<PAGE> 1
VANGUARD
EQUITY INCOME
FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Equity Income Fund and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of all
the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief
Executive Officer. To use yet another Vanguard nautical metaphor, he will be
the new captain. He has the qualities of leadership, integrity, intelligence,
and vision that must continue to be Vanguard's hallmark as we move toward,
and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in
1967, at the age of 38. Most important of all, Jack is completely dedicated
to the Vanguard character, and believes in our basic mission: serving solely
the shareholder, free of any conflict of interest. He believes in holding our
costs of operation to a minimum, and in retaining our position as the
lowest-cost provider of financial services in the world. He is a true
competitor, who shares Vanguard's dedication to providing highly competitive
returns to our investors relative to the returns provided by other mutual funds
with comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set
for Vanguard. You need have no doubt that the essential elements that drew you
to Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out
on industry affairs, reminding all who will listen of the primacy of the
interests of mutual fund shareholders. I will be readily available to provide
Jack Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of
Vanguard since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me
in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
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:
With a double-digit total return of +24.8% for the fiscal year ended September
30, 1995, Vanguard Equity Income Fund enjoyed one of the best years in its
history. This return was achieved in one of the most ebullient stock markets
in recent memory.
Yield-oriented stocks were solid participants in the stock market
upswing, although they were not among the leading market groups. Nonetheless,
the Fund gave a decent account of itself relative to the unmanaged Standard &
Poor's 500 Composite Stock Price Index. This Index--comprising large blue-chip
stocks with both growth and value attributes--has normally proved formidable
competition for equity income funds, and the past twelve months was no
exception. However, as shown in this table, our Fund provided a handsome total
return (capital change plus income) relative to its peers:
<TABLE>
<CAPTION>
- -------------------------------------------------
TOTAL RETURN
-------------------
FISCAL YEAR ENDED
SEPTEMBER 30, 1995
- -------------------------------------------------
<S> <C>
VANGUARD EQUITY INCOME FUND +24.8%
- -------------------------------------------------
AVERAGE EQUITY INCOME FUND +20.0%
STANDARD & POOR'S 500 STOCK INDEX +29.7
- -------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $13.16 per
share on September 30, 1994, and $15.65 per share on September 30, 1995, with
the latter figure adjusted to take into account the reinvestment of four
quarterly dividends totaling $.58 per share from net investment income, and
a distribution of $.09 per share from net capital gains realized during 1994.
THE FISCAL YEAR IN REVIEW
Fiscal 1995 began with stocks essentially marking time for the first three
months. Then, as December ended and the new year began, the U.S. stock market
sprang to life. During the seven months that followed, the market moved
upward, week after week, in virtually straight-line fashion, delighting the
bulls and astonishing the bears. Following a brief respite in August, the stock
market reaccelerated in September to close the fiscal year on a positive
note.
There were, as always, many opinions as to the source of the surprising
strength in the stock market. In my view, it resulted from a combination of:
(1) record-breaking corporate profits; (2) a sharp decline in long-term
interest rates; (3) the diminishing threat of additional increases in
short-term interest rates by the Federal Reserve Board; (4) a slight
softening in U.S. economic growth, resulting in continued optimism about the
outlook for inflation; and (5) a hint of speculative fever in the equity
marketplace.
Among the most dominant of these factors was the sharp drop in interest
rates and the commensurate increase in the prices of long-term bonds. On
balance for the fiscal year, the yield on the long-term U.S. Treasury bond
tumbled from 7.8% to 6.6%, a precipitous drop of 120 basis points, equivalent
to a +16% price increase excluding the generous interest coupon. Short-term
rates, however, continued to rise, with the Treasury bill yield beginning the
fiscal year at 4.7% and closing at 5.4%.
The yield on bonds relative to the yield on income-oriented stocks is
particularly significant, since these two asset classes compete directly
with one another for investors' assets. Indeed, bond returns probably
influence returns on high-yielding stocks nearly as much as do stock returns.
As a bit of perspective, the chart on page 2 traces the returns on
stocks and long-term bonds over the past five fiscal years. During this
period, the Standard & Poor's 500 Stock Index provided an average annual
total return of +17.2%, while long-term U.S. Treasury bonds provided an
annual return of +12.7%. (Both figures, I should note, are far above
long-term historical norms.) Although there is no widely recognized market
index for high-yielding stocks, it is fair to conclude that, during this
five-year period, they provided returns falling roughly in the middle of this
range.
