<PAGE> 1
VANGUARD
ASSET
ALLOCATION
FUND
ANNUAL REPORT 1994
[FIGURE 1 -- SEE EDGAR APPENDIX]
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on June
30, 1929. Its first fifteen years were a struggle for survival in an industry
that was shaken to its roots by the Great Crash of 1929-1933. From an initial
base of $100,000, Wellington's assets had grown to but $27 million by the end
of World War II. The Vanguard Group was founded on September 24, 1974. Soon
thereafter, we assumed responsibility for the management of Wellington Fund and
ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less cautious
investors. And it was a "balanced" fund--in fact, Wellington is America's
oldest balanced fund--with holdings from each of the three basic financial asset
classes: cash reserves, bonds, and common stocks. In short, Wellington Fund was
a staid investment in an era of stock speculation that was to become, almost
within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single
investment; in 1994, such a balance is often achieved by a combination of
Vanguard money market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to the
instruments in which they invest. For example, we have steered clear of exotic
derivative securities with unpredictable investment characteristics. Too many
fund managers have been taken in by these highly risky instruments, and their
shareholders have paid a heavy price--except in cases where the manager has
"made the fund whole," when to do otherwise would have shocked investors and
impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm;
* We offer Funds with sound and durable investment objectives, designed
for long-term investors.
(please turn to inside back cover)
VANGUARD ASSET ALLOCATION FUND SEEKS TO MAXIMIZE LONG-TERM TOTAL RETURN, WHILE
EXHIBITING LESS RISK THAN A PORTFOLIO CONSISTING ENTIRELY OF EQUITIES. THE FUND
ALLOCATES ASSETS AMONG COMMON STOCKS, BONDS, AND MONEY MARKET INSTRUMENTS, IN
PROPORTIONS WHICH REFLECT THE ANTICIPATED RETURNS AND RISKS OF EACH ASSET
CLASS, BUT MAY HAVE UP TO 100% OF ITS ASSETS IN ANY ONE CLASS AT ANY TIME.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Interest rates rose sharply during the twelve months ended September 30, 1994,
Vanguard Asset Allocation Fund's 1994 fiscal year. The net result was a major
dip in the prices of long-term bonds. Combined with the fact that stock prices,
on balance, were roughly unchanged, the year provided a difficult test for the
Fund.
While the -2.1% total return (capital change plus income) of the Fund
was nothing to brag about, it was roughly consistent with the composite return
of the three asset classes eligible for inclusion in our asset allocation
program: common stocks (as measured by the Standard & Poor's 500 Composite
Stock Price Index), long-term U.S. Treasury bonds, and 90-day U.S. Treasury
bills. This table tells the story:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Total Return
---------------------
Fiscal Year Ended
September 30, 1994
- -------------------------------------------------------------------
<S> <C>
VANGUARD ASSET ALLOCATION FUND - 2.1%
- -------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX + 3.7%
LONG-TERM U.S. TREASURY BONDS -10.7
90-DAY U.S. TREASURY BILLS + 3.7
- -------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $15.08 per share on
September 30, 1993, and $13.78 on September 30, 1994, with the latter figure
adjusted to take into account the reinvestment of our two semi-annual dividends
totaling $.48 per share from net investment income, and a distribution of $.53
per share from net capital gains realized from our operations during 1993.
THE FISCAL YEAR IN REVIEW
Fiscal 1994 was, in short, an up and down period for stocks as a group, with
prices ending the year about where they began. On balance, the price of the
Standard & Poor's 500 Index edged upward from 459 to 463. The Index's positive
total return, then, was accounted for largely by the dividends it generated.
The declining interest rate environment that had persisted with
striking consistency since October 1987 came to an end in October 1993. The
yield on the long-term U.S. Treasury bond, which had fallen from 7.5% as 1993
began to a low of 5.9% in mid-October, then began to rise sharply, moving to
the 7.8% level on September 30, 1994. The earlier rate decline had engendered a
+22% increase in the price of the long Treasury bond, the rate rise a
commensurate -22% drop in price. Over the same periods, the yield on the 90-day
U.S. Treasury bill fell from 3.2% to 3.1%, then rose to 4.7% by the fiscal
year's end. (Because of the bill's short maturity, its price remained virtually
flat during the entire period.)
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, there is little evidence of it. The
U.S. Consumer Price Index has risen just 3.0% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at a higher rate.
In an effort to quell inflationary fears, the Federal Reserve has
acted to "tighten" the money supply and slow economic growth and potential
future inflation. Five rate increases--in February, March, April, May, and
again in August--combined to raise the Federal funds rate (at which banks
borrow from
[FIGURE 2 -- SEE EDGAR APPENDIX]
1
<PAGE> 4
[FIGURE 3 -- SEE EDGAR APPENDIX]
one another) from 3.00% to 4.75%. Theory suggests that increases in short-term
rates should be regarded by market participants as a restraint on potential
inflation, and thus cause long-term rates to fall. However, this theory seldom
holds true in practice, and, at least so far in 1994, theory has again been
rebutted by practice.
The problems faced by the bond market during the past fiscal year had
a significant negative impact on the cumulative returns achieved by our three
asset classes over the past five years, as shown in the chart at the top of the
page. After giving stocks a good run for their money through the 1993 fiscal
year end, the cumulative return on long-term Treasury bonds dropped to +52%,
while the cumulative return of the Standard & Poor's 500 Index rose to +55%.
The inevitable ever-upward cumulative return on Treasury bills rose--at its
accustomed slow pace--to a total of +28%. If nothing else, the chart reaffirms
the wisdom of an investment program which utilizes each of the three primary
financial asset classes as a sensible means of balancing risk.
