<PAGE> 1
VANGUARD
ASSET ALLOCATION FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash reserves
averaged more than +8% annually. However, high inflation rates, averaging
8.7% annually, devastated these nominal results. Real returns (nominal
returns less the inflation rate) for each of these three major asset classes
were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in history
and forged well into double-digit territory. To make a good investment
environment even better, inflation was tame (averaging 3.8% annually), and
real returns were solidly positive.
[A TALE OF TWO DECADES CHART - SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has had an
important relationship to its future return. Yields were low when 1973 began,
high when 1983 began, and are again low today. In fact, current income yields
are remarkably close to the levels of 20 years ago, as shown in the following
table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
------------------------------------
1973 1983 1993 (12/31)
- ----------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- ----------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
------------------------------------
1973 1981 1993 (12/31)
- ----------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- ----------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
- --------------------------------------------------------------------------------
VANGUARD ASSET ALLOCATION FUND SEEKS TO MAXIMIZE LONG-TERM TOTAL RETURN, WHILE
EXHIBITING LESS RISK THAN A PORTFOLIO CONSISTING ENTIRELY OF EQUITIES. THE FUND
ALLOCATES ASSETS AMONG COMMON STOCKS, BONDS, AND MONEY MARKET INSTRUMENTS, IN
PROPORTIONS WHICH REFLECT THE ANTICIPATED RETURNS AND RISKS OF EACH ASSET
CLASS, BUT MAY HAVE UP TO 100% OF ITS ASSETS IN ANY ONE CLASS AT ANY TIME.
<PAGE> 3
CHAIRMAN'S LETTER
- ---------------------------------------------------------------------------
FELLOW SHAREHOLDER:
With a total return of +15.4% for the twelve months ended September 30, 1993,
Vanguard Asset Allocation Fund enjoyed excellent results during its fifth
fiscal year of operations. In this period which was great for bonds and good
for stocks, we earned "double-digit" returns for the third consecutive year.
The table below presents the Fund's total return (capital change plus
income) for the fiscal year, compared to the returns of the three asset classes
eligible for inclusion in our asset allocation program: stocks (as measured by
the unmanaged Standard & Poor's 500 Composite Stock Price Index), long-term
U.S. Treasury bonds, and 90-day U.S. Treasury bills.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Total Return
------------------
Fiscal Year Ended
September 30, 1993
- ----------------------------------------------------------------------------------------------
<S> <C>
VANGUARD ASSET ALLOCATION FUND +15.4%
- ----------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +13.0%
LONG-TERM U.S. TREASURY BONDS +20.2
90-DAY U.S. TREASURY BILLS + 3.1
- ----------------------------------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $13.79 per share on
September 30, 1992, and $15.08 on September 30, 1993, with the latter figure
adjusted to take into account the reinvestment of two semi-annual dividends
totaling $.59 per share from net investment income, and a distribution of $.17
per share from net capital gains realized during 1992.
* THE FISCAL YEAR IN REVIEW
As noted at the outset, bonds gave a great account of themselves during the
past twelve months. The best bonds to own were long-term U.S. Treasury bonds;
happily for shareholders of Vanguard Asset Allocation Fund, it is these bonds
that, as a matter of investment policy, compose the Fund's bond component. By
way of example, the +20.2% return on long-term Treasury bonds compared with a
return of +10.0% for the total bond market, including mortgage-backed
securities.
[PHOTO -- SEE EDGAR APPENDIX]
The yield on the long-term Treasury bond opened the fiscal year at
7.3%; within a few months, it began to drop swiftly, resulting in a dramatic
rally in bond prices. By the end of March, the yield had fallen to 6.9%,
reflected in a +6% increase in the price of the U.S. Treasury bond. The rally
in prices continued apace through our fiscal year end, when the yield touched
6.0%, engendering an additional +11% price gain.
This sharp rate decline seemed to be driven by continuing evidence
that inflation remained under good control. The U.S. consumer price index (CPI)
increased 2.7% over the past twelve months, down from 3.0% during the prior
twelve-month period. As a result, "real" yields (stated yields less the
inflation rate) on Treasury bonds remain at healthy levels despite the sharp
decline in interest rates.