(continued)
1
<PAGE> 4
[FIGURE 2]
THE FUND IN FISCAL 1995
The primary reason for the shortfall in the Fund's total return relative to
that of the Standard & Poor's 500 Index during the past twelve months is
relatively easy to explain. With a total return of +56%, technology stocks
were the market leaders by a wide margin. This group accounts for fully 10%
of the value of the Index; however, because technology stocks offer little if
any yield, they are generally unsuitable for an equity income fund, and their
absence negatively impacted our return.
Our shortfall in the technology sector was partially offset by our over
weighting in the high-performing financial and health care groups (combined,
30% of our assets versus 21% for the Index). Our outsized position (28% of
assets) in utility stocks moved from a minus to a plus during the year, as
this group gave a much improved account of itself in the second half of the
fiscal year, and essentially matched the market return for the full twelve
months.
The significant superiority of the Fund's total return (+24.8%) over
the average equity income mutual fund (+20.0%) is more gratifying, but more
complex to explain. Equity income funds comprise a diverse group, and our
"plain vanilla" approach of being fully invested (normally about 90% of net
assets) in higher-yielding, high-grade stocks at all times is, perversely
enough, the exception rather than the rule. While we traditionally carry
higher weightings in the utility group than our peers (28% of our equities
versus 18%), utilities provided market-like returns in fiscal 1995 and thus
were neutral in their impact.
On the positive side, we were blessed both by our broad focus on the
market-leading blue-chip stocks in the Standard & Poor's 500 Index and by our
modest holdings in small capitalization and foreign equities, both of which
lagged the overall market. This table reflects the allocation of our Fund
relative to the average equity income fund as well as the twelve-month return
provided by each asset class:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PORTFOLIO ALLOCATION TOTAL RETURN
SEPTEMBER 30, 1995 OF ASSET CLASS*
-------------------- ---------------
VANGUARD AVERAGE FISCAL
EQUITY EQUITY YEAR
INCOME INCOME ENDED
FUND FUND SEPT. 30, 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
STOCKS
LARGE CAP 83% 59% +29.7%
MID CAP 4 6 +25.8
SMALL CAP 3 9 +23.4
INTERNATIONAL 2 4 + 6.1
BONDS 0 4 +22.1
CONVERTIBLES 2 11 +18.8
CASH RESERVES 6 7 + 5.7
- --------------------------------------------------------
TOTAL PORTFOLIO 100% 100%
- --------------------------------------------------------
</TABLE>
*The benchmarks for each asset class are: the Standard & Poor's 500 Index, the
Standard & Poor's MidCap Index, the Russell 2000 Index, the Morgan Stanley
Capital International EAFE Index, the Lehman Long-Term Corporate Bond Index,
the Goldman Sachs Convertible 100 Index, and the Salomon 90-Day U.S. Treasury
bill.
On December 31, 1994, three months into our fiscal year, we moved to a
"multi-manager" structure in order to diversify the sources of the Fund's
investment management services. Two new
2
<PAGE> 5
advisers--Spare, Kaplan, Bischel & Associates and John A. Levin & Company--were
appointed by the Fund's Board of Directors to assume a portion of the
management responsibilities of Newell Associates, the Fund's adviser since
its inception on March 21, 1988. All three advisers emphasize dividend-paying
common stocks, and seek an average stock yield well above that of the
Standard & Poor's 500 Index (presently yielding 2.3%).
I am pleased to report that the transition was a smooth one,
involving only a limited increase in our portfolio turnover (our turnover ratio
equaled 31% of assets for the full year, compared to 79% for our peers) and
thus a limited increase in the "hidden costs" mutual funds incur in executing
transactions. I am even more pleased to report that all three advisers nicely
outpaced the average return of our peers. This table shows the current
allocation of Fund assets among our three advisers:
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL ASSETS MANAGED
------------------
SEPTEMBER 30, 1995
------------------
MILLIONS PERCENT
- -------------------------------------------------------
<S> <C> <C>
NEWELL ASSOCIATES $682 71%
SPARE, KAPLAN, BISCHEL & ASSOCIATES 117 12
JOHN A. LEVIN & COMPANY 114 11
CASH RESERVES 54 6
- -------------------------------------------------------
TOTAL $967 100%
- --------------------------------------------------------
</TABLE>
With all three managers providing solid returns during the period, Vanguard
Equity Income Fund ranked ninth among all 113 equity income mutual funds for
the full fiscal year.
