VANGUARD(R)EQUITY INCOME FUND
ANNUAL REPORT
[PHOTO OF SHIP]
September 30, 2000
[A MEMBER OF THE VANGUARD GROUP(R)LOGO]
<PAGE>
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual report to make it
even more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
** Vanguard Equity Income Fund earned 6.3% during the 12 months ended September
30, 2000, marking the sixth consecutive fiscal year in which the fund
recorded a positive return.
** Value stocks--including the relatively high-yielding issues that Equity
Income favors--rebounded during the second half of the fiscal year, but
generally trailed growth stocks for the full 12 months.
** The fund's largest industry concentrations--utilities and financial
services--posted disparate results: Utility stocks were up marginally, while
financial stocks soared.
CONTENTS
1 Letter from the Chairman
6 Report from the Advisers
9 Fund Profile
10 Glossary of Investment Terms
11 Performance Summary
12 Report on After-Tax Returns
13 Financial Statements
22 Report of Independent Accountants
<PAGE>
LETTER
from the Chairman
Fellow Shareholders,
VANGUARD EQUITY INCOME FUND returned 6.3% during the fiscal year ended September
30. Although a strong 7.4% return in the July-September quarter narrowed the gap
between our return and that of the average equity income fund, our full-year
performance was not quite up to snuff.
2000 TOTAL RETURNS FISCAL YEAR ENDED
SEPTEMBER 30
----------------------------------------------------------
Vanguard Equity Income Fund 6.3%
Average Equity Income Fund* 8.2
Russell 1000 Value Index 8.9
Wilshire 5000 Index 17.7
S&P 500 Index 13.3
----------------------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table pre-sents the 12-month return of the fund and its
average peer. We also list the returns of three unmanaged market indexes: the
Russell 1000 Value Index, which we consider the "best fit" benchmark for the
Equity Income Fund; the Wilshire 5000 Total Market Index, a proxy for the entire
U.S. stock market; and the Standard & Poor's 500 Index, a well-known benchmark
for large-capitalization stocks.
The fund's total return (capital change plus reinvested dividends) is based
on a decrease in net asset value from $24.14 per share on September 30, 1999, to
$24.06 per share on September 30, 2000, and is adjusted for dividends totaling
$0.64 per share paid from net investment income and a distribution of $0.87 per
share paid from net realized capital gains.
If you own Vanguard Equity Income Fund in a taxable account, you may wish
to review our report of the fund's after-tax returns on page 12.
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------------------
ONE THREE FIVE
YEAR YEARS YEARS
------------------------------------------------------------------------------
STOCKS
S&P 500 Index (Large caps) 13.3% 16.4% 21.7%
Russell 2000 Index (Small caps) 23.4 6.0 12.4
Wilshire 5000 Index (Entire market) 17.7 15.6 20.5
MSCI EAFE Index (International) 3.4 7.7 8.9
------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.0% 5.9% 6.5%
Lehman 10 Year Municipal Bond Index 6.4 4.8 5.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.6 5.2 5.2
==============================================================================
CPI
Consumer Price Index 3.5% 2.5% 2.5%
------------------------------------------------------------------------------
FINANCIAL MARKETS IN REVIEW
On balance,the U.S. stock and bond mar-kets turned in solid results during the
12 months ended September 30, as indicated in
1
<PAGE>
the table at the bottom of page 1. For stocks, however, the fiscal year
consisted of two very different halves.
--------------------------------------------------------------------------------
Market leadership switched from growth to value stocks late in the fiscal year.
--------------------------------------------------------------------------------
During the first six months, growth stocks--especially from the technology
and telecommunication equipment sectors--skyrocketed, making the solid gains of
value stocks look puny by comparison. The Russell 1000 Growth Index, comprising
the growth stocks among the 1,000 largest U.S. stocks, returned 34.1%, while the
Russell 1000 Value Index gained 5.9%.
Then the climate changed. Investors grew anxious about signs of a slowing
economy, and prices of many tech-related stocks declined sharply. From March 31
through September 30, value stocks outpaced growth issues: The Russell 1000
Value Index returned 2.8%, while its growth counterpart recorded a -7.9%
decline.
When the dust settled after the market's bumpy ride, the overall market, as
measured by the Wilshire 5000 Index, had a 12-month return of 17.7%--well above
the long-run average return of 11% to 12% annually for stocks. The performance
consisted of a first-half gain of 23.2% followed by a second-half loss of -4.4%.
In another switch, small- and mid-cap stocks easily outpaced their large-cap
counterparts during the fiscal year. The small-cap Russell 2000 Index returned
23.4% for the 12 months, 10.1 percentage points ahead of the return of the
large-cap S&P 500 Index, which accounts for about 75% of the market value of
U.S. stocks.
Volatility and wide variations in returns were the story within market
sectors, too. Within the S&P 500 Index, the leading group was oil exploration
and service companies in the "other energy" category, which returned about 57%.
Big gains for makers of telecommunications, semiconductor, and electronic
equipment propelled the producer durables sector to an average gain of about
34%. Financial services stocks within the S&P 500 also gained about 34%, while
the health care and technology sectors posted 12-month returns of 25% and 21%,
respectively.
The poorest result, by far, was the average return of about -20% from the
materials & processing group (mainly chemical, paper, steel, aluminum, and
mining companies). This sector was hurt by higher costs for energy, tough
foreign competition, fears of overcapacity, and expectations of slowing demand.
The utilities sector posted a return of -10%, due largely to declines for
telephone companies, which have huge capital-spending needs and face fierce
price competition in formerly protected lines of business.
The overall stock market's climb came despite higher short-term interest
rates. Yields on 3-month U.S. Treasury bills rose 1.36 percentage points during
the 12 months, in line with the Federal Reserve Board's 1.25-point increase in
the federal funds rate. The Fed boosted short-term rates in an attempt to cool
the economy to stave off inflation.
2
<PAGE>
For longer-term securities, results varied widely. A burgeoning federal
budget surplus reduced the supply of U.S. Treasury securities, and yields of
U.S. Treasury bonds were down slightly for the fiscal year: The 30-year
Treasury's yield fell from 6.05% to 5.89%. However, corporate bond issuance was
brisk, putting downward pressure on prices and causing yields to rise.The
overall investment-grade bond market, which includes Treasuries, government
agency bonds, and corporate issues, returned 7.0%, as measured by the Lehman
Aggregate Bond Index.
For lower-quality bonds, yields rose and prices fell significantly, as
investors grew wary of the ability of heavily indebted companies to service
their debt in a slowing economy. The Lehman High Yield Bond Index returned a
scant 1.0% during the fiscal year, as price declines of about -8.0% offset
nearly all of the 9.0% income return for junk bonds.
FISCAL 2000 PERFORMANCE OVERVIEW
Vanguard Equity Income Fund's 6.3% return in the fiscal year ended September 30
was modestly behind the return for our peer-group and index benchmarks. That
said, our performance was much farther behind broad market averages that were
driven by the first-half surge in technology and telecommunications equipment
stocks.
Nonetheless, your fund's solid performance late in the fiscal year--when
many tech stocks were crashing--highlighted the defensive qualities that a
portfolio of high-yielding stocks can possess. We thank our shareholders for
their patience during a period when value stocks with above-average dividend
yields were out of favor. Indeed, at times it seemed that the markets had
written off dividend income as inconsequential. But the compounding effect of
dividend income remains a powerful force in shaping long-term total returns from
stocks. Further, we believe that a well-diversified portfolio has exposure to
both growth stocks and value stocks, such as those held by Equity Income Fund.
Growth stocks have led the market during most of the past several years, but, if
history repeats itself, we expect value stocks to also enjoy periods of
dominance, as they have in the past.
TOTAL ASSETS MANAGED SEPTEMBER 30, 2000
$ MILLION PERCENT
----------------------------------------------------------
Newell Associates $1,245 51%
John A. Levin & Company, Inc. 575 24
Wellington Management Company, LLP 490 20
Cash Investments* 110 5
----------------------------------------------------------
Total $2,420 100%
----------------------------------------------------------
*This cash is invested by The Vanguard Group in equity
index futures to simulate investment in stocks;
each adviser also maintains a modest cash position.
Our shortfall versus broad market averages in fiscal 2000 was largely due
to differences in sector holdings, which in turn were influenced by the fund's
focus on
3
<PAGE>
higher-yielding stocks. For example, Equity Income Fund's average technology
stake was less than 2% of assets because most tech stocks pay little or no
dividends. By contrast, the tech sector accounted for nearly 27% of the S&P 500
Index and nearly 11% of the average equity income fund's assets. Given the
sector's 21% return, any underweighting in this area hurt.
Compared with the S&P 500 Index, our results were hurt by our larger stake
in utilities and materials & processing stocks, both of which were laggards. In
the utility group, we offset this disadvantage with good stock selection (our
utility stocks generated a 3% return, versus -10% for those in the S&P 500). But
our materials stocks fared even worse than the sector's -20% average return.
Financial services, one of the fiscal year's strongest performers, was the
fund's second-largest industry weighting, averaging 19% of equity assets. This
helped in relation to the S&P 500 Index, where financial stocks had an average
weighting of about 14%, but was a modest disadvantage in relation to the Russell
1000 Value Index, which had a 31% weighting in financial stocks.
As you know, the fund employs three investment advisers, each of which uses
its own methods for selecting securities. The table on page 3 shows the current
allocation of assets among the advisers.
LONG-TERM PERFORMANCE OVERVIEW
A mutual fund's performance is best measured over the long haul. To that end,
the table below presents the average annual returns for your fund, the average
equity income fund, and three market benchmarks. It also presents the results of
hypothetical $10,000 investments made ten years ago in the fund, its average
peer, and the indexes.