Lower yields in the bond market provided impetus to stock prices as
well. One factor that investors consider in setting their asset allocations is
the relative yield of bonds vs. stocks. With stock prices rising, the dividend
yield on stocks (the Standard & Poor's 500 Index) declined during the year,
from 3.0% to 2.7%, enough, in and of
1
<PAGE> 4
[CUMULATIVE PERFORMANCE CHART - SEE EDGAR APPENDIX]
itself, to add some +10% to the price of the stocks in the Index. This
valuation change, combined with the dividend yield, was the dominant factor
driving the total return of +13.0% achieved by the S&P 500 Index. This return,
despite the "gloom and doom" being promoted in the financial media, was nicely
ahead of the long-term historical average (since 1926) of +10.3%.
Interestingly, the performance of the Standard & Poor's 500 Index was
not as strong as those of broader measures of the stock market. (The Index
accounts for about 70% of the total market capitalization of all U.S. stocks.)
For the full year, the +13.0% return on the Standard & Poor's Index compared
with a return of +17.3% for stocks in the aggregate, as small and medium-sized
stocks outpaced their larger "blue chip" cousins.
It may surprise some shareholders when bond returns outpace stock
returns. It is an unusual event, but one that is hardly unprecedented. Indeed,
long-term bonds provided higher returns than stocks in eleven of the past 25
years. While historical data affirm that stocks have been the better long-term
bet for total return (and of course carry a higher risk component), "anything
can happen" in a given twelve-month period.
Among the three asset classes available to the Fund for investment
purposes, treasury bills were at the bottom of the total return list. They
provided a return of but +3.1% for the fiscal year, well below their return of
+7.9% during our initial fiscal year (1989), and a far cry from the 10%-12%
yield level of Treasury bills that prevailed during the early 1980s. The chart
to the left traces the comparative returns on stocks, bonds, and bills during
the nearly five full years in which the Fund has operated. You can see that, as
it happens, stocks and bonds provided virtually identical cumulative returns
(+93% for stocks; +91% for bonds), while the return on Treasury bills (+33%)
lagged well behind.
* THE FUND IN FISCAL 1993
Vanguard Asset Allocation Fund obviously enjoyed another fine year in fiscal
1993. We outpaced the stock market despite assuming only about one-half its
risk (i.e., on average the Fund had 57% of assets invested in stocks).
Admittedly, the performance of long-term U.S. Treasury bonds contributed
substantially to our record, but the decision of our investment adviser, Mellon
Capital Management, to own no 90-day Treasury bills proved sound. A portfolio
comprised one-third in each of our asset class options (stocks, bonds, and
bills) would have provided a total return of +12.1%, compared with +15.4% for
the Fund.
Our adviser made a few more changes in our investment allocations this
past year than in the previous four years. Twelve months ago, we began with a
50/50 stock/bond allocation. As bond yields fell, the ratio was changed to
70%/30%, dropping to 60%/40% in May, before returning to 70%/30% where it
remains today. On balance, these marginal adjustments contributed just a bit to
our total return.
The return for the average asset allocation fund was +14.1%, slightly
short of our return. However, the range of returns among the various asset
allocation funds was remarkably wide, with the top performer gaining +29% for
the year and the bottom performer gaining but +2%. Our
2
<PAGE> 5
[CUMULATIVE PERFORMANCE CHART - SEE EDGAR APPENDIX]
policy of avoiding substantial and precipitate changes in our allocations
should keep us from either of these kinds of yearly extremes, but we hope and
expect that, over time, our relatively conservative market-index-oriented
strategy will rank us well above the group's norm.
* A FIVE-YEAR RETROSPECTIVE
Now that Vanguard Asset Allocation Fund is but one month short of its fifth
anniversary (we began operations on November 3, 1988), it seems appropriate to
take a look back and see what we have accomplished. To begin, we outpaced--by a
substantial amount in the case of U.S. Treasury bills--the three financial
asset classes that we established as our investment universe at the Fund's
inception. Even more significant, we believe that we have met the challenging
objective that we set for the Fund five years ago: "to maximize long-term total
returns, while exhibiting less risk than a portfolio consisting entirely of
equities."