A LONGER-TERM PERSPECTIVE
Given our success in fiscal 1995, the superiority of our lifetime results over
those of the average equity income fund was further enhanced. However,
neither our fund nor our peer group was able to surpass the results of the
Standard & Poor's 500 Index. The table that follows summarizes our record,
which is reflected in the chart shown on page 4 on a year-by-year basis. I
should note that our future
<TABLE>
<CAPTION>
- ---------------------------------------------------
TOTAL RETURN*
----------------------
MARCH 21, 1988, TO
SEPTEMBER 30, 1995
----------------------
FINAL VALUE
OF AN INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- ---------------------------------------------------
<S> <C> <C>
VANGUARD EQUITY INCOME FUND +12.4% $24,119
- ---------------------------------------------------
AVERAGE EQUITY INCOME FUND +11.2% $22,165
STANDARD & POOR'S 500 INDEX +14.4 27,504
- ---------------------------------------------------
</TABLE>
*Assumes reinvestment of all dividends and distributions, and excludes sales
charges, if any, on the other mutual funds.
absolute returns may be better or worse than the past returns shown above.
Indeed, the annual return for the Standard & Poor's Index, as illustrated in
the table, is well above the long-term historical norm (+10.5% since 1926)
for common stocks.
Looking at our lifetime return relative to the average equity income
fund, I acknowledge that the low costs at which Vanguard operates the Fund
explain much of our annual advantage over our peers (+1.2%). Our net expense
ratio (expenses as a percentage of average net assets) was but 0.45% during
fiscal 1995, compared to a cost of fully 1.23% for our peers--a Vanguard annual
margin of +0.78%, therefore providing nearly two-thirds of our advantage.
You should know that we evaluate our advisers on the gross returns they
generate relative to the gross returns of our peers, so we remain demanding
taskmasters in the search for above-average performance. In any event, +1.2%
per year "adds up" over time. Indeed, it accounts for the fact that the
cumulative return on a $10,000 initial investment in Vanguard Equity Income
Fund has provided an excess return over our competitors of $1,954--more than
19% of the amount initially invested.
With respect to the shortfall in the annual return of both the Fund and
its peer group relative to the Standard & Poor's 500 Stock Index, it occurred
for two reasons: (1) the Index is a theoretical construct, incurring none of
the real world operating costs that must be borne--to one extent or another--
3
<PAGE> 6
[FIGURE 3]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS-PERIODS ENDED SEPTEMBER 30, 1995
- ---------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- ---------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD EQUITY INCOME FUND +24.77% +15.60% +12.41%
AVERAGE EQUITY INCOME FUND +20.02 +14.94 +11.15
STANDARD & POOR'S 500 INDEX +29.71 +17.19 +14.39
</TABLE>
*Inception, March 21, 1988.
Note: Past performance is not predictive of future performance.
by all mutual funds; and (2) the investment characteristics of yield-oriented
stocks are simply different from those of growth stocks and value stocks,
since a higher proportion of the total return of stocks paying
above-average dividend yields normally arises from income return, and a lower
proportion from capital return.
In this context, we should report that, while our typical competitor
generates a gross dividend yield (4.0%) that is only a bit smaller than ours
(4.2%), the heavy--one might even say excessive--expenses borne by our peers
take a large slice out of this yield before it is ever passed along to their
fund shareholders. After the deduction of the comparative expense ratios
presented earlier, Vanguard Equity Income Fund is currently providing a net
dividend yield of 3.7%, more than thirty percent higher than the 2.8% average
net yield of our peers--an astonishing advantage for the yield-oriented
investor.
Not to be unduly critical, but I honestly don't see how one can fairly
describe a fund yielding 2.8% as an equity income fund. That our
lowest-yielding competitor (0.7%) continues to place itself in the equity
income category raises the question: "What's in a name?" In this instance at
least, the only response must be "not much!"
IN SUMMARY
Our Fund's lifetime record is clearly above average and solid relative to our
peers. Indeed, given our success in fiscal 1995, our margin of advantage has
been increased. Nonetheless, we continue to carefully monitor the results of
each of our three advisers, and we expect them to emulate tough standards.