THE FUND IN FISCAL 1994
The past year would have to go into the record as a disappointing one for
Vanguard Asset Allocation Fund. Nonetheless, it is but the second year in our
six-year history to manifest a negative return (1990 was the other). Happily,
in our other four years we enjoyed "double-digit" returns. In retrospect we
clearly would have been better served in 1994 if larger holdings of Treasury
bills and smaller holdings of Treasury bonds had been employed by our adviser,
Mellon Capital Management, but, as the old saw goes, "hindsight is always
20/20."
As in fiscal 1993, our adviser made several changes--at the margin--in
the Fund's asset allocation. We began the fiscal year at a 70%/30% stock/bond
allocation, moved briefly to an 80%/20% allocation, and then returned to a
70%/30% allocation on December 2. This underweighting in bonds helped us
through the worst of the ensuing bond market decline. We then moved to a
60%/40% allocation in late April. Finally, just before our fiscal year end, we
again reduced stocks in favor of bonds, and our closing allocation was 50%/50%.
Together, these adjustments added a bit to our performance, but not in
sufficient amounts to counter the overwhelming impact of the weak bond market.
The return of the average asset allocation fund for the twelve months
was +0.01%, slightly better than the -2.1% return of Vanguard Asset Allocation
Fund. As I have noted in earlier reports, asset allocation funds are a sort of
"mixedbag." Some are "market timers"; some rely heavily on "short selling" in
hopes of a bear market; and some use a variety of asset classes, including
smallcap and international stocks, currency futures, and (in at least one case)
cattle futures. Sometimes this diversity pushes the relative performance of
these funds up, sometimes down. But the range of performance from best to worst
is inevitably wide. During the past twelve months, for example, the top
performer (among 101 asset allocation funds) provided a return of +11.0%; the
bottom performer provided a return of -14.8%. In this context, our strategy
would be--and, I think, should be--regarded as a conservative and disciplined
one.
2
<PAGE> 5
[FIGURE 4 -- SEE EDGAR APPENDIX]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1994
- ---------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD ASSET ALLOCATION FUND -2.05% +9.03% +11.57%
AVERAGE ASSET ALLOCATION FUND +0.01 +8.10 + 9.53
STANDARD & POOR'S 500 INDEX +3.68 +9.12 +12.41
</TABLE>
*Inception, November 3, 1988.
Note: Past performance is not predictive of future performance.
A LONGER-TERM PERSPECTIVE
While our Fund fell a bit behind the results of the average asset allocation
fund during fiscal 1994, our lifetime record remains comfortably ahead. The
table below shows our record during the period since our inception on November
3, 1988, through September 30, 1994, compared to our average competitor and to
each of the three basic financial asset classes that our Fund utilizes: stocks,
bonds, and bills. The chart above depicts the results since inception of a
$10,000 investment in the Fund, the average competitor, and the stock market.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Total Return
-------------------------------
November 3, 1988,
to September 30, 1994
- --------------------------------------------------------------------------
Cumulative Annualized
- --------------------------------------------------------------------------
<S> <C> <C>
Vanguard Asset Allocation Fund + 91% +11.6%
- --------------------------------------------------------------------------
Average Asset Allocation Fund + 71% + 9.5%
- --------------------------------------------------------------------------
Standard & Poor's 500 Stock Index +100% +12.4%
Long-Term U.S. Treasury Bonds + 70 + 9.4
90-Day U.S. Treasury Bills + 38 + 5.6
- --------------------------------------------------------------------------
</TABLE>
Of special significance, I believe, are: (1) the substantial cumulative margin
we have built and maintained over our competitors (+91% versus +71%); and (2)
our ability to closely "track" an index composed 100% of common stocks during a
strong bull market, despite the fact that our portfolio, on average, comprised
only about 55% in stocks. This positive "reward/risk" ratio is what Vanguard
Asset Allocation Fund seeks to accomplish.
That said, we would caution you that such absolute and relative
returns are in no way intended to suggest that these results will be repeated
in the years ahead. Future returns may be better or worse than those of our
first six years of operations. Indeed, I should note that yields on stocks are
near historic lows; bond yields, while higher for the year, are below those
prevailing during most of our earlier history. As a result, it seems unlikely
to me that financial assets will provide higher returns in, say, the next six
years than they did in the past six years.
(continued)
3
<PAGE> 6
LOOKING AHEAD
We continue to believe that even if the outlook is uncertain--is it not
always?--Vanguard Asset Allocation Fund provides a sensible approach to
investing for the long-term investor. The Fund utilizes, in a single portfolio,
a mix of stocks, bonds, and bills that should, if history is any evidence,
outpace the returns achieved on fixed-dollar savings, albeit by assuming the
clear interim risks of investing in common stocks and long-term bonds.
In the Fund's Annual Report one year ago, I emphasized these risks,
noting that "our Fund's net asset value will not rise when the prices of most
financial assets decline," and adding that "with interest rates at their lowest
levels in two decades and stock yields near historical lows, there are certain
to be some difficult bumps along the way in the second half of our first
decade." During fiscal 1994, it was bonds that got most of the bumps, with
stocks holding their own. It could fairly be said that our "balance" among the
two classes helped iron out the most difficult creases of a difficult year.
That balance, indeed, is what Vanguard Asset Allocation Fund is all
about. It is designed for long-term investors who are ready, willing, and able
to "stay the course." The Fund's course, in turn, involves a quantitative
index-oriented investment strategy based on relative future returns, with a
bias towards marginal--rather than all-or-nothing--changes in asset
allocations. We intend to stay the course as well.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
October 10, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED SEPTEMBER 30,
1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD ASSET ALLOCATION FUND 11/3/88 -2.05% +9.03% +11.57% +7.15% +4.42%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
5
<PAGE> 8
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single share investment in
VANGUARD ASSET ALLOCATION FUND since inception through September 30, 1994.