With a +14.6% average annual total return compared to +14.3% for the
Standard & Poor's 500 Index, we outpaced an unmanaged "all-stock" portfolio
while assuming only about 50% of its risk on balance. By any measure, that is
no mean accomplishment. The table below summarizes our results compared with
those of the average asset allocation fund and the three primary financial
asset classes. The chart above illustrates the results of $10,000 investments
made in the Fund, the average competitor, and the stock market on the Fund's
inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Total Return
------------------------------
November 3, 1988
to September 30, 1993
------------------------------
Cumulative Annualized
<S> <C> <C>
- --------------------------------------------------------------------------------------------
VANGUARD ASSET ALLOCATION FUND +94.9% +14.6%
- --------------------------------------------------------------------------------------------
AVERAGE ASSET ALLOCATION FUND +70.8% +11.5%
- --------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +92.5% +14.3%
LONG-TERM U.S. TREASURY BONDS +90.7 +14.7
90-DAY U.S. TREASURY BILLS +33.1 + 6.0
- --------------------------------------------------------------------------------------------
</TABLE>
You should be cautioned that such absolute and relative past returns
are not intended to reflect
3
<PAGE> 6
possible future returns. The Fund carries the volatility risk that is reflected
daily in the stock and bond markets, and future results may be better or worse
than the results of our first five years. Nonetheless, we will be little short
of ecstatic if we are fortunate enough to present you with annual return
numbers similar to those shown above when we write our tenth Annual Report in
the autumn of 1998.
* LOOKING AHEAD
When Vanguard Asset Allocation Fund began operations, we were but one of twenty
asset allocation funds, and our initial "seed capital" was just $100,000.
Today, our assets total $1 billion. There are now 72 funds in the field, with
assets totaling $19.6 billion. Clearly, asset allocation funds have become a
separate and distinct sub-category in the mutual fund industry.
Not only has the number of asset allocation funds proliferated, but
their policies are becoming increasingly diverse. This is a tempting time to
select last year's "#1" fund in the hope that it will be next year's champion,
too. Alas, in the real world, such consistency almost never occurs. Better to
carefully select a solid performer with understandable and realistic policies
and goals, and hold it for the long term.
We reaffirm the two key policies that we have followed from the
outset. (1) We will make gradual changes in our allocations based on
quantitative measures of estimates of future relative returns. (Our adviser,
Mellon Capital Management, has established a particularly fine record in this
area.) (2) We will use just three "plain vanilla" asset classes: U.S. Treasury
bills, long-term U.S. Treasury bonds, and the stocks that compose the unmanaged
Standard & Poor's 500 Composite Stock Price Index (i.e., we do no "stock
picking").
While we believe that our philosophy makes the most sense for the
long-term investor, we would emphasize that our Fund's net asset value will not
rise when the prices of most financial assets decline. With interest rates at
their lowest levels in two decades and stock yields near historical lows, there
are certain to be some difficult bumps along the way in the second half of our
first decade. That said, your Fund is well-balanced and conservatively
structured, and we expect that it will remain so. Surely Vanguard Asset
Allocation Fund is a fund-- both for its adviser and for its
shareholders--designed to "stay the course."
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
October 20, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURN
Average Total Returns--The average annual total returns for the Fund (periods
ended September 30, 1993) are as follows:
1 Year: +15.41% Since Inception (11/3/88): +14.57%
The average annual total return since inception includes a capital return of
+9.87% and an income return of +4.70%. All of these data represent past
performance. The investment return and principal value of an investment will
fluctuate so that investors' shares, when redeemed, may be worth more or less
than their original cost.
