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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-19446) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 22
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24
VANGUARD FENWAY FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON JANUARY 19, 2001, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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<PAGE>
VANGUARD(R) EQUITY INCOME FUND
INVESTOR SHARES - JANUARY 19, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
September 30, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD EQUITY INCOME FUND
Prospectus
January 19, 2001
A Value Stock Mutual Fund
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CONTENTS
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1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
8 INVESTMENT ADVISERS
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
12 SHARE PRICE
12 FINANCIAL HIGHLIGHTS
14 INVESTING WITH VANGUARD
14 Buying Shares
15 Redeeming Shares
17 Other Rules You Should Know
19 Fund and Account Updates
20 Contacting Vanguard
GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
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<PAGE>
1
FUND PROFILE
The Fund seeks to provide high current income and reasonable long-term capital
growth.
INVESTMENT STRATEGIES
The Fund invests mainly in dividend-paying common stocks of established, large
U.S. companies. Each stock is purchased when it is undervalued relative to its
individual history and to the market. Generally, at the time of purchase, the
stocks are out of favor with the investment community.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from
large-capitalization value stocks--which make up most of the Fund's
holdings--will trail returns from other asset classes or the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another over the past ten years. In addition, there is a table
that shows how the Fund's average annual total returns compare with those of
relevant market indexes over set periods of time. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
[SCALE -40% TO 80%]
1991 25.38%
1992 9.18%
1993 14.65%
1994 -1.59%
1995 37.34%
1996 17.39%
1997 31.17%
1998 17.34%
1999 -0.19%
2000 13.57%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 13.38% (quarter ended March 31, 1991), and the lowest return for a
quarter was -8.37% (quarter ended September 30, 1999).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Equity Income Fund 13.57% 15.42% 15.82%
Standard & Poor's 500 Index -9.10 18.33 17.46
Average Equity Income Fund* 6.77 13.06 14.33
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<PAGE>
2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on those incurred in the fiscal year ended September 30, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.40%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.43%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$44 $138 $241 $542
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Equity Income Fund's expense ratio in fiscal year 2000 was
0.43%, or $4.30 per $1,000 of average net assets. The average equity income
mutual fund had expenses in 1999 of 1.38%, or $13.80 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
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<PAGE>
3
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PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF SEPTEMBER 30, 2000
Dividends are distributed quarterly in $2.4 billion
March, June, September, and December;
capital gains, if any, are distributed SUITABLE FOR IRAS
in December Yes
INVESTMENT ADVISERS MINIMUM INITIAL INVESTMENT
- Newell Associates, Palo Alto, Calif., $3,000; $1,000 for IRAs and custodial
since inception accountsfor minors
- John A. Levin & Co., Inc., New York
City, N.Y., since 1995 NEWSPAPER ABBREVIATION
- Wellington Management Company, LLP, EqInc
Boston, Mass., since 2000
- The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since 1998 065
INCEPTION DATE CUSIP NUMBER
March 21, 1988 921921102
TICKER SYMBOL
VEIPX
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MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
MARKET EXPOSURE
The Fund invests mainly in common stocks of large, established companies that
pay above-average dividends. At the time of purchase by the Fund, a stock is
usually out of favor with the investment community and undervalued relative to
its individual history and to the market.
<PAGE>
4
Stocks purchased by the Fund are expected to produce a relatively high and
stable level of income, and to have the potential for long-term capital
appreciation. In the past, stocks with relatively high dividend yields have
tended to lag the overall stock market during rising markets, and to outperform
it during periods of flat or declining prices.
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PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for
growth in revenue and earnings. Reflecting the market's high expectations for
superior growth, such stocks typically have low dividend yields and
above-average prices in relation to such measures as revenue, earnings, and
book value. Value and growth stocks have, in the past, produced similar
long-term returns, though each category has periods when it outperforms the
other. In general, value funds are appropriate for investors who want some
dividend income and the potential for capital gains, but are less tolerant of
share-price fluctuations. Growth funds, by contrast, appeal to investors who
will accept more volatility in hopes of a greater increase in share price.
Growth funds also may appeal to investors with taxable accounts who want a
higher proportion of returns to come as capital gains (which may be taxed at
lower rates than dividend income).
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[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the S&P 500 Index, a widely used barometer of market
activity. (Total returns consist of dividend income plus change in market
price.) Note that the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world investment portfolio would
incur. Note, also, that the gap between best and worst tends to narrow over the
long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
<PAGE>
5
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PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock or bond holdings, the less
likely that fund performance may be hurt disproportionately by the poor
performance of relatively few securities. One measure of a fund's
diversification is the percentage of its assets represented by its ten largest
holdings. The average U.S. equity mutual fund has about 35% of its assets
invested in its ten largest holdings, while some less-diversified mutual funds
have more than 50% of assets invested in their top ten.
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As of September 30, 2000, the Fund had invested 21.3% of net assets in its
top ten holdings.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, VALUE STOCKS TEND TO GO THROUGH CYCLES OF
DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Vanguard Equity Income Fund employs four investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The Fund's board of trustees decides the proportion of Fund assets to be managed
by each adviser and may change these proportions at any time.
Three of the four advisers use active investment management methods, which
means they buy and sell securities based on their judgments about the financial
prospects of companies, the prices of the securities, and the stock market and
economy in general. Although each of these advisers uses different processes to
select securities for its portion of the Fund's assets, each is committed to
buying stocks that produce above-average income and that, in the adviser's
opinion, have the potential for long-term capital growth.
Newell Associates (Newell), which managed about 51% of the Fund's assets as
of September 30, 2000, selects stocks of large, well-established dividend-paying
U.S.-traded companies. These stocks are purchased when their valuation levels
are low, based on the firm's proprietary Relative Yield Strategy analysis, and
sold when valuation levels are high, based on that analysis.
John A. Levin & Co., Inc. (Levin), which managed about 24% of the Fund's
assets as of September 30, 2000, selects stocks of companies with one or more of
the following attributes: a strong proprietary product or service; a low share
price in relation to cash flow or asset value; a new product or development; or
some other unique situation that offers attractive prospects for long-term
returns and limited risk. Levin generally considers purchasing stocks when their
valuation levels are low and considers selling stocks when their valuation
levels are high.
Wellington Management Company, LLP (Wellington Management), which managed
about 20% of the Fund's assets as of September 30, 2000, employs a fundamental
approach to identify individual stocks, and seeks stocks that offer
above-average dividend yields, below-average valuations, and the potential for
dividend increases in the future. Securities are sold when an investment is no
longer considered as attractive as other available investments, based on
Wellington Management's fundamental valuation approach.
<PAGE>
6
The Vanguard Group (Vanguard), which managed about 5% of the Fund's assets
as of September 30, 2000, as cash investments, invests in stock futures so that
the cash investment portion of the Fund's portfolio may achieve performance
similar to that of common stocks. This strategy is intended to keep the Fund
more fully exposed to common stocks while retaining cash on hand to meet
liquidity needs. See "Other Investment Policies and Risks" for more details on
the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in dividend-paying stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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<PAGE>
7
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.
- Vanguard funds that hold foreign securities may value those securities at
their "fair value," rather than the price at which those securities last
traded on their primary foreign markets or exchanges, to take into account
events that occur after the close of those markets or exchanges.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
<PAGE>
8
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
taxable income. As of September 30, 2000, the average turnover rate for all
large-cap value funds was approximately 81%, according to Morningstar, Inc.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
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INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs four investment advisers that
each independently manage a separate portion of the Fund's assets, subject to
the control of the trustees and officers of the Fund.
- Newell Associates (Newell), 525 University Avenue, Palo Alto, CA 94301, is
an investment advisory firm founded in 1986. As of September 30, 2000,
Newell managed about $1.7 billion in assets.
- John A. Levin & Co., Inc. (Levin), One Rockefeller Plaza, 19th Floor, New
York, NY 10020, is an investment advisory firm founded in 1982. As of
September 30, 2000, Levin managed about $10.5 billion in assets.
- Wellington Management Company, LLP (Wellington Management), 75 State
Street,Boston, MA 02109, is an investment advisory firm founded in 1928. As
of September 30, 2000, Wellington Management managed about $266 billion in
assets.
<PAGE>
9
- The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
founded in 1975, is a wholly owned subsidiary of the Vanguard funds. As of
September 30, 2000, Vanguard served as adviser for about $396 billion in
assets.
The Fund pays three of its investment advisers--Newell, Levin, and
Wellington Management--on a quarterly basis. For each adviser, the quarterly fee
is based on certain annual percentage rates applied to average net assets
managed by the adviser over the quarterly period. In addition, the quarterly
fees paid to Levin and Wellington Management are increased or decreased based
upon the adviser's performance in comparison to a benchmark index. For these
purposes, the cumulative total return of each adviser's portion of the Fund over
a trailing 36-month period is compared to the cumulative total return of the S&P
500 Index (for Levin) and the Lipper Equity Income Fund Average (for Wellington
Management) over the same period.
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard, since it provides services to the Fund on an at-cost
basis.
For the fiscal year ended September 30, 2000, the advisory fees and
expenses represented an effective annual rate of 0.16% of the Fund's average net
assets before a decrease of 0.02% based on performance.
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities, and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
10
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for overseeing the Fund's investments are:
ROGER D. NEWELL, Chairman and Chief Investment Officer of Newell Associates. He
has worked in investment management since 1958; has managed equity funds since
1959; has been with Newell since 1986; and has managed the Fund since 1988.
Education: B.A., University of Minnesota; J.D., Harvard Law School; M.A.,
University of Minnesota.
JENNIFER C. NEWELL, CFA, President, and Portfolio Manager of Newell. She has
worked in investment management since 1986; has been with Newell since 1992 and
its investment team since 1993; and has managed the Fund since 1999. Education:
B.A., Wheaton College; M.B.A., Haas Business School, University of California,
Berkeley.
JOHN A. LEVIN, Chairman and Chief Executive Officer of John A. Levin & Co., Inc.
He has managed equity funds since 1963; has been with Levin since 1982; and has
managed the Fund since 1995. Education: B.A. and L.L.B., Yale University.
JOSEPH A. AUSTIN, Senior Portfolio Manager and Securities Analyst of Levin. He
has worked in investment management since 1984; has been with Levin since 1993;
and has managed the Fund since 2000. Education: B.B.A., Millsaps College;
M.B.A., Columbia University.
JOHN W. MURPHY, Senior Portfolio Manager and Securities Analyst of Levin. He has
worked in investment management since 1988; has been with Levin since 1995; and
has managed the Fund since 2000. Education: B.S., Bryant College; M.B.A.,
Northwestern University.
DANIEL M. THERIAULT, CFA, CPA, Senior Portfolio Manager, and Securities Analyst
of Levin. He has worked in investment management since 1986; has been with Levin
since 1997; and has managed the Fund since 2000. Education: B.A., Boston
College.
JOHN R. RYAN, CFA, Senior Vice President, and Managing Partner of Wellington
Management Company, LLP. He has worked in investment management with Wellington
Management since 1981 and has managed the Fund since 2000. Education: B.S.,
Lehigh University; M.B.A., University of Virginia.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing investments and
strategy since joining the company in 1987. Education: A.B., Dartmouth College;
M.B.A., University of Chicago.
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DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. You can receive distributions of income
<PAGE>
11
dividends or capital gains in cash, or you can have them automatically
reinvested in more shares of the Fund.
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from any
stock holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
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BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
<PAGE>
12
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying
250 shares for $20 each. If the fund pays a distribution of $1 per share on
December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus
250 shares x $1 = $250 in distributions), but you owe tax on the $250
distribution you received--even if you reinvest it in more shares. To avoid
"buying a dividend," check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by dividing the net assets of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
13
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
VANGUARD EQUITY INCOME FUND
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
Turnover Rate 36% 18% 23% 22% 21%
-----------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $24.14 per share.
During the year, the Fund earned $0.62 per share from investment income
(interest and dividends) and $0.81 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.51 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($1.43 per share) minus the distributions ($1.51 per share)
resulted in a share price of $24.06 at the end of the year. This was a decrease
of $0.08 per share (from $24.14 at the beginning of the year to $24.06 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 6.28% for the year.
As of September 30, 2000, the Fund had $2.4 billion in net assets. For the
year, its expense ratio was 0.43% ($4.30 per $1,000 of net assets); and its net
investment income amounted to 2.59% of its average net assets. It sold and
replaced securities valued at 36% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
14
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details
of our many shareholder services for individual investors. A separate
booklet, The Compass, does the same for institutional investors. You can
request either booklet by calling or writing Vanguard, using the Contacting
Vanguard instructions found at the end of this section.
BUYING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS
TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs
and custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
HOW TO BUY SHARES
BY CHECK: Mail your check and a completed account registration form to Vanguard.
When adding to an existing account, send your check with an Invest-By-Mail form
detached from your last account statement. Make the check payable to: The
Vanguard Group-65. For addresses, see Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption
from another Vanguard fund. All open Vanguard funds permit exchange purchases
requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED
INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Know for specifics.
BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined NAV after Vanguard accepts your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your TRADE DATE.
PURCHASE RULES YOU SHOULD KNOW
^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
<PAGE>
15
^U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and drawn
on a U.S. bank.
^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares
at any time, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
REDEEMING SHARES
HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before initiating your request.
ONLINE: Request a redemption through our website at Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see Contacting Vanguard.
BY MAIL: Send your written redemption instructions to Vanguard. For addresses,
see Contacting Vanguard.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined NAV after Vanguard accepts your
redemption request, including any special documentation required under the
circumstances. As long as your request is received before the close of regular
trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your TRADE DATE.
TYPES OF REDEMPTIONS
^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date.