During the period illustrated, stock and bond prices fluctuated widely; these
results should not be considered a representation of the dividend income or
capital gain or loss that may be realized from an investment made in the Fund
today.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ALL DIVIDENDS AND CAPITAL
PERIOD PER SHARE DATA GAINS DISTRIBUTIONS REINVESTED
- --------------------------------------------------------------------------------------------------------------------------
September 30 Net Asset Capital Gains Income Net Asset Capital Income Total
Fiscal Year Value Distributions Dividends Value Return Return Return
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial (11/88) $10.00 -- -- $10.00 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
1989 12.11 -- $0.25 12.39 +21.1% +2.8% +23.9%
- -------------------------------------------------------------------------------------------------------------------------
1990 10.93 $0.15 0.51 11.83 - 8.6 +4.0 - 4.6
- -------------------------------------------------------------------------------------------------------------------------
1991 13.06 0.13 0.62 15.06 +20.9 +6.4 +27.3
- -------------------------------------------------------------------------------------------------------------------------
1992 13.79 0.19 0.59 16.89 + 7.2 +5.0 +12.2
- -------------------------------------------------------------------------------------------------------------------------
1993 15.08 0.17 0.59 19.49 +10.7 +4.7 +15.4
- -------------------------------------------------------------------------------------------------------------------------
1994 13.78 0.53 0.48 19.09 - 5.2 +3.1 - 2.1
- -------------------------------------------------------------------------------------------------------------------------
Average Annual Rate of Return + 7.2% +4.4% +11.6%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
Vanguard Asset Allocation Fund earned a total return of +1.4% during the second
half of the fiscal year ended September 30, 1994. This result merely served to
partially offset a negative return in the first half of the fiscal year,
bringing the Fund's full fiscal year total return to -2.1%. For comparative
purposes, the unmanaged Standard & Poor's 500 Stock Index rose by +3.7% during
the past twelve months, and the long-term U.S. Treasury bond earned a total
return of -10.7%.
The stock market was buoyed by the release of data showing that the
overall economy continues to expand at a reasonably vigorous pace. In a sense,
this same news unsettled the bond market by heightening concerns over future
inflationary pressures. The market for long Treasuries remained quite volatile,
with yields fluctuating within a wide band and closing the second half of the
fiscal year at the upper end of the range.
Over the past twelve months, the fixed-income market has been under
steady downward pressure. This pressure may be attributed, at least in part, to
the Federal Reserve's ongoing efforts to control inflation by raising
short-term interest rates in modest, yet frequent, increments. To date, the
Fed's actions do not appear to have actually been necessary, as the inflation
rate has been hovering around 3% even though the economy has continued to grow.
Whether or not one agrees with the Fed's increases in short-term rates, the
effect on the long maturity end of the bond market has been somewhat
surprising. The case could have been made that prompt and early moves by the
Fed would have been found reassuring by the investment community and, at a
minimum, given some stability to the bond market.
The second half of the fiscal year began with the Fund holding an
asset mix at 60% stock and 40% bonds. As the disparity in realized returns
between stocks and bonds grew steadily wider in favor of equities, the expected
return differences between the two asset classes narrowed; towards the end of
August, the asset allocation model began recommending a 10-percentage-point
shift from higher-risk equities to lower-risk bonds. This new recommendation
held for the required length of time, and in late September, the actual mix of
the Fund was changed from a 60:40 ratio of stocks to bonds to a 50:50 ratio.
Sincerely,
William L. Fouse, CFA
Chairman
Mellon Capital Management Corporation
October 13, 1994
The Mellon Capital Management asset allocation model is forward looking, and it
takes as inputs the expected returns for stocks, bonds, and cash, the risks of
each asset class, and the correlations among the asset class returns. Given the
trade-off between risk and return, the model selects that mix of stocks, bonds,
and cash that best integrates total fund risk and return with the risk aversion
of the average investor. As the model's inputs change over time, and as stock
and bond prices fluctuate, so will the model's recommended optimal solution. It
is to this allocation that the Fund's assets are periodically rebalanced.
7
<PAGE> 10
FINANCIAL STATEMENTS
September 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (49.8%)
- --------------------------------------------------------------------
* AMR Corp. 12,600 $ 649
AT&T Corp. 259,784 14,028
Abbott Laboratories, Inc. 134,900 4,232
* Advanced Micro Devices, Inc. 15,700 467
Aetna Life & Casualty Co. 18,700 867
H.F. Ahmanson & Co. 19,500 407
Air Products & Chemicals, Inc. 18,800 879
* Airtouch Communications 82,000 2,347
Alberto-Culver Co. Class B 4,700 110
Albertson's, Inc. 42,200 1,229
Alcan Aluminium Ltd. 37,350 985
Alco Standard Corp. 9,000 559
Alexander & Alexander
