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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-23444) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 8 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 9 /X/
VANGUARD ASSET ALLOCATION FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (215) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
60 days after filing, pursuant to paragraph (b) of Rule 485
(acceleration of the effective date to December 31, 1993 has been requested).
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24(F )(2) FOR THE YEAR ENDED SEPTEMBER 30, 1993, ON NOVEMBER 12, 1993.
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VANGUARD ASSET ALLOCATION FUND, INC.
CROSS REFERENCE SHEET
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FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Financial Highlights; Performance
Record
Item 4. General Description of Registrant............. Investment Objective; Investment
Policies, Investment Risks;
Investment Limitations; General
Information
Item 5. Management of the Fund........................ Management of the Fund; Investment
Adviser
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Fund's Share Price; Dividends,
Capital Gains and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Management of the Fund
Item 13. Investment Objective and Policies............. Investment Limitations; Description
of U.S. Government Securities;
Description of Repurchase Agreements;
Futures Contracts
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Not Applicable
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
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[LOGO]
A Member of The Vanguard Group
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PROSPECTUS--DECEMBER 31, 1993
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Asset Allocation Fund, Inc. (the "Fund") is an open-end
OBJECTIVE AND diversified investment company that seeks to maximize total return
POLICIES (i.e., capital change plus income). The Fund invests in common stocks,
bonds and money market instruments in proportions consistent with their
expected returns and risks as evaluated by the Fund's adviser. The Fund
should not be considered a complete investment program. There is no
assurance that the Fund will achieve its stated objective.
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OPENING AN Please complete and return the Account Registration Form. If you need
ACCOUNT assistance in completing this Form, please call our Investor Information
Department. The minimum initial investment is $3,000 ($500 for
Individual Retirement Accounts and Uniform Gifts/Transfers to Minors Act
accounts). The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). However, the Fund
incurs expenses for investment advisory, management, administrative and
distribution services.
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ABOUT THIS This Prospectus is designed to set forth concisely the information you
PROSPECTUS should know about the Fund before you invest. It should be retained for
future reference. A "Statement of Additional Information" containing
additional information about the Fund has been filed with the Securities
and Exchange Commission. Such Statement is dated December 31, 1993 and
has been incorporated by reference into this Prospectus. A copy may be
obtained without charge by writing to the Fund or by calling the
Investor Information Department.
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</TABLE>
TABLE OF CONTENTS
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Page
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Fund Expenses.................. 2
Financial Highlights........... 2
Yield and Total Return......... 3
FUND INFORMATION
Investment Objective........... 4
Investment Policies............ 4
Investment Risks............... 5
Who Should Invest.............. 6
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<TABLE>
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Implementation of Policies..... 7
Investment Limitations......... 9
Management of the Fund......... 9
Investment Adviser............. 10
Performance Record............. 11
Dividends, Capital Gains and
Taxes........................ 12
The Fund's Share Price......... 13
General Information............ 14
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares............ 15
When Your Account Will Be
Credited..................... 17
Selling Your Shares............ 17
Exchanging Your Shares......... 19
Transferring Registration...... 21
Other Vanguard Services........ 21
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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FUND EXPENSES The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund. The expenses and fees set forth in
the table are for the 1993 fiscal year.
</TABLE>
<TABLE>
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SHAREHOLDER TRANSACTION EXPENSES
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Sales Load Imposed on Purchases....................................... None
Sales Load Imposed on Reinvested Dividends............................ None
Redemption Fees....................................................... None
Exchange Fees......................................................... None
ANNUAL FUND OPERATING EXPENSES
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Management & Administrative........................................... 0.27%
Investment Advisory Fees.............................................. 0.17
12b-1 Fees............................................................ None
Other Expenses
Distribution Costs.................................................. 0.02%
Miscellaneous Expenses.............................................. 0.03
----
Total Other Expenses.................................................. 0.05
----
TOTAL OPERATING EXPENSES..................................... 0.49%
----
----
</TABLE>
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The purpose of this table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an
investor in the Fund.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period. As noted in the
table above, the Fund charges no redemption fees of any kind.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 5 $ 16 $ 27 $ 62
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THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
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FINANCIAL HIGHLIGHTS The following financial highlights information for a share outstanding
throughout each period, has been audited by Price Waterhouse,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements
and notes thereto, which are incorporated by reference in the Statement
of Additional Information and this Prospectus, and which appear, along
with the report of Price Waterhouse, in the Fund's 1993 Annual Report to
Shareholders. For a more complete discussion of the Fund's performance,
please see the Fund's 1993 Annual Report to Shareholders, which may be
obtained without charge.
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<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------- NOV. 3, 1988+ TO
1993 1992 1991 1990 SEP. 30, 1989
<S> <C> <C> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD........................... $13.79 $13.06 $10.93 $12.11 $10.00
------ ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income........................................ .54 .61 .60 .60 .46
Net Realized and Unrealized Gain (Loss) on Investments....... 1.51 .90 2.28 (1.12) 1.90
------ ------ ------ ------ ------------
TOTAL FROM INVESTMENT OPERATIONS........................... 2.05 1.51 2.88 (.52) 2.36
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DISTRIBUTIONS
Dividends from Net Investment Income......................... (.59) (.59) (.62) (.51) (.25)
Distributions from Realized Capital Gains.................... (.17) (.19) (.13) (.15) --
------ ------ ------ ------ ------------
TOTAL DISTRIBUTIONS........................................ (.76) (.78) (.75) (.66) (.25)
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NET ASSET VALUE, END OF PERIOD................................. $15.08 $13.79 $13.06 $10.93 $12.11
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TOTAL RETURN................................................... 15.41% 12.16% 27.32% (4.57)% 23.93%
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RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................... $1,003 $502 $265 $160 $107
Ratio of Expenses to Average Net Assets........................ .49% .52% .44% .50% .49%*
Ratio of Net Investment Income to Average Net Assets........... 4.07% 4.95% 5.28% 5.53% 5.53%*
Portfolio Turnover Rate........................................ 31% 18% 44% 12% 52%
</TABLE>
*Annualized.
+Commencement of operations.
<TABLE>
<S> <C>
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YIELD AND TOTAL From time to time the Fund may advertise its yield and total return.
RETURN Both yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The "total return" of
the Fund refers to the average annual compounded rates of return over
one, five and ten-year periods or for the life of the Fund (which
periods will be stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated period to the
ending redeemable value of the investment, assuming the reinvestment of
all dividend and capital gains distributions.
The "30-day yield" of the Fund is calculated by dividing the net
investment income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net investment
income includes interest and dividend income earned on the Fund's
securities; it is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts. The yield
calculation assumes that the net investment income earned over thirty
days is compounded monthly for six months and then annualized. Methods
used to calculate advertised yields are standardized for all stock and
bond mutual funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and records, and so the
advertised thirty-day yield may not fully reflect the income paid to
your own account or the yield reported in the Fund's financial
statements. Additionally, the Fund may compare its performance to that
of the Standard & Poor's 500 Composite Stock Price Index.
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3
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INVESTMENT The objective of the Fund is to maximize total return (i.e., capital
OBJECTIVE change plus income) while exhibiting less investment risk than a
portfolio consisting entirely of common stocks. There is no assurance
THE FUND SEEKS TO that the Fund will achieve its stated objective.
MAXIMIZE TOTAL RETURN
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INVESTMENT The Fund will allocate its assets among a common stock portfolio, a bond
POLICIES portfolio, and money market instruments. The Fund's adviser, Mellon
Capital Management, allocates the Fund's assets among stocks, bonds and
THE FUND INVESTS IN money market instruments in proportions which reflect the anticipated
STOCKS, BONDS AND returns and risks of each asset class. The estimates of return and risk
MONEY MARKET are developed based upon the adviser's disciplined valuation
INSTRUMENTS IN methodology. There are no limitations on the amount of the Fund's assets
VARYING which may be allocated to each of the three asset classes (stocks, bonds
PROPORTIONS and money market instruments). The Fund is managed without regard to tax
ramifications.