The Equity Income Fund's advantage over the average competitor amounted to
more than $3,100 over the decade. Our record versus the unmanaged index
benchmarks is not as good. The Russell 1000 Value Index is a fair yardstick for
us, although not a precise fit, since some of its constituent stocks do not pay
dividends and are thus off-limits to your fund. The Wilshire 5000 and S&P 500
indexes, of course, contain value and growth stocks--an advantage during the
past decade, when growth stocks were the best performers.
TOTAL RETURNS TEN YEARS ENDED
SEPTEMBER 30, 2000
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
--------------------------------------------------------------------
Vanguard Equity Income Fund 15.7% $42,910
Average Equity Income Fund 14.8 39,756
Russell 1000 Value Index 17.9 51,796
Wilshire 5000 Index 19.3 58,303
S&P 500 Index 19.4 59,081
--------------------------------------------------------------------
One factor--operating costs--largely explains both our margin over our peer
fund group and part of our shortfall versus our index benchmark. Vanguard Equity
Income Fund's expense ratio is
4
<PAGE>
0.43%, or $4.30 per $1,000 of assets, versus the 1.38% ($13.80 per $1,000)
charged by the average equity income fund. Our expense advantage was almost
precisely equal to our average margin over the peer group. Indexes, on the other
hand, exist only on paper and don't incur operating or transaction costs
(brokerage commissions, bid-asked spreads, and so on). Real-world funds do face
these costs, which explain roughly one-third of our shortfall versus the Russell
1000 Value Index.
Our goal is to provide long-term returns that beat those of both our peer
funds and our index benchmark. We hope to improve our relative returns in future
years, but believe that it's unlikely that we or the market will match the
absolute returns seen during the past ten years. The stock market's performance
during the 1990-2000 decade was one of its best ever; returns were far above
long-term averages of 11% to 12% annually. We caution against extrapolating the
returns of the past decade in your plans. If you make modest assumptions and the
market exceeds them, then you'll just get to your objectives sooner. That's not
a bad outcome.
IN SUMMARY
The financial markets amply demonstrated the importance of diversification
during the past 12 months. Just when it seemed that a single hot sector of the
stock market was the only place to be, technology-related stocks swooned and
value stocks came to the fore. Bonds--the asset class many investors forgot in
the excitement of the 1990s bull market in stocks--posted solid results.
The one safe prediction for the next 12 months is that markets will
continue to be quite unpredictable. But uncertainty and volatility--risk, to use
a four-letter word--are inescapable for investors. We believe that a balanced
investment program--a mix of short-term investments, bonds, and both growth and
value stocks--can help you manage risk. After considering your objectives, time
horizon, financial situation, and tolerance for market fluctuations, set a
course and stay on it.
Sincerely,
/S/ JOHN J. BRENNAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Chairman and Chief Executive Officer
October 17, 2000
5
<PAGE>
REPORT
from the Advisers
VANGUARD EQUITY INCOME FUND'S 6.3% return during the fiscal year ended September
30, 2000, trailed the returns of the average equity income fund and the Russell
1000 Value Index by 1.9 and 2.6 percentage points, respectively.
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The advisers believe that a fund made up of undervalued stocks, most of which
offer high dividend yields compared to their past levels and to the overall
market, can provide a high level of current income, the potential for capital
appreciation, and below-average price volatility for a stock mutual fund.
--------------------------------------------------------------------------------
The fund's performance improved markedly in the second half of the fiscal
year, as traditional value stocks and sectors (capital goods, energy, financial
services, and electric utilities) found favor with investors. Earlier in the
year, as in 1999, technology stocks had soared and nearly everything else
languished, including dividend-paying stocks suitable for equity income
portfolios.
THE INVESTMENT ENVIRONMENT
Given the high expectations inherent in the prices of many stocks, the recent
slowing of growth in corporate profits has made the investment environment
somewhat precarious. The U.S. economy is slowing because of a combination of
higher interest rates, higher fuel prices, and a deceleration in growth for the
technology sector. As the economy slows, corporations have a harder time
increasing revenue. Yet higher energy prices and labor costs are putting upward
pressure on companies' expenses. How these forces will play out is unclear, but
the momentum-driven investment environment that we saw over the past several
years is being severely challenged.
THE FUND'S SUCCESSES
The fund's significant weighting in health care stocks (about 12% of assets
during the year, versus about 5% for the Russell 1000 Value Index and about 10%
for the S&P 500 Index) was a plus, as this was one of the market's strongest
sectors. HCA-Healthcare, Pharmacia, and Baxter were stellar performers.
Within the utility sector--the fund's largest industry weighting during
fiscal 2000--we outperformed our benchmarks in part because we had a larger
stake in electric and gas utilities, which fared better than telephone
utilities. The fund's emphasis on financial stocks also helped, since this group
generally performed well. Strong performers for your fund included Marsh &
McLennan, Mellon, and J.P. Morgan.
6
<PAGE>
THE FUND'S SHORTFALLS
A key reason that Vanguard Equity Income Fund's return fell short of index
benchmarks and, to a lesser extent, other equity income funds was our extremely
light exposure to the technology sector and to tech-related companies in the
producer durables group. Our paucity of tech holdings hurt because, although the
sector tumbled late in the fiscal year, it did not surrender all of the huge
gains won early in the year. We have seen consistently in recent years that when
stocks suitable for equity income funds (good-quality firms paying relatively
high dividend yields) have performed well, tech stocks have been weak.
Conversely, our kind of stocks have lagged badly when tech stocks have been
strong.
The fund also suffered from a relatively large stake in basic material
stocks, which got hammered by higher energy prices and by concern that demand
for these companies' products would fall as the economy slowed. Sharp declines
in telecom stocks also hurt, particularly in the second half of the year.
A list of significant changes in our holdings, with comments, is on page 8.
THE FUND'S POSITION
Overshadowed by the tech sector's popularity, many industry groups have already
had significant price declines and are at much more rational valuations. An
example is the materials & processing group, where prices may have fallen
further than is justified by the deceleration in global economic growth. In
comparison with the broad market, we remain overweighted in the materials &
processing, financial services, and energy sectors. These groups are likely to
benefit if technology companies are unable to maintain their rapid growth rates.
Technology stocks make up less than 2% of the fund, versus more than 25%
for the S&P 500 Index and about 5% for the Russell 1000 Value Index. We remain
underweighted in tech stocks. Despite the correction in tech stocks in the
second half of the fiscal year, even those that pay some dividends are at prices
that are too high for a conservative equity income fund.
In seeking to balance risk and the opportunity for return, we continue to
believe in broad diversification and continue to seek solid income from our
holdings. The average dividend yield of our holdings is 2.5%, more than twice
the 1.1% yield of the S&P 500 Index.
Newell Associates
John A. Levin & Company, Inc.
Wellington Management Company, LLP
October 13, 2000
7
<PAGE>
PORTFOLIO CHANGES FISCAL YEAR ENDED SEPTEMBER 30, 2000
ADDITIONS COMMENTS
--------------------------------------------------------------------------
Hewlett-Packard* One of the best growth profiles
among established tech companies.
--------------------------------------------------------------------------
Sara Lee An inexpensive food stock whose
restructuring should lead to relatively
predictable earnings growth.
--------------------------------------------------------------------------
U.S. Bancorp A high-quality super-regional bank
selling at an attractive price.
--------------------------------------------------------------------------
Kimberly-Clark Solid earnings outlook and good
management execution.
--------------------------------------------------------------------------
REDUCTIONS
--------------------------------------------------------------------------
BP Amoco Achieved target price.
--------------------------------------------------------------------------
Exxon Mobil Reduced holding as price appreciated.
--------------------------------------------------------------------------
Pharmacia Reduced stake as price approached target.
--------------------------------------------------------------------------
Seagate Technology** Sold after strong price rise made
it fully valued.
--------------------------------------------------------------------------
*New holding in portfolio.
**Eliminated from portfolio.
See page13
for a complete
listing of the
fund's holdings.
8
<PAGE>
FUND PROFILE As of September 30, 2000
for Equity Income Fund
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 10.
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PORTFOLIO CHARACTERISTICS
WILSHIRE
EQUITY INCOME BEST FIT* 5000
--------------------------------------------------------------------------
Number of Stocks 169 742 6,793
Median Market Cap $31.6B $39.9B $46.8B
Price/Earnings Ratio 19.4x 20.0x 31.5x
Price/Book Ratio 3.1x 3.2x 4.7x
Yield 2.5% 1.8% 1.1%
Return on Equity 20.5% 20.4% 22.4%
Earnings Growth Rate 6.7% 11.0% 17.2%
Foreign Holdings 5.6% 0.0% 0.0%
Turnover Rate 36% -- --
Expense Ratio 0.43% -- --
Cash Investments 1.1% -- --
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--------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Exxon Mobil Corp. 3.7%
(oil)
Verizon Communications 3.6
(telecommunications)
BP Amoco PLC ADR 2.2
(oil)
SBC Communications Inc. 2.0
(telecommunications)
Bristol-Myers Squibb Co. 1.9
(pharmaceuticals)
General Electric Co. 1.8
(conglomerate)
American Home Products Corp. 1.7
(pharmaceuticals)
Pharmacia Corp. 1.6
(pharmaceuticals)
Marsh & McLennan Cos., Inc. 1.4
(financial services)
AT&T Corp. 1.4
(telecommunications)
--------------------------------------------
Top Ten 21.3%
--------------------------------------------
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VOLATILITY MEASURES
WILSHIRE
EQUITY INCOME BEST FIT* 5000
--------------------------------------------------------------------------
R-Squared 0.38 0.55 1.00
Beta 0.54 0.74 1.00
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% OF COMMON STOCKS)
WILSHIRE
EQUITY INCOME BEST FIT* 5000
--------------------------------------------------------------------------
Auto & Transportation 2.5% 3.0% 1.6%
Consumer Discretionary 5.7 9.2 12.6
Consumer Staples 8.4 7.4 4.8
Financial Services 22.6 32.0 16.7
Health Care 12.4 8.3 11.9
Integrated Oils 12.5 7.3 3.0
Other Energy 2.3 2.7 2.8
Materials & Processing 4.8 3.6 2.3
Producer Durables 3.6 3.4 3.3
Technology 1.6 4.9 27.7
Utilities 19.5 15.6 8.2
Other 4.1 2.6 5.1
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*Russell 1000 Value Index.