5
<PAGE> 8
TOTAL INVESTMENT RETURN
This table illustrates the results of an investment in VANGUARD ASSET
ALLOCATION FUND during the period from November 3, 1988, to September 30, 1993,
the lifetime of the Fund. This was a period in which stock and bond prices
fluctuated widely. The results shown should not be considered as a
representation of the dividend income or capital gain or loss that may be
realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS IN CASH:
ALL INCOME DIVIDENDS AND CAPITAL GAINS ALL DIVIDENDS AND CAPITAL
CAPITAL GAINS DISTRIBUTIONS IN CASH DISTRIBUTIONS REINVESTED GAINS DISTRIBUTIONS REINVESTED
- ------------------------------------------------------------------------------------------------------------------------------------
Capital
Year Ended Net Income Gains Net Income Net Capital Income Total
September 30 Asset Value Dividends Distributions Asset Value Dividends Asset Value Return Return Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial (11/88) $10.00 -- -- $10.00 -- $10.00 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1989 12.11 $0.25 -- 12.11 $0.25 12.39 +21.1% +2.8% +23.9%
- ------------------------------------------------------------------------------------------------------------------------------------
1990 10.93 0.51 $0.15 11.07 0.51 11.83 - 8.6 +4.0 - 4.6
- ------------------------------------------------------------------------------------------------------------------------------------
1991 13.06 0.62 0.13 13.38 0.63 15.06 +20.9 +6.4 +27.3
- ------------------------------------------------------------------------------------------------------------------------------------
1992 13.79 0.59 0.19 14.34 0.60 16.89 + 7.2 +5.0 +12.2
- ------------------------------------------------------------------------------------------------------------------------------------
1993 15.08 0.59 0.17 15.88 0.61 19.49 +10.7 +4.7 +15.4
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $2.56 $0.64 $2.60
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 9.9% +4.7% +14.6%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
Vanguard Asset Allocation Fund's total return (capital change plus income) of
+15.4% for the fiscal year ended September 30, 1993, compares favorably with
the performance of the unmanaged Standard & Poor's 500 Stock Index, which rose
by +13.0% during the same period. The yearly advance by the stock market,
however, was bested by long-term U.S. Treasury bonds, which returned +20.2% for
this twelve-month period.
The S&P 500's gain of +13.0% was quite robust when viewed through the
prism of longer-term history. It exceeded somewhat our long-run expectations
for U.S. equities. Most of the gain was earned during the first half of the
fiscal period. In subsequent months, uncertainty about the impact of the
deficit reduction package and health-care reforms on business activity and
corporate profits dampened investors' enthusiasm for shares of the large,
broadly diversified companies that constitute the S&P 500 Index. These concerns
were shared by investment analysts, whose forecasts of corporate earnings
underwent a series of downward revisions.
By comparison, bond market participants viewed the same economic news
in a more favorable light. The containment of deficit spending promised by the
new Administration in Washington, and its dampening effect on future economic
activity, allayed bond investors' fears of higher inflation. This factor
translated into a powerful bond market rally, with long-maturity Treasury bond
yields falling to levels not witnessed in recent memory. In our opinion, U.S.
Treasury bonds as an asset class have become fully valued.
The Mellon Capital Management asset allocation model is forward
looking, and it takes as inputs the expected returns for stocks, bonds and
cash, the risks of each asset class, and the correlations among the asset class
returns. Given the trade-off between risk and return, the model selects the mix
of stocks, bonds, and cash that best integrates total fund risk and potential
return with the risk aversion of the average investor. As the model's inputs
change over time, and as stock and bond prices fluctuate, the model's
recommended optimal solution will shift. It is to this allocation that the
Fund's assets are periodically rebalanced.
Following the early May shift of a portion of the Fund's assets from
stocks to bonds, the long-term bond market's performance considerably
outdistanced that of the stock market. As yields on long-term bonds declined
(more than one percentage point in the case of 30- year Treasuries), the
expected returns for stocks remained fairly stable. This development increased
the attractiveness of stocks over bonds, and prompted us to change our
portfolio allocation from 60% stocks and 40% bonds to a 70%/30% mix at the
beginning of September.
