Co. 639,700 12,714
American Express Co. 430,900 15,351
Great Western Financial Corp. 814,300 15,980
--------
GROUP TOTAL 44,045
--------
- -------------------------------------------------------------------
FOOD--PACKAGED (.6%)
Borden, Inc. 350,800 6,227
--------
- -------------------------------------------------------------------
HOME APPLIANCES (.2%)
Maytag Corp. 107,500 1,801
--------
- -------------------------------------------------------------------
HOUSEHOLD PRODUCTS (.6%)
Clorox Co. 115,000 6,138
--------
- -------------------------------------------------------------------
INSURANCE--DIVERSIFIED (6.0%)
Aetna Life and Casualty Co. 246,400 14,784
American General Corp. 199,200 6,524
CIGNA Corp. 367,000 23,855
The Travelers Corp. 572,400 21,536
--------
GROUP TOTAL 66,699
--------
- -------------------------------------------------------------------
INSURANCE--PROPERTY & CASUALTY (1.2%)
Continental Corp. 443,100 13,681
--------
- -------------------------------------------------------------------
NATURAL GAS--DIVERSIFIED (.8%)
Tenneco, Inc. 162,400 8,567
--------
- -------------------------------------------------------------------
NATURAL GAS--UTILITIES (2.9%)
Arkla, Inc. 506,200 4,429
Consolidated Natural Gas Co. 323,500 17,307
NICOR, Inc. 165,000 5,033
Pacific Enterprises 199,100 5,276
--------
GROUP TOTAL 32,045
--------
- -------------------------------------------------------------------
PAPER & FOREST PRODUCTS (1.2%)
Union Camp Corp. 113,200 4,797
Weyerhaeuser Co. 197,200 8,036
--------
GROUP TOTAL 12,833
--------
- -------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
Market
Value
Shares (000)+
- -------------------------------------------------------------------
<TABLE>
<S> <C> <C>
PETROLEUM--DOMESTIC (4.4%)
Amoco Corp. 164,500 $ 9,500
Atlantic Richfield Co. 209,300 23,939
Sun Co., Inc. 166,000 4,731
USX-Marathon Group 537,300 10,746
--------
GROUP TOTAL 48,916
--------
- -------------------------------------------------------------------
PETROLEUM--INTERNATIONAL (10.8%)
Chevron Corp. 243,600 23,812
Exxon Corp. 348,200 22,807
Mobil Corp. 352,000 28,732
Royal Dutch Petroleum Co. ADR 135,100 13,730
Texaco, Inc. 451,100 30,562
--------
GROUP TOTAL 119,643
--------
- -------------------------------------------------------------------
PHOTOGRAPHY (2.3%)
Eastman Kodak Co. 432,450 25,623
--------
- -------------------------------------------------------------------
PUBLISHING (2.3%)
The Dun & Bradstreet Corp. 285,100 17,819
John H. Harland Co. 109,000 2,793
McGraw-Hill, Inc. 75,700 5,129
--------
GROUP TOTAL 25,741
--------
- -------------------------------------------------------------------
RETAIL--GENERAL MERCHANDISE (4.2%)
Kmart Corp. 983,100 23,717
J.C. Penney Co., Inc. 207,800 9,741
Sears, Roebuck & Co. 86,700 4,671
Woolworth Corp. 320,400 8,010
--------
GROUP TOTAL 46,139
--------
- -------------------------------------------------------------------
RETAIL--SPECIAL LINES (.9%)
McKesson Corp. 187,900 9,512
--------
- -------------------------------------------------------------------
TELECOMMUNICATIONS (13.0%)
Ameritech Corp. 277,700 23,778
Bell Atlantic Corp. 309,900 19,756
BellSouth Corp. 368,200 22,276
GTE Corp. 638,900 24,518
NYNEX Corp. 641,900 29,447
Pacific Telesis Group 49,500 2,679
U.S. West Corp. 439,300 21,636
--------
GROUP TOTAL 144,090
--------
- -------------------------------------------------------------------
TOBACCO (3.2%)
American Brands, Inc. 521,500 16,949
Philip Morris Cos., Inc. 415,000 19,038
--------
GROUP TOTAL 35,987
--------
- -------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $917,733) 1,055,644
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (3.9%)
- -------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.39%, 10/1/93
(Cost $42,723) $42,723 $ 42,723
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(COST $960,456) 1,098,367
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- -------------------------------------------------------------------
Other assets--Note C 13,999
Liabilities (6,000)
--------
7,999
- -------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------
Applicable to 75,696,827 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,106,366
- -------------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.62
===================================================================
+See Note A to Financial Statements.
