<PAGE> 1
VANGUARD
EQUITY INCOME
FUND
SEMI-ANNUAL REPORT
MARCH 31, 1996
<PAGE> 2
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the past six months, a period that follows directly on the heels of one
of the best fiscal years in our history, Vanguard Equity Income Fund continued
to perform well, providing a total return of +12.1%. This strong performance
was due in part to the strength of the overall stock market, which was marked
by even stronger returns in the higher-yielding common stocks in which the Fund
invests.
The table below compares the total return (capital change plus
reinvested dividends) of the Fund relative to that of the unmanaged and widely
diversified Standard & Poor's 500 Composite Stock Price Index. This Index
represents a rather imperfect measuring standard, since it includes both growth
stocks and income stocks. Given our emphasis on higher-yielding stocks, we also
present the return of the average equity income mutual fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
----------------
SIX MONTHS ENDED
MARCH 31, 1996
- ------------------------------------------------------
<S> <C>
VANGUARD EQUITY INCOME FUND +12.1%
- ------------------------------------------------------
STANDARD & POOR'S 500 INDEX +11.7%
AVERAGE EQUITY INCOME FUND +10.6
- ------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $15.65 per share on
September 30, 1995, and $17.05 on March 31, 1996, with the latter figure
adjusted to take into account the reinvestment of two quarterly dividends
totaling $.32 per share from net investment income, and a distribution of $.17
per share from net capital gains realized during 1995.
THE FINANCIAL MARKETS
Despite last year's near record-breaking equity returns, the stock market
continued to advance during the past six months. Stocks, after taking a
breather in October (the only month in the past 16 with a negative total
return), climbed higher in each successive month for the remainder of the
semi-annual period. Bond prices followed a deceptively volatile path, ending
the period modestly lower despite wide price swings along the way. The interest
rate on long-term U.S. Treasury bonds, after declining from 6.6% on September
30, 1995, to 6.0% in late December, reversed course and rose to 6.7% on March
31, 1996.
Although the Federal Reserve lowered short-term interest rates in
December and January, the bond market fretted over the strength of the economy
and the possibility of renewed inflationary fears. During February and March,
the performance of the stock and bond markets "decoupled," as long-term
Treasury bonds lost a total of more than -6%, even as stocks continued to creep
higher. It remains to be seen whether the stock market has enough earnings
growth momentum to withstand the competition that higher-yielding bonds might
provide.
FUND PERFORMANCE
Vanguard Equity Income Fund enjoyed competitive success during the first six
months of the 1996 fiscal year. Not only did we outpace the performance of the
Standard & Poor's 500 Index, but we also surpassed the return of the average
equity income fund by +1.5% (+12.1% for the Fund versus +10.6% for our peers).
Our solid performance relative to the Standard & Poor's 500 Index was
largely attributable to two factors: (1) outstanding stock selection in the
health-care sector, which was a strong performer for the overall market and an
even stronger performer for the Fund; (2) our far-below-average representation
in the technology sector (1% of the net assets of the Fund versus 10% for the
Index) during a period in which technology stocks, with a return of -0.5%,
trailed all other sectors of the stock market.
The reasons for the superiority of the Fund's return over our second
standard, the average equity income fund, are more difficult to pinpoint.
Although the investment policies of our peers vary widely, the principal
difference between our Fund's portfolio and the portfolios of our peers is the
portion of assets held in common stocks: 91% of net assets for the Fund versus
82% for our average competitor. Our peers' lower weighting in common stocks
reflects
1
<PAGE> 3
their larger commitments in convertible bonds and preferred stocks. For this
reason we consider Vanguard Equity Income Fund to be a "pure" equity income
portfolio, undiluted by higher-yielding, but potentially less-rewarding,
securities.