Sincerely,
William L. Fouse, Chairman
Mellon Capital Management Corporation
October 12, 1993
7
<PAGE> 10
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
September 30, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------------
COMMON STOCKS (69.3%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
* AMR Corp. 16,600 $ 1,081
Abbott Laboratories, Inc. 179,400 4,911
* Advanced Micro Devices, Inc. 19,700 520
Aetna Life and Casualty Co. 24,000 1,440
H.F. Ahmanson & Co. 24,100 479
Air Products & Chemicals, Inc. 24,300 942
Alberto-Culver Co. Class B 6,200 140
Albertson's, Inc. 27,500 1,385
Alcan Aluminium Ltd. 47,550 886
Alco Standard Corp. 10,400 458
Alexander & Alexander Services, Inc. 8,800 191
Allergan, Inc. 13,800 304
Allied-Signal, Inc. 30,700 2,237
Aluminum Co. of America 18,900 1,269
* ALZA Corp. 15,500 343
AMAX, Inc. 18,123 401
Amerada Hess Corp. 20,200 1,071
Amdahl Corp. 23,600 142
American Brands, Inc. 43,500 1,414
American Cyanamid Co. 19,100 1,053
American Electric Power Co., Inc. 40,000 1,540
American Express Co. 105,374 3,754
American General Corp. 46,500 1,523
American Greetings Corp. Class A 16,100 499
American Home Products Corp. 66,900 4,073
American International Group, Inc. 68,637 6,735
American Stores Co. 15,300 648
American Telephone & Telegraph Co. 291,184 17,143
Ameritech Corp. 59,400 5,086
* Amgen, Inc. 29,600 1,140
AMP, Inc. 22,800 1,508
Amoco Corp. 107,300 6,197
* Andrew Corp. 3,800 146
Anheuser-Busch Co., Inc. 58,507 2,684
Apple Computer, Inc. 24,400 567
Archer-Daniels-Midland Co. 75,018 1,679
Arkla, Inc. 25,400 222
* Armco, Inc. 21,400 134
Armstrong World Industries Inc. 7,700 321
Asarco, Inc. 8,800 149
Ashland Oil, Inc. 12,400 420
Atlantic Richfield Co. 34,600 3,957
Autodesk, Inc. 5,200 231
Automatic Data Processing, Inc. 30,800 1,548
Avery Dennison Corp. 12,200 320
Avon Products, Inc. 15,500 808
Baker Hughes, Inc. 29,900 703
Ball Corp. 6,200 187
* Bally Manufacturing Corp. 9,100 $ 88
Baltimore Gas & Electric Co. 30,650 812
Banc One Corp. 74,586 3,095
Bank of Boston Corp. 22,951 585
BankAmerica Corp. 77,197 3,397
Bankers Trust New York Corp. 18,100 1,448
C.R. Bard, Inc. 10,800 267
Barnett Banks of Florida, Inc. 20,600 927
Bassett Furniture Industries, Inc. 3,325 116
Bausch & Lomb, Inc. 13,000 611
Baxter International, Inc. 59,800 1,316
Becton, Dickinson & Co. 15,800 594
Bell Atlantic Corp. 93,800 5,980
BellSouth Corp. 107,100 6,480
Bemis Co., Inc. 10,800 248
Beneficial Corp. 5,400 417
* Bethlehem Steel Corp. 18,900 272
* Beverly Enterprises Inc. 15,600 162
* Biomet, Inc. 23,900 212
Black & Decker Corp. 17,300 352
H & R Block, Inc. 22,800 866
Blockbuster Entertainment Corp. 44,300 1,268
Boatmen's Bancshares, Inc. 10,700 689
The Boeing Co. 73,425 2,818
Boise Cascade Corp. 8,300 174
Borden, Inc. 30,900 548
Briggs & Stratton Corp. 3,200 270
Bristol-Myers Squibb Co. 111,840 6,291
Brown-Forman Corp. Class B 5,800 463
Brown Group, Inc. 3,800 130
Browning-Ferris Industries, Inc. 36,700 844
Bruno's Inc. 16,200 178
Brunswick Corp. 19,700 276
Burlington Northern, Inc. 19,400 1,040
CBS, Inc. 3,406 917
CIGNA Corp. 15,400 1,001
* CNA Financial Corp. 13,600 1,156
CPC International, Inc. 33,300 1,457
CSX Corp. 22,600 1,754