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INVESTMENT FOCUS
[GRID APPEARS HERE]
MARKET CAP LARGE
STYLE VALUE
--------------------------------------------------------------------------
[PHOTO OF COMPUTER]
Visit our website
www.vanguard.com
for regularly updated
fund information
9
<PAGE>
GLOSSARY
of Investment Terms
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
--------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
--------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
--------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
--------------------------------------------------------------------------------
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
--------------------------------------------------------------------------------
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
--------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
--------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
--------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
--------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
--------------------------------------------------------------------------------
10
<PAGE>
PERFORMANCE SUMMARY
for Equity Income Fund
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) SEPTEMBER 30, 1990-SEPTEMBER 30, 2000
[CHART]
EQUITY INCOME FUND RUSSELL 1000 VALUE INDEX
------------------------------------------------------------------------
1991 26.5 28.9
1992 12.3 12.4
1993 19.2 25.4
1994 -2.2 -0.7
1995 24.8 27.7
1996 18.2 17.9
1997 34.2 42.3
1998 9.5 3.6
1999 12.6 18.7
2000 6.3 8.9
------------------------------------------------------------------------
See Financial Highlights table on page 19 for dividend and capital
gains information for the past five years.
------------------------------------------------------------------------
------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE SEPTEMBER 30, 1990-SEPTEMBER 30, 2000
[CHART]
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2000 FINAL VALUE
--------------------------------- OF A $10,000
1 YEAR 5 YEARS 10 YEARS INVESTMENT
------------------------------------------------------------------------------
Equity Income Fund 6.28% 15.76% 15.68% $42,910
Average Equity Income Fund* 8.17 13.76 14.80 39,756
Russell 1000 Value Index 8.91 17.59 17.88 51,796
Wilshire 5000 Index 17.67 20.46 19.28 58,303
S&P 500 Index 13.28 21.69 19.44 59,081
------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Equity Income Fund 3/21/1988 6.28% 15.76% 11.12% 4.56% 15.68%
--------------------------------------------------------------------------------
11
<PAGE>
A REPORT
on Your Fund's After-Tax Returns
This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fund's past results only and cannot be used to predict future tax efficiency.
If you own the fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.
Income taxes can have a considerable impact on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
PRE-TAX AND AFTER-TAX PERIODS ENDED SEPTEMBER 30, 2000
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR FIVE YEARS TEN YEARS
--------------------------------------------------------
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
--------------------------------------------------------------------------------
Vanguard Equity Income
Fund 6.3% 4.1% 15.8% 13.5% 15.7% 13.3%
Average Large Value
Fund* 9.6 7.5 14.6 11.8 15.6 12.9
--------------------------------------------------------------------------------
*Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may differ
somewhat.
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We stress that because many interrelated factors affect how tax-friendly a
fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
[PHOTO OF COMPUTER]
You can use Vanguard's online after-tax
return calculator at
www.vanguard.com/?aftertax
to customize the calculation
of your after-tax return.
12
<PAGE>
FINANCIAL STATEMENTS
September 30, 2000
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
----------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND SHARES (000)
----------------------------------------------------------------------
COMMON STOCKS (92.8%)(1)
----------------------------------------------------------------------
AUTO & TRANSPORTATION (2.3%)
Ford Motor Co. 751,239 19,016
Norfolk Southern Corp. 694,358 10,155
Eaton Corp. 120,000 7,395
Union Pacific Corp. 187,700 7,297
Genuine Parts Co. 233,346 4,448
CSX Corp. 164,200 3,582
The Goodyear Tire & Rubber Co. 140,100 2,522
Visteon Corp. 60,634 917
-------------
55,332
-------------
CONSUMER DISCRETIONARY (5.3%)
Kimberly-Clark Corp. 453,175 25,293
Tribune Co. 437,200 19,073
May Department Stores Co. 671,004 13,756
Eastman Kodak Co. 277,724 11,352
Gillette Co. 303,700 9,377
Black & Decker Corp. 241,000 8,239
The McGraw-Hill Cos., Inc. 114,900 7,303
Avon Products, Inc. 168,700 6,896
J.C. Penney Co., Inc. 573,280 6,772
Sears, Roebuck & Co. 135,129 4,381
The Stanley Works 184,400 4,253
Gannett Co., Inc. 67,000 3,551
Whirlpool Corp. 84,400 3,281
Newell Rubbermaid, Inc. 138,400 3,157
International Flavors &
Fragrances, Inc. 102,400 1,869
-------------
128,553
-------------
CONSUMER STAPLES (7.8%)
Sara Lee Corp. 1,274,500 25,888
Philip Morris Cos., Inc. 870,350 25,621
Anheuser-Busch Cos., Inc. 546,200 23,111
Procter & Gamble Co. 252,800 16,938
PepsiCo, Inc. 278,900 12,829
Nabisco Holdings Corp. Class A 229,400 12,330
H.J. Heinz Co. 297,240 11,016
The Coca-Cola Co. 185,800 10,242
The Quaker Oats Co. 87,800 6,947
Bestfoods 86,701 6,308
General Mills, Inc. 172,700 6,131
The Clorox Co. 143,200 5,665
Kellogg Co. 209,100 5,058
Albertson's, Inc. 209,800 4,406
Hershey Foods Corp. 78,900 4,270
ConAgra Foods, Inc. 193,600 3,884
Campbell Soup Co. 146,500 3,791
UST, Inc. 138,900 3,177
Ralston-Ralston Purina Group 78,600 1,862
-------------
189,474
-------------
13
<PAGE>
----------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND SHARES (000)
----------------------------------------------------------------------
FINANCIAL SERVICES (21.0%)
Marsh & McLennan Cos., Inc. 264,000 $ 35,046
Bank of America Corp. 615,723 32,248
American General Corp. 348,900 27,214
U.S. Bancorp 984,749 22,403
J.P. Morgan & Co., Inc. 135,400 22,121
Washington Mutual, Inc. 518,210 20,631
Ace, Ltd. 516,000 20,253
Bank One Corp. 483,222 18,664
FleetBoston Financial Corp. 462,799 18,049
CIGNA Corp. 170,000 17,748
Aon Corp. 433,100 16,999
XL Capital Ltd. Class A 209,300 15,384
* John Hancock Financial
Services, Inc. 540,800 14,534
The Bank of New York Co., Inc. 246,400 13,814
First Union Corp. 427,530 13,761
Wachovia Corp. 240,135 13,613
Lincoln National Corp. 282,300 13,586
Equity Residential Properties
Trust REIT 280,000 13,440
KeyCorp 496,170 12,559
The Chase Manhattan Corp. 267,885 12,373
National City Corp. 544,600 12,049
PNC Financial Services Group 172,594 11,219
First Data Corp. 286,150 11,178
Mellon Financial Corp. 231,400 10,731
Equity Office Properties
Trust REIT 345,000 10,717
The Chubb Corp. 130,101 10,294
Merrill Lynch & Co., Inc. 153,632 10,140
MBIA, Inc. 140,000 9,957
St. Paul Cos., Inc. 194,833 9,608
Citigroup, Inc. 170,666 9,227
Fannie Mae 101,800 7,279
Wells Fargo Co. 123,165 5,658
Northern Trust Corp. 63,300 5,626
SAFECO Corp. 169,500 4,619
Sun Communities, Inc. REIT 110,000 3,479
Crescent Real Estate, Inc. REIT 100,000 2,231
-------------
$ 508,452
-------------
HEALTH CARE (11.5%)
Bristol-Myers Squibb Co. 795,100 45,420
American Home Products Corp. 735,000 41,573
Pharmacia Corp. 662,800 39,892
Merck & Co., Inc. 438,200 32,619
Glaxo Wellcome PLC ADR 371,700 22,465
Baxter International, Inc. 262,359 20,940
Eli Lilly & Co. 241,700 19,608
Abbott Laboratories 325,200 15,467
Johnson & Johnson 151,600 14,241
Aetna Inc. 206,200 11,972
SmithKline Beecham PLC ADR 119,600 8,207
Schering-Plough Corp. 106,600 4,957
-------------
$ 277,361
-------------
INTEGRATED OILS (11.6%)
Exxon Mobil Corp. 1,013,682 90,344
BP Amoco PLC ADR 999,926 52,996
Texaco Inc. 604,800 31,752
Royal Dutch Petroleum
Co. ADR 384,900 23,070
Chevron Corp. 268,446 22,885
Unocal Corp. 484,300 17,162
Shell Transport &
Trading Co. ADR 275,000 13,458
Conoco Inc. Class A 479,500 12,527
USX-Marathon Group 400,100 11,353
Phillips Petroleum Co. 97,100 6,093
-------------
$ 281,640
-------------
OTHER ENERGY (2.1%)
Williams Cos., Inc. 300,600 12,700
Schlumberger Ltd. 150,200 12,363
Burlington Resources, Inc. 210,000 7,731
Baker Hughes, Inc. 174,400 6,475
Sunoco, Inc. 154,000 4,148
Ultramar Diamond
Shamrock Corp. 160,900 4,083
Ashland, Inc. 110,000 3,706
-------------
$ 51,206
-------------
MATERIALS & PROCESSING (4.5%)
Dow Chemical Co. 1,103,887 27,528
E.I. du Pont de Nemours & Co. 554,027 22,957
Weyerhaeuser Co. 362,200 14,624
Alcoa Inc. 400,000 10,125
International Paper Co. 317,252 9,101
Eastman Chemical Co. 204,500 7,554
Engelhard Corp. 305,000 4,956
Temple-Inland Inc. 84,300 3,193
The Timber Co. 103,700 2,787
USX-U.S. Steel Group 170,000 2,582
Crown Cork & Seal Co., Inc. 215,923 2,308
* Energizer Holdings, Inc. 11,100 272
-------------
$ 107,987
-------------
PRODUCER DURABLES (3.3%)
Emerson Electric Co. 311,859 20,895
United Technologies Corp. 192,116 13,304
Caterpillar, Inc. 271,464 9,162
Xerox Corp. 514,700 7,753
The Boeing Co. 116,800 7,358
Cooper Industries, Inc. 200,000 7,050
Pitney Bowes, Inc. 155,700 6,140
Lockheed Martin Corp. 171,100 5,639
Deere & Co. 100,746 3,350
-------------
$ 80,651
-------------
14
<PAGE>
----------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND SHARES (000)
----------------------------------------------------------------------
TECHNOLOGY (1.5%)
Hewlett-Packard Co. 90,500 $ 8,778
Compaq Computer Corp. 286,500 7,902
Electronic Data Systems Corp. 189,400 7,860
Rockwell International Corp. 199,900 6,047
International Business
Machines Corp. 49,400 5,557
-------------
$ 36,144
-------------
UTILITIES (18.1%)
Verizon Communications 1,775,457 85,999
SBC Communications Inc. 976,372 48,819
AT&T Corp. 1,155,052 33,930
* Qwest Communications
International Inc. 657,836 31,617
BellSouth Corp. 773,604 31,138
FPL Group, Inc. 373,335 24,547
SCANA Corp. 534,027 16,488
Potomac Electric Power Co. 633,600 15,959
