<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Our 1995 fiscal year, which ends September 30, has begun on an auspicious note.
Strong performance in the overall stock market has been accompanied by Vanguard
Equity Income Fund's strong performance relative to other equity income funds.
This is a desirable combination of events, if occurring less frequently than we
might wish.
The table below compares the total return (capital change plus income) of
the Fund to that of the unmanaged and widely diversified Standard & Poor's 500
Composite Stock Price Index, which includes growth stocks, income stocks, and
stocks that combine, in varying degree, both characteristics. Given our
orientation towards higher yielding stocks, the Index represents a rather
imperfect measurement standard; so, we also present the return of the average
equity income fund.
<TABLE>
<CAPTION>
--------------------------------------------------------
Total Return
----------------
Six Months Ended
March 31, 1995
--------------------------------------------------------
<S> <C>
Vanguard Equity Income Fund +8.4%
--------------------------------------------------------
Standard & Poor's 500 Index +9.7%
Average Equity Income Fund +4.7
--------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $13.16 per share on
September 30, 1994, and $13.85 on March 31, 1995, with the latter figure
adjusted to take into account the reinvestment of two quarterly dividends
totaling $.30 per share from net investment income, and a distribution of $.09
per share from net capital gains realized during the 1994 calendar year.
THE FINANCIAL MARKETS
During the past six months, the financial markets gave a fine account of
themselves. Stocks, after stumbling a bit during the first two months, marched
upward in a consistent, uninterrupted pattern--virtually a straight line. Bonds
followed an almost identical turnaround. The interest rate on long-term
Treasury bonds, after rising from 7.8% on September 30, 1994, to 8.2% in
mid-November, then reversed direction and fell to 7.4% on March 31, engendering
a commensurate increase in bond prices.
The decline in interest rates was a major force in the rise in stock
prices. Investor sentiment turned positive as market participants were
impressed with the Federal Reserve Board's discipline in maintaining a tight
monetary policy (helping to hold inflation at bay), and the economy's ability
to maintain a solid growth rate.
FUND PERFORMANCE
The slight lag in the Fund's return relative to the Standard & Poor's 500 Index
largely reflects the fact that technology stocks continued to retain the market
leadership that they so clearly demonstrated during 1994. This group,
comprising nearly 10% of the value of the Index, provided a remarkable total
return of +19.9% during the past six months. However, since such equities
almost invariably provide low yields, our income-oriented investment policy
makes their appearance in our portfolio exceedingly rare. (Technology stocks
represented but 1% of our stock position during the period.) At the same time,
utility stocks (13% of the Index, 30% of Fund assets) continued to lag the
market, with a return of +4.7%. Such stocks are, of necessity, a major
component of the portfolios of virtually all equity income mutual funds, since
utility stock yields are usually the highest available in any industry sector.
The ability of our advisers to select the better-performing utility stocks
was exceptional enough to offset nearly one-half of the sector's shortfall to
the overall market return. That appears to be one of the principal reasons why
we turned in a handsome +3.7 percentage point performance advantage over other
equity income funds (+8.4% for the Fund compared to +4.7% for the competition).
As it happens, this positive margin actually exceeds our shortfall of -3.5
percentage points during fiscal 1994. As a result, our lifetime record (we
began operations in March 1988) reflects an improvement in the excess returns
we have provided. During the full period, we enjoyed an average annual total
return of +11.5% compared to +10.3% for our peer group of funds. Admittedly, a
good portion of this advantage
1
<PAGE> 2
was derived from our traditional expense ratio advantage, which enables us to
provide you with a higher yield, a key element of an equity income fund's
strategy.