^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your
redemption to purchase shares of another Vanguard fund. All open Vanguard funds
accept exchange redemptions requested in writing. Most Vanguard funds--other
than the index-oriented funds--also accept exchange redemptions requested online
or by telephone. See Other Rules You Should Know for specifics.
^WIRE REDEMPTIONS. When redeeming from a money market fund, bond fund, or the
Preferred Stock Fund, you may instruct Vanguard to wire your redemption proceeds
to a previously designated bank account. Wire redemptions
<PAGE>
16
are not available for Vanguard's other funds. The wire redemption option is not
automatic; you must establish it by completing a special form or the appropriate
section of your account registration. Also, wire redemptions must be requested
in writing or by telephone, not online. A $5 fee applies to wire redemptions
under $5,000.
Money Market Funds: For telephone requests accepted at Vanguard by 10:45 a.m.,
Eastern time, the redemption proceeds will arrive at your bank by the close of
business that same day. For other requests accepted before 4 p.m., Eastern time,
the redemption proceeds will arrive at your bank by the close of business on the
following business day.
Bond Funds and Preferred Stock Fund: For requests accepted at Vanguard by 4
p.m., Eastern time, the redemption proceeds will arrive at your bank by the
close of business on the following business day.
REDEMPTION RULES YOU SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain
types of accounts, such as trust, corporate, nonprofit, or retirement accounts.
Please call us before attempting to redeem from these types of accounts.
^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of your redemption in-kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also reserves the right to
delay payment of your redemption proceeds for up to seven days. By calling us
before you attempt to redeem a large dollar amount, you are more likely to avoid
in-kind or delayed payment of your redemption.
^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds
will not be made available to you until the Fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
Vanguard Fund Express(R).
^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written consent of all registered account owners, which must be
provided under signature guarantees. You can obtain a signature guarantee from
most commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
<PAGE>
17
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days at any time. In addition, Vanguard funds
can suspend redemptions and/or postpone payments of redemption proceeds at times
when the New York Stock Exchange is closed or during emergency circumstances, as
determined by the U.S. Securities and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS
^AUTOMATIC. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
^TELE-ACCOUNT(TM). To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a personal identification number (PIN).
Call Tele-Account to obtain a PIN, and allow seven days before using this
service.
^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the following information exactly as
registered on the account:
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification number.
- Personal Identification Number (PIN), if applicable.
^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.
^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone exchanges (in or out),
except for IRAs and certain other retirement accounts.
VANGUARD.COM
^REGISTRATION. You can use your personal computer to review your account
holdings, to sell or exchange shares of most Vanguard funds, and to perform
other transactions. To establish this service, you can register online.
<PAGE>
18
^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund do not permit online exchanges (in or out), except for IRAs
and certain other retirement accounts.
WRITTEN INSTRUCTIONS
^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction
instructions that are not in "good order." This means that your instructions
must include:
- The fund name and account number.
- The amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees, if required for the type of transaction.*
*For instance, signature guarantees must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses due to fraud, so long as
we reasonably believe that the person transacting on an account is authorized to
do so. Please take precautions to protect yourself from fraud. Keep your account
information private and immediately review any account statements that we send
to you. Contact Vanguard immediately about any transactions you believe to be
unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a fund and
increase the fund's costs for all shareholders, Vanguard limits account activity
as follows:
- You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A NON-MONEY
MARKET FUND during any 12-month period.
- Your round trips through a non-money market fund must be at least 30 days
apart.
- All funds may refuse share purchases at any time, for any reason.
- Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed by a purchase back into the
same fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the fund.
<PAGE>
19
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. If you invest with
Vanguard through an intermediary, please read that firm's program materials
carefully to learn of any special rules that may apply. For example, special
terms may apply to additional service features, fees, or other policies.
LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment.
Vanguard deducts a $10 fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES
We will send you quarterly portfolio summaries to help you keep track of your
accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.
AVERAGE COST REVIEW STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you redeemed during the current calendar year, using the average cost
single category method.
CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.
TAX STATEMENTS
We will send you annual tax statements to assist in preparing your income tax
returns. These statements, which are generally mailed in January, will report
the previous year's dividend and capital gains distributions, proceeds from the
sale of shares, and distributions from IRAs or other retirement plans.
<PAGE>
20
REPORTS
Fund financial reports will be mailed twice a year--in May and November. These
comprehensive reports include an assessment of a fund's performance (and a
comparison to its industry benchmark), an overview of the financial markets, the
fund's adviser reports, and the fund's financial statements, which include a
listing of the fund's holdings.
To keep a fund's costs as low as possible (so that you and other
shareholders can keep more of the fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more shareholders have the same last name and address, we send just one fund
report to that address--instead of mailing separate reports to each shareholder.
If you want us to send separate reports, however, you may notify our Client
Services Department.
CONTACTING VANGUARD
ONLINE
VANGUARD.COM
- Your best source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests
- 24 hours per day, 7 days per week
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at 1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at 1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- Business hours only
<PAGE>
21
VANGUARD ADDRESSES
REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBER
Always use this fund number when contacting us about Vanguard Equity Income
Fund-65.
<PAGE>
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<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Equity Income Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-5445
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P065 012001
<PAGE>
VANGUARD(R) EQUITY INCOME FUND
FOR PARTICIPANTS - JANUARY 19, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
September 30, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD EQUITY INCOME FUND
Participant Prospectus
January 19, 2001
A Value Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
8 INVESTMENT ADVISERS
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
11 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
14 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like to
open a personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
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<PAGE>
1
FUND PROFILE
The Fund seeks to provide high current income and reasonable long-term capital
growth.
INVESTMENT STRATEGIES
The Fund invests mainly in dividend-paying common stocks of established, large
U.S. companies. Each stock is purchased when it is undervalued relative to its
individual history and to the market. Generally, at the time of purchase, the
stocks are out of favor with the investment community.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from
large-capitalization value stocks--which make up most of the Fund's
holdings--will trail returns from other asset classes or the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another over the past ten years. In addition, there is a table
that shows how the Fund's average annual total returns compare with those of
relevant market indexes over set periods of time. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
[SCALE -40% TO 80%]
1991 25.38%
1992 9.18%
1993 14.65%
1994 -1.59%
1995 37.34%
1996 17.39%
1997 31.17%
1998 17.34%
1999 -0.19%
2000 13.57%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 13.38% (quarter ended March 31, 1991), and the lowest return for a
quarter was -8.37% (quarter ended September 30, 1999).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Equity Income Fund 13.57% 15.42% 15.82%
Standard & Poor's 500 Index -9.10 18.33 17.46
Average Equity Income Fund* 6.77 13.06 14.33
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<PAGE>
2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on those incurred in the fiscal year ended September 30, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.40%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.43%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$44 $138 $241 $542
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Equity Income Fund's expense ratio in fiscal year 2000 was
0.43%, or $4.30 per $1,000 of average net assets. The average equity income
mutual fund had expenses in 1999 of 1.38%, or $13.80 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
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<PAGE>
3
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PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS INCEPTION DATE
Dividends are distributed quarterly March 21, 1988
in March, June, September, and December;
capital gains, if any, are distributed
in December NET ASSETS AS OF SEPTEMBER 30,
2000
INVESTMENT ADVISERS $2.4 billion
- Newell Associates, Palo Alto, Calif.,
since inception NEWSPAPER ABBREVIATION
- John A. Levin & Co., Inc., New York City, EqInc
N.Y., since 1995
- Wellington Management Company, LLP, Boston, VANGUARD FUND NUMBER
Mass., since 2000 065
- The Vanguard Group, Valley Forge, Pa.,
since 1998 CUSIP NUMBER
921921102
TICKER SYMBOL
VEIPX
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MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
MARKET EXPOSURE
The Fund invests mainly in common stocks of large, established companies that
pay above-average dividends. At the time of purchase by the Fund, a stock is
usually out of favor with the investment community and undervalued relative to
its individual history and to the market.
Stocks purchased by the Fund are expected to produce a relatively high and
stable level of income, and to have the potential for long-term capital
appreciation. In the past, stocks with relatively high dividend yields have
tended to lag the overall stock market during rising markets, and to outperform
it during periods of flat or declining prices.
<PAGE>
4
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PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for
growth in revenue and earnings. Reflecting the market's high expectations for
superior growth, such stocks typically have low dividend yields and
above-average prices in relation to such measures as revenue, earnings, and
book value. Value and growth stocks have, in the past, produced similar
long-term returns, though each category has periods when it outperforms the
other. In general, value funds are appropriate for investors who want some
dividend income and the potential for capital gains, but are less tolerant of
share-price fluctuations. Growth funds, by contrast, appeal to investors who
will accept more volatility in hopes of a greater increase in share price.
Growth funds also may appeal to investors with taxable accounts who want a
higher proportion of returns to come as capital gains (which may be taxed at
lower rates than dividend income).
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the S&P 500 Index, a widely used barometer of market
activity. (Total returns consist of dividend income plus change in market
price.) Note that the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world investment portfolio would
incur. Note, also, that the gap between best and worst tends to narrow over the
long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
<PAGE>
5
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PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock or bond holdings, the less
likely that fund performance may be hurt disproportionately by the poor
performance of relatively few securities. One measure of a fund's
diversification is the percentage of its assets represented by its ten largest
holdings. The average U.S. equity mutual fund has about 35% of its assets
invested in its ten largest holdings, while some less-diversified mutual funds
have more than 50% of assets invested in their top ten.
--------------------------------------------------------------------------------
As of September 30, 2000, the Fund had invested 21.3% of net assets in its
top ten holdings.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, VALUE STOCKS TEND TO GO THROUGH CYCLES OF
DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Vanguard Equity Income Fund employs four investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The Fund's board of trustees decides the proportion of Fund assets to be managed
by each adviser and may change these proportions at any time.
Three of the four advisers use active investment management methods, which
means they buy and sell securities based on their judgments about the financial
prospects of companies, the prices of the securities, and the stock market and
economy in general. Although each of these advisers uses different processes to
select securities for its portion of the Fund's assets, each is committed to
buying stocks that produce above-average income and that, in the adviser's
opinion, have the potential for long-term capital growth.
Newell Associates (Newell), which managed about 51% of the Fund's assets as
of September 30, 2000, selects stocks of large, well-established dividend-paying
U.S.-traded companies. These stocks are purchased when their valuation levels
are low, based on the firm's proprietary Relative Yield Strategy analysis, and
sold when valuation levels are high, based on that analysis.
John A. Levin & Co., Inc. (Levin), which managed about 24% of the Fund's
assets as of September 30, 2000, selects stocks of companies with one or more of
the following attributes: a strong proprietary product or service; a low share
price in relation to cash flow or asset value; a new product or development; or
some other unique situation that offers attractive prospects for long-term
returns and limited risk. Levin generally considers purchasing stocks when their
valuation levels are low and considers selling stocks when their valuation
levels are high.
Wellington Management Company, LLP (Wellington Management), which managed
about 20% of the Fund's assets as of September 30, 2000, employs a fundamental
approach to identify individual stocks, and seeks stocks that offer
above-average dividend yields, below-average valuations, and the potential for
dividend increases in the future. Securities are sold when an investment is no
longer considered as attractive as other available investments, based on
Wellington Management's fundamental valuation approach.
<PAGE>
6
The Vanguard Group (Vanguard), which managed about 5% of the Fund's assets
as of September 30, 2000, as cash investments, invests in stock futures so that
the cash investment portion of the Fund's portfolio may achieve performance
similar to that of common stocks. This strategy is intended to keep the Fund
more fully exposed to common stocks while retaining cash on hand to meet
liquidity needs. See "Other Investment Policies and Risks" for more details on
the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in dividend-paying stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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<PAGE>
7
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.
- Vanguard funds that hold foreign securities may value those securities at
their "fair value," rather than the price at which those securities last
traded on their primary foreign markets or exchanges, to take into account
events that occur after the close of those markets or exchanges.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
taxable income. As of September 30, 2000, the average turnover rate for all
large-cap value funds was approximately 81%, according to Morningstar, Inc.
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<PAGE>
8
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs four investment advisers that
each independently manage a separate portion of the Fund's assets, subject to
the control of the trustees and officers of the Fund.
- Newell Associates (Newell), 525 University Avenue, Palo Alto, CA 94301, is
an investment advisory firm founded in 1986. As of September 30, 2000,
Newell managed about $1.7 billion in assets.
- John A. Levin & Co., Inc. (Levin), One Rockefeller Plaza, 19th Floor, New
York, NY 10020, is an investment advisory firm founded in 1982. As of
September 30, 2000, Levin managed about $10.5 billion in assets.
- Wellington Management Company, LLP (Wellington Management), 75 State
Street,Boston, MA 02109, is an investment advisory firm founded in 1928. As
of September 30, 2000, Wellington Management managed about $266 billion in
assets.
- The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
founded in 1975, is a wholly owned subsidiary of the Vanguard funds. As of
September 30, 2000, Vanguard served as adviser for about $396 billion in
assets.
The Fund pays three of its investment advisers--Newell, Levin, and
Wellington Management--on a quarterly basis. For each adviser, the quarterly fee
is based on certain annual percentage rates applied to average net assets
managed by the adviser over the quarterly period. In addition, the quarterly
fees paid to Levin and Wellington Management are increased or decreased based
upon the adviser's performance in comparison to a benchmark index. For these
purposes, the cumulative total return of each adviser's portion of the Fund over
a trailing 36-month period is compared to the cumulative total return of the S&P
500 Index (for Levin) and the Lipper Equity Income Fund Average (for Wellington
Management) over the same period.
<PAGE>
9
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard, since it provides services to the Fund on an at-cost
basis.
For the fiscal year ended September 30, 2000, the advisory fees and
expenses represented an effective annual rate of 0.16% of the Fund's average net
assets before a decrease of 0.02% based on performance.