In estimating the relative attractiveness of each asset class, the
adviser takes into account various factors. Common stocks are evaluated
using a "dividend-discount" model. This model provides an estimate of
the expected return of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index") based upon earnings forecasts for companies
whose stocks are included in the S&P 500 Index. The expected bond return
is the current yield-to-maturity of long-term U.S. Treasury bonds, while
the return on money market instruments reflects the current yield on
three-month U.S. Treasury bills and long-term inflation forecasts.
Once expected return and volatility (risk) estimates are developed for
each asset class, the adviser attempts to identify apparent imbalances
in the relative pricing of common stocks, bonds and money market
instruments, using a computer model. Implicit in the adviser's approach
is the belief that such short-term imbalances occur periodically but
tend to be corrected fairly quickly. The Fund's allocation among the
three asset classes is then structured to take advantage of these
perceived imbalances.
To implement a particular allocation strategy, the Fund may invest in
the following securities: a diversified portfolio of common stocks
selected by the adviser to parallel the performance of the S&P 500
Index; long-term U.S. Treasury bonds with maturities generally in excess
of 20 years; and selected money market instruments, including repurchase
agreements. The Fund may also invest in futures contracts on stock
indexes and bonds. See "Implementation of Policies" for a description of
the securities in which the Fund invests and other investment practices
of the Fund.
The investment objective and policies of the Fund are not fundamental
and so may be changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to a material
change in either.
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4
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INVESTMENT RISKS Depending on the adviser's allocation of the Fund's assets among stocks,
bonds and cash reserves, investors in the Fund may be exposed to the market
THE FUND IS SUBJECT risk of common stocks and bonds.
TO STOCK AND BOND Stock market risk is the possibility that stock prices in general will
MARKET RISK decline over short or even extended periods. The stock market tends to be cyclical,
with periods when stock prices generally rise and periods when stock prices generally
decline. To illustrate the volatility of domestic stock prices, the following
table sets forth the extremes for U.S. stock market returns as well as the average return
for the period from 1926 to 1992, as measured by the Standard & Poor's 500
Composite Stock Price Index:
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1992)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.1 +10.4 +10.4
</TABLE>
<TABLE>
<S> <C>
As shown, from 1926 to 1992, U.S. common stocks as measured by the Index
have provided an average annual total return (capital appreciation plus
dividend income) of +12.2%. While this average return can be used as a
guide for setting reasonable expectations for future stock market
returns, it may not be useful for forecasting future returns in any
particular period, as stock returns are quite volatile from year to
year.
Bond market risk is the potential for fluctuations in the market value
of bonds. Bond prices vary inversely with changes in the level of
interest rates. When interest rates rise, the prices of bonds fall;
conversely, when interest rates fall, bond prices rise. While bonds
normally fluctuate less in price than stocks, there have been extended
periods of cyclical increases in interest rates that have caused
significant declines in bond prices. For example, long-term bond prices
fell 48% from December 1976 to September 1981. The risk of bonds
declining in value, however, may be offset in whole or in part by the
higher level of income that bonds provide.
While the Fund invests in stocks, bonds and money market instruments in
varying proportions, investors should not construe the Fund as a
balanced investment program offering relatively stable allocations among
these asset classes. Because the allocation strategy of the adviser may,
at certain times, result in a portfolio with a primary emphasis on
common stocks, the Fund may from time to time exhibit a level of
volatility which is more consistent with a common stock portfolio than a
balanced portfolio. However, under normal circumstances, the volatility
of the Fund's total return is expected to be less than that of a common
stock portfolio, as represented, for example, by the S&P 500 Index.
THE ADVISER MAY FAIL Investors should also be aware that the investment results of the Fund
TO ANTICIPATE MARKET depend upon the adviser's ability to anticipate correctly the relative
ADVANCES OR DECLINES performance and risk of stocks, bonds and money market instruments.
Historical evidence indicates that
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5
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correctly timing portfolio allocations among these asset classes has
been an extremely difficult strategy to implement successfully. While
the adviser has substantial experience in asset allocation, there can be
no assurance that the adviser will correctly anticipate relative asset
class performance in the future on a consistent basis. The Fund's
investment results would suffer, for example, if only a small portion of
the Fund's assets were allocated to stocks during a significant stock
market advance, or if a major portion of its assets were allocated to
stocks during a market decline. Similarly, the Fund's performance could
deteriorate if the Fund were substantially invested in bonds at a time
when interest rates moved adversely.
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WHO SHOULD INVEST The Fund is designed for investors seeking maximum total return through
an investment vehicle which provides an actively managed mix of stocks,
LONG-TERM INVESTORS bonds and money market instruments. Because the Fund can and may have a
SEEKING MAXIMUM large percentage of its portfolio invested in common stocks, investors
TOTAL RETURN in the Fund should be willing to accept the risk of an all-stock
portfolio, including the potential for sudden, sometimes substantial
declines in market value.
Due to the risks associated with common stock and bond investments, the
Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
stock and bond market movements. Investors who engage in excessive
account activity generate additional costs which are borne by all of the
Fund's shareholders. In order to minimize such costs the Fund has
adopted the following policies. The Fund reserves the right to reject
any purchase request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to efficient
portfolio management. Additionally, the Fund has adopted exchange
privilege limitations as described in the section "Exchange Privilege
Limitations." Finally, the Fund reserves the right to suspend the
offering of its shares.
No assurance can be given that the Fund will achieve its objective or
that shareholders will be protected from the risk of loss that is
inherent in equity investing. Also, there can be no guarantee that the
adviser will correctly anticipate fluctuations in the stock and bond
markets in its effort to maximize total return while minimizing risk.
The Fund should be considered part of a well-rounded investment program
and not its sole component. Investors may wish to reduce the potential
risk of investing in the Fund by purchasing shares on a regular,
periodic basis (dollar-cost averaging) rather than making an investment
in one lump sum.
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6
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<S> <C>
IMPLEMENTATION OF In an effort to maximize its total investment return, the Fund utilizes
POLICIES a number of investment practices.
THE FUND MAY INVEST IN The Fund invests in stocks, bonds and money market instruments in
STOCKS, BONDS AND varying proportions. For common stocks, the Fund will invest in a
MONEY MARKET diversified portfolio of common stocks selected to parallel the
INSTRUMENTS investment performance of the S&P 500 Index. The Fund may also invest in
stock index futures and options to a limited extent, as described below.
Bond investments for the Fund will consist of long-term U.S. Treasury
bonds (those with maturities generally in excess of 20 years) and, as
described below, futures contracts and options on such bonds. As part of
its bond portfolio, the Fund may also invest in other long-term "full
faith and credit" obligations of the U.S. Government.
The money market instruments held by the Fund will have an average
weighted maturity of less than 90 days. Money market instruments may
include obligations of the United States Government and its agencies and
instrumentalities; commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements collateralized by these
securities.
A repurchase agreement is a means of investing monies for a short
period. In a repurchase agreement, a seller--a U.S. commercial bank or
recognized U.S. securities dealer--sells securities to the Fund and
agrees to repurchase the securities at the Fund's cost plus interest
within a specified period (normally one day). In these transactions, the
securities purchased by the Fund will have a total value equal to or in
excess of the value of the repurchase agreement, and will be held by the
Fund's Custodian Bank until repurchased.