So, we have confidence in Vanguard Equity Income Fund's ability to
continue to meet the needs of investors seeking higher income by emphasizing
equities with above-average yields. Nonetheless, all investors in all types of
equities must be willing to accept the ever-present risks of investing in the
stock and bond markets--risks that may well be increased
4
<PAGE> 7
today simply because of the remarkable gains of the past twelve months.
In our Annual Report a year ago, following a lackluster fiscal 1994,
I noted that "the investment outlook seems more favorable today . . . the
worst of the recent rate increase may be behind us. . . a better environment
for equity income funds would lie ahead." In that context, I urged you to
"stay the course" with Vanguard Equity Income Fund. It proved wise counsel
then; I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- ------------------
John C. Bogle
Chairman of the Board
October 4, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED SEPTEMBER 30, 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 +24.77% +15.60% +12.41% +7.04% +5.37%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
5
<PAGE> 8
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD EQUITY INCOME FUND since inception through September 30, 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 S&P 500
VALUE WITH INCOME ---------------------------- --------
September 30 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Total
Fiscal Year VALUE DISTRIBUTIONS DIVIDENDS GAINS REINVESTED Return Return Return 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 15.65 0.09 0.58 24.12 +19.8 +5.0 +24.8 +29.7
- ------------------------------------------------------------------------------------------------------------
LIFETIME +141.2% +175.0%
- ------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.4% +14.4%
- -------------------------------------------------------------------------------------------------------------
</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.
6
<PAGE> 9
REPORT FROM
THE INVESTMENT ADVISER
Vanguard Equity Income Fund outperformed the average equity income fund by a
small amount over the past six months, and by a substantial margin for the
fiscal year. The fund lagged behind the Standard & Poor's 500 Stock Index
during most of the year, but outperformed the index during the most recent
quarter. The results during the fiscal year are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------
TOTAL RETURN
-------------------------
PERIODS ENDED 9/30/95
- ------------------------------------------------
THREE SIX TWELVE
MONTHS MONTHS MONTHS
- ------------------------------------------------
<S> <C> <C> <C>
VANGUARD EQUITY
INCOME FUND +8.5% +15.1% +24.8%
- ------------------------------------------------
AVERAGE EQUITY
INCOME FUND +7.2% +14.4% +20.0%
STANDARD & POOR'S
500 INDEX +7.9 +18.2 +29.7
- ------------------------------------------------
</TABLE>
Mutual funds included in the average equity income group are very diverse in
character and, as a consequence, it is difficult to divine why they perform as
they do. However, we do know that in recent years some managers in the group
have made investments that would not traditionally be viewed as appropriate
for conservative high-yield equity funds.
It is evident that these departures have not always worked out, and the
negative effects continued to show up in the performance of the equity income
fund group during the past year. On the other hand, most conservative
high-yield common stocks have not had severe performance problems in 1995.
While they generally have not led the market, they have participated in the
rise over the past year to the degree we would have expected in light of their
inherent low volatility.
AN IMPROBABLE ROTATION
During the first six months of 1995, technology stocks cast a spell over stock
investors. Semiconductor, computer, and information technology companies came
to be seen as one-decision growth investments that could be held virtually
forever. The resulting surge in the prices of their stocks was a major factor
in the rise of the stock market. It was also a prime cause of the lag in
performance of equity income funds versus the S&P 500 Index.
For the most part, technology stocks have low current yields and are
not a natural selection for equity income portfolios. In the third quarter,
with the coming of a few earnings disappointments, the spell enveloping
technology stocks began to dissipate. Even some long-time advocates of the
stocks lightened their holdings. Investment commentators have suggested that
some of the proceeds of such sales have gone into conservative stocks,
including utilities and consumer non-durables, as a hedge against a possible
weak market. Switching from technology to utilities is an improbable rotation,
and the mere thought of it cannot fail to give satisfaction to conservative
income stock investors, but it helps to explain the stronger performance of the
Vanguard Equity Income Fund versus the S&P 500 Index in the most recent
quarter.
PORTFOLIO CHANGES
Most of the movement in group allocation since our Semi-Annual Report occurred
as the result of stock price changes rather than purchase and sale activity.