Campbell Soup Co. 54,500 2,098
Capital Cities/ABC, Inc. 3,700 2,135
Capital Holding Corp. 21,800 943
Carolina Power & Light Co. 35,000 1,146
Caterpillar, Inc. 21,800 1,722
Centex Corp. 6,500 274
Central & South West Corp. 40,800 1,341
* Ceridian Corp. 8,000 147
Champion International Corp. 20,300 614
Charming Shoppes, Inc. 21,400 265
The Chase Manhattan Corp. 39,982 1,484
Chemical Banking Corp. 54,493 2,452
Chevron Corp. 70,400 6,882
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Chrysler Corp. 75,800 $ 3,610
The Chubb Corp. 19,100 1,607
Cincinnati Milacron, Inc. 7,100 178
Circuit City Stores, Inc. 20,900 585
* Citicorp 81,204 3,086
* Clark Equipment Co. 3,900 186
Clorox Co. 12,000 641
Coastal Corp. 22,650 620
The Coca Cola Co. 280,400 11,847
Colgate-Palmolive Co. 34,200 1,796
* Columbia Gas Systems, Inc. 10,700 280
Columbia Healthcare Corp. 32,497 951
Comcast Corp. Class A 28,900 896
Commonwealth Edison Co. 46,200 1,403
Community Psychiatric Centers 8,100 107
* Compaq Computer Corp. 18,000 1,046
Computer Associates International, Inc. 35,600 1,139
* Computer Sciences Corp. 3,500 321
Conagra, Inc. 54,500 1,417
Conrail, Inc. 17,100 1,000
Consolidated Edison Co. of New York, Inc. 50,100 1,810
* Consolidated Freightways, Inc. 7,500 119
Consolidated Natural Gas Co. 20,300 1,086
Continental Corp. 11,400 352
Cooper Industries, Inc. 24,700 1,173
Cooper Tire & Rubber Co. 17,300 435
Adolph Coors Co. Class B 7,100 148
CoreStates Financial Corp. 12,700 733
Corning, Inc. 43,700 1,464
Crane Co. 6,450 181
* Cray Research, Inc. 5,600 134
* Crown Cork & Seal Co., Inc. 19,200 686
Cummins Engine Co., Inc. 3,800 310
Cyprus Minerals Co. 10,000 241
* DSC Communications Corp. 11,300 689
Dana Corp. 10,200 589
* Data General Corp. 6,400 66
Dayton-Hudson Corp. 15,203 1,049
Dean Witter Discover and Co. 36,820 1,625
Deere & Co. 18,000 1,303
Delta Air Lines, Inc. 11,000 573
Deluxe Corp. 17,900 635
Detroit Edison Co. 32,000 1,100
The Dial Corp. 9,800 381
* Digital Equipment Corp. 28,600 1,051
Dillard Department Stores Class A 24,000 864
The Walt Disney Co. 115,600 4,364
Dominion Resources, Inc. 35,350 1,710
R.R. Donnelley & Sons Co. 33,500 980
Dover Corp. 12,400 676
Dow Chemical Co. 59,150 $ 3,453
Dow Jones & Co., Inc. 21,700 716
Dresser Industries, Inc. 29,800 637
E.I. du Pont de Nemours & Co. 146,100 6,794
Duke Power Co. 44,400 1,926
The Dun & Bradstreet Corp. 39,100 2,444
EG & G, Inc. 11,900 195
E-Systems, Inc. 7,000 305
Eastern Enterprises 5,000 143
Eastman Kodak Co. 70,900 4,201
Eaton Corp. 15,300 778
Echlin, Inc. 12,100 369
Echo Bay Mines Ltd. 23,000 233
Ecolab, Inc. 6,700 283
Emerson Electric Co. 48,900 2,873
Englehard Corp. 20,400 538
Enron Corp. 50,900 1,782
ENSERCH Corp. 13,700 284
Entergy Corp. 38,000 1,473
Ethyl Corp. 24,400 433
Exxon Corp. 268,300 17,574
* FMC Corp. 7,500 368
FPL Group, Inc. 40,700 1,603
* Fedders Corp. 800 4
* Federal Express Corp. 12,000 743
Federal Home Loan Mortgage Corp. 39,200 1,985
Federal National Mortgage Assn. 59,700 4,701
Federal Paper Board Co., Inc. 8,900 184
First Chicago Corp. 17,746 865
First Fidelity Bancorp. 15,931 739
First Interstate Bancorp. 16,600 1,106
First Mississippi Corp. 4,400 39
First Union Corp. 36,600 1,743
Fleet Financial Group, Inc. 29,000 1,011