THE FUND MAY The Fund may utilize stock and bond futures contracts and options to a
USE FUTURES CONTRACTS limited extent. Specifically, the Fund may enter into futures contracts
AND OPTIONS provided that not more than 5% of its assets are required as a futures
contract deposit; in addition, the Fund may enter into futures contracts
and options only to the extent that obligations under such contracts or
transactions represent not more than 50% of the Fund's assets. However,
under unusual circumstances, the Fund may maintain futures positions
that are equivalent in value to up to 100% of the Fund's assets, so that
the Fund may remain effectively fully invested in proportions consistent
with the adviser's current asset allocation strategy.
Futures contracts and options may be used for several reasons: to
reallocate the Fund's assets among stocks, bonds and money market
instruments while minimizing transaction costs; to maintain cash
reserves while simulating full investment; to facilitate trading; or to
seek higher investment returns when a futures contract is priced more
attractively than the underlying security or index.
For example, in order to reallocate 10% of the Fund's assets from stocks
to bonds while minimizing transaction costs, the adviser may sell stock
index futures and purchase bond futures. Because the transaction costs
of futures contracts and options may be lower than the costs of
investing in stocks or bonds directly, it is
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7
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<S> <C>
expected that the use of futures contracts and options may reduce the
Fund's total transaction costs. Also, because futures contracts only
require a small initial margin deposit, the Fund would then be able to
simultaneously maintain a cash reserve for potential redemptions and
simulate full investment. In the event of net redemptions from the Fund,
sufficient futures contracts would be sold to avoid any leveraging of
the Fund's assets.
FUTURES CONTRACTS AND The primary risks associated with the use of futures contracts and
OPTIONS POSE CERTAIN options are: (i) imperfect correlation between the change in market
RISKS value of the securities held by the Fund and the prices of futures
contracts and options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those contracts whose
behavior is expected to resemble that of the Fund's underlying
securities. The risk that the Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market. While
futures contracts and options can be used as leveraged instruments, the
Fund may not use futures contracts or options to leverage its net
assets.
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 (or gain) to the investor. When
investing in futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
THE FUND MAY LEND The Fund may lend its investment securities to qualified institutional
ITS SECURITIES investors for either short-term or long-term purposes of realizing
additional income. Loans of securities by the Fund will be
collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities.
THE FUND MAY BORROW The Fund may borrow money, subject to the limitations set forth below,
MONEY UNDER UNUSUAL for temporary or emergency purposes, including the meeting of redemption
CIRCUMSTANCES requests which might otherwise require the untimely disposition of
securities.
PORTFOLIO TURNOVER Due to the active asset allocation approach employed by the Fund, the
MAY BE HIGH Fund's portfolio turnover rate may be high, approximately 100% per year.
A 100% portfolio turnover rate would occur, for example, if all of the
Fund's securities were replaced within one year. Further, in order to
comply with the "short-short" test of the Internal Revenue Service, it
may be necessary for the Fund to modify its investment strategy and
refrain from securities sales that it would otherwise make. Under the
IRS's "short-short" test, a mutual fund must not receive more than 30%
of its gross income from gains realized on securities held for less than
90 days.
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8
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<S> <C>
INVESTMENT The Fund has adopted certain limitations in an attempt to reduce its
LIMITATIONS exposure to specific situations. Some of these limitations are that the
Fund will not:
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL (a) with respect to 75% of the value of its total assets,
LIMITATIONS purchase the securities of any issuer (except obligations of the
United States government and its instrumentalities) if as a result
the Fund would hold more than 10% of the outstanding voting
securities of the issuer, or more than 5% of the value of the
Fund's total assets would be invested in the securities of
such issuer;
(b) invest more than 25% of its assets in any one industry;
(c) borrow money except from banks (or through reverse repurchase
agreements) for temporary or emergency purposes (not leveraging), and
then only in an amount not in excess of 15% of the value of
the Fund's net assets at the time the borrowing is made.
Whenever borrowing exceeds 5% of the value of the Fund's
assets, the Fund will not make any additional investments; and
(d) pledge, mortgage or hypothecate any of its assets to an
extent greater than 5% of its total assets.
These investment limitations are considered at the time investment
securities are purchased. The investment limitations described here and
in the Statement of Additional Information may be changed only with the
approval of a majority of the Fund's shareholders.
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MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Companies, a
THE FUND family of 32 investment companies with 77 distinct investment portfolios
and total assets in excess of $120 billion. Through their jointly-owned
VANGUARD subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the
ADMINISTERS AND other funds in the Group obtain at cost virtually all of their corporate
DISTRIBUTES THE management, administrative and distribution services. Vanguard also
FUND provides investment advisory services on an at-cost basis to certain
Vanguard funds. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those of most
competing mutual funds. In 1992, the average expense ratio (annual costs
including advisory fees divided by average net assets) for the Vanguard
Funds amounted to .31% compared to an average of 1.03% for the mutual
fund industry (data provided by Lipper Analytical Services).
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 Directors
(Trustees) of each fund. In addition, each fund bears its own direct expenses,
such as legal, auditing and custodian fees.
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad
policies for the Fund and
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choose its Officers. A list of Directors and Officers of the Fund and a
statement of their present positions and principal occupations during the
past five years can be found in the Statement of Additional Information.
Vanguard provides distribution and marketing services to the funds.
However, each fund bears its share of the Group's distribution costs.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund employs Mellon Capital Management Corporation, 595 Market St.,
ADVISER Suite 3000, San Francisco, CA 94105, as its investment adviser. Under an
investment advisory agreement dated August 25, 1988, the adviser manages
MELLON CAPITAL the investment and reinvestment of the assets of the Fund and
MANAGEMENT continuously reviews, supervises and administers the Fund's investment
MANAGES THE FUND'S program. The adviser discharges its responsibilities subject to the
INVESTMENTS control of the Officers and Directors of the Fund.
The adviser is a professional counseling firm which manages
well-diversified stock and bond portfolios for institutional clients. As
of September 30, 1993 the adviser provided investment advisory services
to 157 clients and managed assets with an approximate value of $34.3
billion. The adviser's asset allocation strategy was developed by the
adviser's Chairman, William Fouse, in 1972, and is used by 93 of its
clients and accounts for approximately $10.9 billion of the assets that
it manages. For its asset allocation clients, including the Fund, the
adviser employs a proprietary asset allocation model in managing client
investment portfolios and an indexing approach in selecting individual
equity securities. The Fund is one of the adviser's two investment
company clients.
The adviser was founded in October 1983 by a group of investment
professionals from Wells Fargo Bank, including Mr. Fouse. Mr. Fouse has
been responsible for overseeing the implementation of the firm's
strategy for the Fund since the Fund's inception. The adviser is a
wholly owned subsidiary of MBC Investment Corporation, which itself is a
subsidiary of Mellon Bank Corporation.
The Fund pays the adviser 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 Fund's average month-end net assets for the
quarter:
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<CAPTION>
NET ASSETS RATE
-------------------- ----
<S> <C>
First $100 million .20%
Over $100 million .15%
This fee may be increased or decreased by applying an adjustment formula
based on the performance of the Fund relative to the investment record
of the S&P 500 Index. The fee payment will be increased (decreased) by
an incentive (penalty) of 0.05% of average net assets if the Fund's
cumulative investment performance for the thirty-six months preceding
the end of the quarter is at least six percentage points above (below)
the cumulative investment record of the S&P 500 Index for the same
period. For the year ended September 30, 1993, the investment advisory
fee paid by the Fund represented an effective annual rate of .16 of 1%
before an increase of .01 of 1% based on performance.
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The investment advisory agreement authorizes the adviser to select
brokers or dealers to execute purchases and sales of the Fund's
portfolio securities, and directs the adviser to use its best efforts to
obtain the best available price and most favorable execution with
respect to all transactions. The full range and quality of brokerage
services available are considered in making these determinations.
The Fund has authorized the adviser to pay higher commissions in
recognition of brokerage services felt necessary for the achievement of
better execution, provided the adviser believes this to be in the best
interest of the Fund. Although the Fund does not market its shares
through intermediary brokers or dealers, the Fund may place orders with
qualified broker-dealers who recommend the Fund to clients if the
Officers of the Fund believe that the quality of the transaction and the
commission are comparable to what they would be with other qualified
brokerage firms.