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities, and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
10
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for overseeing the Fund's investments are:
ROGER D. NEWELL, Chairman and Chief Investment Officer of Newell Associates. He
has worked in investment management since 1958; has managed equity funds since
1959; has been with Newell since 1986; and has managed the Fund since 1988.
Education: B.A., University of Minnesota; J.D., Harvard Law School; M.A.,
University of Minnesota.
JENNIFER C. NEWELL, CFA, President, and Portfolio Manager of Newell. She has
worked in investment management since 1986; has been with Newell since 1992 and
its investment team since 1993; and has managed the Fund since 1999. Education:
B.A., Wheaton College; M.B.A., Haas Business School, University of California,
Berkeley.
JOHN A. LEVIN, Chairman and Chief Executive Officer of John A. Levin & Co., Inc.
He has managed equity funds since 1963; has been with Levin since 1982; and has
managed the Fund since 1995. Education: B.A. and L.L.B., Yale University.
JOSEPH A. AUSTIN, Senior Portfolio Manager and Securities Analyst of Levin. He
has worked in investment management since 1984; has been with Levin since 1993;
and has managed the Fund since 2000. Education: B.B.A., Millsaps College;
M.B.A., Columbia University.
JOHN W. MURPHY, Senior Portfolio Manager and Securities Analyst of Levin. He has
worked in investment management since 1988; has been with Levin since 1995; and
has managed the Fund since 2000. Education: B.S., Bryant College; M.B.A.,
Northwestern University.
DANIEL M. THERIAULT, CFA, CPA, Senior Portfolio Manager, and Securities Analyst
of Levin. He has worked in investment management since 1986; has been with Levin
since 1997; and has managed the Fund since 2000. Education: B.A., Boston
College.
JOHN R. RYAN, CFA, Senior Vice President, and Managing Partner of Wellington
Management Company, LLP. He has worked in investment management with Wellington
Management since 1981 and has managed the Fund since 2000. Education: B.S.,
Lehigh University; M.B.A., University of Virginia.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing investments and
strategy since joining the company in 1987. Education: A.B., Dartmouth College;
M.B.A., University of Chicago.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored
<PAGE>
11
retirement or savings plan. You will not owe taxes on these distributions until
you begin withdrawals from the plan. You should consult your plan administrator,
your plan's Summary Plan Description, or your tax adviser about the tax
consequences of plan withdrawals.
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from any
stock holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
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SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by dividing the net assets of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
12
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
VANGUARD EQUITY INCOME FUND
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
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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%
Turnover Rate 36% 18% 23% 22% 21%
-----------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $24.14 per share.
During the year, the Fund earned $0.62 per share from investment income
(interest and dividends) and $0.81 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.51 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($1.43 per share) minus the distributions ($1.51 per share)
resulted in a share price of $24.06 at the end of the year. This was a decrease
of $0.08 per share (from $24.14 at the beginning of the year to $24.06 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 6.28% for the year.
As of September 30, 2000, the Fund had $2.4 billion in net assets. For the
year, its expense ratio was 0.43% ($4.30 per $1,000 of net assets); and its net
investment income amounted to 2.59% of its average net assets. It sold and
replaced securities valued at 36% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
14
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Equity Income Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-5445
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I065 012001
<PAGE>
VANGUARD(R) GROWTH EQUITY FUND
INVESTOR SHARES - JANUARY 19, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
September 30, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD GROWTH EQUITY FUND
Prospectus
January 19, 2001
A Growth Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
4 MORE ON THE FUND
9 THE FUND AND VANGUARD
9 INVESTMENT ADVISER
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
12 SHARE PRICE
12 FINANCIAL HIGHLIGHTS
14 INVESTING WITH VANGUARD
14 Buying Shares
15 Redeeming Shares
17 Other Rules You Should Know
19 Fund and Account Updates
20 Contacting Vanguard
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPORTANT NOTE
The minimum initial investment for the Fund is $10,000.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to long-term capital appreciation.
INVESTMENT STRATEGIES
The Fund invests mainly--at least 65% of its total assets--in mid- and
large-capitalization stocks of U.S. companies. The Fund's adviser looks for
companies that are believed to have strong earnings growth potential and to be
reasonably valued at the time of purchase. The Fund seeks to remain "sector
neutral" as compared to the Russell 1000 Growth Index, meaning that it invests
across economic sectors in roughly the same proportions as those sectors are
represented in the Index. The Fund trades stocks aggressively, which may result
in higher transaction costs for the Fund, greater capital gains tax liabilities
for shareholders, and reduced after-tax performance.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from mid- and
large-capitalization growth stocks will trail returns from other asset
classes or the overall stock market. Specific types of stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- Sector risk, which is the chance that the Fund's returns could be hurt
significantly by problems affecting a particular economic sector. With a
substantial portion of the Fund's total assets invested in technology
stocks, sector risk is quite high for the Fund. The pace of change is
extremely rapid in the technology sector, and new technology products or
services can become obsolete just a short period of time after they emerge.
Consequently, technology stocks tend to be much more volatile than stocks
of other economic sectors.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another since inception. In addition, there is a table that
shows how the Fund's average annual total returns compare with those of a
relevant market index over set periods of time. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.*
*Prior to June 12, 2000, Vanguard Growth Equity Fund was organized as Turner
Growth Equity Fund and was sponsored by Turner Investment Partners, Inc., its
investment adviser. A reorganization brought the Fund into The Vanguard Group,
while maintaining the same investment objective, strategies, and adviser.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
[SCALE -40% TO 80%]
1993 15.38%
1994 -6.73%
1995 29.96%
1996 19.23%
1997 31.36%
1998 38.07%
1999 53.60%
2000 -23.10%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 39.67% (quarter ended December 31, 1999), and the lowest return for
a quarter was -28.91% (quarter ended December 31, 2000).
-----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
-----------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-----------------------------------------------------------------
Vanguard Growth Equity Fund -23.10% 20.63% 17.19%
Russell 1000 Growth Index -22.43 18.15 16.14
-----------------------------------------------------------------
*March 11, 1992.
-----------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on amounts now in effect.*
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.63%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.65%
*The information in the table has been restated to reflect estimated
expenses for the Fund's first full fiscal year as a member of The Vanguard
Group, rather than to reflect last year's expenses, which changed
materially when the Fund became a member of The Vanguard Group on June 12,
2000.
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$66 $208 $362 $810
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect the Fund's expense ratio for the current fiscal year to be
0.65%, or $6.50 per $1,000 of average net assets. The average large-cap growth
mutual fund had expenses in 1999 of 1.41%, or $14.10 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10,000; $1,000 for IRAs and custodial
accountsfor minors
INVESTMENT ADVISER
Turner Investment Partners, Inc., NEWSPAPER ABBREVIATION
Berwyn, Pa., since inception GrowEq
INCEPTION DATE VANGUARD FUND NUMBER
March 11, 1992 544
NET ASSETS AS OF SEPTEMBER 30, 2000 CUSIP NUMBER
$918 million 921921201
SUITABLE FOR IRAS TICKER SYMBOL
Yes VGEQX
--------------------------------------------------------------------------------
<PAGE>
4
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, such stocks typically have low
dividend yields and above-average prices in relation to such measures as
revenue, earnings, and book value. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison to such factors as
earnings and book value, and these stocks typically pay above-average dividend
yields. Growth and value stocks have, in the past, produced similar long-term
returns, though each category has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income).
Value funds, by contrast, are appropriate for investors who want some dividend
income and the potential for capital gains, but are less tolerant of
share-price fluctuations.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have, on average, a market value exceeding
$13 billion; mid-cap funds as those holding stocks of companies with a market
value between $1.5 billion and $13 billion; and small-cap funds as those
typically holding stocks of companies with a market value of less than $1.5
billion. Vanguard periodically reassesses these classifications.
--------------------------------------------------------------------------------
<PAGE>
5
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that are believed to have strong earnings growth potential and that
are reasonably valued at the time of purchase.
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
As of September 30, 2000, the Fund had invested 40% of net assets in its
top ten holdings.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock or bond holdings, the less
likely that fund performance may be hurt disproportionately by the poor
performance of relatively few securities. One measure of a fund's
diversification is the percentage of its assets represented by its ten largest
holdings. The average U.S. equity mutual fund has about 35% of its assets
invested in its ten largest holdings, while some less-diversified mutual funds
have more than 50% of assets invested in their top ten.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, MID- AND LARGE-CAP GROWTH STOCKS TEND TO
GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL.
THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
6
SECURITY SELECTION
Turner Investment Partners, Inc. (Turner), adviser to the Fund, seeks to buy
stocks of companies with strong earnings prospects and sell those with
deteriorating earnings prospects. The adviser evaluates a company's earnings
prospects through a blend of quantitative, fundamental, and technical criteria.
First, Turner uses a proprietary computer model to screen stocks according to
numerous earnings-growth and valuation factors. Next, Turner applies fundamental
analysis--meeting with companies' management teams and talking to industry
authorities in an effort to anticipate changes in corporate earnings before
other investors do. Finally, Turner uses technical analysis to evaluate trends
in trading volume and prices of individual stocks. Turner is interested
primarily in money flow, which measures investor interest in a stock based on
its volume, pricing patterns, and relative strengths versus other stocks in the
same industry.
The adviser believes forecasts for market-timing and sector rotation are
unreliable and introduce an unacceptable level of risk to a portfolio.
Accordingly, Turner invests the Fund's assets across major economic sectors and
attempts to maintain sector weightings that approximate the Russell 1000 Growth
Index. The sector weightings of the Index were as follows on September 30, 2000:
----------------------------------------------------
SECTOR PERCENTAGE OF INDEX
----------------------------------------------------
Technology 50.5%
Health Care 16.2
Consumer Discretionary 12.1
Other 7.7
Consumer Staples 3.1
Financial Services 3.1
Utilities 2.7
Producer Durables 2.2
Other Energy 2.0
Auto and Transportation 0.3
Materials and Processing 0.1
Integrated Oils 0.0
----------------------------------------------------
Keep in mind that, because sector weightings change daily, this listing is
only a "snapshot" at one point in time.
[FLAG] THE FUND IS ALSO SUBJECT TO SECTOR RISK, WHICH IS THE CHANCE THAT THE
FUND'S RETURN COULD BE HURT SIGNIFICANTLY BY PROBLEMS AFFECTING A
PARTICULAR ECONOMIC SECTOR. WITH A SUBSTANTIAL PORTION OF THE FUND'S TOTAL
ASSETS INVESTED IN TECHNOLOGY STOCKS, SECTOR RISK IS QUITE HIGH FOR THE
FUND.
The pace of change is extremely rapid in the technology sector, and new
technology products or services can become obsolete just a short period of time
after they emerge. Consequently, technology stocks tend to be much more volatile
than stocks of other economic sectors.
<PAGE>
7
The adviser also believes that it is imprudent to be overly invested in any
one stock, and therefore limits the Fund's investments as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
IF A STOCK'S MONTH-END
WEIGHTING WITHIN THE
INDEX IS: THEN THE FUND WILL LIMIT INVESTMENTS AT-COST IN THAT STOCK TO:
-----------------------------------------------------------------------------------------
<S> <C>
Less than 2% No more than 3.5% of Fund assets
2% to 5% No more than twice the Index weight at time of purchase
More than 5% No more than 1 1/2 times the Index weight at time of purchase
-----------------------------------------------------------------------------------------
</TABLE>
In addition, the Fund may invest no more than 3% of its assets in any stock
that is not part of the Index.
The Fund is run according to traditional methods of active investment
management. This means that securities are bought and sold according to the
adviser's judgments about companies and their financial prospects, within the
context of the stock market and the economy in general.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
The Fund may invest a portion of its assets in securities that are
convertible to common stocks, warrants, rights to purchase common stocks, and
American Depositary Receipts (ADRs). The Fund may also invest, to a limited
extent, in foreign securities.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
<PAGE>
8
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.
- Vanguard funds that hold foreign securities may value those securities at
their "fair value," rather than the price at which those securities last
traded on their primary foreign markets or exchanges, to take into account
events that occur after the close of those markets or exchanges.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
The Fund may sell securities regardless of how long they have been held.
Historically, the Fund has bought and sold securities frequently, resulting in a
HIGH turnover rate. The FINANCIAL HIGHLIGHTS section of this prospectus shows
historic turnover rates for the Fund. A turnover rate of 100%, for example,
would mean that the Fund had sold and replaced securities valued at 100% of its
net assets within a one-year period.
<PAGE>
9
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
taxable income. As of September 30, 2000, the average turnover rate for all
large-cap growth funds was approximately 128%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISER
Turner Investment Partners, Inc. (Turner), 1235 Westlakes Drive, Suite 350,
Berwyn, PA 19312, adviser to the Fund, is an investment advisory firm founded in
1990. As of September 30, 2000, Turner managed about $12 billion in assets. The
firm manages the Fund subject to the control of the trustees and officers of the
Fund.
Turner's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, the firm's advisory fee may be increased or decreased,
based on the cumulative total return of the Fund over a trailing 36-month period
as compared with the cumulative total return of the Russell 1000 Growth Index
over the same period. Please consult the Fund's Statement of Additional
Information for a complete explanation of how advisory fees are calculated.
Advisory fees for the full fiscal year ended September 30, 2000,
represented an effective annual rate of 0.53%. For the period prior to June 12,
2000, when the Fund
<PAGE>
10
became associated with Vanguard, the effective annual rate was 0.75%. For the
period from June 12 to September 30, 2000, the effective annual rate was 0.41%.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The managers primarily responsible for overseeing the Fund's investments are:
ROBERT E. TURNER, CFA, Chairman, and Chief Executive Officer of Turner
Investment Partners, Inc. He has worked in investment management since 1981 and
has been with Turner since co-founding the firm in 1990. Education: B.S. and
M.B.A., Bradley University.