Southern Co. 470,910 15,275
Duke Energy Corp. 152,752 13,098
DTE Energy Co. 305,900 11,701
Pinnacle West Capital Corp. 206,900 10,526
Allegheny Energy, Inc. 272,000 10,387
Dominion Resources, Inc. 171,082 9,933
American Electric Power
Co., Inc. 250,460 9,799
Questar Corp. 317,600 8,833
Constellation Energy Group 158,150 7,868
Edison International 392,640 7,583
PECO Energy Corp. 115,000 6,965
KeySpan Corp. 172,700 6,930
NICOR, Inc. 172,700 6,250
TXU Corp. 153,096 6,066
National Fuel Gas Co. 100,000 5,606
ScottishPower PLC ADR 182,845 5,497
Xcel Energy, Inc. 147,000 4,042
Sprint Corp. 68,700 2,014
Washington Gas Light Corp. 60,000 1,612
-------------
$ 438,482
-------------
OTHER (3.8%)
General Electric Co. 753,800 43,485
Minnesota Mining &
Manufacturing Co. 288,707 26,308
Honeywell International Inc. 409,162 14,576
Fortune Brands, Inc. 147,531 3,910
Brunswick Corp. 112,100 2,046
-------------
$ 90,325
-------------
----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,518,073) $ 2,245,607
----------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.5%)
----------------------------------------------------------------------
Owens-Illinois Inc. 4.75%
Cvt. Pfd. 294,400 5,078
Crown Castle International
Corp. 6.25% Cvt. Pfd. 89,600 4,542
Loral Space & Communications
Ltd. 6.00% Cvt. Pfd. 137,200 2,641
----------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $23,463) 12,261
----------------------------------------------------------------------
FACE
AMOUNT
(000)
----------------------------------------------------------------------
CONVERTIBLE BONDS (1.1%)
----------------------------------------------------------------------
Hewlett Packard Co. Cvt.
0.00%, 10/14/2017 $ 23,000 16,747
Security Capital U.S. Realty Cvt.
2.00%, 5/22/2003 8,300 6,183
Waste Management Inc. Cvt.
4.00%, 2/1/2002 4,000 3,740
----------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $26,655) 26,670
----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.3%)(1)
----------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(2) 6.57%, 10/19/2000 6,000 5,982
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 6.55%, 11/2/2000 2,000 1,988
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.50%, 10/2/2000 145,756 145,756
----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $153,726) 153,726
----------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(Cost $1,721,917) 2,438,264
----------------------------------------------------------------------
15
<PAGE>
-----------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND (000)
-----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.7%)
-----------------------------------------------------------------------
Other Assets--Note C 16,391
Liabilities (34,582)
--------------
(18,191)
-----------------------------------------------------------------------
NET ASSETS (100%)
-----------------------------------------------------------------------
Applicable to 100,593,999 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $2,420,073
=======================================================================
NET ASSET VALUE PER SHARE $24.06
=======================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets
through the use of index futures contracts. After giving effect to
futures investments, the fund's effective common stock and temporary
cash investment positions represent 97.3% and 1.8%, respectively, of
net assets.
See Note F in Notes to Financial Statements.
(2)Securities with an aggregate value of $7,970,000 have been
segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
---------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
---------------------------------------------------------
AMOUNT PER
(000) SHARE
---------------------------------------------------------
Paid in Capital--Note E $ 1,593,940 $ 15.85
Undistributed Net
Investment Income 277 --
Accumulated Net
Realized Gains--Note E 112,533 1.12
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 716,347 7.12
Futures Contracts (3,024) (.03)
---------------------------------------------------------
NET ASSETS $2,420,073 $24.06
=========================================================
16
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
-------------------------------------------------------------------------------
EQUITY INCOME FUND
YEAR ENDED SEPTEMBER 30, 2000
(000)
-------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 67,203
Interest 10,378
Security Lending 91
-------------------------------------------------------------------------------
Total Income 77,672
-------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 4,131
Performance Adjustment (561)
The Vanguard Group--Note C
Management and Administrative 6,929
Marketing and Distribution 372
Custodian Fees 53
Auditing Fees 17
Shareholders' Reports 94
Trustees' Fees and Expenses 4
-------------------------------------------------------------------------------
Total Expenses 11,039
Expenses Paid Indirectly--Note D (458)
-------------------------------------------------------------------------------
Net Expenses 10,581
-------------------------------------------------------------------------------
NET INVESTMENT INCOME 67,091
-------------------------------------------------------------------------------
REALIZED NET GAIN
-------------------------------------------------------------------------------
Investment Securities Sold 128,252
Futures Contracts 9,516
-------------------------------------------------------------------------------
REALIZED NET GAIN 137,768
-------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (86,778)
Futures Contracts 3,598
-------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (83,180)
-------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $121,679
===============================================================================
17
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
-------------------------------------------------------------------------------
EQUITY INCOME FUND
YEAR ENDED SEPTEMBER 30,
---------------------------
2000 1999
(000) (000)
-------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 67,091 $ 75,905
Realized Net Gain 137,768 109,251
Change in Unrealized Appreciation (Depreciation) (83,180) 108,420
-------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 121,679 293,576
-------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (69,729) (78,305)
Realized Capital Gain (105,954) (87,951)
-------------------------------------------------------------------------------
Total Distributions (175,683) (166,256)
-------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 366,363 931,840
Issued in Lieu of Cash Distributions 157,861 149,024
Redeemed (1,058,890) (576,972)
-------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share
Transactions (534,666) 503,892
-------------------------------------------------------------------------------
Total Increase (Decrease) (588,670) 631,212
-------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 3,008,743 2,377,531
-------------------------------------------------------------------------------
End of Year $2,420,073 $3,008,743
===============================================================================
(1)Shares Issued (Redeemed)
Issued 15,846 37,304
Issued in Lieu of Cash Distributions 6,823 6,175
Redeemed (46,700) (23,137)
-------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding (24,031) 20,342
===============================================================================
18
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
EQUITY INCOME FUND
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a Share Outstanding Throughout Each Year 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $24.14 $22.80 $22.28 $17.69 $15.65
-------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .62 .64 .64 .64 .63
Net Realized and Unrealized Gain (Loss)on Investments .81 2.20 1.44 5.17 2.18
-------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.43 2.84 2.08 5.81 2.81
-------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.64) (.67) (.67) (.64) (.60)
Distributions from Realized Capital Gains (.87) (.83) (.89) (.58) (.17)
-------------------------------------------------------------------------------------------------------------
Total Distributions (1.51) (1.50) (1.56) (1.22) (.77)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $24.06 $24.14 $22.80 $22.28 $17.69
=============================================================================================================
TOTAL RETURN 6.28% 12.56% 9.54% 34.17% 18.22%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,420 $3,009 $2,378 $1,948 $1,309
Ratio of Total Expenses to Average Net Assets 0.43% 0.41% 0.39% 0.45% 0.42%
Ratio of Net Investment Income to Average Net Assets 2.59% 2.59% 2.80% 3.25% 3.69%
Portfolio Turnover Rate 36% 18% 23% 22% 21%
=============================================================================================================
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Equity Income Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES CONTRACTS: The fund uses S&P 500 Index and S&P MidCap 400 Index
futures contracts to a limited extent, with the objective of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Newell Associates, John A. Levin & Co., Inc., and Wellington Management
Company, llp, provide investment advisory services to the fund for fees
calculated at an annual percentage rate of average net assets. The basic fee for
John A. Levin & Co., Inc. is subject to quarterly adjustments based on
performance relative to the S&P 500 Index for the preceding three years.
20
<PAGE>
Prior to January 1, 2000, Spare, Kaplan, Bischel & Associates served as
adviser to the fund. Effective January 1, 2000, assets managed by Spare, Kaplan,
Bischel & Associates were transferred to Wellington Management Company, llp.
The Vanguard Group manages the cash reserves of the fund on an at-cost
basis.
For the year ended September 30, 2000, the aggregate advisory fee
represented an effective annual basic rate of 0.16% of the fund's average net
assets before a decrease of $561,000 (0.02%) based on performance.