The Fund's Board of Directors may, without the approval of shareholders,
provide for: (a) the employment of a new investment adviser pursuant to
the terms of a new advisory agreement either as a replacement for an
existing adviser or as an additional adviser; (b) a change in the terms
of an advisory agreement; and (c) the continued employment of an
existing adviser on the same advisory contract terms where a contract
has been assigned because of a change in control of the adviser. Any
such change will only be made upon not less than 30 days prior written
notice to shareholders of the Fund which shall include substantially the
information concerning the adviser that would have normally been
included in a proxy statement.
- --------------------------------------------------------------------------------------------------
PERFORMANCE The table below provides investment results for the Fund for several
RECORD periods throughout the Fund's lifetime. The results shown represent
"total return" investment performance, which assumes the reinvestment of
all capital gains and income dividends for the indicated periods. Also
included is comparative information with respect to the unmanaged
Standard & Poor's 500 Composite Stock Price Index, a widely-used
barometer of stock market activity, and the Consumer Price Index, a
statistical measure of changes in the prices of goods and services. The
tables do not make any allowance for federal, state or local income
taxes, which shareholders must pay on a current basis.
The results should not be considered a representation of the total
return from an investment made in the Fund today. This information is
provided to help investors better understand the Fund and may not
provide a basis for comparison with other investments or mutual funds
which use a different method to calculate performance. During the
periods shown, Mellon Capital Management Corporation served as the
Fund's sole investment adviser.
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<CAPTION>
AVERAGE ANNUAL RETURN FOR VANGUARD ASSET ALLOCATION FUND
PERCENTAGE CHANGE
-------------------------------------------
FISCAL PERIODS VANGUARD ASSET S&P 500 CONSUMER
ENDED 9/30/93 ALLOCATION FUND INDEX PRICE INDEX
-------------- --------------- ------- -----------
<S> <C> <C> <C>
1 Year +15.41% +13.0 +2.7%
Lifetime* +14.6 +14.3 --
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*November 3, 1988, to September 30, 1993.
- --------------------------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay dividends semi-annually from ordinary income.
CAPITAL GAINS Net capital gains distributions, if any, will be made annually.
AND TAXES
In addition, in order to satisfy certain distribution requirements of
THE FUND PAYS SEMI- the Tax Reform Act of 1986, the Fund may declare special year-end
ANNUAL DIVIDENDS dividend and capital gains distributions during December. Such
AND ANY CAPITAL distributions, if received by shareholders by January 31, are deemed to
GAINS ANNUALLY have been paid by the Fund and received by shareholders on December 31st
of the prior year.
Dividend and capital gains distributions may be automatically reinvested
or received in cash. See "Choosing a Distribution Option" for a
description of these distribution methods.
The Fund intends to continue to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so that it will not
be subject to federal income tax to the extent its income is distributed
to shareholders. Dividends paid by the Fund from net investment income
and net short-term capital gains, whether received in cash or reinvested
in additional shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends from net investment income
and net short-term capital gains will generally qualify in part for the
intercorporate dividends-received deduction. However, the portion of the
dividends so qualified depends on the aggregate taxable qualifying
dividend income received by the Fund from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or reinvested in additional shares, are taxable as
long-term capital gains, regardless of the length of time you have owned
shares in the Fund. Capital gains distributions are made when the Fund
realizes net capital gains on sales of portfolio securities during the
year. The Fund does not seek to realize any particular amount of capital
gains during a year; rather, realized gains are a byproduct of portfolio
management activities. Consequently, capital gains distributions may be
expected to vary considerably from year to year; there will be no
capital gains distributions in years when the Fund realizes net capital
losses.
Note that if you accept capital gains distributions in cash, instead of
reinvesting them in additional shares, you are in effect reducing the
capital at work for you in the Fund. Also, keep in mind that if you
purchase shares in the Fund shortly before the record date for a
dividend or capital gains distribution, a portion of your
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investment will be returned to you as a taxable distribution, regardless
of whether you are reinvesting your distributions or receiving them in
cash.
The Fund will notify you annually as to the tax status of dividend and
capital gains distributions paid by the Fund.
A CAPITAL GAIN OR LOSS A sale of shares of the Fund is a taxable event and may result in a
MAY BE REALIZED UPON capital gain or loss. A capital gain or loss may be realized from an
EXCHANGE OR ordinary redemption of shares or an exchange of shares between two
REDEMPTION mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may be subject to state and
local taxes.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid
this withholding requirement by certifying on your Account Registration
Form your proper Social Security or Taxpayer Identification Number and
by certifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do business as a
foreign corporation in Pennsylvania and does business and maintains an
office in that state. In the opinion of counsel, the shares of the Fund
are exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund. The Fund
is managed without regard to tax ramifications.
- --------------------------------------------------------------------------------------------------
THE FUND'S SHARE The Fund's share price or "net asset value" per share is determined by
PRICE dividing the total market value of the Fund's investments and other
assets, less any liabilities, by the number of outstanding shares of the
Fund. The Fund's net asset value is determined at the close of regular
trading (generally, 4:00 p.m. Eastern time) each day the New York Stock
Exchange is open for trading.
Common stocks that are listed on a securities exchange are valued at the
last quoted sales price on the day the valuation is made. Price
information on listed stocks is taken from the exchange where the
security is primarily traded. Securities which are listed on an exchange
but which are not traded on the valuation date are valued at the mean of
the bid and asked prices. Unlisted securities for which market
quotations are readily available are valued at the latest quoted bid
price. Bonds are valued at the latest 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. Other assets and securities for which no quotations are
readily available are valued at fair value as determined in good faith
by the Directors. 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
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securities. Short-term instruments (those with remaining maturities of
60 days or less) are valued at cost, which approximates market.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading of The Vanguard Group.
- --------------------------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of Incorporation permit
INFORMATION the Directors to issue 1,000,000,000 shares of common stock, with a
$.001 par value. The Board of Directors has the power to designate one
or more classes ("series") of shares of common stock and to classify or
reclassify any unissued shares with respect to such series. Currently
the Fund is offering one class of shares.
The shares of the Fund are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or other
features; and have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as required by
the Investment Company Act of 1940 and other applicable law. An annual
meeting will be held to vote on the removal of a Director or Directors
of the Fund if requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by State Street Bank and Trust Company,
Boston, MA. The Vanguard Group, Inc., Valley Forge, PA, serves as the
Fund's Transfer and Dividend Disbursing Agent. Price Waterhouse serves
as independent accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------------------------
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SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply complete and
ACCOUNT AND return an Account Registration Form or appropriate Adoption Agreement
PURCHASING (e.g., the IRA Adoption Agreement) and any required legal documentation.
SHARES Please indicate the amount you wish to invest. Your purchase must be
equal to or greater than the $3,000 minimum initial investment
requirement ($500 for Individual Retirement Accounts, other retirement
accounts and Uniform Gifts/Transfers to Minors Act accounts). If you
need assistance with the Account Registration Form or have any questions
about the Fund, please call our Investor Information Department at
1-800-662-7447. Note: For other types of account registrations (e.g.
corporations, associations, other organizations, trusts or power of
attorney), please call us to determine which additional forms you may
need.
The Fund's shares are purchased at the next-determined net asset value
after your investment has been received. The Fund is offered on a
no-load basis (i.e., there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum), wire ($1,000
INVESTMENTS minimum), exchange from another Vanguard Fund account, or Vanguard Fund
Express. However, the Fund reserves the right to reject any specific
purchase request, whether it be made by check, wire, exchange from
another Vanguard Fund account or Vanguard Fund Express.