As you know, on December 31, 1994, the Fund added two new advisers, Spare,
Kaplan, Bischel & Associates, Inc., and John A. Levin & Company. Our principal
adviser remains Newell Associates, which had been our sole portfolio manager up
until the end of December 1994. The table below shows the present allocation of
the Fund's assets to each adviser:
<TABLE>
<CAPTION>
-------------------------------------------------------
Total Assets Managed
--------------------------
$ Million Percent
-------------------------------------------------------
<S> <C> <C>
Newell Associates $667 72%
Spare, Kaplan, Bischel 110 12
John A. Levin & Co. 108 12
Cash Reserves 36 4
------------------------------------------------------
Total $921 100%
------------------------------------------------------
</TABLE>
Only three months have elapsed since the implementation of our multi-manager
strategy. While this is obviously far too short a period to draw any
conclusions about the success of our reallocation decision, I can report that
each of our three advisers provided a total return well in excess of that of
the Fund's peer group.
So, the fiscal year is off to a distinctly positive start. I look forward
to reporting to you in further detail in our 1995 Annual Report six months
hence.
Sincerely,
/s/ JOHN C. BOGLE
---------------------
John C. Bogle
Chairman of the Board
April 17, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
--------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD EQUITY INCOME FUND 3/21/88 +15.39% +9.16% +11.10% +5.71% +5.39%
</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.
2
<PAGE> 3
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD EQUITY INCOME FUND since inception through March 31, 1995. 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*
----------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund
Value with Income -------------------------------
September 30 Net Asset Capital Gains Income Dividends & Capital Capital Income Total S&P 500 Index
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (3/88) $10.00 -- -- $10.00 -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
1988 10.58 -- $0.24 10.83 + 5.8% +2.5% + 8.3% + 3.1%
----------------------------------------------------------------------------------------------------------------------------------
1989 13.07 $0.02 0.48 13.95 +23.8 +5.0 +28.8 +32.9
----------------------------------------------------------------------------------------------------------------------------------
1990 10.36 0.03 0.64 11.68 -20.5 +4.3 -16.2 - 9.2
----------------------------------------------------------------------------------------------------------------------------------
1991 12.14 0.07 0.79 14.77 +18.0 +8.5 +26.5 +31.1
----------------------------------------------------------------------------------------------------------------------------------
1992 12.81 0.10 0.65 16.58 + 6.4 +5.9 +12.3 +11.0
----------------------------------------------------------------------------------------------------------------------------------
1993 14.62 -- 0.59 19.76 +14.1 +5.1 +19.2 +13.0
----------------------------------------------------------------------------------------------------------------------------------
1994 13.16 0.52 0.61 19.33 - 6.5 +4.3 - 2.2 + 3.7
----------------------------------------------------------------------------------------------------------------------------------
1995 (3/31) 13.85 0.09 0.30 20.95 + 6.0 +2.4 + 8.4 + 9.7
----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +109.5% +132.6%
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +11.1% +12.8%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
PERFORMANCE
Vanguard Equity Income Fund rose strongly during the past six months,
substantially outperforming the average equity income fund, but lagging the
Standard & Poor's 500 Stock Index by a fairly narrow margin.
THE RELATIVE YIELD STRATEGY
Like the S&P 500 Index, Newell Associates' Relative Yield Strategy invests
primarily in large U.S. stocks. However, the Relative Yield Strategy charts a
very different course from that of the S&P 500 Index. We use the yield history
of stocks relative to the yield of the market to judge when stocks are
attractive for purchase and when they should be sold. We maintain the current
yield of the Fund between 50% and 100% higher than the yield of the S&P 500
Index. Currently, at 4.4%, the Fund's yield is 69% higher than that of the
Index.
Our investment process aims to buy the stocks of major U.S. companies while
they are temporarily out of favor, but have the potential for recovery to
higher valuation levels as measured by relative yield. This strategy produces
very different company and industry weightings from those of the Index. Because
of the high average yield of our holdings, the Fund exhibits defensive
characteristics during periods of market weakness.
INVESTORS RETURN TO LARGE U.S. STOCKS
After a flirtation with a variety of foreign and alternative investments,
investors have recently returned to buying a broad range of large
capitalization U.S. stocks, including many that are not traditional growth
stocks. We believe this is an important factor in Vanguard Equity Income Fund's
outperformance since last September. As a result, twelve industry groups,
representing nearly 55% of the stocks in the Fund, outperformed the S&P 500
during that period, including some of the largest groups in the Fund such as
drugs, electric utilities, petroleum, and tobacco.