As you may recall, on December 31, 1994, the Fund added two new
advisers, Spare, Kaplan, Bischel & Associates, and John A. Levin & Company to
complement our principal adviser, Newell Associates. It gives us great pleasure
to report that each of the three investment advisers we employ under our
multi-manager strategy outpaced the average equity income fund. In all, we
believe the benefits of a multi-manager strategy, designed to ensure broad
diversification, have fully justified our confidence. This table shows the
Fund's present allocation to each adviser:
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL ASSETS
MANAGED
-------------------
$ MILLION PERCENT
- -------------------------------------------------------
<S> <C> <C>
NEWELL ASSOCIATES $ 777 65%
SPARE, KAPLAN, BISCHEL & ASSOCIATES 181 15
JOHN A. LEVIN & COMPANY 184 15
CASH RESERVES 63 5
- -------------------------------------------------------
TOTAL $1,205 100%
- -------------------------------------------------------
</TABLE>
The absolute returns experienced by the equity markets during the recent bull
market (an average annual return of +16% per year during the past three years)
continue to exceed the long-term historical return on stocks of about +10%.
There is virtually no question that such extraordinary returns will not persist
indefinitely. Nonetheless, we would recommend continued exposure to equities as
part of a balanced program that includes bonds and cash reserves as
appropriate.
The fiscal year of Vanguard Equity Income Fund has reached its half-way
point on an auspicious note. We look forward to reporting to you in further
detail in our 1996 Annual Report six months hence.
Sincerely,
/s/JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
John J. Brennan
President
April 17, 1996
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, 1996) 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 +29.09% +14.02% +13.20% +7.87% +5.33%
</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> 4
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, 1996. 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> <C>
INITIAL (3/88) $10.00 -- -- $10.00 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
1988 10.58 -- $0.24 10.83 + 5.8% +2.5% + 8.3% + 3.2%
- ----------------------------------------------------------------------------------------------------------------------------
1989 13.07 $0.02 0.48 13.95 + 23.8 +5.0 + 28.8 + 33.0
- ----------------------------------------------------------------------------------------------------------------------------
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 + 31.2
- ----------------------------------------------------------------------------------------------------------------------------
1992 12.81 0.10 0.65 16.58 + 6.4 +5.9 + 12.3 + 11.1
- ----------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------
1996 (3/31) 17.05 0.17 0.32 27.05 + 10.1 +2.0 + 12.1 + 11.7
- ----------------------------------------------------------------------------------------------------------------------------
LIFETIME +170.5% +208.2%
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 13.2% + 15.1%
- ----------------------------------------------------------------------------------------------------------------------------
</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> 5
REPORT FROM THE INVESTMENT ADVISER
The stock market continued its upward surge during the past six months, adding
to its remarkable ascent since the latter part of 1994. Vanguard Equity Income
Fund outperformed both the average equity income fund and the Standard & Poor's
500 Stock Index during the six months ended March 31, 1996. The Fund also
outperformed the average equity income fund over the past 12 months, but fell a
little short of the S&P 500. For the last three months, however, the Fund has
underperformed both our peers and the S&P 500. The results are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
--------------------------
PERIODS ENDED 3/31/96
--------------------------
THREE SIX TWELVE
MONTHS MONTHS MONTHS
- -------------------------------------------------------
<S> <C> <C> <C>
VANGUARD EQUITY
INCOME FUND +3.0% +12.1% +29.1%
- -------------------------------------------------------
AVERAGE EQUITY
INCOME FUND +4.5% +10.6% +26.4%
STANDARD & POOR'S
500 INDEX +5.4 +11.7 +32.1
- -------------------------------------------------------
</TABLE>
A TUG OF WAR
For some time there has been a tug of war in the stock market between stocks
that do well in a subdued economy with falling interest rates and those that do
well in a strong economy with rising rates. Changes in the economic outlook
have caused the fortunes of the groups to reverse fitfully. Such a change
occurred in the early part of this fiscal year. Health-care and telephone
stocks, as well as certain interest-sensitive groups, were the mainstay of
Vanguard Equity Income Fund's performance during 1995, against a backdrop of a
slow economy and low inflation. However, the new year spawned a whole new
investment premise. Suddenly, in the early part of 1996, the economy looked
stronger and interest rates began to rise. Stock prices in many companies
sensitive to the economic cycle surged as investors anticipated a pickup in
their profitability. Health-care stocks still performed quite well, but not
relative to the more cyclical areas, and the growing uncertainties of telephone
deregulation hurt the performance of the regional telephone companies.