Services, Inc. 7,200 140
Allergan, Inc. 10,500 266
Allied-Signal, Inc. 47,100 1,607
Aluminum Co. of America 14,800 1,254
* ALZA Corp. 13,600 280
* Amdahl Corp. 19,200 168
Amerada Hess Corp. 15,500 721
American Barrick Resources 56,900 1,515
American Brands, Inc. 33,500 1,214
American Electric Power Co., Inc. 30,700 963
American Express Co. 83,044 2,522
American General Corp. 34,800 944
American Greetings Corp. Class A 12,400 358
American Home Products Corp. 50,900 3,054
American International Group, Inc. 52,237 4,643
American Stores Co. 23,800 601
Ameritech Corp. 91,400 3,679
* Amgen, Inc. 22,200 1,182
Amoco Corp. 82,100 4,864
AMP, Inc. 17,500 1,354
* Andrew Corp. 4,200 209
Anheuser-Busch Co., Inc. 44,007 2,239
Apple Computer, Inc. 19,700 662
Archer-Daniels-Midland Co. 57,134 1,485
* Armco, Inc. 17,300 104
Armstrong World Industries Inc. 6,200 269
Asarco, Inc. 7,000 230
Ashland Oil, Inc. 10,000 354
Atlantic Richfield Co. 26,700 2,693
Autodesk, Inc. 3,900 244
Automatic Data Processing, Inc. 23,400 1,313
Avery Dennison Corp. 9,400 323
Avon Products, Inc. 11,800 705
Baker Hughes, Inc. 23,400 436
Ball Corp. 4,900 139
* Bally Entertainment Corp. 9,600 72
Baltimore Gas & Electric Co. 24,550 565
Banc One Corp. 67,984 2,031
Bank of Boston Corp. 17,751 473
BankAmerica Corp. 60,851 2,685
Bankers Trust New York Corp. 13,300 888
C.R. Bard, Inc. 8,600 215
Barnett Banks of Florida, Inc. 16,200 717
Bassett Furniture Industries, Inc. 2,425 63
Bausch & Lomb, Inc. 9,900 386
Baxter International, Inc. 47,000 1,322
Becton, Dickinson & Co. 11,900 574
Bell Atlantic Corp. 72,100 3,821
BellSouth Corp. 82,000 4,572
Bemis Co., Inc. 8,500 210
Beneficial Corp. 8,700 355
* Bethlehem Steel Corp. 18,200 382
* Beverly Enterprises Inc. 13,800 212
* Biomet, Inc. 19,200 238
Black & Decker Corp. 14,000 306
H & R Block, Inc. 17,700 812
Boatmen's Bancshares, Inc. 17,400 539
The Boeing Co. 56,725 2,446
Boise Cascade Corp. 6,300 186
Borden, Inc. 23,500 323
Briggs & Stratton Corp. 2,400 169
Bristol-Myers Squibb Co. 84,240 4,833
Brown-Forman Corp. Class B 11,500 310
Brown Group, Inc. 3,000 101
Browning-Ferris Industries, Inc. 32,600 1,035
Bruno's Inc. 13,000 120
Brunswick Corp. 15,900 320
Burlington Northern, Inc. 14,900 749
Burlington Resources, Inc. 21,500 806
CBS, Inc. 2,026 650
CIGNA Corp. 12,000 739
CPC International, Inc. 24,700 1,250
CSX Corp. 17,400 1,192
Campbell Soup Co. 41,600 1,643
Capital Cities/ABC, Inc. 25,600 2,099
Carolina Power & Light Co. 26,700 704
Caterpillar, Inc. 33,800 1,829
Centex Corp. 5,300 123
Central & South West Corp. 31,500 701
* Ceridian Corp. 7,400 182
Champion International Corp. 15,500 601
Charming Shoppes, Inc. 17,100 135
The Chase Manhattan Corp. 31,012 1,074
Chemical Banking Corp. 42,193 1,477
Chevron Corp. 107,800 4,487
Chrysler Corp. 59,000 2,648
The Chubb Corp. 14,600 1,038
Cincinnati Milacron, Inc. 5,600 144
Circuit City Stores, Inc. 16,000 414
* Cisco Systems, Inc. 43,500 1,191
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------
<S> <C> <C>
Citicorp 64,804 $ 2,754
* Clark Equipment Co. 2,900 201
Clorox Co. 8,900 464
Coastal Corp. 17,450 486
The Coca-Cola Co. 213,500 10,381
Colgate-Palmolive Co. 24,500 1,421
* Columbia Gas Systems, Inc. 8,400 226
Columbia/HCA Healthcare Corp. 59,697 2,597
Comcast Corp. Class A Special 39,800 602
Community Psychiatric Centers 7,200 98
* Compaq Computer Corp. 42,900 1,400
Computer Associates
International, Inc. 26,900 1,197
* Computer Sciences Corp. 8,400 365
Conagra, Inc. 41,300 1,301
Conrail, Inc. 13,100 648
Consolidated Edison Co. of
New York, Inc. 39,100 973
* Consolidated Freightways, Inc. 6,000 132
Consolidated Natural Gas Co. 15,500 603
Continental Corp. 9,200 124
Cooper Industries, Inc. 19,200 773
Cooper Tire & Rubber Co. 13,900 325
Adolph Coors Co. Class B 6,400 118
CoreStates Financial Corp. 23,909 637
Corning, Inc. 36,800 1,191
Crane Co. 5,050 129
* Cray Research, Inc. 4,300 88
* Crown Cork & Seal Co., Inc. 14,800 570
Cummins Engine Co., Inc. 6,900 272
Cyprus Amax 15,411 482
* DSC Communications Corp. 18,600 530
Dana Corp. 16,400 459
* Data General Corp. 7,300 73
Dayton-Hudson Corp. 11,903 911
Dean Witter Discover & Co. 28,420 1,069
Deere & Co. 14,400 988
Delta Air Lines, Inc. 8,400 376
Deluxe Corp. 13,700 402
Detroit Edison Co. 24,500 625
The Dial Corp. 15,300 319
* Digital Equipment Corp. 23,000 609
Dillard Department Stores Class A 18,800 503
The Walt Disney Co. 89,400 3,475
Dominion Resources, Inc. 28,150 1,049
R.R. Donnelley & Sons Co. 25,700 771
Dover Corp. 9,500 540
Dow Chemical Co. 45,550 3,564
Dow Jones & Co., Inc. 16,600 498
Dresser Industries, Inc. 30,600 620
E.I. du Pont de Nemours & Co. 113,000 6,554
Duke Power Co. 34,100 1,330
The Dun & Bradstreet Corp. 28,300 1,627
EG & G, Inc. 9,200 140
E-Systems, Inc. 5,700 236
Eastern Enterprises 3,400 89
Eastman Chemical 13,750 748
Eastman Kodak Co. 54,900 2,841
Eaton Corp. 12,700 603
Echlin, Inc. 9,800 298
Echo Bay Mines Ltd. 18,700 257
Ecolab, Inc. 10,500 228
Emerson Electric Co. 37,300 2,224
Engelhard Corp. 16,100 433
Enron Corp. 41,800 1,264
ENSERCH Corp. 11,100 154
Entergy Corp. 38,000 883
Exxon Corp. 205,500 11,842
* FMC Corp. 6,000 374
FPL Group, Inc. 31,700 1,030
* Federal Express Corp. 9,300 575
Federal Home Loan
Mortgage Corp. 30,000 1,601
Federal National Mortgage Assn. 45,100 3,552
Federal Paper Board Co., Inc. 7,000 220
First Chicago Corp. 15,446 709
First Data Corp. 18,300 920
First Fidelity Bancorp. 13,325 560
First Interstate Bancorp. 13,500 1,095
First Mississippi Corp. 3,300 67
First Union Corp. 28,023 1,212