PORTFOLIO MANAGEMENT ACTIVITY
In the latter part of 1994, the prices of regional bank stocks were quite weak
on earnings concerns, and we added to several of our positions at that time.
Some of the electric utility stocks in the portfolio have made very significant
price recoveries from their lows of last year, and in two cases moved into sale
territory from a relative yield standpoint. We made reductions in these
holdings during the past six months. Our patience in delaying the sale of IBM,
despite its low yield, has been justified. By the end of March, the price of
the stock had more than doubled from its low in 1993, and we finished the
process of selling our position.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
April 11, 1995
4
<PAGE> 5
FINANCIAL STATEMENTS
(unaudited)
March 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
--------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.5%)
--------------------------------------------------------------------------
BASIC MATERIALS (5.7%)
ARCO Chemical Co. 263,200 $ 11,712
Dow Chemical Co. 227,900 16,637
E.I. du Pont de Nemours & Co. 115,000 6,957
The BF Goodrich Co. 33,000 1,464
Monsanto Co. 79,000 6,340
Olin Corp. 10,000 537
Potlatch Corp. 39,500 1,664
Praxair, Inc. 60,000 1,395
Union Camp Corp. 97,300 5,047
Witco Chemical Corp. 40,000 1,175
----------
GROUP TOTAL 52,928
----------
--------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (1.0%)
Caterpillar, Inc. 25,000 1,391
General Electric Co. 25,000 1,353
General Motors Corp. Class H 44,700 1,844
VHoneywell, Inc. 50,000 1,869
Thomas & Betts Corp. 48,600 3,147
----------
GROUP TOTAL 9,604
----------
--------------------------------------------------------------------------
CONSUMER CYCLICALS (7.6%)
Deluxe Corp. 196,100 5,589
The Dun & Bradstreet Corp. 253,200 13,325
Eastman Kodak Co. 266,650 14,166
John H. Harland Co. 155,150 3,510
Kmart Corp. 938,600 12,906
McGraw-Hill, Inc. 40,000 2,870
Melville Corp. 85,300 3,177
National Service Industries, Inc. 57,500 1,552
J.C. Penney Co., Inc. 99,600 4,469
Sears, Roebuck & Co. 20,000 1,067
Woolworth Corp. 389,400 7,155
----------
GROUP TOTAL 69,786
----------
--------------------------------------------------------------------------
CONSUMER STAPLES (7.1%)
American Brands, Inc. 474,300 18,616
Clorox Co. 52,600 3,156
The Coca-Cola Co. 20,000 1,130
General Mills, Inc. 22,400 1,336
H.J. Heinz Co. 123,000 4,736
Nabisco Holdings Corp. Class A 20,900 598
Philip Morris Cos., Inc. 372,000 24,273
* RJR Nabisco Holdings 100,500 590
SuperValu, Inc. 54,600 1,461
Tambrands, Inc. 162,800 7,265
UST, Inc. 76,100 2,416
----------
GROUP TOTAL 65,577
----------
--------------------------------------------------------------------------
ENERGY (14.6%)
Amoco Corp. 110,500 7,031
Atlantic Richfield Co. 190,800 21,942
Chevron Corp. 410,900 19,723
Exxon Corp. 324,100 21,634
McDermott International, Inc. 143,000 3,915