Vanguard Equity Income Fund has less representation in cyclical stocks
than in other areas because many cyclicals do not pay high enough dividends to
justify heavy holdings in a high-yield portfolio. This difference in
representation relative to the market is much of the reason for the
underperformance of the Fund in the first calendar quarter of 1996.
A GOOD FISHING HOLE
Vanguard Equity Income Fund, however, usually does not choose stocks simply on
the basis of economic forecast. The Fund endeavors to purchase stocks when
their yields are high and attractive relative to the yield history of the
companies and to sell them when price appreciation causes those yields to move
to low levels relative to history.
Investors sometimes fear that this consigns the Fund to a dull area of
investing which virtually guarantees underperformance. However, research
suggests quite the contrary. Recent studies show that the stocks in the S&P 500
with above-average yields, treated as a portfolio, have equaled or exceeded the
performance of the Index itself in most annual measurement periods over the
past 15 years--and at a risk level below that of the Index. This might seem
surprising since stocks with above-average yields are often among the slow
growers in the Index. However, these out-of-favor companies with depressed
profitability often can be purchased at bargain prices, and offer the potential
for a return to higher profitability and the resulting capital appreciation.
High-yield out-of-favor stocks have another advantage: reinvested
dividends compound at a higher rate, giving a powerful boost to total return.
Far from consigning investors to a stagnant backwater, high-yield common stocks
provide a good fishing hole for anyone trying to keep up with the long-running
bull market without taking high risk.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
April 16, 1996
4
<PAGE> 6
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
March 31, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (90.7%)
- ---------------------------------------------------------------------
BASIC MATERIALS (5.3%)
ARCO Chemical Co. 123,700 $ 6,417
Betz Laboratories, Inc. 35,300 1,641
Dow Chemical Co. 274,700 23,865
E.I. du Pont de Nemours & Co. 95,700 7,943
Lubrizol Corp. 16,000 472
Monsanto Co. 33,400 5,127
Potlatch Corp. 105,600 4,514
Praxair, Inc. 25,900 1,033
Union Camp Corp. 111,200 5,518
Weyerhaeuser Co. 114,200 5,267
Witco Chemical Corp. 53,900 1,900
-----------
SECTOR TOTAL 63,697
-----------
- ---------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (2.0%)
Cooper Industries, Inc. 35,000 1,365
General Electric Co. 77,400 6,028
General Motors Corp. Class H 20,400 1,290
Honeywell, Inc. 49,300 2,724
Lockheed Martin Corp. 21,900 1,662
Loral Corp. 63,500 3,111
Thomas & Betts Corp. 58,600 4,395
WMX Technologies Inc. 106,800 3,391
-----------
SECTOR TOTAL 23,966
-----------
- ---------------------------------------------------------------------
CONSUMER CYCLICALS (7.0%)
Deluxe Corp. 213,900 6,711
The Walt Disney Co. 28,000 1,788
The Dun & Bradstreet Corp. 268,000 16,247
Eastman Kodak Co. 130,350 9,255
Ford Motor Co. 90,000 3,094
John H. Harland Co. 157,150 3,457
ITT Industries, Inc. 92,000 2,346