Fleetwood Enterprises, Inc. 9,600 222
Fleming Cos., Inc. 7,800 258
Fluor Corp. 17,600 722
Ford Motor Co. 106,200 5,868
Foster Wheeler Corp. 7,400 231
GTE Corp. 206,300 7,917
Gannett Co., Inc. 31,800 1,522
The Gap, Inc. 31,100 917
General Dynamics Corp. 7,000 645
General Electric Co. 184,700 17,685
General Mills, Inc. 34,900 2,103
General Motors Corp. 152,700 6,375
General Re Corp. 18,200 2,239
General Signal Corp. 9,200 296
* Genesco, Inc. 2,500 20
Genuine Parts Co. 26,400 990
Georgia-Pacific Corp. 19,400 1,208
Gerber Products Co. 14,400 387
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Giant Food, Inc. Class A 12,400 $ 285
Giddings & Lewis, Inc. 7,300 172
Gillette Co. 47,700 2,737
Golden West Financial Corp. 14,100 615
The BF Goodrich Co. 5,500 242
The Goodyear Tire & Rubber Co. 31,400 1,370
W.R. Grace & Co. 19,900 689
W.W. Grainger, Inc. 11,300 606
Great Atlantic & Pacific Tea Co., Inc. 8,100 201
Great Lakes Chemical Corp. 15,200 1,079
Great Western Financial Corp. 28,600 561
Grumman Corp. 7,000 263
Halliburton Co. 25,000 928
Handleman Co. 6,250 70
Harcourt General, Inc. 16,363 734
John H. Harland Co. 7,300 187
Harnischfeger Industries Inc. 4,700 91
Harris Corp. 8,200 350
* Hartmarx Corp. 3,400 21
Hasbro, Inc. 18,700 736
H.J. Heinz Co. 55,000 1,959
Helmerich & Payne, Inc. 5,300 180
Hercules, Inc. 9,500 866
Hershey Foods Corp. 19,300 963
Hewlett-Packard Co. 54,800 3,747
Hilton Hotels Corp. 10,600 519
Home Depot, Inc. 96,600 3,719
Homestake Mining Co. 28,200 472
Honeywell, Inc. 28,900 1,033
Household International, Inc. 10,300 802
Houston Industries, Inc. 28,300 1,319
ITT Corp. 25,900 2,425
Illinois Tool Works, Inc. 23,900 923
IMCERA Group, Inc. 16,700 541
Inco Ltd. 22,600 401
Ingersoll-Rand Co. 22,300 845
* Inland Steel Industries, Inc. 7,500 211
Intel Corp. 91,000 6,416
* Intergraph Corp. 8,800 92
International Business Machines Corp. 123,200 5,174
International Flavors & Fragrances, Inc. 8,400 854
International Paper Co. 26,500 1,597
Interpublic Group of Cos., Inc. 15,600 484
* JWP, Inc. 2,600 3
James River Corp. 16,900 357
Jefferson-Pilot Corp. 11,100 592
Johnson & Johnson 141,400 5,550
Johnson Controls, Inc. 9,000 489
Jostens Inc. 9,600 190
Kmart Corp. 87,200 2,104
Kaufman & Broad Home Corp. 7,600 $ 148
Kellogg Co. 50,200 2,485
Kerr-McGee Corp. 10,500 545
Kimberly-Clark Corp. 34,500 1,690
* King World Productions, Inc. 7,800 319
Knight-Ridder, Inc. 11,900 622
* The Kroger Co. 22,900 461
Eli Lilly & Co. 64,000 3,200
The Limited, Inc. 77,600 1,756
Lincoln National Corp. 20,300 949
* Litton Industries, Inc. 9,900 588
Liz Claiborne, Inc. 17,100 346
Lockheed Corp. 13,300 845
Longs Drug Stores, Inc. 4,500 149
Loral Corp. 9,200 575
* Lotus Development Corp. 8,700 396
Louisiana Land & Exploration Co. 5,900 263
Louisiana-Pacific Corp. 23,100 757
Lowes Cos., Inc. 16,000 722
Luby's Cafeterias, Inc. 5,200 114
* M/A-Com, Inc. 4,800 43
MBNA Corp. 21,600 726
MCI Communications Corp. 114,500 3,134
Manor Care Inc. 12,100 257
Marriott Corp. 21,900 684
Marsh & McLennan, Inc. 16,000 1,396
Martin Marietta Corp. 10,200 908
Masco Corp. 32,400 1,029
Mattel, Inc. 20,962 579
* Maxus Energy Corp. 27,700 222
May Department Stores Co. 53,700 2,336