Mobil Corp. 183,100 16,960
Royal Dutch Petroleum Co. ADR 55,300 6,636
Sun Co., Inc. 206,300 5,880
Texaco, Inc. 343,100 22,816
USX-Marathon Group 433,900 7,593
----------
GROUP TOTAL 134,130
----------
--------------------------------------------------------------------------
FINANCIAL (15.5%)
Aetna Life & Casualty Co. 196,500 11,200
H.F. Ahmanson & Co. 442,000 7,956
American Express Co. 205,500 7,167
American General Corp. 299,000 9,643
Banc One Corp. 144,300 4,112
BankAmerica Corp. 23,500 1,134
Bankers Trust New York Corp. 128,800 6,730
Barnett Banks, Inc. 56,500 2,571
Beneficial Corp. 11,000 432
Boatmen's Bancshares, Inc. 149,900 4,534
CIGNA Corp. 191,800 14,337
Chemical Banking Corp. 40,000 1,510
Citicorp 52,200 2,218
* Continental Corp. 266,950 5,239
CoreStates Financial Corp. 187,800 6,010
First Union Corp. 59,300 2,572
Great Western Financial Corp. 587,100 11,008
Kimco Realty Corp. 25,000 959
Lincoln National Corp. 132,300 5,325
Meditrust 40,000 1,190
Mellon Bank Corp. 167,050 6,807
J.P. Morgan & Co., Inc. 158,800 9,687
NBD Bancorp, Inc. 92,000 2,990
NationsBank, Inc. 54,500 2,766
PNC Bank Corp. 248,200 6,050
Rockefeller Center Properties Inc. 103,000 631
Safeco Corp. 19,200 1,046
U.S. Bancorp 125,800 3,271
Unitrin Inc. 4,100 199
Wachovia Corp. 105,200 3,735
----------
GROUP TOTAL 143,029
----------
--------------------------------------------------------------------------
HEALTH CARE (11.9%)
American Home Products Corp. 357,800 25,493
Baxter International, Inc. 167,100 5,473
Bristol-Myers Squibb Co. 374,600 23,600
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
--------------------------------------------------------------------------
<S> <C> <C>
Eli Lilly & Co. 312,200 $ 22,830
Merck & Co., Inc. 239,200 10,196
Upjohn Co. 474,000 16,946
Warner-Lambert Co. 60,000 4,695
----------
GROUP TOTAL 109,233
----------
--------------------------------------------------------------------------
TECHNOLOGY (.3%)
International Business
Machines Corp. 27,500 2,252
----------
--------------------------------------------------------------------------
TRANSPORT & SERVICES (.1%)
Union Pacific Corp. 23,100 1,271
----------
--------------------------------------------------------------------------
UTILITIES (25.5%)
AT&T Corp. 30,200 1,563
Allegheny Power System, Inc. 213,700 4,835
Ameritech Corp. 382,400 15,774
Baltimore Gas & Electric Co. 304,600 7,196
Bell Atlantic Corp. 299,300 15,788
BellSouth Corp. 212,600 12,650
Central & South West Corp. 240,500 5,832
Consolidated Edison Co.
of New York, Inc. 96,700 2,635
Consolidated Natural Gas Co. 268,600 10,375
Dominion Resources, Inc. 86,600 3,118
Duke Power Co. 92,700 3,569
FPL Group, Inc. 145,200 5,282
GTE Corp. 594,600 19,770
Houston Industries, Inc. 56,900 2,169
New York State Electric &
Gas Corp. 20,000 427
NICOR, Inc. 163,100 4,077
NorAm Energy Corp. 299,000 1,607
Northeast Utilities 97,400 2,070
Northern States Power Co.