Fleet Financial Group, Inc. 23,727 893
Fleetwood Enterprises, Inc. 7,700 193
Fleming Cos., Inc. 6,200 145
Fluor Corp. 13,700 682
Ford Motor Co. 167,000 4,634
Foster Wheeler Corp. 6,000 206
GTE Corp. 158,300 4,808
Gannett Co., Inc. 24,500 1,176
The Gap, Inc. 24,300 799
General Dynamics Corp. 10,500 459
General Electric Co. 283,500 13,643
General Mills, Inc. 26,400 1,525
General Motors Corp. 124,100 5,817
General Re Corp. 13,700 1,450
General Signal Corp. 7,900 277
Genuine Parts Co. 20,700 727
Georgia-Pacific Corp. 15,000 1,148
Giant Food, Inc. Class A 9,900 213
Giddings & Lewis, Inc. 5,700 101
Gillette Co. 36,800 2,604
Golden West Financial Corp. 10,300 408
The BF Goodrich Co. 4,300 181
The Goodyear Tire & Rubber Co. 25,200 841
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------
<S> <C> <C>
W.R. Grace & Co. 15,600 $ 647
W.W. Grainger, Inc. 8,400 498
Great Atlantic & Pacific Tea
Co., Inc. 6,400 162
Great Lakes Chemical Corp. 11,900 699
Great Western Financial Corp. 22,100 425
Halliburton Co. 19,000 599
Handleman Co. 5,550 60
Harcourt General, Inc. 12,963 446
John H. Harland Co. 5,100 107
Harnischfeger Industries Inc. 4,600 121
Harris Corp. 6,600 321
* Hartmarx Corp. 7,700 41
Hasbro, Inc. 14,600 431
H.J. Heinz Co. 41,500 1,520
Helmerich & Payne, Inc. 4,100 115
Hercules, Inc. 6,700 689
Hershey Foods Corp. 14,500 653
Hewlett-Packard Co. 42,000 3,670
Hilton Hotels Corp. 8,000 479
Home Depot, Inc. 74,500 3,129
Homestake Mining Co. 22,900 487
Honeywell, Inc. 21,700 749
Household International, Inc. 15,700 561
Houston Industries, Inc. 21,800 768
ITT Corp. 19,500 1,626
Illinois Tool Works, Inc. 18,900 808
Inco Ltd. 19,566 589
Ingersoll-Rand Co. 17,600 623
* Inland Steel Industries, Inc. 7,400 291
Intel Corp. 69,300 4,262
* Intergraph Corp. 7,500 68
International Business
Machines Corp. 96,400 6,700
International Flavors &
Fragrances, Inc. 18,500 770
International Paper Co. 20,700 1,625
Interpublic Group of Cos., Inc. 12,600 416
James River Corp. 13,600 330
Jefferson-Pilot Corp. 8,200 434
Johnson & Johnson 106,800 5,514
Johnson Controls, Inc. 6,800 338
Jostens Inc. 7,600 136
Kmart Corp. 75,900 1,357
Kaufman & Broad Home Corp. 5,400 74
Kellogg Co. 37,300 2,140
Kerr-McGee Corp. 8,600 418
Keycorp 40,700 1,241
Kimberly-Clark Corp. 26,800 1,575
* King World Productions, Inc. 6,200 237
Knight-Ridder, Inc. 8,900 443
* The Kroger Co. 18,400 490
Eli Lilly & Co. 48,700 2,819
The Limited, Inc. 59,600 1,170
Lincoln National Corp. 15,800 591
Liz Claiborne, Inc. 13,100 298
Lockheed Corp. 10,500 731
Longs Drug Stores, Inc. 3,500 121
Loral Corp. 13,900 547
* Lotus Development Corp. 7,600 277
Louisiana Land & Exploration Co. 5,500 241
Louisiana-Pacific Corp. 18,200 603
Lowes Cos., Inc. 26,200 1,012
Luby's Cafeterias, Inc. 4,200 97
* M/A-Com, Inc. 4,800 37
MBNA Corp. 24,700 571
MCI Communications Corp. 89,900 2,281
Mallinckrodt Group, Inc. 12,800 414
Manor Care Inc. 10,400 277
Marriott International 20,700 598
Marsh & McLennan, Inc. 12,300 961
Martin Marietta Corp. 16,000 712
Masco Corp. 26,100 630
Mattel, Inc. 29,752 807
* Maxus Energy Corp. 22,300 100
May Department Stores Co. 41,400 1,630
Maytag Corp. 17,800 287
McDermott International, Inc. 8,900 229
McDonald's Corp. 116,900 3,069
McDonnell Douglas Corp. 6,600 762
McGraw-Hill, Inc. 8,200 601
The Mead Corp. 9,900 515
Medtronic, Inc. 19,400 1,026
Melville Corp. 17,600 627
Mercantile Stores Co., Inc. 6,100 253
Merck & Co., Inc. 209,300 7,430
Meredith Corp. 2,300 107
Merrill Lynch & Co., Inc. 32,400 1,122
Micron Technology Inc. 16,900 583
* Microsoft Corp. 95,200 5,343
Millipore Corp. 4,100 220
Minnesota Mining &
Manufacturing Co. 69,800 3,856
Mobil Corp. 65,800 5,206
Monsanto Co. 19,600 1,575
Moore Corp. Ltd. 16,600 305
J.P. Morgan & Co., Inc. 31,542 1,916
Morrison-Knudsen Co., Inc. 5,300 88
Morton International, Inc. 24,600 677
Motorola, Inc. 93,600 4,937
NBD Bancorp, Inc. 26,700 764
NACCO Industries, Inc. Class A 1,500 89
Nalco Chemical, Inc. 11,500 378
National City Corp. 25,000 703
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------
<S> <C> <C>
* National Education Corp. 6,600 $ 34
* National Medical Enterprises, Inc. 27,600 473
* National Semiconductor Corp. 20,500 320
National Service Industries, Inc. 8,300 220
NationsBank, Inc. 45,514 2,230
* Navistar International Corp. 12,480 173
New York Times Co. Class A 17,500 383
Newell Co. 26,300 585
Newmont Mining Corp. 14,346 646
Niagara Mohawk Power Corp. 23,900 317
NICOR, Inc. 8,800 213
Nike, Inc. Class B 12,300 724
NorAm Energy Corp. 20,300 132
Nordstrom, Inc. 13,700 548
Norfolk Southern Corp. 22,700 1,413
Northern States Power Co. of
Minnesota 11,100 469
Northern Telecom Ltd. 42,000 1,460
Northrop Corp. 8,200 371
Norwest Corp. 53,000 1,312
* Novell, Inc. 61,600 909
Nucor Corp. 14,500 1,010
NYNEX Corp. 70,000 2,695
Occidental Petroleum Corp. 52,000 1,092
Ogden Corp. 7,300 153
Ohio Edison Co. 25,400 483
Oneok, Inc. 4,400 74
* Oracle Systems Corp. 47,700 2,051
Oryx Energy Co. 16,100 223
Oshkosh B Gosh, Inc. Class A 2,900 41
Outboard Marine Corp. 3,300 75
* Owens-Corning Fiberglas Corp. 7,200 241
PECO Energy Corp. 36,900 936
PNC Bank Corp. 39,100 1,012
PPG Industries, Inc. 35,400 1,403
PSI Resources, Inc. 9,500 213
Paccar, Inc. 6,470 294
Pacific Enterprises 13,600 289
Pacific Gas & Electric Co. 71,700 1,631
Pacific Telesis Group 70,600 2,171
Pacificorp 46,900 791
Pall Corp. 19,166 331
Panhandle Eastern Corp. 20,045 466
Parker Hannifin Corp. 8,100 323
J.C. Penney Co., Inc. 39,200 2,024
Pennzoil Co. 7,700 361
Peoples Energy Corp. 5,800 152
Pep Boys (Manny, Moe & Jack) 10,200 354