C. The Vanguard Group 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 trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At September 30, 2000, the fund had contributed capital of $435,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.4% of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. The fund has asked its investment advisers to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the year ended
September 30, 2000, directed brokerage and custodian fee offset arrangements
reduced expenses by $447,000 and $11,000, respectively. The total expense
reduction represented an effective annual rate of 0.02% of the fund's average
net assets.
E. During the year ended September 30, 2000, the fund purchased $865,902,000 of
investment securities and sold $1,428,329,000 of investment securities other
than temporary cash investments.
The fund used a tax accounting practice to treat a portion of the price of
capital shares redeemed during the year as distributions from realized capital
gains. Accordingly, the fund has reclassified $17,085,000 from accumulated net
realized gains to paid in capital.
F. At September 30, 2000, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $716,347,000,
consisting of unrealized gains of $839,600,000 on securities that had risen in
value since their purchase and $123,253,000 in unrealized losses on securities
that had fallen in value since their purchase.
At September 30, 2000, the aggregate settlement value of open futures
contracts expiring in December 2000 and the related unrealized depreciation
were:
------------------------------------------------------------------------------
(000)
----------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
------------------------------------------------------------------------------
S&P 500 Index 242 $87,949 $(2,803)
S&P MidCap 400 Index 81 22,085 (221)
------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for federal income tax purposes.
21
<PAGE>
REPORT
of Independent Accountants
To the Shareholders and Trustees of Vanguard Equity Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Equity Income Fund (the "Fund") at September 30, 2000, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. 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 auditing
standards generally accepted in the United States of America, 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 at September 30, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 1, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD EQUITY INCOME FUND
This information for the fiscal year ended September 30, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $84,265,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 85.6% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
22
<PAGE>
THE VANGUARD(R)
Family of Funds
STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets
Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital
Appreciation Fund
Tax-Managed Growth and
Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock
Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term
Treasury Fund
Admiral(TM) Short-Term
Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term
Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term
Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds
(California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
23
<PAGE>
THE PEOPLE
Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
The majority of Vanguard's board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, Cummins Engine Co., and
The Mead Corp.; Trustee of Vanderbilt University.
--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Managing Director and Secretary of The Vanguard
Group, Inc.; Secretary of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
John C. Bogle
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P
MidCap400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies,
Inc. All other index names may contain trademarks and are the exclusive property
of their respective owners.
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www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q650 112000
<PAGE>
VANGUARD(R) GROWTH EQUITY FUND
ANNUAL REPORT
[PHOTO OF SHIP]
SEPTEMBER 30, 2000
[A MEMBER OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual report to make it
even more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
** Vanguard Growth Equity Fund returned 51.1% during the fiscal year ended
September 30, 2000.
**Growth Equity Fund joined The Vanguard Group on June 12.
**The fund employs an aggressive investment approach, and should be expected to
experience periods of weak performance.
CONTENTS
1 Letter from the Chairman
6 Report from the Adviser
8 Fund Profile
9 Glossary of Investment Terms
10 Performance Summary
11 Report on After-Tax Returns
12 Financial Statements
20 Report of Independent Accountants
<PAGE>
LETTER
from the Chairman
Fellow Shareholders,
This is the first of my reports to the investors in vanguard growth equity fund.
I extend a sincere welcome to shareholders who are new to Vanguard.
2000 TOTAL RETURNS FISCAL YEAR ENDED
SEPTEMBER 30
----------------------------------------------
Vanguard Growth Equity Fund 51.1%
Average Large-Cap Growth Fund* 30.3
Russell 1000 Growth Index 23.4
Wilshire 5000 Index 17.7
----------------------------------------------
*Derived from data provided by Lipper Inc.
Before June 12, 2000, Turner Investment Partners of Berwyn, Pennsylvania,
sponsored your fund and managed its investments. Under a reorganization approved
by shareholders, the fund joined The Vanguard Group on June 12. We assumed
responsibility for fund distribution and shareholder service, while Turner
remained the fund's investment adviser. Neither the fund's investment
objective--to provide long-term capital appreciation--nor its investment
strategies changed.
During the 12 months ended September 30, those strategies proved remarkably
successful, as the Growth Equity Fund posted a tremendous total return of 51.1%.
This figure is based on an increase in net asset value from $15.88 per share on
September 30, 1999, to $18.68 per share on September 30, 2000, and a
distribution of $4.52 per share in net realized capital gains. The fund did not
distribute any dividends during the period.
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2000
ONE THREE FIVE
STOCKS YEAR YEARS YEARS
-------------------------------------------------------------------------------
S&P 500 Index (Large caps) 13.3% 16.4% 21.7%
Russell 2000 Index (Small caps) 23.4 6.0 12.4
Wilshire 5000 Index (Entire market) 17.7 15.6 20.5
MSCI EAFE Index (International) 3.4 7.7 8.9
-------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.0% 5.9% 6.5%
Lehman 10 Year Municipal Bond Index 6.4 4.8 5.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.6 5.2 5.2
===============================================================================
CPI
Consumer Price Index 3.5% 2.5% 2.5%
-------------------------------------------------------------------------------
The table above compares your fund's total return with the results for
competing mutual funds and two unmanaged indexes--one that serves as a benchmark
for your fund (the Russell 1000 Growth Index) and a broader one that tracks the
performance of the overall stock market (the Wilshire 5000 Total Market Index).
As you can see, your fund shone in all comparisons.
1
<PAGE>
FINANCIAL MARKETS IN REVIEW
Stocks ended 1999 in fine fashion but proceeded in 2000 to remind investors just
how risky they can be. In five of the year's first nine months, the overall
stock market declined. Share prices were particularly volatile for smaller
stocks, which rose or fell by 10% or more in February, April, June, and August.
On balance, stocks declined slightly during the nine months ended September 30.
For the full fiscal year, however, the overall market, as measured by the
Wilshire 5000 Index, gained 17.7%. Small- and mid-capitalization stocks, as
measured by the Wilshire 4500 Completion Index, led the way, climbing 34.8%.
Bonds, as measured by the Lehman Aggregate Bond Index, rose 7.0% during the
12-month period.
Leadership within the market switched during the period. Growth
stocks--both large and small--dominated the first half of the year, but value
stocks performed better in the second half. The turning point came in March,
soon after the technology-laden Nasdaq Composite Index surpassed 5,000 for the
first time. That's when investors appeared to become worried about rising
interest rates, corporate earnings, and stock valuations. A movement toward
so-called old economy stocks helped to erase nearly one-fifth of the value of
the Nasdaq during the six months ended September 30.
--------------------------------------------------------------------------------
The domestic economy continued to expand, setting a record in the process.
--------------------------------------------------------------------------------
Amid the equity markets'gyrations, the domestic economy set a record,
concluding its 107th consecutive month of growth at the end of February, one
month better than during the expansion of 1961-1969. The economy's growth
continued throughout the fiscal year. About 6% more goods and services were
produced in the second quarter of this year than in the same period a year
earlier, even after adjusting for inflation. Slower growth was seen during the
July-September period, however, as rising interest rates slowed consumer
spending on such big-ticket items as houses and cars.
The Federal Reserve Board concluded that strong economic growth and low
unemployment--the U.S. jobless rate fluctuated around 4% of the workforce during
the fiscal year--created a high risk of rising inflation. In response, it
boosted the federal funds rate four times by a total of 125 basis points (1.25
percentage points). In all, the Fed has raised its target for short-term
interest rates by 175 basis points since June 1999. Short-term rates complied;
the yield on 90-day U.S. Treasury bills climbed 136 basis points, to 6.21%,
during the year ended September 30. However, the yield on long-term Treasuries
declined slightly, to 5.89%, as their supply dwindled.
FISCAL 2000 PERFORMANCE OVERVIEW
The Growth Equity Fund had great success during the 12 months ended September
30. The fund's 51.1% total return, which was nearly three times the
2
<PAGE>
return of the overall stock market and more than 20 percentage points better
than the average gain of peer funds, was simply terrific.
Of course, such a result is not attainable without the assumption of
considerable risk. The Growth Equity Fund's investment approach begins with a
policy of remaining "sector neutral" relative to the Russell 1000 Growth Index,
which comprises most of the 1,000 largest U.S. stocks. This means that the size
of the fund's investment in any given economic sector will roughly match that
sector's weighting in the index. (For example, the fund's 54% stake in
technology stocks at fiscal year-end was just a bit larger than the index's.)
The fund's investment adviser, Turner Investment Partners, believes that the
alternate approach--"over-" or "underweighting" sectors--leads to erratic
investment performance. The adviser seeks to avoid undue exposure to any one
company by limiting the amount of fund assets that may be invested in a single
stock. The limit is based on the company's representation in (or absence from)
the index.
--------------------------------------------------------------------------------
In an effort to capitalize on market volatility, the fund's adviser trades its
holdings extremely quickly.
--------------------------------------------------------------------------------
The net effect of these policies is a fund that emphasizes stock selection.
The adviser reasons that if it picks the best stocks in each sector, the fund
will provide relatively strong results. In an effort to capitalize on market
volatility, Turner trades its holdings extremely quickly. During the 12 months
ended September 30, for example, the fund's turnover rate was 303%. This means
that, on average, the fund held a stock for about four months. It is difficult
for any investor to consistently choose the best times to buy and sell a stock.
As a result, it must be recognized that, due to its aggressive stance, an
investment in Growth Equity Fund entails significant risk. The fund will
inevitably go through periods of weak performance on both an absolute and a
relative basis.
The fund delivered impressive results during the fiscal year ended
September 30 primarily because the adviser held the right technology stocks at
the right times. For example, a position in i2 Technologies proved rewarding.
Shares of the e-business company rose due, in part, to the European Union's
approval of the company's business-to-business Internet marketplace software.
The fund also outperformed the Russell 1000 Growth Index by sidestepping some
poor performers, such as Lucent Technologies (-53% during the fiscal year). On
the downside, an investment in Internet Capital Group (-53% during the third
quarter) detracted a bit from the fund's performance.