of Minnesota 68,700 3,023
NYNEX Corp. 509,700 20,197
Oklahoma Gas & Electric Co. 130,700 4,476
Pacific Enterprises 143,000 3,539
Pacific Telesis Group 242,000 7,320
PacifiCorp 508,700 9,856
Pennsylvania Power and Light Co. 235,100 4,614
Potomac Electric Power Co. 227,400 4,292
Public Service Enterprise
Group Inc. 279,900 7,662
SCEcorp 430,000 6,719
SCANA Corp. 97,600 4,075
Southern New England
Telecom Corp. 84,600 2,823
TECO Energy, Inc. 189,300 3,975
Texas Utilities Co. 244,000 7,747
Union Electric Corp. 113,600 4,019
U.S. West Inc. 426,000 17,040
Wisconsin Energy Corp. 177,100 4,804
----------
GROUP TOTAL 234,918
----------
--------------------------------------------------------------------------
MISCELLANEOUS (2.2%)
Hanson PLC ADR 505,000 9,532
Minnesota Mining &
Manufacturing Co. 34,800 2,023
Ogden Corp. 428,800 8,630
----------
GROUP TOTAL 20,185
----------
--------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $725,251) 842,913
--------------------------------------------------------------------------
PREFERRED STOCKS (1.5%)
--------------------------------------------------------------------------
AK Steel Holding Cvt. 7.00% 50,000 1,425
American Express Cvt. 6.25% 30,000 1,346
Atlantic Richfield Cvt. 9.00% 50,000 1,250
Burlington Northern 6.25% 20,000 1,275
Citicorp Cvt. $1.217 110,000 2,131
Federal Mogul Cvt. $ 3.87 15,000 833
General Motors Class E Cvt. $ 3.25 10,000 574
Republic NY Corp. Cvt. 3.375% 45,000 2,396
Sprint Cvt. 8.25% 40,000 1,335
Times Mirror Series B Cvt. $1.374 27,700 592
Westinghouse Electric Cvt. $1.30 70,000 1,033
--------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (1.4%)
(Cost $14,168) 14,190
--------------------------------------------------------------------------
CONVERTIBLE BONDS (1.8%)
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
Centocor Inc.
7.25%, 2/1/01 $ 1,675 1,449
Champion International
6.50%, 4/15/11 2,500 3,075
CIGNA Corp.
8.20%, 7/10/10 1,500 1,654
Cooper Industries, Inc.
7.05%, 1/1/15 500 510
Danka Business
6.75%, 4/01/02 825 887
Fieldcrest Cannon
6.00%, 3/15/12 1,750 1,356
Inco Ltd.
5.75%, 7/1/04 1,900 2,109
International Paper Co.
5.75%, 9/23/02 2,000 2,180
Pennzoil Co.
6.50%, 1/15/03 1,500 1,807
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
---------------------------------------------------------------------------------
<S> <C> <C>
Price Co.
5.50%, 2/28/12 $ 973 $ 836
Regency Health
6.50%, 7/15/03 800 924
---------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS (1.8%)
(Cost $16,274) 16,787
---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.9%)
---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 6.27%, 4/3/95
(Cost $44,706) 44,706 44,706
---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $800,399) 918,596
---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
---------------------------------------------------------------------------------
Other Assets--Note C 8,526
Liabilities (6,015)
-------
2,511
---------------------------------------------------------------------------------
NET ASSETS (100%)
---------------------------------------------------------------------------------
Applicable to 66,487,721 outstanding
$ .001 par value shares
(authorized 1,000,000,000 shares) $921,107
---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.85
=================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT MARCH 31, 1995,
NET ASSETS CONSISTED OF:
---------------------------------------------------------------------------------
Amount Per
(000) Share
---------- -------
<S> <C> <C>
Paid in Capital $800,621 $12.04
Undistributed Net
Investment Income 8,787 .13
Accumulated Net Realized Losses (6,498) (.10)
Unrealized Appreciation
of Investments--Note E 118,197 1.78
---------------------------------------------------------------------------------
NET ASSETS $921,107 $13.85
---------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1995
(000)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,099
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064
-----------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 22,163
-----------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . . . . 764
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . $1,052
Marketing and Distribution . . . . . . . . . . . . . . . . . . 88 1,140
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . 38
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . 15
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 42
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 6
Directors Fees and Expenses . . . . . . . . . . . . . . . . . .