------------------------------------------------------------------------
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ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group-78 and Please make your check payable
mail to: to The Vanguard Group-78, write
your account number on your
VANGUARD FINANCIAL CENTER check and, using the return
P.O. BOX 2600 envelope provided, mail to the
VALLEY FORGE, PA 19482 address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------------------
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PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD ASSET ALLOCATION FUND
BEFORE WIRING ACCOUNT NUMBER
ACCOUNT REGISTRATION
Please contact
Client Services To assure proper receipt, please be sure your bank includes the name of
(1-800-662-2739) the Fund, the account number Vanguard has assigned to you and the eight
digit CoreStates number. If you are opening a new account, please complete
the Account Registration Form and mail it to the "New Account" address
after completing your wire arrangement. Note: Federal Funds wire purchase
orders will be accepted only when the Fund and Custodian Bank are open for
business.
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<S> <C>
------------------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares by making an
EXCHANGE (from a exchange from another Vanguard Fund account. However, the Fund reserves
Vanguard account) the right to refuse any exchange purchase request. Call our Client
Services Department toll-free at 1-800-662-2739. The new account will
have the same registration as the existing account.
------------------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money from your
FUND EXPRESS bank account to your Vanguard account at your request. Or if you choose
the Automatic Investment option, money will be moved from your bank
Special Purchase and account to your Vanguard account on the schedule--monthly, bimonthly
Automatic Investment (every other month), quarterly or yearly--you select. To establish these
Fund Express options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation of your Fund
Express service; please wait three weeks before using the service.
- --------------------------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital gains
distributions will be reinvested in additional Fund shares. This option
will be selected for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash and your
capital gains will be reinvested in additional Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains distributions will
be paid in cash.
You may change your option by calling our Client Services Department
(1-800-662-2739).
An option to invest your dividends and/or capital gains distributions in
another Vanguard Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information. You may also elect
Vanguard Dividend Express which allows you to transfer your dividends
and/or capital gains distributions
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automatically to your bank account. Please see "Other Vanguard Services"
for more information.
IMPORTANT TAX NOTE If you purchase shares shortly before a distribution of dividends or
capital gains, a portion of your investment will be classified as a
taxable distribution (regardless of whether you are reinvesting your
distributions or taking them in cash).
- --------------------------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on your account
INFORMATION is to select the options you desire when you complete your Account
Registration Form. If you wish to add shareholder options later, you may
OPTIONAL SERVICES need to provide Vanguard with additional information and a signature
guarantee. Please call our Client Services Department (1-800-662-2739)
for further assistance.
SIGNATURE For our mutual protection, we may require a signature guarantee on
GUARANTEES certain written transaction requests. A signature guarantee verifies the
authenticity of your signature and may be obtained from banks, brokers
and any other guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or adviser may
charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase, exchange, or
redemption) believed to be authentic, received in writing or by
telephone, once the trade has been received.
- --------------------------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credited. If your
ACCOUNT WILL BE purchase is made by check, Federal Funds wire, or exchange, and is
CREDITED received by the close of regular trading on the New York Stock Exchange,
(generally 4:00 p.m. Eastern time), your trade date is the day of
receipt. If your purchase is received after the close of the Exchange,
your trade date is the next business day. Your shares are purchased at
the net asset value determined on your trade date.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, Vanguard will only accept a foreign check which has been
drawn in U.S. dollars and has been issued by a foreign bank with a U.S.
correspondent bank.
Because of the risks associated with common stock and bond investments,
the Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
stock and bond market movements. Consequently the Fund reserves the
right to reject any specific purchase (and exchange purchase) request.
The Fund also reserves the right to suspend the offering of shares for a
period of time.
- --------------------------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by redeeming
SHARES shares at any time (please see Important Redemption Information). You
may initiate a
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request by writing or by telephoning. Your redemption proceeds are
normally mailed within two business days after the receipt of the request
in Good Order.
------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER, VANGUARD ASSET
ALLOCATION FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard Financial Center,
Vanguard Asset Allocation Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net asset value next
determined after Vanguard has received all required documents in Good
Order.
------------------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or shares).
3. Signatures of all owners EXACTLY as they are registered on the
account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be required in the
case of estates, corporations, trusts and certain other accounts.
If you have questions about this definition as it pertains to your
request, please call our Client Services Department at 1-800-662-2739.
------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized representative
may call our Client Services Department at 1-800-662-2739. The proceeds
will be sent to you by mail. In addition to the details below, please
see "Important Information About Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically established on your
account unless you indicate otherwise on your Account Registration Form.
You may redeem any amount by calling Vanguard. The proceeds will be paid
to the registered shareholders and mailed to the address of record.
------------------------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal option, money will
EXPRESS be automatically moved from your Vanguard Fund account to your bank
account according to the schedule you have selected. The Special
Automatic Redemption option lets you move money from your Vanguard account to your
Withdrawal bank account on your request. You may elect Fund Express on the Account
& Special Redemption Registration Form or call our Investor Information Department at
1-800-662-7447 for a Fund Express application.
------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange to another Vanguard Fund
account. Please see "Exchanging Your Shares" for details.
------------------------------------------------------------------------
IMPORTANT Shares purchased by check, Fund Express Special Purchase or Fund Express
REDEMPTION Automatic Investment Plan may not be redeemed until payment for the
INFORMATION purchase is collected, which may take up to ten calendar days. Your
money is invested during the holding period.
------------------------------------------------------------------------
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DELIVERY OF Redemption requests received by telephone prior to the close of regular
REDEMPTION PROCEEDS trading on the New York Stock Exchange (generally, 4:00 p.m. Eastern
time) are processed on the day of receipt and the redemption proceeds
are normally sent on the following business day.
Redemption requests received by telephone after the close of the
Exchange are processed on the business day following receipt and the
proceeds are normally sent on the second business day following receipt.
The Fund reserves the right to revise or terminate the telephone
redemption privilege at any time.
Redemption proceeds must be sent to you within seven days of receipt of
your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption request
may be made by regular or express mail. It will be implemented at the
net asset value next determined after your request has been received by
Vanguard in Good Order.
The Fund may suspend the redemption right or postpone payment at times
when the New York Stock Exchange is closed or under any emergency
circumstances as determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the Fund's remaining shareholders to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
------------------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard will send
COST STATEMENT you an Average Cost Statement which provides you with the tax basis of
the shares you redeemed. Please see "Other Vanguard Services" for
additional information.
------------------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller accounts, the
BALANCE Fund reserves the right to redeem shares in any account that is below
REQUIREMENT the minimum initial investment amount of $3,000. In addition, if at any
time the total investment does not have a value of at least $1,000, you
may be notified that the value of your account is below the Fund's
minimum account balance requirement. You would then be allowed 60 days
to make an additional investment before the account is liquidated.
Proceeds would be promptly paid to the shareholder. This minimum does
not apply to Individual Retirement Accounts, other retirement accounts
and Uniform Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your shares of
SHARES Vanguard Asset Allocation Fund for those of other available Vanguard
Funds.
EXCHANGING BY
TELEPHONE: In addition to the details below, please see "Important Information
Call Client Services About Telephone Transactions."
(1-800-662-2739)
When exchanging shares by telephone, please have ready the Fund name,
account number, Social Security number or Taxpayer Identification number listed
on the
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account, and account address. Only the registered shareowner may
complete such an exchange. Requests for telephone exchanges received
prior to the close of the New York Stock Exchange (generally, 4:00 p.m.
Eastern time) are processed at the close of business that same day.
Requests received after the close of the Exchange are processed the next
business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD
BALANCED INDEX FUND, VANGUARD EXPLORER FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND--EUROPEAN AND PACIFIC
PORTFOLIOS, AND VANGUARD QUANTITATIVE PORTFOLIOS. If you experience
difficulty in making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be implemented at the
closing net asset value on the date received by Vanguard provided the
request is received in Good Order.