PepsiCo, Inc. 131,100 4,343
Perkin-Elmer Corp. 7,300 229
Pet, Inc. 16,900 334
Pfizer, Inc. 50,400 3,484
Phelps Dodge Corp. 11,800 733
Philip Morris Cos., Inc. 144,200 8,814
Phillips Petroleum Co. 43,500 1,490
Pioneer Hi Bred International 14,800 463
Pitney Bowes, Inc. 26,200 930
Pittston Services Group 6,900 197
Placer Dome Group, Inc. 39,700 997
Polaroid Corp. 7,762 273
Potlatch Corp. 4,900 202
Praxair, Inc. 22,600 551
Premark International, Inc. 10,600 448
* Price/Costco Inc. 36,556 585
Procter & Gamble Co. 113,122 6,745
* Promus Co. Inc. 17,000 572
Providian Corp. 16,400 517
Public Service Enterprise Group Inc. 40,700 1,068
Pulte Corp. 4,600 100
Quaker Oats Co. 11,100 849
Ralston-Purina Group 16,700 691
Raychem Corp. 7,100 291
Raytheon Co. 22,500 1,443
Reebok International Ltd. 13,700 490
Reynolds Metals Co. 10,300 583
Rite Aid Corp. 14,200 295
Roadway Services, Inc. 6,500 372
Rockwell International Corp. 36,500 1,250
Rohm & Haas Co. 11,300 646
* Rollins Environmental Services, Inc. 12,400 76
* Rowan Cos., Inc. 13,900 101
Royal Dutch Petroleum Co. 88,600 9,513
Rubbermaid, Inc. 27,100 722
Russell Corp. 6,700 204
* Ryan's Family Steak Houses, Inc. 11,200 66
Ryder System, Inc. 12,900 331
SCE Corp. 74,500 969
SPX Corp. 2,600 45
Safeco Corp. 10,500 541
Safety-Kleen Corp. 9,600 156
St. Jude Medical, Inc. 7,700 275
St. Paul Cos., Inc. 14,000 569
Salomon, Inc. 17,600 695
Santa Fe Energy Resources Inc. 14,971 138
Santa Fe Pacific Corp. 31,062 703
Sara Lee Corp. 79,600 1,791
Schering-Plough Corp. 32,000 2,272
Schlumberger Ltd. 40,500 2,202
Scientific-Atlanta, Inc. 6,250 255
Scott Paper Co. 12,400 758
The Seagram Co. Ltd. 62,000 1,876
Sears, Roebuck & Co. 58,500 2,808
Service Corp. International 14,250 367
Shared Medical Systems Corp. 3,800 105
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------
<S> <C> <C>
Shawmut National Corp. 19,600 $ 407
Sherwin-Williams Co. 14,200 442
* Shoney's Inc. 6,800 94
Sigma Aldrich Corp. 8,300 291
Skyline Corp. 1,900 38
Snap-On Inc. 7,100 250
Sonat, Inc. 14,500 455
Southern Co. 108,000 2,012
Southwest Airlines Co. 23,800 536
Southwestern Bell Corp. 99,500 4,229
Springs Industries Inc. Class A 3,000 108
Sprint Corp. 57,500 2,192
The Stanley Works 7,500 305
* Stone Container Corp. 15,010 293
Stride Rite Corp. 8,300 116
Sun Co., Inc. 17,800 512
* Sun Microsystems, Inc. 15,700 461
Suntrust Banks, Inc. 20,400 995
SuperValu, Inc. 11,900 309
Sysco Corp. 30,600 776
TJX Cos., Inc. 12,200 256
TRW, Inc. 10,800 783
* Tandem Computers, Inc. 19,100 310
Tandy Corp. 10,532 453
Tektronix, Inc. 5,000 194
* Tele-Communications Inc. Class A 96,200 2,128
Teledyne Inc. 9,200 146
Temple-Inland Inc. 9,200 508
Tenneco, Inc. 28,300 1,249
Texaco, Inc. 43,200 2,592
Texas Instruments, Inc. 15,300 1,046
Texas Utilities Co. 36,665 1,196
Textron, Inc. 14,800 753
Thomas & Betts Corp. 3,200 217
Time Warner, Inc. 63,085 2,216
The Times Mirror Co. Class A 21,400 658
The Timkin Co. 5,100 192
Torchmark Corp. 12,100 531
* Toys R Us, Inc. 47,900 1,706
Transamerica Corp. 11,700 588
Transco Energy Co. 6,800 102
Travelers Inc. 54,148 1,780
The Tribune Co. 11,200 605
Trinova Corp. 4,800 167
Tyco International Ltd. 7,700 366
USF&G Corp. 14,200 188
UST, Inc. 33,900 970
USX-Marathon Group 47,700 847
USX-U.S. Steel Group 12,540 525
Unilever NV 26,600 3,016
Unicom Corp. 35,600 792
Union Camp Corp. 11,600 570
Union Carbide Corp. 25,200 857
Union Electric Corp. 17,000 595
Union Pacific Corp. 34,100 1,829
* Unisys Corp. 28,400 305
United Healthcare Corp. 28,500 1,511
* USAir Group, Inc. 9,900 46
U.S. Bancorp 16,550 422
U.S. Healthcare, Inc. 26,600 1,237
USLIFE Corp. 3,850 128
U.S. West Corp. 75,630 2,931
United States Surgical Corp. 9,400 253
United Technologies Corp. 21,000 1,315
Unocal Corp. 40,300 1,138
UNUM Corp. 12,600 580
Upjohn Co. 28,800 983
VF Corp. 10,714 529
* Varity Corp. 7,280 272
* Viacom International Class B 57,500 2,286
WMX Technologies Inc. 80,500 2,324
Wachovia Corp. 28,500 919
Wal-Mart Stores, Inc. 380,600 8,897
Walgreen Co. 20,500 771
Warner-Lambert Co. 22,300 1,790
Wells Fargo & Co. 8,800 1,277
Wendy's International, Inc. 16,800 244
* Western Atlas Inc. 7,600 333
Westinghouse Electric Corp. 59,100 768
Westvaco Corp. 11,200 427
Weyerhaeuser Co. 34,200 1,526
Whirlpool Corp. 12,400 637
Whitman Corp. 17,500 293
Williams Cos., Inc. 17,400 522
Winn Dixie Stores, Inc. 12,400 620
Woolworth Corp. 22,000 382
Worthington Industries, Inc. 15,050 324
Wm. Wrigley, Jr. Co. 19,400 791
Xerox Corp. 17,316 1,848
Yellow Corp. 4,700 87
* Zenith Electronics Corp. 7,300 83
Zurn Industries, Inc. 2,000 39
- --------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $496,630) 557,194
- --------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (48.9%)
- --------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BONDS
7.125%, 2/15/23 $50,645 $ 46,024
7.50%, 11/15/16 9,400 8,904
7.625%, 11/15/22 67,145 64,722
8.00%, 11/15/21 61,100 61,176
8.125%, 8/15/19 29,060 29,378
8.125%, 5/15/21 42,455 43,026
8.125%, 8/15/21 52,655 53,354
8.50%, 2/15/20 40,362 42,443
8.75%, 5/15/17 15,613 16,781
8.75%, 5/15/20 42,000 45,321
8.75%, 8/15/20 38,055 41,081
8.875%, 8/15/17 23,712 25,801
8.875%, 2/15/19 36,815 40,140
9.125%, 5/15/18 3,000 3,347
9.25%, 2/15/16 4,729 5,320
10.375%, 11/15/12 5,250 6,297
11.25%, 2/15/15 2,700 3,579
11.625%, 11/15/04 5,085 6,485
12.00%, 5/15/05 3,800 4,970
- --------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $592,898) 548,149
- --------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.6%)