MARK TURNER, President of Turner. He has worked in investment management since
1982 and has been with Turner since co-founding the firm in 1990. Education:
B.S., Bradley University; M.B.A., University of Illinois.
JOHN HAMMERSCHMIDT, Senior Equity Portfolio Manager of Turner. He has worked in
investment management since 1983 and has been with Turner since 1992. Education:
B.S., Lehigh University; M.B.A., Duke University.
CHRISTOPHER MCHUGH, Senior Equity Portfolio Manager of Turner. He has worked in
investment management since 1986 and has been with Turner since 1990. Education:
B.S., Philadelphia College of Textiles and Science; M.B.A., St. Joseph's
University.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
<PAGE>
11
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from any stock
holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
--------------------------------------------------------------------------------
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply.
<PAGE>
12
Please consult your tax adviser for detailed information about a fund's tax
consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by dividing the net assets of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements. Other independent accountants audited the financial statements for
years prior thereto. PricewaterhouseCoopers LLP, the Fund's independent
accountants, audited those financial statements for the year ended September 30,
2000, and their report--along with the Fund's financial statements--is included
in the Fund's most recent annual report to shareholders. You may have the annual
report sent to you without charge by contacting Vanguard.
<PAGE>
13
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
VANGUARD GROWTH EQUITY FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------- OCT. 31, 1995, TO YEAR ENDED
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%
Turnover Rate 303% 328% 250% 178% 148% 178%
===================================================================================================================================
</TABLE>
*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.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $15.88 per share.
During the year, the Fund had negative investment income of ($0.01) per share
(because expenses were greater than interest and dividend income), and a gain
of $7.33 per share from investments that had appreciated in value or that were
sold for higher prices than the Fund paid for them.
Shareholders received $4.52 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($7.32 per share) minus the distributions ($4.52 per share)
resulted in a share price of $18.68 at the end of the year. This was an
increase of $2.80 per share (from $15.88 at the beginning of the year to $18.68
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was 51.07% for the
year.
As of September 30, 2000, the Fund had $918 million in net assets. For the
year, its expense ratio was 0.74% ($7.40 per $1,000 of net assets); and its net
investment income amounted to -0.19% of its average net assets. It sold and
replaced securities valued at 303% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
14
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INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details
of our many shareholder services for individual investors. A separate
booklet, The Compass, does the same for institutional investors. You can
request either booklet by calling or writing Vanguard, using the Contacting
Vanguard instructions found at the end of this section.
BUYING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS
TO OPEN AND MAINTAIN AN ACCOUNT: $10,000 for regular accounts; $1,000 for IRAs
and custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
HOW TO BUY SHARES
BY CHECK: Mail your check and a completed account registration form to Vanguard.
When adding to an existing account, send your check with an Invest-By-Mail form
detached from your last account statement. Make the check payable to: The
Vanguard Group-544. For addresses, see Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption
from another Vanguard fund. All open Vanguard funds permit exchange purchases
requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED
INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Know for specifics.
BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined NAV after Vanguard accepts your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your TRADE DATE.
PURCHASE RULES YOU SHOULD KNOW
^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
<PAGE>
15
^U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and drawn
on a U.S. bank.
^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares
at any time, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
REDEEMING SHARES
HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before initiating your request.
ONLINE: Request a redemption through our website at Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see Contacting Vanguard.
BY MAIL: Send your written redemption instructions to Vanguard. For addresses,
see Contacting Vanguard.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined NAV after Vanguard accepts your
redemption request, including any special documentation required under the
circumstances. As long as your request is received before the close of regular
trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your TRADE DATE.
TYPES OF REDEMPTIONS
^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date.
^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your
redemption to purchase shares of another Vanguard fund. All open Vanguard funds
accept exchange redemptions requested in writing. Most Vanguard funds--other
than the index-oriented funds--also accept exchange redemptions requested online
or by telephone. See Other Rules You Should Know for specifics.
^WIRE REDEMPTIONS. When redeeming from a money market fund, bond fund, or the
Preferred Stock Fund, you may instruct Vanguard to wire your redemption proceeds
to a
<PAGE>
16
previously designated bank account. Wire redemptions are not available for
Vanguard's other funds. The wire redemption option is not automatic; you must
establish it by completing a special form or the appropriate section of your
account registration. Also, wire redemptions must be requested in writing or by
telephone, not online. A $5 fee applies to wire redemptions under $5,000.
Money Market Funds: For telephone requests accepted at Vanguard by 10:45 a.m.,
Eastern time, the redemption proceeds will arrive at your bank by the close of
business that same day. For other requests accepted before 4 p.m., Eastern time,
the redemption proceeds will arrive at your bank by the close of business on the
following business day.
Bond Funds and Preferred Stock Fund: For requests accepted at Vanguard by 4
p.m., Eastern time, the redemption proceeds will arrive at your bank by the
close of business on the following business day.
REDEMPTION RULES YOU SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain
types of accounts, such as trust, corporate, nonprofit, or retirement accounts.
Please call us before attempting to redeem from these types of accounts.
^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of your redemption in-kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also reserves the right to
delay payment of your redemption proceeds for up to seven days. By calling us
before you attempt to redeem a large dollar amount, you are more likely to avoid
in-kind or delayed payment of your redemption.
^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds
will not be made available to you until the Fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
Vanguard Fund Express(R).
^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written consent of all registered account owners, which must be
provided under signature guarantees. You can obtain a signature guarantee from
most commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
<PAGE>
17
^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days at any time. In addition, Vanguard funds
can suspend redemptions and/or postpone payments of redemption proceeds at times
when the New York Stock Exchange is closed or during emergency circumstances, as
determined by the U.S. Securities and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS
^AUTOMATIC. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
^TELE-ACCOUNT(TM). To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a personal identification number (PIN).
Call Tele-Account to obtain a PIN, and allow seven days before using this
service.
^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the following information exactly as
registered on the account:
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification number.
- Personal Identification Number (PIN), if applicable.
^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.
^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone exchanges (in or out),
except for IRAs and certain other retirement accounts.
VANGUARD.COM
^REGISTRATION. You can use your personal computer to review your account
holdings, to sell or exchange shares of most Vanguard funds, and to perform
other transactions. To establish this service, you can register online.
^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund do not permit online exchanges (in or out), except for IRAs
and certain other retirement accounts.
<PAGE>
18
WRITTEN INSTRUCTIONS
^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction
instructions that are not in "good order." This means that your instructions
must include:
- The fund name and account number.
- The amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees, if required for the type of transaction.*
*For instance, signature guarantees must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses due to fraud, so long as
we reasonably believe that the person transacting on an account is authorized to
do so. Please take precautions to protect yourself from fraud. Keep your account
information private and immediately review any account statements that we send
to you. Contact Vanguard immediately about any transactions you believe to be
unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a fund and
increase the fund's costs for all shareholders, Vanguard limits account activity
as follows:
- You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A NON-MONEY
MARKET FUND during any 12-month period.
- Your round trips through a non-money market fund must be at least 30 days
apart.
- All funds may refuse share purchases at any time, for any reason.
- Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed by a purchase back into the
same fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the fund.
<PAGE>
19
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. If you invest with
Vanguard through an intermediary, please read that firm's program materials
carefully to learn of any special rules that may apply. For example, special
terms may apply to additional service features, fees, or other policies.
LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment.
Vanguard deducts a $10 fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES
We will send you quarterly portfolio summaries to help you keep track of your
accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.
AVERAGE COST REVIEW STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you redeemed during the current calendar year, using the average cost
single category method.
CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.
TAX STATEMENTS
We will send you annual tax statements to assist in preparing your income tax
returns. These statements, which are generally mailed in January, will report
the previous year's dividend and capital gains distributions, proceeds from the
sale of shares, and distributions from IRAs or other retirement plans.
<PAGE>
20
REPORTS
Fund financial reports will be mailed twice a year--in May and November. These
comprehensive reports include an assessment of a fund's performance (and a
comparison to its industry benchmark), an overview of the financial markets, the
fund's adviser reports, and the fund's financial statements, which include a
listing of the fund's holdings.
To keep a fund's costs as low as possible (so that you and other
shareholders can keep more of the fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more shareholders have the same last name and address, we send just one fund
report to that address--instead of mailing separate reports to each shareholder.
If you want us to send separate reports, however, you may notify our Client
Services Department.
CONTACTING VANGUARD
ONLINE
VANGUARD.COM
- Your best source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests
- 24 hours per day, 7 days per week
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at 1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at 1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- Business hours only
<PAGE>
21
VANGUARD ADDRESSES
REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBER
Always use this fund number when contacting us about Vanguard Growth Equity
Fund-544.
<PAGE>
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<PAGE>
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<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Growth Equity Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-5445
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P544 012001
<PAGE>
VANGUARD(R) EQUITY INCOME FUND
FOR PARTICIPANTS - JANUARY 19, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
September 30, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD GROWTH EQUITY FUND
Participant Prospectus
January 19, 2001
A Growth Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
4 MORE ON THE FUND
9 THE FUND AND VANGUARD
9 INVESTMENT ADVISER
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
11 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
14 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like to
open a personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to long-term capital appreciation.
INVESTMENT STRATEGIES
The Fund invests mainly--at least 65% of its total assets--in mid- and
large-capitalization stocks of U.S. companies. The Fund's adviser looks for
companies that are believed to have strong earnings growth potential and to be
reasonably valued at the time of purchase. The Fund seeks to remain "sector
neutral" as compared to the Russell 1000 Growth Index, meaning that it invests
across economic sectors in roughly the same proportions as those sectors are
represented in the Index. The Fund trades stocks aggressively, which may result
in higher transaction costs for the Fund, greater capital gains tax liabilities
for shareholders, and reduced after-tax performance.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from mid- and
large-capitalization growth stocks will trail returns from other asset
classes or the overall stock market. Specific types of stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- Sector risk, which is the chance that the Fund's returns could be hurt
significantly by problems affecting a particular economic sector. With a
substantial portion of the Fund's total assets invested in technology
stocks, sector risk is quite high for the Fund. The pace of change is
extremely rapid in the technology sector, and new technology products or
services can become obsolete just a short period of time after they emerge.
Consequently, technology stocks tend to be much more volatile than stocks
of other economic sectors.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another since inception. In addition, there is a table that
shows how the Fund's average annual total returns compare with those of a
relevant market index over set periods of time. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.*
*Prior to June 12, 2000, Vanguard Growth Equity Fund was organized as Turner
Growth Equity Fund and was sponsored by Turner Investment Partners, Inc., its
investment adviser. A reorganization brought the Fund into The Vanguard Group,
while maintaining the same investment objective, strategies, and adviser.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
[SCALE -40% TO 80%]
1993 15.38%
1994 -6.73%
1995 29.96%
1996 19.23%
1997 31.36%
1998 38.07%
1999 53.60%
2000 -23.10%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 39.67% (quarter ended December 31, 1999), and the lowest return for
a quarter was -28.91% (quarter ended December 31, 2000).
-----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
-----------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-----------------------------------------------------------------
Vanguard Growth Equity Fund -23.10% 20.63% 17.19%
Russell 1000 Growth Index -22.43 18.15 16.14
-----------------------------------------------------------------
*March 11, 1992.
-----------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on amounts now in effect.*
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.63%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.65%
*The information in the table has been restated to reflect estimated
expenses for the Fund's first full fiscal year as a member of The Vanguard
Group, rather than to reflect last year's expenses, which changed
materially when the Fund became a member of The Vanguard Group on June 12,
2000.
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$66 $208 $362 $810
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect the Fund's expense ratio for the current fiscal year to be
0.65%, or $6.50 per $1,000 of average net assets. The average large-cap growth
mutual fund had expenses in 1999 of 1.41%, or $14.10 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December GrowEq
INVESTMENT ADVISER VANGUARD FUND NUMBER
Turner Investment Partners, Inc., Berwyn, Pa., 544
since inception
CUSIP NUMBER
INCEPTION DATE 921921201
March 11, 1992
TICKER SYMBOL
NET ASSETS AS OF SEPTEMBER 30, 2000 VGEQX
$918 million
--------------------------------------------------------------------------------
<PAGE>
4
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, such stocks typically have low
dividend yields and above-average prices in relation to such measures as
revenue, earnings, and book value. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison to such factors as
earnings and book value, and these stocks typically pay above-average dividend
yields. Growth and value stocks have, in the past, produced similar long-term
returns, though each category has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income).
Value funds, by contrast, are appropriate for investors who want some dividend
income and the potential for capital gains, but are less tolerant of
share-price fluctuations.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have, on average, a market value exceeding
$13 billion; mid-cap funds as those holding stocks of companies with a market
value between $1.5 billion and $13 billion; and small-cap funds as those
typically holding stocks of companies with a market value of less than $1.5
billion. Vanguard periodically reassesses these classifications.
--------------------------------------------------------------------------------
<PAGE>
5
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that are believed to have strong earnings growth potential and that
are reasonably valued at the time of purchase.
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
As of September 30, 2000, the Fund had invested 40% of net assets in its
top ten holdings.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock or bond holdings, the less
likely that fund performance may be hurt disproportionately by the poor
performance of relatively few securities. One measure of a fund's
diversification is the percentage of its assets represented by its ten largest
holdings. The average U.S. equity mutual fund has about 35% of its assets
invested in its ten largest holdings, while some less-diversified mutual funds
have more than 50% of assets invested in their top ten.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, MID- AND LARGE-CAP GROWTH STOCKS TEND TO
GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL.
THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
6
SECURITY SELECTION
Turner Investment Partners, Inc. (Turner), adviser to the Fund, seeks to buy
stocks of companies with strong earnings prospects and sell those with
deteriorating earnings prospects. The adviser evaluates a company's earnings
prospects through a blend of quantitative, fundamental, and technical criteria.
First, Turner uses a proprietary computer model to screen stocks according to
numerous earnings-growth and valuation factors. Next, Turner applies fundamental
analysis--meeting with companies' management teams and talking to industry
authorities in an effort to anticipate changes in corporate earnings before
other investors do. Finally, Turner uses technical analysis to evaluate trends
in trading volume and prices of individual stocks. Turner is interested
primarily in money flow, which measures investor interest in a stock based on
its volume, pricing patterns, and relative strengths versus other stocks in the
same industry.
The adviser believes forecasts for market-timing and sector rotation are
unreliable and introduce an unacceptable level of risk to a portfolio.
Accordingly, Turner invests the Fund's assets across major economic sectors and
attempts to maintain sector weightings that approximate the Russell 1000 Growth
Index. The sector weightings of the Index were as follows on September 30, 2000:
----------------------------------------------------
SECTOR PERCENTAGE OF INDEX
----------------------------------------------------
Technology 50.5%
Health Care 16.2
Consumer Discretionary 12.1
Other 7.7
Consumer Staples 3.1
Financial Services 3.1
Utilities 2.7
Producer Durables 2.2
Other Energy 2.0
Auto and Transportation 0.3
Materials and Processing 0.1
Integrated Oils 0.0
----------------------------------------------------
Keep in mind that, because sector weightings change daily, this listing is
only a "snapshot" at one point in time.
[FLAG] THE FUND IS ALSO SUBJECT TO SECTOR RISK, WHICH IS THE CHANCE THAT THE
FUND'S RETURN COULD BE HURT SIGNIFICANTLY BY PROBLEMS AFFECTING A
PARTICULAR ECONOMIC SECTOR. WITH A SUBSTANTIAL PORTION OF THE FUND'S TOTAL
ASSETS INVESTED IN TECHNOLOGY STOCKS, SECTOR RISK IS QUITE HIGH FOR THE
FUND.
The pace of change is extremely rapid in the technology sector, and new
technology products or services can become obsolete just a short period of time
after they emerge. Consequently, technology stocks tend to be much more volatile
than stocks of other economic sectors.
<PAGE>
7
The adviser also believes that it is imprudent to be overly invested in any
one stock, and therefore limits the Fund's investments as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
IF A STOCK'S MONTH-END
WEIGHTING WITHIN THE
INDEX IS: THEN THE FUND WILL LIMIT INVESTMENTS AT-COST IN THAT STOCK TO:
-----------------------------------------------------------------------------------------
<S> <C>
Less than 2% No more than 3.5% of Fund assets
2% to 5% No more than twice the Index weight at time of purchase
More than 5% No more than 1 1/2 times the Index weight at time of purchase
-----------------------------------------------------------------------------------------
</TABLE>
In addition, the Fund may invest no more than 3% of its assets in any stock
that is not part of the Index.
The Fund is run according to traditional methods of active investment
management. This means that securities are bought and sold according to the
adviser's judgments about companies and their financial prospects, within the
context of the stock market and the economy in general.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
The Fund may invest a portion of its assets in securities that are
convertible to common stocks, warrants, rights to purchase common stocks, and
American Depositary Receipts (ADRs). The Fund may also invest, to a limited
extent, in foreign securities.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
<PAGE>
8
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.
- Vanguard funds that hold foreign securities may value those securities at
their "fair value," rather than the price at which those securities last
traded on their primary foreign markets or exchanges, to take into account
events that occur after the close of those markets or exchanges.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
The Fund may sell securities regardless of how long they have been held.
Historically, the Fund has bought and sold securities frequently, resulting in a
HIGH turnover rate. The FINANCIAL HIGHLIGHTS section of this prospectus shows
historic turnover rates for the Fund. A turnover rate of 100%, for example,
would mean that the Fund had sold and replaced securities valued at 100% of its
net assets within a one-year period.
<PAGE>
9
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
taxable income. As of September 30, 2000, the average turnover rate for all
large-cap growth funds was approximately 128%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISER
Turner Investment Partners, Inc. (Turner), 1235 Westlakes Drive, Suite 350,
Berwyn, PA 19312, adviser to the Fund, is an investment advisory firm founded in
1990. As of September 30, 2000, Turner managed about $12 billion in assets. The
firm manages the Fund subject to the control of the trustees and officers of the
Fund.
Turner's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, the firm's advisory fee may be increased or decreased,
based on the cumulative total return of the Fund over a trailing 36-month period
as compared with the cumulative total return of the Russell 1000 Growth Index
over the same period. Please consult the Fund's Statement of Additional
Information for a complete explanation of how advisory fees are calculated.
Advisory fees for the full fiscal year ended September 30, 2000,
represented an effective annual rate of 0.53%. For the period prior to June 12,
2000, when the Fund
<PAGE>
10
became associated with Vanguard, the effective annual rate was 0.75%. For the
period from June 12 to September 30, 2000, the effective annual rate was 0.41%.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The managers primarily responsible for overseeing the Fund's investments are:
ROBERT E. TURNER, CFA, Chairman, and Chief Executive Officer of Turner
Investment Partners, Inc. He has worked in investment management since 1981 and
has been with Turner since co-founding the firm in 1990. Education: B.S. and
M.B.A., Bradley University.
MARK TURNER, President of Turner. He has worked in investment management since
1982 and has been with Turner since co-founding the firm in 1990. Education:
B.S., Bradley University; M.B.A., University of Illinois.
JOHN HAMMERSCHMIDT, Senior Equity Portfolio Manager of Turner. He has worked in
investment management since 1983 and has been with Turner since 1992. Education:
B.S., Lehigh University; M.B.A., Duke University.
CHRISTOPHER MCHUGH, Senior Equity Portfolio Manager of Turner. He has worked in
investment management since 1986 and has been with Turner since 1990. Education:
B.S., Philadelphia College of Textiles and Science; M.B.A., St. Joseph's
University.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>
11
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from any
stock holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by dividing the net assets of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements. Other independent accountants audited the financial statements for
years prior thereto. PricewaterhouseCoopers LLP, the Fund's independent
accountants, audited those financial statements for the year ended September 30,
2000, and their report--along with the Fund's financial statements--is included
in the Fund's most recent annual report to shareholders. You may have the annual
report sent to you without charge by contacting Vanguard.
<PAGE>
12
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
VANGUARD GROWTH EQUITY FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------- OCT. 31, 1995, TO YEAR ENDED
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%
Turnover Rate 303% 328% 250% 178% 148% 178%
===================================================================================================================================
</TABLE>
*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.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $15.88 per share.
During the year, the Fund had negative investment income of ($0.01) per share
(because expenses were greater than interest and dividend income), and a gain
of $7.33 per share from investments that had appreciated in value or that were
sold for higher prices than the Fund paid for them.
Shareholders received $4.52 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($7.32 per share) minus the distributions ($4.52 per share)
resulted in a share price of $18.68 at the end of the year. This was an
increase of $2.80 per share (from $15.88 at the beginning of the year to $18.68
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was 51.07% for the
year.
As of September 30, 2000, the Fund had $918 million in net assets. For the
year, its expense ratio was 0.74% ($7.40 per $1,000 of net assets); and its net
investment income amounted to -0.19% of its average net assets. It sold and
replaced securities valued at 303% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
14
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Growth Equity Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-5445
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I544 012001
<PAGE>
PART B
VANGUARD(R) FENWAY FUNDS (THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 19, 2001
This Statement is not a Prospectus but should be read in conjunction with
the Trust's current Prospectuses dated January 19, 2001. To obtain, without
charge, a Prospectus or the most recent Annual Report to Shareholders, which
contain the Trust's financial statements as hereby incorporated by reference,
please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE TRUST .........................................B-1
INVESTMENT POLICIES ..............................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS ...............................B-9
PURCHASE OF SHARES ...............................................B-10
REDEMPTION OF SHARES .............................................B-10
SHARE PRICE ......................................................B-10
MANAGEMENT OF THE FUNDS ..........................................B-11
YIELD AND TOTAL RETURNS ..........................................B-14
INVESTMENT ADVISORY SERVICES .....................................B-15
PORTFOLIO TRANSACTIONS ...........................................B-20
FINANCIAL STATEMENTS .............................................B-22
COMPARATIVE INDEXES ..............................................B-22
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Vanguard Equity Income Fund, Inc., a Maryland
corporation, in 1987, and was reorganized as Vanguard Equity Income Fund, a
Delaware business trust, in May 1998. On March 1, 2000, the Trust was renamed
Vanguard Fenway Funds. The Trust is registered with the United States Securities
and Exchange Commission (the Commission) under the Investment Company Act of
1940 (the 1940 Act) as an open-end, diversified management company. It currently
offers the following funds, each of which is an open-end diversified management
company:
Vanguard(R) Equity Income Fund
Vanguard(R) Growth Equity Fund
(individually, a Fund; collectively the Funds)
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that each Fund may
issue.
B-1
<PAGE>
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02110, serves as the custodian for Vanguard Equity Income Fund. The
custodian for Vanguard Growth Equity Fund is First Union National Bank, PA4943,
530 Walnut Street, Philadelphia, PA 19106. The custodians are responsible for
maintaining the Funds' assets and keeping all necessary accounts and records of
Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square,
Suite 1700, 2001 Market Street, Philadelphia, PA 19103, serves as the Funds'
independent accountants. The accountants audit the Funds' financial statements
and provide other related services. Prior to the Vanguard Growth Equity Fund
reorganization, the Fund employed other auditors as its independent auditors.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, PA 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of the Funds. Each Fund may be terminated
by reorganization into another mutual fund or by liquidation and distribution of
its assets. Unless terminated by reorganization or liquidation, the Funds will
continue indefinitely.
SHAREHOLDER LIABILITY. The Funds are organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of a Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to
distributions. Distributions will be made from the assets of a Fund, and will be
paid ratably to all shareholders of the Fund according to the number of shares
of such Fund held by shareholders on the record date.
VOTING RIGHTS. Shareholders are entitled to a vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any Fund; or (iii) the
trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove trustees upon the written request of shareholders
representing 10% or more of a Fund's net assets, and to change any fundamental
policy of a Fund. Unless otherwise required by applicable law, shareholders of
each Fund receive one vote for each dollar of net asset value owned on the
record date, and a fractional vote for each fractional dollar of net asset value
owned on the record date. However, only the shares of the Fund affected by a
particular matter are entitled to vote on that matter. Voting rights are
non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the applicable Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with each
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with each
Fund's shares.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. Each Fund's shares, when issued, are fully paid and
non-assessable.
B-2
<PAGE>
TAX STATUS OF THE FUNDS
Each Fund intends to continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. This special tax
status means that a Fund will not be liable for federal tax on income and
capital gains distributed to shareholders. In order to preserve its tax status,
each Fund must comply with certain requirements. If a Fund fails to meet these
requirements in any taxable year, it will be subject to tax on its taxable
income at corporate rates, and all distributions from earnings and profits,
including any distributions of net tax-exempt income and net long-term capital
gains, will be taxable to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the Funds' investment objectives and
policies set forth in the Prospectuses. Vanguard Equity Income Fund intends to
invest at least 65% of its total assets in equity securities intended to produce
income. Vanguard Growth Equity Fund intends to invest at least 65% of its total
assets in common stocks of growth companies.
FUTURES CONTRACTS AND OPTIONS
Each Fund may enter into futures contracts, options, and options on futures
contracts in order to maintain cash reserves while simulating full investment.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
Government agency. Assets committed to futures contracts will be segregated to
the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been sold, selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to the market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the value of the underlying securities. Each Fund intends to use futures
contracts only for bona fide hedging purposes. Regulations of the CFTC
applicable to each Fund require that all of its futures transactions constitute
bona fide hedging transactions except to the extent that the aggregate initial
B-3
<PAGE>
margins and premiums required to establish any non-hedging positions do not
exceed five percent of the value of the respective Fund's portfolio.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of a Fund's income to fluctuations in the
market value of its securities, the use of futures contracts may be a more
effective means of hedging this exposure. While the Funds will incur commission
expenses in both opening and closing out futures positions, these costs are
lower than transaction costs incurred in the purchase and sale of the underlying
securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each Fund will
not enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the Fund's total assets. In addition, each Fund will not enter into futures
contracts to the extent that its outstanding obligations to purchase securities
under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures may be closed
out only on an Exchange which provides a secondary market for such futures.
However, there can be no assurance that a liquid secondary market will exist for
any particular futures contract at any specific time. Thus, it may not be
possible to close a futures position. In the event of adverse price movements,
each Fund would continue to be required to make daily cash payments to maintain
its required margin. In such situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily margin requirements at a
time when it may be disadvantageous to do so. In addition, each Fund may be
required to make delivery of the instruments underlying the futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge. Each Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out.
A 15% decrease in the value of the futures contract would result in a loss
equal to 150% of the original margin deposit if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract. However, because the futures strategies of
each Fund are engaged in only for hedging purposes, the Advisers do not believe
that the Funds are subject to the risks of loss frequently associated with
futures transactions. Each Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in the underlying
financial instrument and sold it after the decline.
Utilization of futures transactions by each Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that each Fund could both lose money on futures contracts and also
experience a decline in the value of its portfolio securities. There is also the
risk of loss by each Fund of margin deposits in the event of bankruptcy of a
broker with whom the respective Fund has an open position in a futures contract
or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
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FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Except for transactions that
each Fund has identified as hedging transactions, each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. The Funds may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Funds.