--------------------------------------------------------------------------------
The fund delivered impressive results primarily because the adviser held the
right technology stocks at the right times.
--------------------------------------------------------------------------------
Our discussion of the fund's fiscal-year result would not be complete if we
did not acknowledge that many of our shareholders participated only
3
<PAGE>
modestly in the fund's advance. Specifically, the fund returned 3.3%, a bit less
than the overall market and competing funds, between June 12--when the Growth
Equity Fund joined The Vanguard Group--and September 30. The fund's
reorganization, of course, had no bearing on its performance over the next 31/2
months. And in any event, nothing of consequence can be inferred from the
results of such a brief period.
LONG-TERM PERFORMANCE OVERVIEW
Of course, a fund's 12-month performance tells only part of the story. A useful
evaluation of any mutual fund requires a review of long-term performance. The
adjacent table presents the average annual returns of the Growth Equity Fund and
its comparative standards since the fund's inception date. It also presents the
results of hypothetical $10,000 investments made on March 11, 1992, in the fund,
its average competitor, and the unmanaged indexes we use to measure the fund's
performance.
TOTAL RETURNS MARCH 11, 1992,* TO
SEPTEMBER 30, 2000
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
----------------------------------------------------------------------
Vanguard Growth Equity Fund** 22.5% $56,878
Average Large-Cap Growth Fund 19.9 47,295
Russell 1000 Growth Index 20.0 47,478
Wilshire 5000 Index 18.0 41,060
----------------------------------------------------------------------
*The fund's inception date.
**Prior to June 12, 2000, the fund was organized as Turner Growth
Equity Fund.
As you can see, the Growth Equity Fund enjoys an excellent long-term
record. Our advantage over the Russell 1000 Growth Index during the eight and
one-half years amounted to $9,400. And against the broad stock market (measured
by the Wilshire 5000 Index), the fund's margin totaled nearly $16,000. Indexes
make formidable competitors because they are theoretical constructs that incur
no operating or transactions costs. The average stock mutual fund, in contrast,
operates at a cost equal to more than 1% of its net assets, and loses perhaps
another 1% of assets to transaction costs. To post the same result as an index,
then, a fund must earn a larger gross return.
Our goal is to provide long-term returns that exceed those of our
competitive measures. The fund will be aided in this effort by its relatively
low costs. As of September 30, the fund had an expense ratio (annual operating
expenses as a percentage of average net assets) of 0.74%, or $7.40, per $1,000
in assets. That's about half the 1.41% ($14.10 per $1,000) charged by our
average mutual fund peer. Because the managerial and administrative fund costs
of all mutual funds are deducted directly from the income that shareholders
would otherwise receive, our fund enjoys a head start versus funds that charge
higher expenses.
4
<PAGE>
Our significant cost advantage is due in large part to our unique corporate
structure: The Vanguard Group is owned by the Vanguard funds, which, in turn,
are owned by the funds' shareholders. The typical mutual fund firm is managed by
a company that seeks to maximize its profits. In contrast, the Vanguard funds
operate on an at-cost basis, thereby returning any potential profits to the fund
shareholder, not a management company.
IN SUMMARY
The Growth Equity Fund delivered an amazing gain during the 12 months ended
September 30. But it will not always be so rewarding. Thus, it is helpful to
remember that markets are ever cyclical and that the primary purpose of equity
investing is to meet long-term goals.
It is also prudent, we believe, to maintain one's balance. Growth stocks
certainly have their place in a balanced investment program, provided that the
program also includes short-term investments, bond funds, and stock funds that
invest in equities of various sizes and styles. For its part, Vanguard Growth
Equity Fund will provide investors with a low-cost, actively managed way to gain
exposure to large- and mid-cap growth stocks.
Sincerely,
/S/ JOHN J. BRENNAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Chairman and Chief Executive Officer
October 13, 2000
NOTICE TO SHAREHOLDERS
At a special meeting on May 22, 2000, shareholders of Turner Growth Equity Fund
(the "Turner Fund") approved a proposal to reorganize the Turner Fund into
Vanguard Growth Equity Fund. Each shareholder of the Turner Fund received one
share (or fraction of a share) of Vanguard Growth Equity Fund for each share (or
fraction of a share) owned of the Turner Fund. Shares of the two funds at the
time of the reorganization had the same net asset value. The reorganization was
approved by 8,410,948 shares, or 98.49% of those voted. In all, 99,657 shares
voted no, and 29,144 shares abstained.
5
<PAGE>
REPORT
from the Adviser TURNER INVESTMENT PARTNERS
VANGUARD GROWTH EQUITY FUND capitalized on a favorable market for growth stocks
to generate a return of 51.1% for the 12 months ended September 30, 2000. In our
estimation, good stock selection and adroit trading also helped us achieve our
excellent return, which handily beat the Wilshire 5000 Index's 17.7% gain and
the Russell 1000 Growth Index's return of 23.4%.
Much of the fund's outperformance was earned early in the period--
primarily in the final three months of 1999. During that time, the stock market
rebounded like a golf ball bouncing off a cart path. For example, the S&P 500
Index declined more than 6% during a single week in early October 1999 but
bounced back dramatically and finished the quarter with a 14.9% gain. Growth
stocks, as represented by the Russell 1000 Growth Index, benefited handsomely
from the surge, soaring 25.1% during the final three months of 1999.
Overall, large growth stocks outperformed value stocks during the 12 months
ended September 30. The Russell 1000 Growth Index's gain of 23.4% was well above
the 8.9% return of the Russell 1000 Value Index.
OUR SUCCESSES
As for our success in picking stocks, our selections in seven of the ten sectors
in which we invested during the year outperformed their corresponding Russell
1000 Growth Index sectors. Heading the list, by far, were our technology
holdings, which made up the fund's largest single sector weighting, about 50%,
and gained more than 90%. Why were we so heavily invested in technology? The
reason is simple: Tech stocks are becoming a bigger part of the Russell 1000
Growth Index. It is our policy to keep the fund's sector weightings very close
to those of the index. So as a sector grows, we follow suit.
Some of our best tech performers were stocks of broadband-related,
software, communications, and Internet-infrastructure companies, including
Applied Micro Circuits, BEA Systems, CIENA, EMC, Sun Microsystems, and Veritas
Software. Also making a notable contribution to the fund's return were our
producer durables holdings, especially semiconductor-equipment stocks.
OUR SHORTFALLS
Detracting from performance were subpar returns among our holdings in consumer
product companies. We held growth-oriented stocks with relatively high
price/earnings multiples (Coca-Cola, Procter & Gamble, Colgate-Palmolive, and
Sysco) that proved to be out of favor with investors for most of the fiscal
year. When investors weren't shunning the sector altogether
6
<PAGE>
because of its chronic lack of pricing power, they showed a preference for less
expensive, lower-risk consumer stocks.
MARKET VOLATILITY AND OUR TRADING
Turnover in the Growth Equity Fund topped 300% over the past 12 months. In our
judgment, our active trading practices helped us nail down extra return in a
market in which some stocks gained or lost half of their value in a matter of
days. Overall, stock market volatility was unprecedented. For example, during
the past 12 months, the S&P 500 Index moved up or down at least 2% during more
than one out of every five trading days. Prior to 1990, the S&P 500 moved that
sharply on just 3 out of every 100 trading days. In such a volatile environment,
it paid to be able to build or eliminate a position quickly.
In contrast to its bold actions of the past 12 months, the market has been
behaving tentatively lately: The S&P 500 moved in a circumscribed but volatile
range in the July-September quarter, declining a modest 1.0%. Growth stocks
fared far worse, and tech stocks worse still. Market pundits have attributed the
decline to rich valuations and fears that capital spending on technology will
slow next year.
THE FUND'S POSITION
We believe that the tech sector is poised to lead the market once again in the
fourth quarter of 2000 and early in 2001. In our analysis, the valuations of
many tech stocks have become more reasonable. Also, we believe that worries
about technology spending are largely unwarranted; we think tech spending will
decline little, if at all. The Growth Equity Fund remains heavily invested in
tech stocks, so it's well-positioned to exploit a tech rally. We expect no letup
in market volatility over the next 12 months. We look forward to the
continuation of the bull market and to the potentially rewarding trading
opportunities that will arise from the market's continued volatility.
Bob Turner, Chairman and Chief Investment Officer
October 12, 2000
See page 12
for a complete
listing of the
fund's holdings
7
<PAGE>
FUND PROFILE As of September 30, 2000
for Growth Equity Fund
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 9.
------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
GROWTH WILSHIRE
EQUITY BEST FIT* 5000
------------------------------------------------------------------
Number of Stocks 95 530 6,793
Median Market Cap $69.0B $87.3B $46.8B
Price/Earnings Ratio 131.1x 60.6x 31.5x
Price/Book Ratio 16.3x 11.9x 4.7x
Yield 0.1% 0.3% 1.1%
Return on Equity 25.2% 26.7% 22.4%
Earnings Growth Rate 22.0% 24.2% 17.2%
Foreign Holdings 3.0% 0.0% 0.0%
Turnover Rate 303% -- --
Expense Ratio 0.74% -- --
Cash Investments 1.4% -- --
------------------------------------------------------------------
----------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
General Electric Co. 9.7%
(conglomerate)
Cisco Systems, Inc. 7.1
(computer networks)
Pfizer, Inc. 3.9
(pharmaceuticals)
EMC Corp. 3.8
(computer technology)
Sun Microsystems, Inc. 3.4
(computer technology)
America Online, Inc. 3.0
(information services)
Oracle Corp. 3.0
(software)
Corning, Inc. 2.6
(telecommunications)
Nortel Networks Corp. 1.9
(telecommunications)
CIENA Corp. 1.6
(telecommunications)
----------------------------------
Top Ten 40.0%
----------------------------------
------------------------------------------------
VOLATILITY MEASURES
GROWTH WILSHIRE
EQUITY BEST FIT* 5000
------------------------------------------------
R-Squared 0.73 0.92 1.00
Beta 1.24 1.13 1.00
------------------------------------------------
---------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% OF COMMON STOCKS)
GROWTH WILSHIRE
EQUITY BEST FIT* 5000
---------------------------------------------------------------------
Auto & Transportation 0.0% 0.3% 1.6%
Consumer Discretionary 9.3 12.1 12.6
Consumer Staples 2.6 3.1 4.8
Financial Services 2.6 3.1 16.7
Health Care 14.3 16.2 11.9
Integrated Oils 0.0 0.0 3.0
Other Energy 1.8 2.0 2.8
Materials & Processing 0.0 0.1 2.3
Producer Durables 3.5 2.2 3.3
Technology 53.6 50.5 27.7
Utilities 2.4 2.7 8.2
Other 9.9 7.7 5.1
---------------------------------------------------------------------
*Russell 1000 Growth Index.