Kmart Corp. 509,200 4,774
May Department Stores Co. 56,100 2,707
The McGraw-Hill Cos. 40,000 3,470
J.C. Penney Co., Inc. 240,000 11,940
Reader's Digest Assn., Inc. Class A 90,000 4,252
Tribune Co. 32,600 2,148
*U S WEST Media Group 242,400 5,000
Wal-Mart Stores, Inc. 93,300 2,158
Woolworth Corp. 319,800 4,997
-----------
SECTOR TOTAL 84,344
-----------
- ---------------------------------------------------------------------
CONSUMER STAPLES (8.0%)
American Brands, Inc. 441,900 18,725
Anheuser-Busch Co., Inc. 68,200 4,595
Avon Products, Inc. 31,100 2,667
The Clorox Co. 62,000 5,340
The Coca-Cola Co. 20,000 1,653
Earthgrains Co. 2,728 82
General Mills, Inc. 96,300 5,622
H.J. Heinz Co. 163,400 5,413
Nabisco Holdings Corp. Class A 36,900 1,208
Philip Morris Cos., Inc. 345,850 30,348
The Quaker Oats Co. 125,000 4,172
RJR Nabisco Holdings Corp. 33,500 1,013
SuperValu Inc. 24,200 747
Tambrands, Inc. 167,400 7,826
UST Inc. 232,600 7,414
-----------
SECTOR TOTAL 96,825
-----------
- ---------------------------------------------------------------------
ENERGY (14.3%)
Amoco Corp. 151,000 10,910
Ashland Inc. 44,500 1,708
Atlantic Richfield Co. 202,400 24,086
Chevron Corp. 494,500 27,754
Exxon Corp. 317,800 25,940
McDermott International, Inc. 94,300 1,815
Mobil Corp. 165,500 19,177
Oryx Energy Co. 93,300 1,294
Phillips Petroleum Co. 139,100 5,494
Royal Dutch Petroleum Co. ADR 63,200 8,927
Sun Co., Inc. 131,591 3,800
Texaco Inc. 371,700 31,966
USX-Marathon Group 459,000 8,836
-----------
SECTOR TOTAL 171,707
-----------
- ---------------------------------------------------------------------
FINANCIAL (16.4%)
Aetna Life & Casualty Co. 115,900 8,750
H.F. Ahmanson & Co. 492,900 11,953
American Express Co. 87,400 4,315
American General Corp. 333,900 11,520
Banc One Corp. 219,050 7,804
Bankers Trust New York Corp. 143,500 10,171
Barnett Banks, Inc. 65,800 4,096
Beneficial Corp. 17,700 1,020
Boatmen's Bancshares, Inc. 159,900 6,276
CIGNA Corp. 23,000 2,628
Citicorp 56,600 4,528
CoreStates Financial Corp. 187,600 7,950
First Chicago NBD Corp. 135,700 5,632
First Union Corp. 132,400 8,010
Fleet Financial Group, Inc. 127,200 5,152
Great Western Financial Corp. 513,100 12,379
KeyCorp 125,700 4,855
Lincoln National Corp. 261,900 13,291
Marsh & McLennan Cos., Inc. 89,500 8,312
Meditrust 55,000 1,863
Mellon Bank Corp. 206,650 11,392
J.P. Morgan & Co., Inc. 177,300 14,716
</TABLE>
5
<PAGE> 7
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------
<S> <C> <C>
NationsBank Corp. 54,500 $ 4,367
PNC Bank Corp. 312,500 9,609
SAFECO Corp. 108,300 3,628
Sizzlers Property Investors, Inc. 57,500 453
U.S. Bancorp 152,200 5,174
Unitrin Inc. 60,000 2,760
Wachovia Corp. 106,700 4,774
-----------
SECTOR TOTAL 197,378
-----------
- ---------------------------------------------------------------------
HEALTH CARE (12.5%)
American Home Products Corp. 285,400 30,930
Baxter International, Inc. 175,300 7,932
Bristol-Myers Squibb Co. 348,000 29,798
Glaxo Wellcome PLC ADR 155,600 3,909
Eli Lilly & Co. 500,800 32,552
Merck & Co., Inc. 249,200 15,513
Pharmacia & Upjohn, Inc. 572,025 22,810
Pharmacopeia, Inc. 38,000 926
Warner-Lambert Co. 64,600 6,670
-----------
SECTOR TOTAL 151,040
-----------
- ---------------------------------------------------------------------