The Fund's weightings in banks, drugs, insurance, and telephone companies
increased in size primarily because of their strong performance relative to
the market. However, the Fund also added two new stocks to the insurance group
and one each to the food and banking groups. Despite the strong performance of
these groups, the share prices of the new stocks lagged the broad market
during the past six months, causing them to enter their relative yield buy
zones. The Fund also made additional sales of two stocks in the financial area
which continued to move through their relative yield sell zones based on
reports of strong earnings and restructuring.
Respectfully,
Roger D. Newell, Chairman
Newell Associates October 9, 1995
7
<PAGE> 10
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
September 30, 1995
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.4%)
- ------------------------------------------------------------------------------
BASIC MATERIALS (5.1%)
ARCO Chemical Co. 123,700 $ 6,030
Champion International Corp. 19,856 1,070
Dow Chemical Co. 209,500 15,608
E.I. du Pont de Nemours & Co. 77,200 5,308
The BF Goodrich Co. 24,200 1,594
Kimberly-Clark Corp. 8,000 537
Monsanto Co. 74,000 7,456
Olin Corp. 28,500 1,959
Potlatch Corp. 66,800 2,730
Praxair, Inc. 42,700 1,142
Union Camp Corp. 89,200 5,140
Witco Chemical Corp. 40,000 1,405
--------
GROUP TOTAL 49,979
--------
- ------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (1.3%)
Caterpillar, Inc. 9,800 557
Cooper Industries, Inc. 8,714 307
General Electric Co. 29,200 1,862
General Motors Corp. Class H 32,400 1,328
Honeywell, Inc. 57,000 2,444
Lockheed Martin Corp. 27,200 1,826
Thomas & Betts Corp. 58,600 3,787
--------
GROUP TOTAL 12,111
--------
- ------------------------------------------------------------------------------
CONSUMER CYCLICAL (7.7%)
Deluxe Corp. 184,100 6,098
The Walt Disney Co. 17,000 975
The Dun & Bradstreet Corp. 258,200 14,943
Eastman Kodak Co. 168,050 9,957
Equity Inns Inc. 75,000 862
Ford Motor Co. 75,000 2,334
John H. Harland Co. 155,150 3,433
HGI Realty 9,152 220
Kmart Corp. 653,800 9,480
* Lin Broadcasting Corp. 31,000 4,011
The McGraw-Hill Cos. 40,000 3,270
Melville Corp. 85,300 2,943
National Service Industries, Inc. 44,600 1,305
J.C. Penney Co., Inc. 155,400 7,712
Polaroid Corp. 4,800 191
Reader's Digest Assn., Inc. Class A 12,700 598
Rubbermaid, Inc. 30,100 832
Sears, Roebuck & Co. 15,000 553
Woolworth Corp. 319,800 5,037
--------
GROUP TOTAL 74,754
--------
- ------------------------------------------------------------------------------
CONSUMER STAPLES (8.1%)
American Brands, Inc. 420,900 17,783
Anheuser-Busch Co., Inc. 29,300 1,827
Avon Products, Inc. 11,000 789
The Clorox Co. 52,600 3,754
The Coca-Cola Co. 20,000 1,380
General Mills, Inc. 51,100 2,849
H.J. Heinz Co. 97,000 4,438
Nabisco Holdings Corp. Class A 41,000 1,214
Philip Morris Cos., Inc. 333,700 27,864
The Quaker Oats Co. 54,300 1,799
RJR Nabisco Holdings Corp. 32,800 1,062
SuperValu Inc. 54,600 1,604
Tambrands, Inc. 167,400 7,345
UST Inc. 158,700 4,543
--------
GROUP TOTAL 78,251
--------
- ------------------------------------------------------------------------------
ENERGY (13.3%)
Amoco Corp. 123,900 7,945
Atlantic Richfield Co. 181,700 19,510
Chevron Corp. 423,700 20,602
* Cooper Cameron Corp. 7,653 198
Exxon Corp. 293,100 21,177
McDermott International, Inc. 90,500 1,787
Mobil Corp. 165,500 16,488
Phillips Petroleum Co. 79,500 2,584
Royal Dutch Petroleum Co. ADR 60,400 7,414
Sun Co., Inc. 154,091 3,968
Texaco Inc. 320,100 20,686
USX-Marathon Group 322,000 6,360
--------
GROUP TOTAL 128,719
--------
- ------------------------------------------------------------------------------
FINANCIAL (17.7%)
Aetna Life & Casualty Co. 80,900 5,936
H.F. Ahmanson & Co. 351,000 8,907
American Express Co. 96,100 4,264
American General Corp. 283,900 10,611
Banc One Corp. 164,300 5,997
Bankers Trust New York Corp. 154,800 10,875
Barnett Banks, Inc. 48,500 2,746
Beneficial Corp. 11,700 611
Boatmen's Bancshares, Inc. 149,900 5,546
CIGNA Corp. 75,800 7,893
Citicorp 69,249 4,899