- --------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 4.85%, 10/3/94
(Cost $6,265) 6,265 6,265
- --------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $1,095,793) 1,111,608
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- --------------------------------------------------------------------
<S> <C>
Other Assets--Notes C and F $ 29,516
Liabilities--Note F (21,128)
----------
8,388
- --------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------
Applicable to 81,298,466 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,119,996
- --------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.78
====================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AT SEPTEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------
Amount Per
(000) Share
---------- ---------
<S> <C> <C>
Paid in Capital $1,099,014 $13.52
Undistributed Net
Investment Income 16,952 .21
Overdistributed Net
Realized Gains--Note E (11,785) (.15)
Unrealized Appreciation
of Investments--Note D 15,815 .20
- --------------------------------------------------------------------
NET ASSETS $1,119,996 $13.78
- --------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
September 30, 1994
(000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,310
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,515
- -------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . 47,825
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,785
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,785
------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . 3,335
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 243 3,578
------
Taxes (other than income taxes)--Note A . . . . . . . . . . . . . . . . . . 93
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 17
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 6
- -------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . 5,670
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 42,155
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,422)
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . (69,584)
- -------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . $(28,851)
===============================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 1994 September 30, 1993
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,155 $ 29,750
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,422) 28,347
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . . (69,584) 47,284
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . . . . . (28,851) 105,381
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,747) (27,401)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,500) (6,895)
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . (75,247) (34,296)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,504 333,431
-- In Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . 71,439 32,231
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,157 205,392
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . (193,927) (49,779)
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . (178,431) (91,424)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . . . . . . 220,742 429,851
- -------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,644 500,936
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003,352 502,416
- -------------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,119,996 $1,003,352
===============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $.48 $.59
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . $.53 $.17
- -------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,017 37,613
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . 5,029 2,318
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,278) (9,834)
- -------------------------------------------------------------------------------------------------------------------------------
14,768 30,097
- -------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . . . . . $ 16,952 $ 11,544
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . $15.08 $13.79 $13.06 $10.93 $12.11
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .52 .54 .61 .60 .60
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . (.81) 1.51 .90 2.28 (1.12)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . (.29) 2.05 1.51 2.88 (.52)
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.48) (.59) (.59) (.62) (.51)
Distributions from Realized Capital Gains . (.53) (.17) (.19) (.13) (.15)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (1.01) (.76) (.78) (.75) (.66)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . $13.78 $15.08 $13.79 $13.06 $10.93
=========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . -2.05% +15.41% +12.16% +27.32% -4.57%
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . $1,120 $1,003 $502 $265 $160
Ratio of Expenses to Average Net Assets . . . . .50% .49% .52% .44% .50%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 3.68% 4.07% 4.95% 5.28% 5.53%
Portfolio Turnover Rate . . . . . . . . . . . . 51% 31% 18% 44% 12%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Asset Allocation Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Common stocks listed on an exchange are valued at the
latest quoted sales prices as of 4:00 PM on the valuation date; such
securities not traded are valued at the mean of the latest quoted bid and
asked prices; those securities not listed are valued at the latest quoted
bid prices. Bonds are valued utilizing the latest quoted bid prices and on