TECHNOLOGY (1.1%)
General Motors Corp. Class E 78,078 4,450
International Business
Machines Corp. 33,600 3,734
*Seagate Technology 70,658 3,869
Varian Associates, Inc. 21,200 1,057
-----------
SECTOR TOTAL 13,110
-----------
- ---------------------------------------------------------------------
TRANSPORT & SERVICES (.3%)
Burlington Northern Santa Fe Corp. 20,759 1,705
Union Pacific Corp. 34,100 2,340
-----------
SECTOR TOTAL 4,045
-----------
- ---------------------------------------------------------------------
UTILITIES (21.9%)
AT&T Corp. 18,400 1,127
Allegheny Power System, Inc. 314,700 9,559
Ameritech Corp. 280,200 15,271
Baltimore Gas & Electric Co. 261,600 7,227
Bell Atlantic Corp. 287,500 17,753
BellSouth Corp. 295,700 10,941
Central & South West Corp. 280,500 7,994
Consolidated Edison Co. of
New York, Inc. 96,700 3,082
Consolidated Natural Gas Co. 260,800 11,345
Dominion Resources, Inc. 104,300 4,133
Duke Power Co. 92,700 4,681
Edison International 362,200 6,203
FPL Group, Inc. 86,200 3,901
GTE Corp. 589,300 25,856
NICOR, Inc. 201,600 5,393
Northeast Utilities 150,000 2,963
Northern States Power Co. 68,700 3,349
NYNEX Corp. 487,950 24,337
Oklahoma Gas & Electric Co. 133,700 5,331
PECO Energy Corp. 43,000 1,145
PP&L Resources Inc. 209,000 5,094
Pacific Enterprises 130,500 3,377
Pacific Telesis Group 406,600 11,232
PacifiCorp 467,000 9,749
Potomac Electric Power Co. 196,400 5,131
Public Service Enterprise
Group Inc. 287,600 7,909
SCANA Corp. 190,600 5,242
Southern New England
Telecommunications Corp. 53,600 2,157
TECO Energy, Inc. 189,300 4,709
Texas Utilities Co. 164,900 6,823
Union Electric Co. 171,700 7,040
U S WEST Communications Group 464,350 15,032
Western Resources, Inc. 49,000 1,494
Wisconsin Energy Corp. 263,100 7,464
-----------
SECTOR TOTAL 264,044
-----------
- ---------------------------------------------------------------------
MISCELLANEOUS (1.9%)
Corning, Inc. 78,700 2,755
Hanson PLC ADR 513,400 7,701
Minnesota Mining &
Manufacturing Co. 93,800 6,085
Ogden Corp. 340,700 6,644
-----------
SECTOR TOTAL 23,185
-----------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $800,867) 1,093,341
- ---------------------------------------------------------------------
PREFERRED STOCKS (1.7%)
- ---------------------------------------------------------------------
Atlantic Richfield Cvt. 9.00% 110,000 3,163
Catellus Development Cvt. $3.625 60,000 2,880
Crown Cork & Seal Cvt. Pfd. 4.50% 60,000 2,835
FHP International Corp. Pfd. A 150,000 4,181
Federal Mogul Cvt. $3.875 15,000 863
Globalstar Telecommunications
Pfd. 6.50% 25,000 1,188
Houghton Mifflin Cvt. 6.00% 23,900 2,079
McDermott International
Cvt. $2.875 17,500 665
Westingthouse Electric Cvt. $1.30 140,000 2,537
- ---------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $18,733) 20,391
- ---------------------------------------------------------------------
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (.6%)
- --------------------------------------------------------------------
Centocor Inc.
7.25%, 2/1/01 $ 1,775 $ 2,299
Riverwood International
6.75%, 9/15/03 1,400 1,610
Roche Holdings, Inc.
0.00%, 4/20/10 800 357
Time Warner Inc.
7.301%, 12/17/12 2,600 930
Unisys Corp.