------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name and account
number of your current Fund, the name of the Fund you wish to exchange
into, the amount you wish to exchange, and the signatures of all
registered account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD ASSET ALLOCATION FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to Vanguard
Financial Center, Vanguard Asset Allocation Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
------------------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the following:
INFORMATION
- Please read the Fund's prospectus before making an exchange. For a
copy and for answers to any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption and a purchase. Therefore, you
could realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and the Taxpayer
Identification numbers of the two accounts are identical.
- The shares to be exchanged must be on deposit and not held in
certificate form.
- New accounts are not currently accepted in Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is the net asset
value next determined after Vanguard has received the required
documentation in Good Order.
- When opening a new account by exchange, you must meet the minimum
investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege. However,
the Fund reserves the right to revise or terminate its provisions, limit
the amount of or reject any exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford shareholders a
PRIVILEGE way to speculate on short-term movements in the market. Accordingly, in
LIMITATIONS order to prevent excessive use of the exchange privilege that may
potentially disrupt the manage-
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ment of the Fund and increase transaction costs, the Fund has established
a policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive if limited to
TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from the
Fund during any calendar year. These limitations do not apply to
exchanges from Vanguard's money market portfolios.
IMPORTANT The ability to initiate redemptions (except wire redemptions) and
INFORMATION ABOUT exchanges by telephone is automatically established on your account
TELEPHONE unless you request in writing that telephone transactions on your
TRANSACTIONS account not be permitted.
To protect your account from losses resulting from unauthorized or
fraudulent telephone instructions, Vanguard adheres to the following
security procedures:
1. SECURITY CHECK. To request a transaction by telephone, the caller
must know (i) the name of the Portfolio; (ii) the 10-digit account
number; (iii) the exact name in which the account is registered; and
(iv) the Social Security or Taxpayer Identification number listed on
the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption by mail will
be made payable to the registered shareowner and mailed to the address
of record, only.
Neither the Fund nor Vanguard will be responsible for the authenticity
of transaction instructions received by telephone, provided that
reasonable security procedures have been followed. Vanguard believes
that the security procedures described above are reasonable and that if
such procedures are followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone transactions on your
account. If Vanguard fails to follow reasonable security procedures, it
may be liable for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares to another
REGISTRATION person by completing a transfer form and sending it to: VANGUARD
FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482. The request
must be in Good Order. BEFORE MAILING YOUR REQUEST, PLEASE CALL OUR
CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FULL INSTRUCTIONS.
- --------------------------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call our
SERVICES Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time you initiate a
REPORTS transaction in your account except for checkwriting redemptions from
Vanguard money market accounts. You will also receive a comprehensive
account statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the average cost of
shares redeemed from your account, using the average cost single
category method. This service is available for most taxable accounts
opened since January 1, 1986. In
</TABLE>
21
<PAGE> 24
<TABLE>
<S> <C>
general, investors who redeemed shares from a qualifying Vanguard account
may expect to receive their Average Cost Statement in February of the
following year. Please call our Client Services Department (1-800-662-2739)
for information.
Financial reports on the Fund will be mailed to you semi-annually,
according to the Fund's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government checks
DEPOSIT SERVICE (including Social Security and military pension checks) and private
payroll checks may be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for direct deposit
of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move money
EXCHANGE SERVICE automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or other
retirement plan.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between your Fund
EXPRESS account and your account at a bank, savings and loan association, or a
credit union that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447) for a Fund
Express application.
The minimum amount that can be transferred by telephone is $100.
However, if you have established one of the automatic options, the
minimum amount is $50. The maximum amount that can be transferred using
any of the options is $100,000.
Special rules govern how your Fund Express purchases or redemptions are
credited to your account. In addition, some services of Fund Express
cannot be used with specific Vanguard Funds. For more information,
please refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your dividends and/or
EXPRESS capital gains distributions automatically from your Fund account, one
business day after the Fund's payable date, to your account at a bank,
savings and loan association, or credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this service on
the Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service that provides
TELE-ACCOUNT share price, price change and yield quotations on Vanguard Funds through
any TouchTone(TM) telephone. This free service also lets you obtain
information about your account balance, your last transaction, and your
most recent dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A free
brochure offering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------------------------
</TABLE>
22
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23
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24
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- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
(VANGUARD LOGO) (VANGUARD LOGO)
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP DECEMBER 31, 1993
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT
FOR 24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
(VANGUARD LOGO)
</TABLE>
IPO78
- --------------------------------------------------------------------------------
<PAGE> 28
PART B
VANGUARD ASSET ALLOCATION FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1993
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated December 31, 1993). To obtain the Prospectus
please call:
Investor Information Department
1-800-662-7447 (SHIP)
<TABLE>
<S> <C>
TABLE OF CONTENTS PAGE
Investment Limitations............................................................ 1
Purchase of Shares................................................................ 2
Redemption of Shares.............................................................. 2
Management of the Fund............................................................ 3
Performance Measures.............................................................. 5
Total Return...................................................................... 6
Investment Advisory Services...................................................... 6
Portfolio Transactions............................................................ 7
Description of U.S. Government Securities......................................... 7
Description of Repurchase Agreements.............................................. 8
Futures Contracts................................................................. 8
Glossary.......................................................................... 10
Financial Statements.............................................................. 11
</TABLE>
INVESTMENT LIMITATIONS
The following restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund, as defined in the Investment Company Act of 1940 (the "1940 Act"). The
Fund may not under any circumstances:
1) Borrow money, except from banks (or through reverse repurchase agreements)
for temporary or emergency purposes (not leveraging), and then only in an
amount not in excess of 15% of the value of the Fund's net assets at the
time the borrowing is made. Whenever borrowing exceeds 5% of the value of
the Fund's assets, the Fund will not make any additional investments;
2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of the issuer, or more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer;
3) Invest for the purpose of exercising control of management of any company;
4) Purchase the securities of any other investment company, except as they
may be acquired as part of a merger, consolidation or acquisition of
assets or otherwise to the extent permitted by Section 12 of the 1940 Act.
The Fund will invest only in investment companies which have investment
objectives consistent with those of the Fund;
5) The Fund will not engage in the business of underwriting securities issued
by other persons except to the extent that the Fund may technically be
deemed to be an underwriter under the Securities Act of 1933 in disposing
of portfolio securities. Additionally, the Fund will not purchase or
otherwise acquire any security if, as a result, more than 15% of its net
assets would be invested in securities that are illiquid (included in this
limitation is the Fund's investment in The Vanguard Group, Inc.);
6) Invest in commodities, except that the Fund may invest in futures
contracts, options and options on futures contracts to the extent that not
more than 5% of the Fund's assets are required as margin deposit for
futures contracts;
1
<PAGE> 29
7) Invest in real estate or real estate limited partnership interests
although the Fund may purchase and sell securities of companies which
invest in real estate, or interests therein;
8) Purchase securities on margin or sell any securities short except as
specified in investment limitation No. 6 above;
9) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending its
securities to banks, brokers, dealers and other financial institutions so
long as such loans are not inconsistent with the Investment Company Act or
the Rules and Regulations or interpretations of the Securities and
Exchange Commission thereunder. No loan of securities will be made if, as
a result the aggregate of such loans in the Fund would exceed 33 1/3% of
the value of the Fund's total assets;
10) Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of its total assets; and
11) Invest more than 25% of the value of its total assets in any one industry.