Directors Fees and Expenses . . . . . . . . . . . . . . . . . . 2
-----------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 2,015
-----------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 20,148
-----------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . (9,076)
-----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . 60,278
-----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . $71,350
=================================================================================================================
</TABLE>
8
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MARCH 31, 1995 September 30, 1994
(000) (000)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 20,148 $ 43,428
Realized Net Gain (Loss) . . . . . . . . . . . . . . . (9,076) 8,790
Change in Unrealized Appreciation (Depreciation) . . . 60,278 (79,992)
-----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . 71,350 (27,774)
-----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (19,876) (43,802)
Realized Net Gain . . . . . . . . . . . . . . . . . . (5,992) (38,665)
-----------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (25,868) (82,467)
-----------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--NOTE A . . . . . . . . . . . . (454) (1,606)
-----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . 35,339 175,953
--In Lieu of Cash Distributions . . . . . . 22,671 74,878
--Exchange . . . . . . . . . . . . . . . . 25,118 151,508
Redeemed --Regular . . . . . . . . . . . . . . . . . (43,219) (188,962)
--Exchange . . . . . . . . . . . . . . . . . (64,453) (307,273)
-----------------------------------------------------------------------------------------------------------
Net Decrease from
Capital Share Transactions . . . . . . . . (24,544) (93,896)
-----------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . 20,484 (205,743)
-----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 900,623 1,106,366
-----------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . $ 921,107 $ 900,623
===========================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . $.30 $.61
Realized Net Gain . . . . . . . . . . . . . . . $.09 $.52
-----------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . 4,602 24,186
Issued in Lieu of Cash Distributions . . . . . . 1,743 5,633
Redeemed . . . . . . . . . . . . . . . . . . . . (8,279) (37,094)
-----------------------------------------------------------------------------------------------------------
(1,934) (7,275)
-----------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . $ 8,787 $ 8,969
-----------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
SIX MONTHS ENDED ----------------------------------------------------------
For a Share Outstanding Throughout Each Period MARCH 31, 1995 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $13.16 $14.62 $12.81 $12.14 $10.36 $13.07
----- ----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .30 .59 .59 .59 .65 .73
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .78 (.92) 1.81 .83 1.99 (2.77)
----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . 1.08 (.33) 2.40 1.42 2.64 (2.04)
----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.30) (.61) (.59) (.65) (.79) (.64)
Distributions from Realized Capital Gains . . . . (.09) (.52) -- (.10) (.07) (.03)
----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . (.39) (1.13) (.59) (.75) (.86) (.67)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $13.85 $13.16 $14.62 $12.81 $12.14 $10.36
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +8.39% -2.19% +19.17% +12.26% +26.46% -16.25%
----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
------------------------
Net Assets, End of Period (Millions) . . . . . . . . $921 $901 $1,106 $778 $518 $353
Ratio of Expenses to Average Net Assets . . . . . . . .45%* .43% .40% .44% .46% .48%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 4.52%* 4.41% 4.39% 4.74% 5.52% 5.67%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 34%* 18% 15% 13% 9% 5%
----------------------------------------------------------------------------------------------------------------------------------
*Annualized.
</TABLE>
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 the close of the New York Stock
Exchange (generally 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. Bonds are valued utilizing the latest quoted bid prices and on
the basis of a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Temporary cash investments are valued at
cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares
issued and
10
<PAGE> 11
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 advisory contracts, the Fund pays Newell Associates and,
effective January 1, 1995, Spare, Kaplan, Bischel & Associates and John A.
Levin & Co., Inc. investment advisory fees calculated at an annual percentage
rate of average net assets.
For the six months ended March 31, 1995, the aggregate investment advisory fee
represented an effective annual rate of .17 of 1% of average net assets.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At March 31, 1995, the Fund had contributed capital of $133,000 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 advisers 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 six months ended March 31, 1995, directed
brokerage arrangements reduced the Fund's expenses by $193,000 (an annual rate
of .04 of 1% of average net assets).
D. During the six months ended March 31, 1995, the Fund made purchases of
$144,505,000 and sales of $214,781,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At March 31, 1995, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $118,197,000 of which $135,747,000
related to appreciated securities and $17,550,000 related to depreciated
securities.
11
<PAGE> 12
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
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)
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 LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
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
[VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q652-3/95
[VANGUARD EQUITY INCOME FUND LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 1995