In order for each Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to each
Fund's business of investing in such securities or currencies. It is anticipated
that any net gain recognized on futures contracts will be considered qualifying
income for purposes of the 90% requirement.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on a Fund's other investments and shareholders will be advised on
the nature of the transactions.
REPURCHASE AGREEMENTS
Each Fund, along with other members of The Vanguard Group, may invest in
repurchase agreements with commercial banks, brokers, or dealers either for
defensive purposes due to market conditions or to generate income from its
excess cash balances. A repurchase agreement is an agreement under which a Fund
acquires a fixed-income security (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, each Fund's board of trustees will monitor
repurchase agreement transactions generally and will establish guidelines and
standards for review by the investment adviser of the creditworthiness of any
bank, broker, or dealer party to a repurchase agreement.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to the liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the advisers
acknowledge these risks, it is expected that they will be controlled through
careful monitoring procedures.
LENDING OF SECURITIES
Each Fund may lend its investment securities to qualified institutional
investors (typically brokers, dealers, banks, or other financial institutions)
who need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities, or completing
arbitrage operations. By lending its investment securities, a Fund attempts to
increase its net investment income through the receipt of
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interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Fund. The terms, the structure, and the aggregate amount of such loans must
be consistent with the 1940 Act and the Rules or interpretations of the
Commission thereunder. These provisions limit the amount of securities a Fund
may lend to 33 1/3% of the Fund's total assets, and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit, or securities issued or guaranteed by the United
States Government having at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the
Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities, and any increase in
their market value. Loan arrangements made by a Fund will comply with all other
applicable regulatory requirements, including the rules of the New York Stock
Exchange, which presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer, or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Funds' board of trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the loaned securities, but if a material event occurs that affects the
securities on loan, the Fund must call the loan and vote the securities.
VANGUARD INTERFUND LENDING PROGRAM
The Commission has issued an exemptive order permitting each Fund and other
Vanguard funds to participate in Vanguard's interfund lending program. This
program allows the Vanguard funds to borrow money from and loan money to each
other for temporary or emergency purposes. The program is subject to a number of
conditions, including the requirement that no fund may borrow or lend money
through the program unless it receives a more favorable interest rate than is
available from a typical bank for a comparable transaction. In addition, a
Vanguard fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The boards of trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
TEMPORARY INVESTMENTS
Each Fund may take temporary defensive measures that are inconsistent with
the Fund's normal fundamental or non-fundamental investment policies and
strategies in response to adverse market, economic, political, or other
conditions. Such measures could include investments in (a) highly liquid
short-term fixed income securities issued by or on behalf of municipal or
corporate issuers, obligations of the U.S. Government and its agencies,
commercial paper, and bank certificates of deposit; (b) repurchase agreements
involving any such securities; (c) shares of other investment companies which
have investment objectives consistent with those of the Fund; and (d) other
money market instruments. There is no limit on the extent to which a Fund may
take temporary defensive measures. In taking such measures, the Fund may fail to
achieve its investment objective.
FOREIGN INVESTMENTS
Each Fund may invest up to 20% of its total assets in securities of foreign
companies. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies.
CURRENCY RISK. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, The Funds will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of each
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Fund permit it to enter into forward foreign currency exchange contracts in
order to hedge holdings and commitments against changes in the level of future
currency rates. Such contracts involve an obligation to purchase or sell a
specific currency at a future date at a price set at the time of the contract.
COUNTRY RISK. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of foreign stock exchanges, brokers, and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in companies in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, commissions on many foreign
stock exchanges are generally higher than commissions on U.S. exchanges. In
addition, it is expected that the expenses for custodial arrangements of foreign
securities will be somewhat greater than the expenses for the custodial
arrangements for handling U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option, or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary gain or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency income or loss arising from certain
identified forward contracts, futures contracts, and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
Fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated
investments and foreign currency contracts the Funds may make or enter into will
be subject to the special currency rules described above.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are securities that may not be sold or disposed of in the
ordinary course of business within seven business days at approximately the
value at which they are being carried on a Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional
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buyers or after they have been held for a number of years, they may be
considered illiquid securities--meaning that they could be difficult for a Fund
to convert to cash if needed.
If a substantial market develops for a restricted security held by a Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Funds' board of trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933 (the 1933
Act). While the Funds' investment advisers determine the liquidity of restricted
securities on a daily basis, the board oversees and retains ultimate
responsibility for the advisers' decisions. Several factors that the board
considers in monitoring these decisions include the valuation of a security, the
availability of qualified institutional buyers, and the availability of
information about the security's issuer.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
ADRs are securities, typically issued by a U.S. financial institutional (a
depositary), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
may be available through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the underlying security.
Holders of unsponsored depositary receipts generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through, to the holders of the
receipts, voting rights with respect to the deposited securities.
CONVERTIBLE SECURITIES
Convertible securities are corporate securities that are exchangeable for a
set number of another security at a prestated price. Convertible securities
typically have characteristics of both fixed income and equity securities.
Because of the conversion feature, the market value of a convertible security
tends to move with the market value of the underlying stock. The value of a
convertible security is also affected by prevailing interest rates, the credit
quality of the issuer, and any call provisions.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations may carry variable or floating rates of interest, and
may involve a conditional or unconditional demand feature. Such instruments bear
interest at rates which are not fixed, but which vary with changes in specified
market rates or indices. The interest rates on these securities may be reset
daily, weekly, quarterly, or some other reset period, and may have a floor or
ceiling on interest rate changes. There is a risk that the current interest rate
on such obligations may not accurately reflect existing market interest rates. A
demand instrument with a demand notice exceeding seven days may be considered
illiquid if there is no secondary market for such security.
WARRANTS
Warrants are instruments giving holders the right, but not the obligation,
to buy equity or fixed income securities of a company at a given price during a
specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
When-issued or delayed delivery securities are subject to market
fluctuations due to changes in market interest rates and it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. Although a
Fund generally purchases securities on a when-issued or forward commitment basis
with the intention of actually acquiring securities for its investment
portfolio, a Fund may dispose of a when-issued security or forward commitment
prior to settlement if it deems appropriate.
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FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the Fund's shares. For these purposes, a "majority" of the
Fund's shares means shares representing the lesser of: (i) 67% or more of the
shares voted, so long as more than 50% of a Fund's outstanding shares are
present or represented by proxy; or (ii) more than 50% of a Fund's outstanding
shares.
BORROWING. Vanguard Equity Income Fund may not borrow money, except for
temporary purposes in an amount not exceeding 15% of the Fund's net assets.
Vanguard Growth Equity Fund may not borrow money in an amount exceeding 33 1/3%
of the value of its total assets, provided that, for purposes of this
limitation, investment strategies which either obligate the Fund to purchase
securities or require the Fund to segregate assets are not considered to be
borrowings. For Vanguard Growth Equity Fund, asset coverage of at least 300% is
required for all borrowings, except where the Fund has borrowed for temporary
purposes in amounts not exceeding 5%. Each Fund may borrow money through banks,
or Vanguard's interfund lending program only, and must comply with all
applicable regulatory conditions. Each Fund may not make any additional
investments whenever outstanding borrowings exceed 5% of net assets.
COMMODITIES. Each Fund may not invest in commodities, except that a Fund
may invest in stock futures contracts, stock options, and options on stock
futures contracts. No more than 5% of the Fund's total assets may be used as
initial margin deposit for futures contracts, and no more than 20% of the Fund's
total assets may be obligated under futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, each fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. Each Fund may not invest in a company for the
purpose of controlling its management.*
INVESTMENT COMPANIES. Each Fund may not invest in any other investment
company, except through a merger, consolidation, or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.*
LOANS. Each Fund may not lend money to any person except by purchasing
fixed income securities that are publicly distributed, by entering into
repurchase agreements, by lending its portfolio securities, or through
Vanguard's interfund lending program.
MARGIN. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.*
PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.*
REAL ESTATE. Each Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. Each Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
* For Vanguard Growth Equity Fund, this is a non-fundamental limitation and may
be changed by the Fund's board of trustees.
None of these limitations prevents the Funds from participating in The
Vanguard Group (Vanguard). Because each Fund is a member of the Group, each Fund
may own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirements. See "Management of the Funds"
for more information. The investment limitations set forth above are considered
at the time investment securities are purchased. If a percentage restriction is
adhered to at the time the investment is made, a later increase in percentage
resulting from a change in the market value of assets will not constitute a
violation of such restriction.
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PURCHASE OF SHARES
Each Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for, or any other restrictions on,
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the Commission as a result of
which it is not reasonably practicable for each Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Each Fund has made a Rule 18f-1 election with the Commission to pay in cash
all redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund
at the beginning of such period.
No charge is made by the Funds for redemptions. Shares redeemed may be
worth more or less than what was paid for them, depending on the market value of
the securities held by the Funds.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the regular close
of the New York Stock Exchange (the Exchange) generally 4 p.m. Eastern time on
each day that the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price or the official closing price on the day the valuation is made. Such
securities which are not traded on the valuation date are valued at the mean of
the bid and ask prices. Price information on exchange-listed securities is taken
from the exchange where the security is primarily traded. Any foreign securities
are valued at the latest quoted sales price available before the time when
assets are valued. Securities may be valued on the basis of prices provided by a
pricing service when such prices are believed to reflect the fair market value
of such securities.
Short-term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
board of trustees deems in good faith to reflect fair value.
The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
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MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of the Funds manage their day-to-day operations and are
responsible to the Funds' board of trustees. The trustees set broad policies for
each Fund and choose its officers. The following is a list of trustees and
officers of each Fund and a statement of their present positions and principal
occupations during the past five years. As a group, the Funds' trustees and
officers own less than 1% of the outstanding shares of each Fund. Each trustee
(except Mr. MacLaury) serves as a director of The Vanguard Group, Inc. In
addition, each trustee serves as a trustee of each of the 109 funds administered
by Vanguard (99 in the case of Mr. MacLaury). The mailing address of the
trustees and officers of the Funds is Post Office Box 876, Valley Forge, PA
19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
CHARLES D. ELLIS, (DOB: 10/23/1937) Trustee Retired Managing Partner of
Greenwich Associates (International Business Strategy Consulting); Successor
Trustee of Yale University; Overseer of the Stern School of Business at New York
University; Trustee of the Whitehead Institute for Biomedical Research.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee Vice President, Chief
Information Officer, and member of the Executive Committee of Johnson & Johnson
(Pharmaceuticals/Consumer Products); Director of Johnson & Johnson*MERCK
Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's
Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee President Emeritus of The Brookings
Institution (Independent Non-Partisan Research Organization); Director of
American Express Bank, Ltd., The St. Paul Companies, Inc. (Insurance and
Financial Services), and National Steel Corp.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President, Chief
Executive Officer, and Director of NACCO Industries, Inc. (Machinery/Coal/
Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee 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, (DOB: 3/2/1936) Trustee Retired Chairman and CEO of Rohm &
Haas Co. (Chemicals); Director of Cummins Engine Co. (Diesel Engines), The Mead
Corp. (Paper Products), and AmeriSource Health Corp. (Pharmaceutical
Distribution); Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary* Managing Director of The
Vanguard Group, Inc.; Secretary of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer* Principal of The Vanguard Group,
Inc.; Treasurer of each of the investment companies in The Vanguard Group.
* Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Each Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard
Group obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard funds.
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Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and equipment. Each
fund pays a share of Vanguard's total expenses which are allocated among the
funds under methods approved by the board of trustees of each fund. In addition,
each fund bears its own direct expenses such as legal, auditing and custodian
fees. In order to generate additional revenues for Vanguard and thereby reduce
the funds' expenses, Vanguard also provides certain administrative services to
other organizations.
The funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard and the Funds' advisers have adopted Codes of Ethics designed to
prevent employees who may have access to nonpublic information about the trading
activities of the Funds (access persons) from profiting from that information.
The Codes permit access persons to invest in securities for their own accounts,
including securities that may be held by the Funds, but place substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons receive advance approval for every securities trade
to ensure that there is no conflict with the trading activities of the Funds.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each fund's relative
net assets and its contribution to Vanguard's capital. At September 30, 2000,
the Funds had contributed $589,000 to Vanguard, representing 0.02% of each
Fund's net assets and 0.60% of Vanguard's capitalization. The Amended and
Restated Funds' Service Agreement provides as follows: (a) each Vanguard fund
may be called upon to invest up to 0.40% of its current assets in Vanguard, and
(b) there is no other limitation on the dollar amount that each Vanguard fund
may contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
trustees and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon relative net assets. The remaining one
half of those expenses is allocated among the funds based upon each fund's sales
for the preceding 24 months relative to the total sales of the funds as a Group,
provided, however, that no fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
the average distribution expense rate for The Vanguard Group, and that no fund
shall incur annual distribution expenses in excess of 0.20 of 1% of its average
month-end net assets.
During the fiscal years ended September 30, 1998, 1999, and 2000, Vanguard
Equity Income Fund incurred the following approximate amounts of The Vanguard
Group's management (including transfer agency), distribution, and marketing
expenses: $5,443,000, $7,897,000, and $6,854,000 respectively.
Prior to joining The Vanguard Group, Vanguard Growth Equity Fund was party
to an administration agreement, under which, for the fiscal years ended
September 30, 1998, 1999, and the period ended June 11, 2000, the Fund paid the
following administrative fees, net of waivers: $114,049, $117,203, and $138,000,
respectively. For the period June 12, 2000 through September 30, 2000, Vanguard
Growth Equity Fund incurred $462,000 of the Vanguard Group's Management
(including transfer agency), distribution, and marketing expenses.
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<PAGE>
INVESTMENT ADVISORY SERVICES. An experienced investment management staff
employed directly by Vanguard provides investment advisory services to Vanguard
Equity Income Fund and many Vanguard funds. These services are provided on an
internalized, at-cost basis. The compensation and other expenses of this staff
are paid by the funds utilizing these services.