CoreStates Financial Corp. 174,900 6,406
First Chicago Corp. 8,600 590
First Union Corp. 97,100 4,952
Fleet Financial Group, Inc. 73,600 2,778
Great Western Financial Corp. 513,100 12,186
* Hospitality Properties Trust 48,000 1,260
Irvine Apartment
Communities, Inc. 114,300 2,015
KeyCorp 66,900 2,291
Lincoln National Corp. 176,900 8,336
Marsh & McLennan Cos., Inc. 62,400 5,483
Mellon Bank Corp. 180,350 8,048
J.P. Morgan & Co., Inc. 158,800 12,287
NBD Bancorp 110,000 4,208
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
NationsBank, Inc. 54,500 $ 3,665
PNC Bank Corp. 358,200 9,985
* Patriot American Hospitality, Inc. 35,000 897
Republic New York Corp. 51,724 3,026
SAFECO Corp. 54,700 3,583
Sizzlers Property Investors, Inc. 57,500 539
U.S. Bancorp 169,800 4,797
Unitrin Inc. 4,100 192
Wachovia Corp. 118,700 5,119
--------
GROUP TOTAL 170,928
--------
- ------------------------------------------------------------------------------
HEALTH CARE (12.1%)
American Home Products Corp. 306,100 25,980
Baxter International, Inc. 103,300 4,248
Bristol-Myers Squibb Co. 344,600 25,113
Eli Lilly & Co. 250,400 22,505
Merck & Co., Inc. 239,200 13,395
The Upjohn Co. 451,000 20,126
Warner-Lambert Co. 60,000 5,715
--------
GROUP TOTAL 117,082
--------
- ------------------------------------------------------------------------------
TECHNOLOGY (.5%)
General Motors Corp. Class E 64,600 2,939
International Business
Machines Corp. 17,800 1,680
--------
GROUP TOTAL 4,619
--------
- ------------------------------------------------------------------------------
TRANSPORT & SERVICES (.1%)
Burlington Northern Santa Fe Corp. 8,600 624
Union Pacific Corp. 7,500 497
--------
GROUP TOTAL 1,121
--------
- ------------------------------------------------------------------------------
UTILITIES (24.6%)
AT&T Corp. 20,500 1,348
Allegheny Power System, Inc. 161,700 4,123
Ameritech Corp. 338,500 17,644
Baltimore Gas & Electric Co. 230,100 5,954
Bell Atlantic Corp. 277,200 17,013
BellSouth Corp. 152,800 11,174
Central & South West Corp. 240,500 6,133
Consolidated Edison Co.
of New York, Inc. 96,700 2,937
Consolidated Natural Gas Co. 252,600 10,199
Dominion Resources, Inc. 87,700 3,300
Duke Power Co. 92,700 4,021
FPL Group, Inc. 86,200 3,524
GTE Corp. 568,300 22,306
NICOR, Inc. 158,100 4,308
Northeast Utilities 97,400 2,374
Northern States Power Corp. 68,700 3,117
NYNEX Corp. 462,350 22,077
Oklahoma Gas & Electric Co. 111,700 4,203
PECO Energy Corp. 15,000 429
PP&L Resources Inc. 188,200 4,399
Pacific Enterprises 130,500 3,279
Pacific Telesis Group 265,600 8,167
PacifiCorp 467,000 8,873
Potomac Electric Power Co. 196,400 4,763
Public Service Enterprise
Group Inc. 231,900 6,899
SCECorp 312,200 5,542
SCANA Corp. 190,600 4,574
Southern New England
Telecommunications Corp. 53,600 1,896
TECO Energy, Inc. 189,300 4,425
Texas Utilities Co. 189,800 6,619
Union Electric Co. 136,700 5,109
U S West, Inc. 466,950 22,005
Wisconsin Energy Corp. 187,100 5,286
--------
GROUP TOTAL 238,020
--------
- ------------------------------------------------------------------------------
MISCELLANEOUS (1.9%)
Hanson PLC ADR 395,000 6,419
Minnesota Mining &
Manufacturing Co. 71,800 4,057
Ogden Corp. 340,700 8,006
--------
GROUP TOTAL 18,482
--------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $681,188) 894,066
- ------------------------------------------------------------------------------
PREFERRED STOCKS (1.2%)
- ------------------------------------------------------------------------------
Atlantic Richfield Cvt. 9.00% 50,000 1,275
Burlington Northern Santa Fe 6.25% 26,000 2,009
Catellus Development Cvt. $3.625 46,900 1,923
Citicorp $1.217 Cvt. 32,755 663
Federal Mogul Cvt. $3.875 15,000 851
General Motors Class E $3.25 10,000 649
Houghton Mifflin 6.00% Cvt. 33,900 2,170
McDermott International Cvt. $2.875 17,500 700
Westingthouse Electric Cvt. $1.30 70,000 1,041
- ------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $11,024) 11,281
- ------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (.8%)
- ------------------------------------------------------------------------------
AMR Corp.