the basis of a matrix system (which considers such factors as security
prices, yields, maturities and ratings), both as furnished by independent
pricing services. Temporary cash investments are valued at cost which
approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by the Fund's
custodian bank until maturity of each repurchase agreement. Provisions of
the agreement ensure that the market value of the collateral is sufficient
in the event of default; however, in the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
4. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and osses
on sales of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Discounts and premiums on debt securities purchased are
amortized to interest income over the lives of the respective securities.
B. Under the terms of a contract which expires July 31, 1995, the Fund pays
Mellon Capital Management Corporation an advisory fee calculated at an annual
percentage rate of average net assets. The basic fee thus computed is subject
to quarterly adjustments based on performance relative to the Standard & Poor's
500 Stock Index. For the year ended September 30, 1994, the advisory fee
represented an effective annual rate of .16 of 1% of average net assets. No
performance adjustments were required during the year.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
September 30, 1994, the Fund had contributed capital of $179,000 to Vanguard
(included in Other Assets), representing .9% of Vanguard's capitalization. The
Fund's officers and directors are also officers and directors of Vanguard.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
D. During the year ended September 30, 1994, the Fund made purchases of
$297,222,000 and sales of $432,668,000 of investment securities other than
U.S. Government securities and temporary cash investments. Purchases and sales
of U.S. Government securities were $475,249,000 and $136,960,000, respectively.
At September 30, 1994, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $15,815,000, of which $73,483,000
related to appreciated securities and $57,668,000 related to depreciated
securities.
E. Capital gains distributions are determined on a tax basis and may differ
from realized capital gains for financial reporting purposes depending on the
timing of realization of gains. As a result of the December 1993 capital gains
distributions required for tax purposes, and the subsequent realization of net
capital losses, at September 30, 1994, the Fund had available $11,785,000 to
offset future net capital gains.
F. The market value of securities on loan to broker/dealers at September 30,
1994, was $33,474,000 for which the Fund has received as collateral cash of
$5,738,000 and U.S. Treasury securities with a market value of $29,345,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Asset Allocation Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Asset Allocation Fund (the "Fund") at September 30, 1994, the results
of its operations, the changes in its net assets and the financial highlights
for each of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 26, 1994
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD ASSET ALLOCATION FUND, INC.
Corporate shareholders should note that for the fiscal year ended September 30,
1994, 53.9% of the investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
19
<PAGE> 22
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Company and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
20
<PAGE> 23
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent
with each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the
same).
These principles make at least as much sense today as they did in 1929,
perhaps even more. For we live in an era when many fund organizations have
become asset-gathering machines, capitalizing on past performance that is
unrepeatable and investment fads that today, as yesterday, will come and go.
The new marketing policy is too often "if investors want it, we'll sell it to
them." But our principle remains "if it makes sound investment sense, we'll
offer it, even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
[FIGURE 5 -- SEE EDGAR APPENDIX]
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
TAXABLE MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
TAXABLE INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q780-9/94
<PAGE> 25
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the Vanguard
ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through four.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart showing cumulative performance by indexed value of the
Standard & Poor's 500 Stock Index, Long-Term U.S. Treasury Bonds and 90-Day
U.S. Treasury Bills for the fiscal years 1990 to 1994 appears at the upper-
left of page two.
A cumulative performance line chart, including average annual total
returns, for the Standard & Poor's 500 Index, Vanguard Asset Allocation
Fund and the Average Asset Allocation Fund for the period November 3, 1998,
to September 30, 1994, appears at the top of page three.
A running head featuring a coiled rope appears on page five.
A running head featuring a lantern appears on page six.
A running head featuring a map and telescope appears on page seven.
A running head featuring a log book and pen appears on pages eight
through nineteen.
A running head featuring a compass appears on page twenty.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A running head featuring a seagull in flight appears on the back cover
of the report.