TRUSTEE COMPENSATION
The same individuals serve as trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing below), and each fund pays a
proportionate share of the trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by the
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent trustees--that
is, the ones who are not also officers of the fund--in three ways:
- The independent trustees receive an annual fee for their service to the
Funds, which is subject to reduction based on absences from scheduled board
meetings.
- The independent trustees are reimbursed for the travel and other expenses
that they incur in attending board meetings.
- Upon retirement, the independent trustees receive an aggregate annual fee
of $1,000 for each year served on the board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Funds for each trustee. In addition, the table shows
the total amount of benefits that we expect each trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each trustee by all Vanguard funds.
VANGUARD FENWAY FUNDS
TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM ALL VANGUARD
COMPENSATION AS PART OF THESE ESTIMATED ANNUAL FUNDS PAID TO
FROM THESE FUNDS FUNDS' EXPENSES BENEFITS UPON TRUSTEES
NAMES OF TRUSTEES (1) (1) RETIREMENT (2)
------------------------------------------------------------------------------------------------------------------------------------
John C. Bogle(3). . . . . . . . . . . . . . . . None None None None
John J. Brennan . . . . . . . . . . . . . . . . None None None None
Charles D. Ellis(4) . . . . . . . . . . . . . . N/A N/A N/A N/A
JoAnn Heffernan Heisen. . . . . . . . . . . . . $652 $29 $15,000 $100,000
Bruce K. MacLaury . . . . . . . . . . . . . . . $673 $48 $12,000 $ 95,000
Alfred M. Rankin, Jr. . . . . . . . . . . . . . $652 $34 $15,000 $100,000
John C. Sawhill(5). . . . . . . . . . . . . . . $291 $34 N/A $44,483
James O. Welch, Jr. . . . . . . . . . . . . . . $652 $0 $15,000 $100,000
J. Lawrence Wilson. . . . . . . . . . . . . . . $652 $37 $15,000 $100,000
</TABLE>
(1) The amounts shown in this column are based on the Funds' fiscal year ended
September 30, 2000.
(2) The amount reported in this column reflect the total compensation paid to
each trustee for his or her service as trustee of 109 Vanguard funds (99 in
the case of Mr. MacLaury) for the 2000 calendar year.
(3) Mr. Bogle retired from the Funds' board on December 31, 1999.
(4) Mr. Ellis joined the Funds' board effective January 1, 2001.
(5) Mr. Sawhill died in May 2000.
B-13
<PAGE>
YIELD AND TOTAL RETURNS
The yield of Vanguard Equity Income Fund for the 30-day period ended
September 30, 2000 was 2.50%. The yield of Vanguard Growth Equity Fund for the
30-day period ended September 30, 2000 was 0.14%. The average annual total
return of the Funds for the following periods ended September 30, 2000 is set
forth below.
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
9/30/00 9/30/00 9/30/00
------------ ------------- --------------
Vanguard Equity Income Fund 6.28% 15.76% 15.68%
Vanguard Growth Equity Fund 51.07% 30.37% 22.53%*
* Since Inception--March 11, 1992.
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6 - 1]
Where:
a =dividends and interest earned during the period.
b =expenses accrued for the period (net of
reimbursements).
c =the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d =the maximum offering price per share on the last day of
the period
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of a Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of each Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)1/N - 1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding
the average annual compounded rate of return over the 1-, 5-, and 10-year
periods that would equate the initial amount invested to the after-tax value,
according to the following formulas:
After-tax return:
P (1+T)N = ATV
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<PAGE>
Where:
P =a hypothetical initial payment of $1,000
T =average annual after-tax total return
n =number of years
ATV =after-tax value at the end of the 1-,5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods
Instructions:
1. Assume all distributions by the fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
INVESTMENT ADVISORY SERVICES
VANGUARD EQUITY INCOME FUND
The Fund currently has four investment advisers: Newell Associates
(Newell), 525 University Avenue, Palo Alto, CA 94301; John A. Levin & Co., Inc.
(Levin), One Rockefeller Plaza, 19th Floor, New York, NY 10020; Wellington
Management Company, LLP (Wellington Management), 75 State Street, Boston, MA
02109; and The Vanguard Group, Inc. (Vanguard), Post Office Box 2600, Valley
Forge, PA 19482. Prior to January 1, 1995, Newell was the sole investment
adviser to the Fund. Spare, Kaplan, Bischel & Associates (Spare Kaplan) served
as an adviser to the Fund from 1995 through 1999. Levin was added as an
investment adviser effective January 1, 1995. Vanguard was added as an adviser
effective January 16, 1998. Wellington Management was added as an adviser
effective January 1, 2000. The Fund has entered into investment advisory
agreements with Newell, Levin, and Wellington Management which provide that the
advisers manage the investment and reinvestment
B-15
<PAGE>
of the Fund's assets and continuously review, supervise and administer the
Fund's investment program. The advisers discharge their responsibilities subject
to the control of the officers and trustees of the Fund.
The proportion of the net assets of the Fund managed by each adviser is
established by the board of trustees, and may be changed in the future as
circumstances warrant. As of September 30, 2000, Newell was responsible for
approximately 51% of the Fund's investment, Levin was responsible for
approximately 24%, and Wellington Management was responsible for approximately
20%. Vanguard's advisory role is limited; it currently manages just the Fund's
cash reserves, which normally represent about 5% of the Fund's assets.
NEWELL ASSOCIATES
The Fund pays Newell an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets managed by Newell for the
quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $250 million . . . .200%
Next $500 million. . . . .150%
Next $250 million. . . . .100%
Over $1 billion. . . . . .080%
During the fiscal years ended September 30, 1998, 1999, and 2000, Vanguard
Equity Income Fund incurred the following advisory fees owed to Newell:
$1,851,435, $2,150,288, and $1,835,000, respectively.
JOHN A. LEVIN & CO., INC.
The Fund pays Levin a basic advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end assets of the Fund managed by Levin
(Levin Portfolio) for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $100 million . . . 0.40%
Next $200 million. . . . 0.25%
Next $200 million. . . . 0.30%
Next $500 million. . . . 0.20%
Over $1 billion. . . . . 0.10%
The basic fee paid to Levin, as provided above, may be increased or
decreased by applying a performance fee adjustment to the basic fee reflecting
the investment performance of the Levin Portfolio relative to the return of the
Standard and Poor's 500 Composite Stock Price Index (S&P 500 Index), an index
which emphasizes large capitalization companies.
The following table sets forth the performance fee rates payable by the
Fund to Levin under the investment advisory agreement:
THREE YEAR PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VS. THE S&P 500 INDEX ADJUSTMENT*
---------------------------------- ---------------
Less than 0%. . . . . . . . . -0.40 x Basic Fee
Between 0% and 3% . . . . . . -0.20 x Basic Fee
Between 3% and 6% . . . . . . 0.00 x Basic Fee
Between 6% and 9% . . . . . . 0.20 x Basic Fee
More than 9%. . . . . . . . . 0.40 x Basic Fee
* For purposes of this calculation, the basic fee is calculated by applying a
quarterly rate based on the annual basic fee rate using average assets over
the same period over which the performance is measured.
The investment performance of the Levin Portfolio for any period, expressed
as a percentage of the "Levin Portfolio unit value" per share at the beginning
of such period, will be the sum of: (i) the change in the Levin
B-16
<PAGE>
Portfolio unit value during such period; (ii) the unit value of the Fund's cash
distributions from the Levin Portfolio's net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by the Fund for undistributed long-term
capital gains realized from the Levin Portfolio.
The Levin Portfolio unit value will be determined by dividing the total net
assets of the Levin Portfolio by a given number of units. On the initial date of
the agreement, the number of units in the Levin Portfolio was equal to the total
shares outstanding of the Fund. After such initial date, as assets are added to
or withdrawn from the Levin Portfolio, the number of units of the Levin
Portfolio will be adjusted based on the unit value of the Levin Portfolio on the
day such changes are executed.
The investment record of the S&P 500 Index will be obtained from an
independent source at the end of each applicable quarter. The calculation will
be based on the thirty-six month period ending with the applicable quarter and
will be gross of applicable costs and expenses.
For the purposes of determining the performance fee adjustment, the net
assets managed by Levin will be averaged over the same period as the investment
performance of those assets and the investment record of the S&P 500 Index are
computed.
Under the Fund's investment advisory agreement with Levin, the maximum
performance adjustment for an incentive fee is made at a difference of +9
percentage points from the performance of the index over a thirty-six month
period. The maximum performance adjustment for a penalty fee is made at a
difference of less than +0 percentage points from the performance of the index
over a thirty-six month period. On a per year basis, these maximum adjustments
effectively would occur at differences from the index of +3 percentage points
and less than +0 percentage point, respectively.
During the fiscal years ended September 30, 1998, 1999, and 2000, Vanguard
Equity Income Fund incurred the following advisory fees owed to Levin:
1998 1999 2000
----------------------------------
Basic Fee. . . . . . . . . . $1,085,000 $1,584,000 $1,655,000
Increase or Decrease for Performance
Adjustment. . . . . . . . . (290,000) (403,000) (527,000)
--------- --------- ---------
Total. . . . . . . . . . . . $795,000 $1,181,000 $1,128,000
WELLINGTON MANAGEMENT COMPANY, LLP
The Fund pays Wellington Management a basic advisory fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the average month-end net assets of the Fund managed
by Wellington Management (Wellington Management Portfolio) for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $1 billion . . . . .125%
Next $4 billion. . . . . .100%
Over $5 billion. . . . . .080%
The basic fee paid to Wellington Management, as provided above, may be
increased or decreased by applying a performance fee adjustment to the basic fee
reflecting the investment performance of the Wellington Management Portfolio
relative to the return of the Lipper Equity Income average.
B-17
<PAGE>
The following table sets forth the performance fee rates payable by the
Fund to Wellington Management under the investment advisory agreement:
THREE YEAR PERFORMANCE DIFFERENTIAL PERFORMANCE FEE
AVERAGE VS. THE LIPPER EQUITY INCOME ADJUSTMENT*
----------------------------------------- ---------------
Exceeds by 3% to 6% . . . . . 0.10 x Basic Fee
Exceeds by more than 6% . . . 0.20 x Basic Fee
Trails by 3% to 6%. . . . . . -0.10 x Basic Fee
Trails by more than 6%. . . . -0.20 x Basic Fee
* For purposes of this calculation, the basic fee is calculated by applying a
quarterly rate based on the annual basic fee rate using average assets over
the same period over which the performance is measured.
The performance fee adjustment will not be fully operable until the quarter
ending December 31, 2002. Until that time, the following transition rules will
apply:
(A) JANUARY 1, 2000 THROUGH SEPTEMBER 30, 2000. Wellington Management's
compensation was the basic fee. No performance fee adjustment was applied
during this period.
(B) OCTOBER 1, 2000 THROUGH DECEMBER 31, 2002. Beginning October 1, 2000, the
performance fee adjustment will take effect on a progressive basis with
regard to the number of months elapsed between January 1, 2000, and the
quarter for which Wellington Management's fee is being computed. During
this period, the performance fee adjustment will be multiplied by a
fraction. The fraction will equal the number of months elapsed since
January 1, 2000, divided by thirty-six.
(C) ON AND AFTER DECEMBER 31, 2002. For the quarter ending December 31, 2002,
and thereafter, the performance fee adjustment will be fully operable. The
period used to calculate the adjustment shall be the 36 months preceding
the end of the quarter for which the fee is being computed.
The investment performance of the Wellington Management Portfolio for any
period, expressed as a percentage of the "Wellington Management Portfolio unit
value" at the beginning of such period, will be calculated in a manner
consistent with the total return methodology used by Lipper Inc., to calculate
investment performance.
The Wellington Management Portfolio unit value will be determined by
dividing the total net assets of the Wellington Management Portfolio by a given
number of units. Initially, the number of units in the Wellington Management
Portfolio was equal to the total shares outstanding of the Fund on January 1,
2000. Subsequently, as assets are added to or withdrawn from the Wellington
Management Portfolio, the number of units of the Wellington Management Portfolio
will be adjusted based on the unit value of the Wellington Management Portfolio
on the day such changes are executed. Any cash buffer maintained by the Fund
outside of the Wellington Management Portfolio shall neither be included in the
total net assets of the Wellington Management Portfolio nor included in the
computation of the Wellington Management Portfolio unit value.
The investment record of the Lipper Equity Income average for any period
will be obtained from an independent source at the end of each applicable
quarter. The calculation will be based on the thirty-six month period ending
with the applicable quarter and will be gross of applicable costs and expenses.
For the period January 1, 2000, through September 30, 2000, Vanguard Equity
Income Fund incurred investment advisory fees of $641,000 (before a decrease of
$34,000 based on performance) owed to Wellington Management.
DESCRIPTION OF THE ADVISERS
NEWELL ASSOCIATES. Newell Associates, a California corporation, was founded
in 1986 to provide investment management services to institutions. Newell
Associates uses its proprietary Relative Yield Strategy to determine when stocks
are undervalued and, therefore, candidates for purchase or overvalued and,
therefore, candidates for sale. The officers of the corporation are: Roger D.
Newell, Chairman; Robert A. Huret, Vice Chairman; and Jennifer C. Newell, CFA,
President.
JOHN A. LEVIN & CO. INC. John A. Levin, which commenced operations in 1982,
provides investment advisory services to institutional and private clients,
including registered investment trusts and several private
B-18
<PAGE>
investment partnerships. The investment process at Levin emphasizes identifying
investment value through fundamental research. John A. Levin, a founding
principal and Chairman and Chief Executive Officer of Levin, and Joseph A.