6.125%, 11/1/24 $ 2,000 $ 2,035
Centocor Inc.
7.25%, 2/1/01 1,800 1,602
CIGNA Corp.
8.20%, 7/10/10 996 1,519
Federated Department Stores
9.72%, 2/15/04 336 343
Morgan Stanley MTN
(Convertible into The Boeing Co.)
0.00%, 9/30/00 1,800 1,584
Sandoz
2.00%, 10/6/02 400 338
Seagate Technology
6.75%, 5/1/12 582 628
- ------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $7,616) 8,049
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (5.2%)
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.41%, 10/2/95
(Cost $50,544) 50,544 50,544
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $750,372) 963,940
- ------------------------------------------------------------------------------
MARKET
VALUE
(000)+
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.4%)
- ------------------------------------------------------------------------------
Other Assets--Notes C and E $ 19,923
Liabilities--Note E (16,468)
---------
3,455
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 61,797,562 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $967,395
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.65
==============================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
MTN--Medium Term Note.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $735,136 $11.89
Undistributed Net Investment
Income 9,313 .15
Accumulated Net Realized Gains 9,378 .15
Unrealized Appreciation of
Investments--Note D 213,568 3.46
- -----------------------------------------------------------------------------
NET ASSETS $967,395 $15.65
- -----------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1995
(000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends .............................................................. $ 39,973
Interest................................................................ 2,880
- --------------------------------------------------------------------------------------------------
Total Income..................................................... 42,853
- --------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B ....................................... 1,614
The Vanguard Group--Note C
Management and Administrative ....................................... $2,225
Marketing and Distribution........................................... 185 2,410
------
Taxes (other than income taxes)......................................... 75
Custodians' Fees........................................................ 55
Auditing Fees .......................................................... 14
Shareholders' Reports................................................... 62
Annual Meeting and Proxy Costs.......................................... 14
Directors' Fees and Expenses............................................ 4
- --------------------------------------------------------------------------------------------------
Total Expenses .................................................. 4,248
Expenses Paid Indirectly--Note C................................. (155)
- --------------------------------------------------------------------------------------------------
Net Expenses.................................................. 4,093
- --------------------------------------------------------------------------------------------------
Net Investment Income......................................... 38,760
- --------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON
INVESTMENT SECURITIES SOLD ............................................... 6,800
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES .................................. 155,649
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations.......... $201,209
==================================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 1995 September 30, 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income ............................................. $ 38,760 $ 43,428
Realized Net Gain ................................................. 6,800 8,790
Change in Unrealized Appreciation (Depreciation)................... 155,649 (79,992)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 201,209 (27,774)
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income.............................................. (37,074) (43,802)
Realized Net Gain ................................................. (5,992) (38,665)
- --------------------------------------------------------------------------------------------------------
Total Distributions .......................................... (43,066) (82,467)
- --------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--NOTE A ...................................... (1,342) (1,606)
- --------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular................................................. 77,635 175,953
-- In Lieu of Cash Distributions........................... 37,534 74,878
-- Exchange ............................................... 50,383 151,508
Redeemed -- Regular................................................. (138,439) (188,962)
-- Exchange................................................ (117,142) (307,273)
- --------------------------------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions ................. (90,029) (93,896)
- --------------------------------------------------------------------------------------------------------
Total Increase (Decrease) .................................... 66,772 (205,743)
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year.................................................. 900,623 1,106,366
- --------------------------------------------------------------------------------------------------------
End of Year (3).................................................... $ 967,395 $ 900,623
========================================================================================================
(1) Distributions Per Share
Net Investment Income.......................................... $.58 $.61
Realized Net Gain.............................................. $.09 $.52