These investment limitations are considered at the time Portfolio securities
are purchased. Although not fundamental policies subject to shareholder vote, as
long as the Fund's shares are registered for sale in certain states, it will not
(i) invest in put, call, straddle or spread options except as permitted in
investment limitation No. 6, above, (ii) invest in interests in oil, gas or
other mineral exploration or development programs, (iii) invest more than 5% of
the assets of the Fund, at the time of investment, in the securities of any
issuers which have (with predecessors) a record of less than three years'
continuous operation, and (iv) purchase or retain any security if (i) one or
more officers, trustees or partners of the Fund or its investment adviser
individually own or would own, directly or beneficially, more than 1/2 of 1 per
cent of the securities of such issuer, and (ii) in the aggregate such persons
own or would own more than 5% of such securities.
Notwithstanding these limitations, the Fund may own all or any portion of the
securities of, or make loans to, or contribute to the costs or other financial
requirements of any company which will be wholly owned by the Fund and one or
more other investment companies and is primarily engaged in the business of
providing, at-cost, management, administrative, distribution or related services
to the Fund and other investment companies. See "Management of the Fund."
PURCHASE OF SHARES
The 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 for 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
The 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 Securities and Exchange Commission
(the "Commission"), (ii) during any period when an emergency exists as defined
by the rules of the Commission as a result of which it is not reasonably
practicable for the 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.
The Fund has made an 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 l% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more or
less than the shareholder's cost depending on the market value of the securities
held by the Fund.
2
<PAGE> 30
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The officers of the Fund manage its day to day operations and are responsible to
the Fund's Board of Directors. The Directors set broad policies for the Fund and
choose its officers. The following is a list of Directors and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. The mailing address of the Directors and officers of the
Fund is Post Office Box 876, Valley Forge, PA 19482.
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, Director of the Mead Corporation
and General Accident Insurance.
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, Director
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc; Director of
Immune Response Corp. and Sun Company, Inc; Trustee, Universal Health Realty
Income Trust.
BARBARA BARNES HAUPTFUHRER, Director
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, Director
President, The Brookings Institution; Director of Dayton Hudson Corporation,
American Express Bank Ltd., and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Director
Chemical Bank Chairmen's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., and The Southern New England Telephone Company.
ALFRED M. RANKIN, JR., Director
President, Chief Executive Officer and Director of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; and President, New York
University; Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Director
Chairman and Director of Rohn & Haas Company; Director of Cummins Engine
Company and Vanderbilt University; Trustee of the Culver Educational
Foundation.
RAYMOND J. KLAPINSKY, Secretary
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer
Treasurer of The Vanguard Group, Inc., and of each of the invest-
ment 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.
The Fund, is a member of The Vanguard Group of Investment Companies. Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other Funds in the 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.
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 its
share of Vanguard's total expenses which are allocated among the Funds under
methods approved by the Board of Directors (Trustees) of each Fund. In addition,
each Fund bears its own direct expenses such as legal, auditing and custodian
fees.
The Fund's 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.
The Vanguard Group was established and operates under a 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. The Fund's Service
Agreement was amended on May 15, 1992 to provide as follows: (a) each Vanguard
Fund may invest up to .40% of its current assets in Vanguard, and (b) there is
no limit on the amount that each Vanguard Fund may contribute to Vanguard's
capitalization. At September 30, 1993, the Fund had contributed capital of
$161,000, representing .8% of Vanguard's capitalization.
3
<PAGE> 31
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. During the fiscal year ended
September 30, 1993, the Fund's allocated share of Vanguard's actual net costs of
operations relating to management and administrative services (including
transfer agency) totaled approximately $2,008,000.
DISTRIBUTION
Vanguard provides all distribution and marketing activities for the Funds in
the Group. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, acts as Sales Agent for the shares of the Funds in connection with any
sales made directly to investors in the states of Florida, Missouri, New York,
Ohio, Texas and such other states as it may be required.
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 Group. The Directors 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
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the fiscal year ended September 30, 1993, the Fund paid
approximately $173,000 of the Group's distribution and marketing expenses, which
represented an effective annual rate of .02 of 1% of the Fund's average net
assets.
INVESTMENT ADVISORY SERVICES
Vanguard provides investment advisory services to Vanguard Money Market
Reserves, Vanguard Institutional Portfolios, Vanguard Municipal Bond Fund,
Short-Term, Intermediate-Term, and Long-Term Corporate Portfolios of Vanguard
Fixed Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New
York Insured Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Ohio
Tax-Free Fund, Vanguard Admiral Funds, Vanguard Balanced Index Fund, Vanguard
Bond Index Fund, Vanguard Index Trust, Vanguard International Equity Index Fund,
Money Market, High-Grade Bond, and Equity Index Portfolios of Vanguard Variable
Insurance Fund, Vanguard/Windsor II and Vanguard Institutional Index Fund. These
services are provided on an at-cost basis from a money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not also an officer, an annual fee plus
travel and other expenses incurred in attending Board meetings. The Fund's
officers and employees are paid by Vanguard which, in turn, is reimbursed by the
Fund, and each other Fund in the Group, for its proportionate share of officers'
and employees' salaries and retirement benefits. During the year ended September
30, 1993 the Fund's proportionate share of remuneration paid to all officers of
the Fund, as a group,was approximately $33,431.
Retired Directors who are not officers are paid an annual fee based on the
number of years of service. The fee is equal to $1,000 for each year of service
and each investment company member of The Vanguard Group contributes a
proportionate amount to this fee based on its relative net assets. Under its
retirement plan, Vanguard contributes annually an amount equal to 10% of each
eligible officer's annual compensation plus 5.7% of that part of an eligible
officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its thrift plan, all eligible officers
are permitted to make pre-tax contributions in an amount up to 4% of total
compensation, subject to federal tax limitations, which are matched by Vanguard
on a 100% basis. The Fund's proportionate share of retirement contributions made
by Vanguard under its retirement and thrift plans on behalf of all Officers of
the Fund, as a group, during the 1993 fiscal year was approximately $4,929.
4
<PAGE> 32
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard Asset Allocation Fund, may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
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 and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
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.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
over 6,000 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 $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE 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 $1.3
trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE 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 $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE 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 $900 billion.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND --
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX --
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND --
STANDARD & POOR'S PREFERRED INDEX --
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 -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
5
<PAGE> 33
TOTAL RETURN
The average annual total return for the Fund for the year ended September 30,
1993 and for the period from inception (November 3, 1988) to September 30, 1993
was +15.4% and +14.6%, respectively.
Total return is computed by determining the average compounded rates of return
over the periods set forth above that would equate an initial amount invested at
the beginning of the periods to the ending redeemable value of the investment.
INVESTMENT ADVISORY SERVICES
The Fund employs Mellon Capital Management Corporation ("MCM"), 595 Market
St., Suite 3000, San Francisco, California (the "Adviser") under an investment
advisory agreement dated as of August 25, 1988 to manage the investment and
reinvestment of the assets of the Fund and to continuously review, supervise and
administer the Fund's investment program. The Adviser discharges its
responsibilities subject to the control of the officers and Directors of the
Fund.
The Fund pays the Adviser 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 Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
<S> <C>
First $100 million............ .20%
Over $100 million............. .15%
</TABLE>
This fee may be increased or decreased by applying an adjustment formula based
on the performance of the Fund's portfolio relative to the investment record of
the S&P 500 Index. The fee payment will be increased (decreased) by an incentive
(penalty) of 0.05% of average net assets, if the Fund's cumulative investment
performance for the thirty-six months preceding the end of the quarter is at
least six percentage points above (below) the cumulative investment record of
the S&P 500 Index for the same period.
The agreement will continue until July 31, 1994 and will be renewable
thereafter for successive one year periods, only if each renewal is specifically
approved by a vote of the Fund's Board of Directors, including the affirmative
votes of a majority of the Trustees who are not parties to the contract or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party, cast in person at a meeting called for the purpose of considering
such approval. In addition, the question of continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund. The agreement is automatically terminated if assigned,
and may be terminated without penalty at any time (1) either by vote of the
Board of Directors of the Fund or by vote of its outstanding voting securities
on 60 days' written notice to the Adviser, or (2) by the Adviser upon 90 days'
written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or as an
additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in control
of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
Because the Adviser provides only investment advisory services to the Fund and
has no control over the Fund's expenses, the Adviser has not undertaken to
guarantee expenses of the Fund. The officers of the Fund have worked out
alternative arrangements with state authorities which do require an expense
guarantee.