8.25%, 3/15/06 1,885 2,068
- --------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $6,369) 7,264
- --------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (7.3%)
- --------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.40%, 4/1/96
(Cost $87,938) 87,938 87,938
- --------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $913,907) 1,208,934
- --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- --------------------------------------------------------------------
Other Assets--Notes C and E 15,492
Liabilities--Note E (19,031)
----------
(3,539)
- --------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------
Applicable to 70,701,191 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,205,395
- --------------------------------------------------------------------
NET ASSET VALUE PER SHARE $17.05
====================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
AT MARCH 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------
<S> <C> <C>
PAID IN CAPITAL $ 881,790 $12.48
UNDISTRIBUTED NET
INVESTMENT INCOME 9,923 .14
ACCUMULATED NET
REALIZED GAINS 18,655 .26
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE D 295,027 4.17
- -------------------------------------------------------------------
NET ASSETS $1,205,395 $17.05
- -------------------------------------------------------------------
</TABLE>
7
<PAGE> 9
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1996
(000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,201
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,670
- -------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . 22,871
- -------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . $1,022
Performance Adjustment . . . . . . . . . . . . . . . . . . . (90) 932
-----
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . 1,285
Marketing and Distribution . . . . . . . . . . . . . . . . . 95 1,380
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . 32
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . 23
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 32
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 12
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . 2
- -------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 2,420
Expenses Paid Indirectly--Note C . . . . . . . . . (80)
- -------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . 2,340
- -------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 20,531
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . 20,146
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . 81,459
- -------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $122,136
=================================================================================================
</TABLE>
8
<PAGE> 10
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MARCH 31, 1996 September 30, 1995
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,531 $ 38,760
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,146 6,800
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . 81,459 155,649
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . 122,136 201,209
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . (21,312) (37,074)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,869) (5,992)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . (32,181) (43,066)
- ---------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--NOTE A . . . . . . . . . . . . . . . . 1,391 (1,342)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . 122,250 77,635
--In Lieu of Cash Distributions . . . . . . . . . . . . . . . 28,696 37,534
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 102,261 50,383
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . (56,889) (138,439)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . (49,664) (117,142)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . . 146,654 (90,029)
- ---------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 238,000 66,772
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . 967,395 900,623
- ---------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,205,395 $967,395
=====================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $.32 $.58
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . $.17 $.09
- ---------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,624 9,266
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . 1,717 2,741
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,437) (18,631)
- ---------------------------------------------------------------------------------------------------------------------
8,904 (6,624)
- ---------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . . $ 9,923 $ 9,313
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $15.65 $13.16 $14.62 $12.81 $12.14 $10.36
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .31 .60 .59 .59 .59 .65
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . 1.58 2.56 (.92) 1.81 .83 1.99
------ ------ ------ ------ ------ -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . . 1.89 3.16 (.33) 2.40 1.42 2.64
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.32) (.58) (.61) (.59) (.65) (.79)
Distributions from Realized Capital Gains . . . . (.17) (.09) (.52) -- (.10) (.07)
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.49) (.67) (1.13) (.59) (.75) (.86)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $17.05 $15.65 $13.16 $14.62 $12.81 $12.14
==========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +12.15% +24.77% -2.19% +19.17% +12.26% +26.46%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $1,205 $967 $901 $1,106 $778 $518
Ratio of Expenses to Average Net Assets . . . . . . . .44%*+ .47%+ .43% .40% .44% .46%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 3.75%* 4.27% 4.41% 4.39% 4.74% 5.52%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 27%* 31% 18% 15% 13% 9%
Average Commission Rate Paid . . . . . . . . . . . . $.0605++ N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The 1996 and 1995 Ratios of Expenses to Average Net
Assets were .43% and .45%, respectively, after including these reductions. See
Note C.
++Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
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.
10
<PAGE> 12
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,
Spare, Kaplan, Bischel & Associates and John A. Levin & Co., Inc. advisory fees
calculated at an annual percentage rate of average net assets. The basic fees
thus computed for Spare, Kaplan, Bischel & Associates are subject to quarterly
adjustments based on performance relative to the Standard & Poor's/BARRA Value
Index; such fees for John A. Levin & Co., Inc. are subject to quarterly
adjustments based on performance relative to the Standard & Poor's 500 Stock
Index. For the period ended March 31, 1996, the aggregate advisory fee
represented an effective annual rate of .19 of 1% of average net assets before
a decrease of $90,000 (.02% of 1%) based on performance.
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, 1996, the Fund had contributed capital of $130,000 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 period ended March 31, 1996, directed
brokerage arrangements reduced the Fund's expenses by $80,000 (an annual rate
of .01 of 1% of average net assets).
D. During the six months ended March 31, 1996, the Fund made purchases of
$242,167,000 and sales of $136,120,000 of investment securities other than U.S.
Government securities and temporary cash investments. At March 31, 1996,
unrealized appreciation for financial reporting and Federal income tax purposes
aggregated $295,027,000 of which $306,318,000 related to appreciated securities
and $11,291,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at March 31, 1996,
was $6,171,000 for which the Fund had received cash collateral of $6,591,000.
11
<PAGE> 13
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 Selected Value Portfolio
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 Portfolio
Vanguard/Wellesley Income Fund
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GROWTH FUNDS
Vanguard/Morgan Growth Fund
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Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
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Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
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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:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q652-3/96