------------------------
INVESTMENT FOCUS
[GRID APPEARS HERE]
MARKET CAP LARGE
STYLE GROWTH
------------------------
[PHOTO OF COMPUTER]
Visit our website
www.vanguard.com
for regularly updated
fund information.
8
<PAGE>
GLOSSARY
of Investment Terms
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
--------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
--------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
--------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
--------------------------------------------------------------------------------
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
--------------------------------------------------------------------------------
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
--------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
--------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
--------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
--------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
--------------------------------------------------------------------------------
9
<PAGE>
PERFORMANCE SUMMARY
for Growth Equity Fund
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
---------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) MARCH 11, 1992-SEPTEMBER 30, 2000
[CHART]
GROWTH EQUITY FUND RUSSELL 1000 GROWTH INDEX
1992 1.9 4.7
1993 26.6 6.0
1994 -3.0 5.8
1995 20.6 32.2
1996 22.9 21.4
1997 32.6 36.3
1998 10.7 11.1
1999 38.2 34.9
2000 51.1 23.4
---------------------------------------------------------------------
See Financial Highlights table on page 17 for dividend and
capital gains information for the past five years.
---------------------------------------------------------------------
------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE MARCH 11, 1992-SEPTEMBER 30, 2000
[CHART] AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2000
---------------------------------- FINAL VALUE
SINCE OF A $10,000
1 YEAR 5 YEARS INCEPTION INVESTMENT
------------------------------------------------------------------------------
Growth Equity Fund 51.07% 30.37% 22.53% $56,878
Average Large-Cap Growth Fund* 30.33 25.06 19.92 47,295
Russell 1000 Growth Index 23.43 25.07 19.97 47,478
Wilshire 5000 Index 17.67 20.46 17.95 41,060
------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
------------------------------------------------------------------------------
----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
SINCE INCEPTION
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
Growth Equity Fund 3/11/1992 51.07% 30.37% 22.12% 0.41% 22.53%
----------------------------------------------------------------------------
10
<PAGE>
A REPORT
on Your Fund's After-Tax Returns
This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fund's past results only and should not be used to predict future tax
efficiency.
If you own the fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.
Income taxes can have a considerable impact on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
PRE-TAX AND AFTER-TAX PERIODS ENDED SEPTEMBER 30, 2000
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR FIVE YEARS SINCE INCEPTION*
--------------------------------------------------------
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
--------------------------------------------------------------------------------
Vanguard Growth Equity Fund 51.1% 40.3% 30.4% 23.8% 22.5% 18.8%
Average Large Growth Fund** 30.7 28.4 22.6 19.8 -- --
--------------------------------------------------------------------------------
*March 11, 1992.
**Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may
differ somewhat.
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses, and the net cash flow it
receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
[PHOTO OF A COMPUTER]
You can use Vanguard's online after-tax
return calculator at
www.vanguard.com/?aftertax
to customize the calculation
of your after-tax return.
11
<PAGE>
FINANCIAL STATEMENTS
September 30, 2000
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying the
composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
-------------------------------------------------------------------------
MARKET
VALUE*
GROWTH EQUITY FUND SHARES (000)
-------------------------------------------------------------------------
COMMON STOCKS (98.6%)
-------------------------------------------------------------------------
CONSUMER DISCRETIONARY (9.1%)
* America Online, Inc. 516,600 $ 27,767
The Walt Disney Co. 238,520 9,123
Home Depot, Inc. 163,110 8,655
* Commerce One, Inc. 95,810 7,521
* EchoStar Communications Corp. 117,400 6,193
* Gemstar-TV Guide
International, Inc. 62,130 5,417
* TMP Worldwide, Inc. 59,600 4,798
* CDW Computer Centers, Inc. 57,690 3,981
* Best Buy Co., Inc. 62,030 3,947
* Kohl's Corp. 57,560 3,320
* Starbucks Corp. 79,330 3,178
--------
$ 83,900
--------
CONSUMER STAPLES (2.6%)
* The Kroger Co. 312,070 7,041
PepsiCo, Inc. 151,320 6,961
Sysco Corp. 111,810 5,178
* Safeway, Inc. 94,700 4,421
--------
$ 23,601
--------
ENERGY (1.8%)
* AES Corp. 121,710 8,337
Enron Corp. 94,080 8,244
--------
$ 16,581
--------
FINANCIAL SERVICES (2.6%)
American International
Group, Inc. 75,250 7,200
Charles Schwab Corp. 134,630 4,779
Providian Financial Corp. 31,950 4,058
Automatic Data Processing, Inc. 59,850 4,002
Paychex, Inc. 70,620 3,707
--------
$ 23,746
--------
HEALTH CARE (14.1%)
Pfizer, Inc. 797,834 35,853
American Home Products Corp. 220,240 12,457
* Amgen, Inc. 173,650 12,126
Pharmacia Corp. 184,452 11,102
* Genentech, Inc. 57,960 10,762
HCA-The Healthcare Co. 223,640 8,303
Medtronic, Inc. 140,170 7,262
* PE Corp.-Celera Genomics Group 71,200 7,093
Abbott Laboratories 138,540 6,589
Baxter International, Inc. 80,750 6,445
* Serono SA 198,930 6,018
* MedImmune Inc. 74,220 5,734
--------
$ 129,744
--------
PRODUCER DURABLES (3.5%)
Nokia Corp. ADR 348,040 13,856
United Technologies Corp. 92,290 6,391
12
<PAGE>
-------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
-------------------------------------------------------------------------
* Waters Corp. 65,840 $ 5,860
Tektronix, Inc. 42,710 3,281
* Polycom, Inc. 40,180 2,691
--------
$ 32,079
--------
TECHNOLOGY (52.8%)
COMMUNICATIONS TECHNOLOGY (21.4%)
* Cisco Systems, Inc. 1,173,260 64,823
Corning, Inc. 80,790 23,995
Nortel Networks Corp. 291,190 17,344
* CIENA Corp. 121,900 14,971
* Juniper Networks, Inc. 57,660 12,624
* Brocade Communications
Systems, Inc. 50,910 12,015
* JDS Uniphase Corp. 96,910 9,176
* Extreme Networks, Inc. 41,290 4,728
* Sycamore Networks, Inc. 42,340 4,573
* Metromedia Fiber Network, Inc. 185,540 4,511
* Aether Systems, Inc. 39,890 4,208
* Redback Networks Inc. 24,190 3,967
* TyCom, Ltd. 102,360 3,928
* ONI Sytems Corp. 42,130 3,636
* Sonus Networks, Inc. 27,610 3,489
* Finisar Corp. 69,350 3,355
* Avici Systems Inc. 29,090 2,767
* Turnstone Systems, Inc. 54,380 2,522
COMPUTER SERVICES SOFTWARE & SYSTEMS (12.4%)
* Oracle Corp. 346,620 27,296
* Veritas Software Corp. 82,265 11,682
* VeriSign, Inc. 45,404 9,197
* Siebel Systems, Inc. 79,730 8,875
* Ariba, Inc. 61,780 8,851
* i2 Technologies, Inc. 46,000 8,605
* BEA Systems, Inc. 96,100 7,484
* Check Point Software
Technologies Ltd. 44,760 7,050
* Intuit, Inc. 118,220 6,738
* Micromuse Inc. 22,590 4,539
* Phone.com, Inc. 38,660 4,393
* Rational Software Corp. 60,740 4,214
* Mercury Interactive Corp. 26,110 4,093
* Quest Software, Inc. 16,370 1,017
COMPUTER TECHNOLOGY (9.7%)
* EMC Corp. 352,590 34,950
* Sun Microsystems, Inc. 263,920 30,813
* Network Appliance, Inc. 60,010 7,644
* Palm, Inc. 139,710 7,396
* Corvis Corp. 72,220 4,409
* StorageNetworks, Inc. 40,030 4,091
ELECTRONICS (1.1%)
* Flextronics International Ltd. 75,910 6,234
* Sanmina Corp. 43,000 4,026
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (7.8%)
* PMC Sierra Inc. 45,950 9,891
* Celestica, Inc. 126,520 8,761
* Applied Micro Circuits Corp. 42,230 8,744
* Broadcom Corp. 35,760 8,716
* Xilinx, Inc. 81,560 6,984
* Vitesse Semiconductor Corp. 74,090 6,589
* SDL, Inc. 20,670 6,366
* Jabil Circuit, Inc. 111,900 6,350
* Marvell Technology Group Ltd. 54,490 4,203
PerkinElmer, Inc. 31,460 3,284
* GlobeSpan, Inc. 15,270 1,863
SCIENTIFIC EQUIPMENT & SUPPLIES (0.4%)
Newport Corp. 21,480 3,421
--------
$ 485,401
--------
UTILITIES (2.4%)
* Qwest Communications
International Inc. 186,700 8,973
* Global Crossing Ltd. 227,560 7,054
* Southern Energy, Inc. 185,170 5,810
--------
$ 21,837
--------
OTHER (9.7%)
General Electric Co. 1,538,050 88,726
--------
-------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $831,420) $ 905,615
-------------------------------------------------------------------------
FACE
AMOUNT
(000)
-------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.2%)
-------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.46%, 10/2/2000--Note F $ 15,985 15,985
6.50%, 10/2/2000 22,430 22,430
-------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $38,415) 38,415
-------------------------------------------------------------------------
TOTAL INVESTMENTS (102.8%)
(Cost $869,835) 944,030
-------------------------------------------------------------------------
13
<PAGE>
-------------------------------------------------------------------------
MARKET
VALUE*
GROWTH EQUITY FUND (000)
-------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET
(-2.8%) $(25,845)
-------------------------------------------------------------------------
NET ASSETS (100%)
-------------------------------------------------------------------------
Applicable to 49,163,261 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 918,185
=========================================================================
NET ASSET VALUE PER SHARE $ 18.68
=========================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
-------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
-------------------------------------------------------------------------
ASSETS
Investments in Securities, at Value $ 944,030
Receivables for Investment Securities Sold 50,412
Other Assets--Note C 13,677
Total Assets 1,008,119
LIABILITIES
Payables for Investment Securities Purchased 72,383
Other Liabilities--Note F 17,551
Total Liabilities 89,934
-------------------------------------------------------------------------
NET ASSETS $ 918,185
=========================================================================
------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
------------------------------------------------------------------------------
Paid in Capital $ 851,096 $ 17.31
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note D (7,106) (.14)
Unrealized Appreciation--Note E 74,195 1.51
------------------------------------------------------------------------------
NET ASSETS $ 918,185 $ 18.68
==============================================================================
14
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
----------------------------------------------------------------------------
GROWTH EQUITY FUND
YEAR ENDED SEPTEMBER 30, 2000
(000)