DESCRIPTION OF THE ADVISER. The Adviser is a professional counseling firm
which manages well diversified stock and bond portfolios for institutional
clients. As of September 30, 1993 the Adviser provided investment advisory
services to 157 clients and managed assets with an approximate value of $34.3
billion. The Adviser's asset allocation strategy was developed by the Adviser's
Chairman, William Fouse, in 1972, and is used by 93 of its clients and accounts
for approximately $10.9 billion of the assets that it manages. The Adviser is a
wholly-owned subsidiary of MBC Investment Corporation, which itself is a
wholly-owned subsidiary of Mellon Bank Corporation. For the fiscal years ended
September 30, 1991, September 30, 1992, and September 30, 1993, the Fund paid
approximately $313,000 ($363,000 basic fee reduced by $50,000 for performance
adjustment), $629,000, and $1,224,000 ($1,176,000 basic fee increased by $48,000
for performance adjustment), respectively, to the Adviser for investment
advisory services.
6
<PAGE> 34
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the approval of
the Fund's Board of Directors) to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and directs
the Adviser to use its best efforts to obtain the best available price and most
favorable execution as to all transactions for the Fund. The Adviser undertakes
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, the Adviser will use its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain 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 Fund and/or the
Adviser. The Adviser considers such information useful in the 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 agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the Adviser may cause the Fund 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 Fund.
Currently, it is the Fund's policy that the 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. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. 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 Fund. However, the
Adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients, and may, when a number of brokers and dealers
can provide comparable best price and execution on a particular transaction,
consider the sale of Fund shares by a broker or dealer in selecting among
qualified broker-dealers.
The total brokerage commissions paid by the Fund for the fiscal years ended
September 30, 1991, September 30, 1992 and September 30, 1993, totaled $73,209,
$93,112 and $288,270, respectively.
Some securities considered for investment by the Fund may also be appropriate
for other clients served by the Adviser. If purchases or sales 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.
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
As used in this prospectus, the term "U.S. Government Securities" refers to a
variety of securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and by various
instrumentalities which have been established or sponsored by the United States
Government. The term also refers to "repurchase agreements" collateralized by
such securities.
U.S. Treasury Securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and the U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
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<PAGE> 35
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
DESCRIPTION OF REPURCHASE AGREEMENTS
Repurchase agreements are transactions by which a person purchases a security
and simultaneously commits to resell that security to the seller (a member bank
of the Federal Reserve System or recognized securities dealer) at an agreed upon
price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreement defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, the
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Portfolio may not be able to substantiate its interest in the
underlying securities. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
FUTURES CONTRACTS
The Fund may enter into stock index and fixed income futures contracts, stock
index and fixed income options, and options on such futures contracts to remain
fully invested, to reduce transactions costs. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security or index 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.
Although many fixed income futures contracts call for actual delivery or
acceptance of the underlying securities at a specified date (stock index futures
contracts do not permit delivery of securities), the contracts are normally
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.
After a futures contract position is opened, the value of the contract is
marked to 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. The 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 (anticipated or potential) in the value of securities currently owned or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts
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<PAGE> 36
which they trade, and use futures contracts with the expectation of realizing
profits from fluctuations in the value of the underlying securities. The Fund
intends to use futures contracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Portfolio require that all of its
futures transactions constitute bonafide hedging transactions. The Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Portfolio expects that approximately 75% of its futures contract purchases will
be "completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Fund upon sale of open futures
contracts.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The 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 market value of the Portfolio'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, the 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. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge.
A 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 contracts. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (or 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 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. The Fund also bears the risk that
the Adviser will incorrectly predict future market trends. However, because the
futures strategies of the Portfolio are engaged in only for hedging purposes,
the adviser does not believe that the Fund is subject to the risks of loss
frequently associated with futures transactions. The 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 the 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 the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in some
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 future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
Except for transactions the Fund has identified as hedging transactions, the
Fund is required for Federal income tax purposes to recognize as income for each
taxable year its net unrealized gains and losses on futures contracts as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect
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<PAGE> 37
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. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by the Fund may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
In order for the 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 its business of
investing in such securities or currencies. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer the
closing out of futures contracts beyond the time when it would otherwise be
advantageous to do so. It is anticipated that unrealized gains on futures
contracts, which have been open for less than three months as of the end of the
Portfolio's fiscal year and which are recognized for tax purposes, will not be
considered gains on securities held less than three months for the purpose of
the 30% test.
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes (including unrealized gains
at the end of the Portfolio's fiscal year) on futures transaction. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the payments.
GLOSSARY
a. HISTORICAL MARKET RETURNS -- Total returns of broad asset class benchmarks.
As examples, the returns of well-known benchmarks for domestic stocks, bonds,
and money market instruments are given below.
<TABLE>
<CAPTION>
MONEY MARKET
ASSET CLASS COMMON STOCKS BONDS INSTRUMENTS
STANDARD & POOR'S
500 COMPOSITE STOCK LEHMAN BROTHERS 90 DAY
BENCHMARK PRICE INDEX LONG TREASURY INDEX U.S. TREASURY BILLS
<S> <C> <C> <C>
1978 6.5% -1.4% 7.1%
1979 18.4 -0.5 10.0
1980 32.4 -2.9 11.4
1981 -4.9 0.4 14.7
1982 21.5 41.8 10.9
1983 22.5 2.0 9.0
1984 6.2 14.8 10.0
1985 31.6 31.6 7.8
1986 18.6 24.1 6.2
1987 5.2 -2.7 5.9
1988 16.5 9.2 6.8
1989 31.6 18.9 8.6
1990 -3.1 6.3 7.9
1991 30.3 18.5 5.8
1992 7.6 8.0 3.6
1993(9/30) 7.6 19.1 2.3
</TABLE>
b. ASSET ALLOCATION -- Asset allocation -- in its most generic sense -- is the
allotment of an investor's monies to broad asset classes such as stocks or
bonds. Investors establish percentage allocation guidelines for stocks,
bonds, and money market instruments which are consistent with their
particular long-term investment needs. These needs will include current
income, potential growth in capital, and willingness to accept risk.
In implementing their asset allocation targets, some investors attempt to
maintain a stable mix -- such as 50% stocks and 50% bonds -- while others
will actively manage the stock/bond mix in pursuit of higher returns, lower
risk, or other investment objectives. The key difference between investors
who maintain a stable mix and those who actively change allocations is their
willingness to forecast the risks and returns of individual asset classes,
their
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forecasting abilities, and their comfort in making investment decisions based
upon such forecasts. Historically, investors who actively managed the mix
based upon conjecture have often underperformed both investors with
relatively stable allocations and investors with logical, disciplined methods
for assessing relative value and risk. Institutional investors commonly refer
to active asset allocation approaches which are based upon disciplined
methodologies as tactical asset allocation.
FINANCIAL STATEMENTS
The Fund's financial statements, including the financial highlights for each
of the four fiscal years ended September 30, 1993 and for the period from
November 3, 1988 (commencement of operations) through September 30, 1989,
appearing in the Fund's 1993 Annual Report to Shareholders and the report
thereon of Price Waterhouse, independent accountants, also appearing therein,
are incorporated by reference into this Statement of Additional Information. The
Fund's 1993 Annual Report to Shareholders is enclosed with this Statement of
Additional Information. For a more complete discussion of the Fund's
performance, please see the Fund's 1993 Annual Report to Shareholders, which can
be obtained without charge.
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