- --------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued ........................................................ 9,266 24,186
Issued in Lieu of Cash Distributions .......................... 2,741 5,633
Redeemed ...................................................... (18,631) (37,094)
- --------------------------------------------------------------------------------------------------------
(6,624) (7,275)
- --------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income........................... $ 9,313 $ 8,969
- --------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .............. $13.16 $14.62 $12.81 $12.14 $10.36
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income ....................... .60 .59 .59 .59 .65
Net Realized and Unrealized Gain
(Loss) on Investments ..................... 2.56 (.92) 1.81 .83 1.99
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS........ 3.16 (.33) 2.40 1.42 2.64
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ........ (.58) (.61) (.59) (.65) (.79)
Distributions from Realized Capital Gains.... (.09) (.52) -- (.10) (.07)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS..................... (.67) (1.13) (.59) (.75) (.86)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................... $15.65 $13.16 $14.62 $12.81 $12.14
=================================================================================================
TOTAL RETURN.................................... +24.77% -2.19% +19.17% +12.26% +26.46%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) ............. $967 $901 $1,106 $778 $518
Ratio of Expenses to Average Net Assets......... .47%+ .43% .40% .44% .46%
Ratio of Net Investment Income to
Average Net Assets........................... 4.27% 4.41% 4.39% 4.74% 5.52%
Portfolio Turnover Rate......................... 31% 18% 15% 13% 9%
- -------------------------------------------------------------------------------------------------
</TABLE>
+Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.45% after including these reductions. See Note C.
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 using 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.
13
<PAGE> 16
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 a custodian bank until
maturity of each repurchase agreement. Provisions of the agreement require
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. advisory fees calculated at an annual percentage rate of
average net assets. For the year ended September 30, 1995, the aggregate
advisory fee represented an effective annual rate of .18 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, 1995, the Fund had contributed capital of $117,000
to Vanguard (included in Other Assets), representing .6% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
Vanguard has requested the Fund's investment adviser to direct certain portfolio
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate or credit to the Fund a portion of the commissions generated.
Such rebates or credits are used solely to reduce the Fund's administrative
expenses. For the year ended September 30, 1995, directed brokerage arrangements
reduced the Fund's expenses by $155,000 (an annual rate of .02 of 1% of average
net assets).
D. During the year ended September 30, 1995, the Fund made purchases of
$265,737,000 and sales of $407,802,000 of investment securities other than
U.S. Government securities and temporary cash investments. At September 30,
1995, unrealized appreciation for financial reporting and Federal income tax
purposes aggregated $213,568,000 of which $221,463,000 related to appreciated
securities and $7,895,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at September 30,
1995, was $9,985,000 for which the Fund had received cash collateral of
$10,388,000.
14
<PAGE> 17
REPORT OF
INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Equity Income Fund
In ouropinion, 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, 1995, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 30, 1995
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD EQUITY INCOME FUND
Corporate shareholders should note that for the fiscal year ended September 30,
1995, 87.3% 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 of Rh#ne-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of 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 Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and The
Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. 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. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
16
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
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.
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q650-9/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet decimated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 20
[BACK COVER ART]
<PAGE> 21
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile"
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet and gloves and battleships in the
background appear at the top of pages one through five.
A line chart of the Indexed Value (Standard & Poor's 500 Stock Index) of
Vanguard Equity Income Fund for the fiscal years 1991 through 1995 appears at
the upper left of page two.
Line charts illustrating cumulative performance between Vanguard Equity Income
Fund, Standard & Poor's 500 Index and Average Equity Income Fund, average
Annual Total Returns for the period March 21, 1988 to September 30, 1995 appear
at the top of page four.
A running head featuring a cannon with battleships in the background appears at
the top of page six.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of page seven.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages eight through fifteen.
A running head featuring a sextant, a map and battleships in the background
appears at the top of page sixteen.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