----------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 1,120
Interest 830
Security Lending 37
----------------------------------------------------------------------------
Total Income $ 1,987
----------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 1,991
Administrator and Transfer Agent Fees--Note C 218
The Vanguard Group--Note C
Management and Administrative 462
Custodian Fees 27
Auditing Fees 25
Shareholders' Reports 17
Legal Fees 24
Trustees' Fees and Expenses 3
----------------------------------------------------------------------------
Total Expenses $ 2,767
Expenses Paid Indirectly--Note C (80)
----------------------------------------------------------------------------
Net Expenses $ 2,687
----------------------------------------------------------------------------
NET INVESTMENT LOSS $ (700)
----------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD $ (2,548)
----------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES $ 61,372
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 58,124
============================================================================
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
-----------------------------------------------------------------------------
GROWTH EQUITY FUND
YEAR ENDED SEPTEMBER 30,
----------------------------
2000 1999
(000) (000)
-----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ (700) $ (509)
Realized Net Gain $ (2,548) $ 37,857
Change in Unrealized Appreciation (Depreciation) $ 61,372 $ 658
-----------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations $ 58,124 $ 38,006
-----------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- --
Realized Capital Gain $ (41,208) $ (12,236)
-----------------------------------------------------------------------------
Total Distributions $ (41,208) $ (12,236)
-----------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued $ 834,293 $ 39,040
Issued in Lieu of Cash Distributions $ 39,734 $ 11,874
Redeemed $ (115,582) $ (31,717)
-----------------------------------------------------------------------------
Net Increase from Capital Share Transactions $ 758,445 $ 19,197
-----------------------------------------------------------------------------
Total Increase $ 775,361 $ 44,967
-----------------------------------------------------------------------------
NET ASSETS
Beginning of Year $ 142,824 $ 97,857
-----------------------------------------------------------------------------
End of Year $ 918,185 $ 142,824
=============================================================================
1Shares Issued (Redeemed)
Issued $ 44,062 $ 2,547
Issued in Lieu of Cash Distributions $ 2,499 $ 890
Redeemed $ (6,389) $ (2,051)
-----------------------------------------------------------------------------
Net Increase in Shares Outstanding $ 40,172 $ 1,386
=============================================================================
16
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
GROWTH EQUITY FUND
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING ----------------------------------- OCT. 31, 1995, TO YEAR ENDED
THROUGHOUT EACH PERIOD 2000 1999 1998 1997 SEP. 30, 1996* OCT. 31, 1995
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.88 $ 12.87 $ 16.64 $ 17.03 $ 14.97 $ 12.46
----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income (Loss) (.01) (.05) (.05) (.03) .02 .10
Net Realized and Unrealized Gain (Loss)
on Investments 7.33 4.66 1.10 4.23 2.91 2.52
----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 7.32 4.61 1.05 4.20 2.93 2.62
----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- -- -- -- (.02) (.11)
Distributions from Realized Capital Gains (4.52) (1.60) (4.82) (4.59) (.85) --
----------------------------------------------------------------------------------------------------------------------
Total Distributions (4.52) (1.60) (4.82) (4.59) (.87) (.11)
----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.68 $ 15.88 $ 12.87 $ 16.64 $ 17.03 $ 14.97
======================================================================================================================
TOTAL RETURN 51.07% 38.15% 10.71% 32.61% 20.61% 21.15%
======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 918 $ 143 $ 98 $ 100 $ 96 $ 116
Ratio of Total Expenses
to Average Net Assets 0.74% 0.96% 1.04%+ 1.02%+ 1.06%** 1.03%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.19%) (0.42%) (0.42) (0.25%) 0.03%** 0.69%
Portfolio Turnover Rate 303% 328% 250% 178% 148% 178%
======================================================================================================================
*The fund's fiscal year-end changed from October 31 to September 30, effective September 30, 1996.
**Annualized.
+Expense ratios before waivers and reimbursements of expenses were 1.12% in 1998 and 1.05% in 1997.
</TABLE>
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth Equity Fund (formerly Turner Growth Equity Fund) is registered
under the Investment Company Act of 1940 as a diversified open-end investment
company, or mutual fund. On May 22, 2000, Turner Growth Equity Fund's
shareholders approved its reorganization into Vanguard Growth Equity Fund,
effective June 12, 2000.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the board of trustees to represent fair value.
2. Federal Income Taxes: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Distributions: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes. Net investment losses that are applied to reduce required capital gain
distributions are reclassified to accumulated net realized loss.
5. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Turner Investment Partners provides investment advisory services to the fund
for a fee calculated at an annual percentage rate of average net assets.
Advisory fees for the period prior to June 12, 2000, the period from June 12 to
September 30, 2000, and the full year ended September 30, 2000, represented
effective annual rates of 0.75%, 0.41%, and 0.53%, respectively.
C. Prior to June 12, 2000, SEI Investments Mutual Funds Services, SEI
Investments Distribution Co., and DST Systems Inc. acted as administrator,
distributor, and transfer agent, respectively, under agreements with the fund.
Certain officers of the fund were also officers of the administrator and/or
distributor. The administrator and transfer agent received fees of $100,000 and
$118,000, respectively, for the period prior to June 12, 2000. The fund directed
certain portfolio trades to brokers who paid a portion of the fund's expenses.
For the period prior to June 12, 2000, directed brokerage arrangements reduced
expenses by $80,000 (an annual rate of 0.02% of the fund's average net assets).
Effective June 12, 2000, The Vanguard Group 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
trustees. The fund has committed to provide up to 0.40% of its net assets in
capital contributions to Vanguard. At September 30, 2000, the fund
18
<PAGE>
had contributed capital of $154,000 to Vanguard (included in Other Assets),
representing 0.02% of the fund's net assets and 0.2% of Vanguard's
capitalization. The fund's trustees and officers are also directors and officers
of Vanguard.
D. During the year ended September 30, 2000, the fund purchased $1,815,005,000
of investment securities and sold $1,109,382,000 of investment securities other
than temporary cash investments.
For federal tax purposes, capital gains required to be distributed in
December 1999 included net gains realized through October 31, 1999.
Subsequently, the fund realized capital losses of $6,020,000, which are
available to offset future net capital gains.
E. At September 30, 2000, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $74,195,000,
consisting of unrealized gains of $93,491,000 on securities that had risen in
value since their purchase and $19,296,000, in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at September 30,
2000, was $15,698,000, for which the fund held cash collateral of $15,985,000.
The fund invests cash collateral received in repurchase agreements, and records
a liability for the return of the collateral, during the period the securities
are on loan.
19
<PAGE>
REPORT
of Independent Accountants
To the Shareholders and Trustees of Vanguard Growth Equity Fund
In our opinion, the accompanying statements of net assets and of assets and
liabilities 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 Growth Equity Fund (formerly Turner Growth
Equity Fund) at September 30, 2000, and the results of its operations, the
changes in its net assets, and the financial highlights for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America. 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 audit. We conducted our audit of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, 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
audit, which included confirmation of securities at September 30, 2000 by
correspondence with the custodian, provides a reasonable basis for our opinion.
The statement of changes in net assets for the year ended September 30, 1999 and
the financial highlights for each of the five periods then ended were audited by
other independent accountants whose report dated November 8, 1999 expressed an
unqualified opinion on the financial statements containing those statements of
changes in net assets and financial highlights.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 1, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD GROWTH EQUITY FUND
This information for the fiscal year ended September 30, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $15,499,000 as capital gain dividends (from net long-term
capital gains) to shareholders during the fiscal year, all of which is
designated as a 20% rate gain distribution.
20
<PAGE>
THE PEOPLE
Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, Cummins Engine Co., and
The Mead Corp.; Trustee of Vanderbilt University.
--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Managing Director and Secretary of The Vanguard
Group, Inc.; Secretary of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. Gubanich, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
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Valley Forge, Pennsylvania 19482-2600
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top-notch service. The image is based on two works: a painting titled The First
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Pennsylvania.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P
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Inc. All other index names may contain trademarks and are the exclusive property
of their respective owners.
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FUND INFORMATION
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This report is intended for the fund's shareholders. It may not be distributed
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fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
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