Austin, John W. Murphy, and Daniel M. Theriault, Senior Portfolio Managers of
Levin, are responsible for managing the portion of the Fund's assets managed by
Levin. Levin is an indirect subsidiary of BKF Capital Group, Inc.
WELLINGTON MANAGEMENT COMPANY, LLP. Wellington Management is a professional
investment advisory firm that provides services to individuals, employee benefit
plans, endowment funds, and other institutions. The firm was founded in 1928,
and is organized as a Massachusetts limited liability partnership. The managing
partners of Wellington Management are Duncan M. McFarland, Laurie A. Gabriel,
and John R. Ryan. Mr. Ryan is the portfolio manager who is primarily responsible
for Wellington Management's portion of the Fund.
THE VANGUARD GROUP. The Vanguard Group is a family of more than 100 funds
holding assets worth more than $550 billion. Vanguard serves as an investment
adviser to the Fund and currently manages about $396 billion in total assets.
VANGUARD GROWTH EQUITY FUND
The Fund pays Turner Investment Partners (Turner) a basic fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end net assets of the
Fund.
NET ASSETS ANNUAL RATE
---------- -----------
First $200 million . . . . . . . 0.50%
Next $300 million. . . . . . . . 0.40%
Next $1.5 billion. . . . . . . . 0.30%
Over $2 billion. . . . . . . . . 0.20%
The basic fee paid to Turner, as provided above, may be increased or
decreased by applying a performance fee adjustment. The adjustment will be
calculated as a percentage of the basic fee and will change proportionately with
the investment performance of the Fund relative to the return of the Russell
1000 Growth Index (the Index) for the 36-month period ending with the then-ended
quarter.
The following table sets forth the performance fee rates payable by the
Fund to Turner under the investment advisory agreement.
CUMULATIVE 36-MONTH
PERFORMANCE OF THE FUND ADJUSTMENT AS A
VERSUS THE INDEX (A) PERCENTAGE OF BASIC FEE (B)
-------------------- ---------------------------
Trails by more than 9%. . -75%
Trails by 0% to 9%. . . . Linear decrease from 0% to 75%
Exceeds by 0% to 9% . . . Linear increase from 0% to +75%
Exceeds by more than 9% . +75%
(A) During the first thirty-six month (36) period, inception-to-date Fund
performance versus performance of the Index for the same period will be
utilized. Subject to the transition rules provided for below, the +/-9%
hurdle rate illustrated in the table above will be multiplied by a
fraction, the numerator being the months elapsed since inception and the
denominator being thirty-six (36).
For purposes of the adjustment calculator, the basic fee is calculated by
applying the above rate schedule against the average month-end net assets over
the same time period for which the performance is measured.
(B) Linear application of the adjustment provides for an infinite number of
results within the stated range. Example: Cumulative 36-month performance
of the Fund versus the Index is +7.2%. Accordingly, a performance fee
adjustment of +60% [(7.2% divided by 9.0%) times 75% maximum] of the basic
fee would be due and payable.
The adjustment will not be fully operable until the Fund has operated under
the agreement for a full 36 months. Until that time, the following transition
rules will apply:
B-19
<PAGE>
(A) JUNE 12, 2000 THROUGH APRIL 30, 2001. Adviser compensation will be the
basic fee. No adjustment will apply during this period.
(B) MAY 1, 2001 THROUGH JUNE 30, 2003. Beginning May 1, 2001 the adjustment
will take effect on a progressive basis with regard to the number of months
elapsed between July 1, 2000 and the quarter end for which the adviser fee
is being computed. During this period, the adjustment that has been
determined as provided above will be multiplied by a fraction. The
fraction's numerator will equal the number of months that have elapsed
since July 1, 2000 and the denominator will be thirty-six (36).
(C) ON AND AFTER JULY 1, 2003. Commencing July 1, 2003, the adjustment will be
fully operable.
During the fiscal years ended September 30, 1998 and 1999, and the period
ended June 11, 2000, Vanguard Growth Equity Fund incurred the following
investment advisory fees:**
1998 1999 2000
---- ---- ----
Basic Fee. . . . . . . . . . . $664,449 $987,424 $1,207,000
Advisory Fee Waived. . . . . . 76,793 0 0
** These fees were paid under a prior investment advisory fee structure.
For the period June 12, 2000, through September 30, 2000, the Fund incurred
$784,000 in investment advisory fees under the existing fee structure.
DESCRIPTION OF TURNER
Turner is a professional advisory firm, founded in March 1990. Robert E.
Turner is the Chairman and controlling shareholder. As of September 30, 2000,
Turner had discretionary management authority with respect to approximately $12
billion, including 22 non-Vanguard mutual funds with $2.6 billion in assets.
Turner has provided investment advisory services to investment companies since
1992.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
Each Fund's current agreement with its adviser(s) is renewable for
successive one-year periods, only if (1) each renewal is specifically approved
by a vote of the Fund's board of trustees, including the affirmative votes of a
majority of trustees who are not parties to the contract or "interested persons"
(as defined in the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of considering such approval, or (2) each renewal is
specifically approved by a vote of a majority of the Fund's outstanding voting
securities. An agreement is automatically terminated if assigned, and may be
terminated without penalty at any time (1) by vote of the board of trustees of
the Fund on 60 days' written notice to the adviser, (2) by a vote of a majority
of the Fund's outstanding voting securities, or (3) by the adviser upon 90 days'
written notice to the Fund.
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the advisers (with the
approval of the Funds' board of trustees) to select the brokers or dealers that
will execute the purchases and sales of portfolio securities for the Funds and
direct the advisers to use their best efforts to obtain the best available price
and most favorable execution as to all transactions for the Funds. The advisers
have undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, each adviser will use its best judgment
to choose the broker most capable of providing the brokerage services necessary
to obtain the best available price and most favorable execution. The full range
and quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Funds and/or the
adviser. Each adviser considers such information useful in the
B-20
<PAGE>
performance of its obligations under the agreement, but is unable to determine
the amount by which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Funds' board of trustees, each adviser may cause the Funds to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Funds.
Currently, it is the Funds' policy that each adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. Each adviser will only pay such higher
commissions if it believes this to be in the best interest of the Funds. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the adviser and/or the Funds. However, each
adviser has informed the Funds that it generally will not pay higher commission
rates solely for the purpose of obtaining research services.
Some securities considered for investment by a Fund may also be appropriate
for other clients served by each adviser. If purchase or sale of securities
consistent with the investment policies of the Fund and one or more of these
other clients serviced by the adviser are considered at or about the same time,
transactions in such securities will be allocated among the Fund and such other
clients in a manner deemed equitable by the adviser. Although there may be no
specified formula for allocating such transactions, the allocation methods used,
and the results of such allocations, will be subject to periodic review by the
Funds' board of trustees.
During the fiscal years ended September 30, 1998, 1999 and 2000, Vanguard
Equity Income Fund paid $1,404,979, $1,624,448 and $2,875,000 respectively, in
brokerage commissions. During the fiscal years ended September 30, 1998, 1999,
and 2000, Vanguard Growth Equity Fund paid $464,404, $671,953, and $1,642,000,
respectively, in brokerage commissions.
5% SHAREHOLDERS
As of September 30, 2000, the following persons were the only persons who
were record owners (or to the knowledge of the Fund, beneficial owners) of 5% or
more of the outstanding shares of the Vanguard Growth Equity Fund. The Fund
believes that most of the shares referred to below were held by the persons
indicated in accounts for their fiduciary, agency, or custodial customers:
TOTAL NUMBER PERCENTAGE OF
SHAREHOLDER OF SHARES FUND'S SHARES
----------- --------- -------------
Security Trust Company Custodian 4,585,795.945 6.54%
FBO Sheet Metal Workers
Annuity Fund of Local Union #19
A/C 9943312678
2390 E. Camelback Rd.
Suite 240
Phoenix, AZ 85016-3434
B-21
<PAGE>
FINANCIAL STATEMENTS
Vanguard Equity Income Fund's financial statements as of and for the year
ended September 30, 2000, appearing in the Vanguard Equity Income Fund 2000
Annual Report to Shareholders, and the report thereon of PricewaterhouseCoopers
LLP, independent accountants, also appearing therein, are incorporated by
reference in this Statement of Additional Information.
The financial statements of Vanguard Growth Equity Fund as of and for the
fiscal year ended September 30, 2000, appearing in the Vanguard Growth Equity
Fund 2000 Annual Report to Shareholders, including notes thereto and the report
thereon of PricewaterhouseCoopers, LLP, independent accountants, are also
incorporated by reference in this Statement of Additional Information. (Prior to
June 12, 2000, Vanguard Growth Equity Fund was organized as Turner Growth Equity
Fund.)
For a more complete discussion of the performance, please see each Fund's
Annual Report to Shareholders, which may be obtained without charge.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies. Each of
the investment company members of The Vanguard Group, including Vanguard Fenway
Funds, may, from time to time, use one or more of the following unmanaged
indexes for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the Standard
& Poor's 500 Composite Stock Price Index with the lowest price-to-book ratios,
comprising 50% of the market capitalization of the S&P 500.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily listing pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 1000 GROWTH INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the highest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of over 3,000 common stocks
accounting for over 90% of the market value of publicly traded stocks in the
U.S.
RUSSELL 2000 STOCK INDEX--composed of the 2,000 smallest securities in the
Russell 3000, representing approximately 7% of the Russell 3000 total market
capitalization.
RUSSELL 2000 VALUE INDEX--contains stocks from the Russell 2000 Index with a
less-than-average growth orientation.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.
B-22
<PAGE>
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND INDEX--is a market-weighted index
that contains over 4,800 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market-weighted index that
contains individually priced U.S. Treasury Securities with maturities of 10
years or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN BROTHERS CREDIT (BAA) BOND INDEX--all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG CREDIT BOND INDEX--is a subset of the Lehman Brothers
Credit Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Corporate A or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long Credit A or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's 500/BARRA
Value Index, and 12.5% Standard & Poor's Utilities Index and 12.5% Standard &
Poor's Telephone Index).
LEHMAN BROTHERS LONG CREDIT A OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
over 4,000 individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $5 trillion.
LEHMAN BROTHERS CREDIT A OR BETTER BOND INDEX--consists of all publicly issued,
investment grade corporate bonds rated A or better, of all maturity levels.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CREDIT INDEX--is a market
weighted index that contains over 1,500 individually priced U.S. Treasury,
agency, and corporate investment grade bonds rated BBB- or better with
maturities between 1 and 5 years. The index has a market value of over $1.6
trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CREDIT INDEX--is a
market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with maturities
between 5 and 10 years. The index has a market value of over $800 billion.
B-23
<PAGE>
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CREDIT INDEX--is a market weighted index
that contains over 1,900 individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $1.1 trillion.
LIPPER SMALL-CAP GROWTH FUND AVERAGE--a fund that by prospectus or portfolio
practice invests primarily in growth companies with market capitalizations less
than $1 billion at the time of purchase.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
LIPPER EQUITY INCOME FUND AVERAGE--an industry benchmark of average equity
income funds with similar investment objectives and policies, as measured by
Lipper Inc.
SAI065 012001
B-24
<PAGE>
PART C
VANGUARD FENWAY FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
EXHIBIT DESCRIPTION
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contracts + (e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Codes of Ethics**
*Filed herewith.
**Filed previously.
+Filed herewith for John A. Levin & Co., Inc.; filed previously for all other
investment advisers.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
John A. Levin & Co., Inc. (Levin) is an investment adviser registered under the
Advisers Act. The list required by this Item 26 of officers and directors of
Levin, together with any information as to any business profession, vocation, or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Levin pursuant to the Advisers Act (SEC File No.
801-18010).
Newell Associates (Newell) is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the Advisers Act). The list
required by this Item 26 of officers and directors of Newell, together with any
information as to any business profession, vocation, or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated herein by reference from Schedules B and D of Form ADV
filed by Newell pursuant to the Advisers Act (SEC File No. 801-26949).
Turner Investment Partners, Inc., (Turner) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
partners of Turner, together with any information as to any business profession,
vocation, or employment of substantial nature engaged in by such officers and
partners during the past two years, is incorporated herein by reference from
Schedules B and D of Form ADV filed by Turner pursuant to the Advisers Act (SEC
File No. 801-07527).
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).
Wellington Management Company, LLP (Wellington Management) is an investment
adviser registered under the Advisers Act. The list required by this Item 26 of
officers and partners of Wellington Management, together with any information as
to any business profession, vocation, or employment of substantial nature
engaged in by such officers and partners during the past two years, is
incorporated herein by reference from Schedules B and D of Form ADV filed by
Wellington Management pursuant to the Advisers Act (SEC File No. 801-15908).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section
31(a) under the 1940 Act and the rules promulgated thereunder will be maintained
at the offices of Registrant; Registrant's Transfer Agent, The Vanguard Group,
Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrant's
Custodians, State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02110, and First Union National Bank, PA4943, 530 Walnut Street, Philadelphia,
PA 19106.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 16th day of January, 2001.
VANGUARD FENWAY FUNDS
BY:_________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief January 16, 2001
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ CHARLES D. ELLIS Trustee January 16, 2001
---------------------------
(Heidi Stam)
Charles D. Ellis*
By:/S/ JOANN HEFFERNAN HEISEN Trustee January 16, 2001
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee January 16, 2001
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ ALFRED M. RANKIN, JR. Trustee January 16, 2001
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JAMES O. WELCH, JR. Trustee January 16, 2001
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee January 16, 2001
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal January 16, 2001
---------------------------Financial Officer and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . .Ex-99.BD
Consent of Independent Accountants. . . . . . . . . . . . . . . . . . .Ex-99.BJ