- -------------------------------------------------------------------
AT SEPTEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $919,061 $12.14
Undistributed Net Investment
Income 10,949 .15
Accumulated Net Realized Gains 38,445 .51
Unrealized Appreciation of
Investments 137,911 1.82
- -------------------------------------------------------------------
NET ASSETS $1,106,366 $14.62
- -------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
September 30, 1993
(000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,846
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068
- -------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . 44,914
- -------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . 1,445
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . $1,889
Marketing and Distribution . . . . . . . . . . . . . . . . . 22
------ 2,116
Taxes (other than income taxes)--Note A . . . . . . . . . . . . 73
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . 15
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 18
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . 73
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 14
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . 3
- -------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 3,757
- -------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . 41,157
- -------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD--Note D . . . . . . . . . . . . . . . . . . . . . 38,518
- -------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES--Note D . . . . . . . . . 88,744
- -------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations . . . . . . . . . . . . . . . . . . . . . . . . . $168,419
===========================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 199 September 30, 1992
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . $ 41,157 $ 29,994
Realized Net Gain--Note D . . . . . . . . . . . . . . . 38,518 1,434
Change in Unrealized Appreciation
(Depreciation)--Note D . . . . . . . . . . . . . . . . . 88,744 40,522
- -----------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . . 168,419 171,950
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . (41,029) (33,152)
Realized Net Gain . . . . . . . . . . . . . . . . . . . -- (4,411)
- -----------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (41,029) (37,563)
- -----------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A . . . . . . . . . . . . . 2,515 3,102
- -----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . 236,217 232,647
-- In Lieu of Cash Distributions . . . . . . . 36,956 34,489
-- Exchange . . . . . . . . . . . . . . . . . 182,470 111,345
Redeemed -- Regular . . . . . . . . . . . . . . . . . (98,397) (77,770)
-- Exchange . . . . . . . . . . . . . . . . . (158,383) (78,559)
- -----------------------------------------------------------------------------------------------
Net Increase from Capital Share
Transactions . . . . . . . . . . . . . . . . . . . . 198,863 222,152
- -----------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . 328,768 259,641
- -----------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . 777,598 517,957
- -----------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . $1,106,366 $777,598
===============================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . $.59 $.65
Realized Net Gain . . . . . . . . . . . . . . . . . -- $.10
- -----------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . 31,288 27,949
Issued in Lieu of Cash Distributions 2,735 2,876
Redeemed . . . . . . . . . . . . . . . . . . . . . . (19,041) 18,040
- -----------------------------------------------------------------------------------------------
14,982 18,040
- -----------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income [B. . . . . . . $ 10,949 $18,306
- -----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . $12.81 $12.14 $10.36 $13.07 $10.58
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . .59 .59 .65 .73 .76
Net Realized and Unrealized Gain (Loss) on Investments . . . . . . 1.81 .83 1.99 (2.77) 2.23
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . . . 2.40 1.42 2.64 (2.04) 2.99
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . (.59) (.65) (.79) (.64) (.48)
Distributions from Realized Capital Gains . . . . . . . . . . . . . -- (.10) (.07) (.03) (.02)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . (.59) (.75) (.86) (.67) (.50)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . $14.62 $12.81 $12.14 $10.36 $13.07
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . +19.17% +12.26% +26.46% -16.25% +28.85%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . . . . . . $1,106 $778 $518 $353 $267
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . . .40% .44% .46% .48% .44%
Ratio of Net Investment Income to Average Net Assets . . . . . . . . 4.39% 4.74% 5.52% 5.67% 6.01%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . 15% 13% 9% 5% 8%
- -----------------------------------------------------------------------------------------------------------------------------------
</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 the 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, 1993, 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, 1993, the Fund had contributed capital of
$188,000 to Vanguard (included in Other Assets), representing .9% of
Vanguard's capitalization. The Fund's officers and directors are also
officers and directors of Vanguard.
* D. During the year ended September 30, 1993, the Fund made purchases
of $326,635,000 and sales of $137,922,000 of investment securities other than
U.S. Government securities and temporary cash investments.
At September 30, 1993, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $137,911,000 of which $179,755,000
related to appreciated securities and $41,844,000 related to depreciation
securities.
13
<PAGE> 16
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, 1993, 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 (hereinafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities 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
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 25, 1993
14
<PAGE> 17
SPECIAL TAX INFORMATION
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD EQUITY INCOME FUND
Corporate shareholders should note that for the fiscal year ended September
30, 1993, 97.4% 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. 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., and The St. Paul Companies,
Inc.
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 and Vanderbilt University; Trustee of 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
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if
withdrawing from the stock market proves to be justified, the next
decision--when to return--will one day be required. "Being right twice"
is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing so, you
buy more shares of a mutual fund when its price falls, and fewer shares
when its price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that stock prices are "too
high," make only marginal--not "all or nothing"-- changes in your
portfolio balance. Given the perils of predicting the future, any
changes should be limited to, say, 15 percentage points. That is, if
your normal portfolio allocation is 60% in stock funds, it might be
reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of the added
principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income
stream, but their prices are highly volatile. Short-term and
intermediate-term bond funds offer a "middle way" of increasing income
with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns, never
forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on
the irrational. Funds investing in other securities markets--emerging
nations, international stocks and bonds, and small U.S. companies--carry
their own special risks. Generally, limit such alternative investments
to, say, 20% of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing today,
it seems highly unlikely that the returns enjoyed by investors in the
past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to
your own requirements, you can build a portfolio providing appropriate
elements of capital appreciation, capital conservation, and current
income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put
another way, high-cost funds must select investments with higher
prospective gross returns--which entail higher risks--to match the net
returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
GROWTH FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellington Fund
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
Vanguard/Wellesley Income Fund
TAX-FREE INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUND
Vanguard Money Market Reserves
[LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 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.
Q220-10/93
<PAGE> 21
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 20.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index and
Standard & Poor's Value Index) of the U.S. Growth Portfolio for the Fiscal
Years 1988 through 1993 appears at the upper-left of page two.
Line charts illustrating cumulative performance of the Vanguard U.S.
Asset Allocation Portfolio and the Average Asset Allocation Fund compared to
(i) the S&P 500 Index and (ii) Average Growth and International Funds for the
Fiscal Years 1984 through 1993 appear on page four.