Maytag Corp. 22,000 368
* McCaw Cellular Communications, Inc. 45,500 2,434
McDermott International, Inc. 10,800 305
McDonald's Corp. 76,500 3,968
McDonnell Douglas Corp. 8,600 775
McGraw-Hill, Inc. 11,000 745
McKesson Corp. 8,500 430
The Mead Corp. 13,000 549
Medtronic, Inc. 12,900 874
Melville Corp. 22,300 981
Mercantile Stores Co., Inc. 7,900 271
Merck & Co., Inc. 244,900 7,531
Meredith Corp. 3,500 127
Merrill Lynch & Co., Inc. 22,800 2,234
Millipore Corp. 6,000 198
Minnesota Mining & Manufacturing Co. 47,000 4,835
Mobil Corp. 86,300 7,044
Monsanto Co. 26,100 1,710
Moore Corp. Ltd. 20,600 363
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
J.P. Morgan & Co., Inc. 41,535 $ 3,255
Morrison-Knudsen Co., Inc. 6,600 164
Morton International, Inc. 10,500 920
Motorola, Inc. 58,800 5,939
NBD Bancorp, Inc. 34,800 1,192
N L Industries, Inc. 8,800 44
NACCO Industries, Inc. Class A 1,700 79
Nalco Chemical, Inc. 14,500 491
* National Education Corp. 6,600 43
* National Intergroup, Inc. 3,500 48
National Medical Enterprises, Inc. 36,300 349
* National Semiconductor Corp. 23,600 484
National Service Industries, Inc. 10,400 260
NationsBank, Inc. 56,231 2,896
Navistar International Corp. 5,480 130
New York Times Co. Class A 16,500 410
Newell Co. 17,200 604
Newmont Mining Corp. 14,700 696
Niagara Mohawk Power Corp. 30,800 735
NICOR, Inc. 11,700 357
Nike, Inc. Class B 16,200 729
Nordstrom, Inc. 18,000 545
Norfolk Southern Corp. 30,300 2,068
Northern States Power Co. of Minnesota 14,200 659
Northern Telecom Ltd. 54,000 1,316
Northrop Corp. 9,900 348
Norwest Corp. 62,900 1,738
* Novell, Inc. 64,800 1,215
Nucor Corp. 18,800 1,018
NYNEX Corp. 90,200 4,138
Occidental Petroleum Corp. 65,900 1,359
Ogden Corp. 9,100 229
Ohio Edison Co. 32,800 828
Oneok, Inc. 5,800 129
* Oracle Systems Corp. 30,900 1,896
Oryx Energy Co. 20,000 490
Oshkosh B Gosh, Inc. Class A 2,900 51
Outboard Marine Corp. 3,800 70
* Owens-Corning Fiberglas Corp. 9,500 425
PNC Bank Corp. 50,200 1,544
PPG Industries, Inc. 23,100 1,507
PSI Resources, Inc. 11,800 307
Paccar, Inc. 7,100 438
Pacific Enterprises 18,200 482
Pacific Gas & Electric Co. 93,400 3,304
Pacific Telesis Group 89,800 4,860
Pacificorp 59,100 1,160
Pall Corp. 23,966 461
Panhandle Eastern Corp. 25,645 644
Paramount Communications, Inc. 25,500 2,011
Parker Hannifin Corp. 10,100 345
J.C. Penney Co., Inc. 50,900 $ 2,386
Pennzoil Co. 9,900 629
Peoples Energy Corp. 7,400 236
Pep Boys (Manny, Moe & Jack) 12,600 296
PepsiCo, Inc. 171,100 6,694
Perkin-Elmer Corp. 9,200 290
Pet, Inc. 22,200 375
Pfizer, Inc. 68,700 4,088
Phelps Dodge Corp. 15,400 612
Philadelphia Electric Co. 47,400 1,558
Philip Morris Cos., Inc. 189,000 8,670
Phillips Petroleum Co. 55,900 1,880
Pitney Bowes, Inc. 34,200 1,308
Pittston Services Group 8,600 186
Placer Dome Group, Inc. 50,300 962
Polaroid Corp. 9,662 326
Potlatch Corp. 6,300 267
Praxair, Inc. 27,300 423
Premark International, Inc. 6,700 428
* Price Co. 9,600 361
Primerica Corp. 50,733 2,416
Procter & Gamble Co. 147,122 6,988
* Promus Co., Inc. 14,500 1,095
Public Service Enterprise Group Inc. 52,300 1,837
Pulte Corp. 5,900 223
Quaker Oats Co. 15,800 1,059
Ralston-Ralston Purina Group 22,200 866
Raychem Corp. 8,600 367
Raytheon Co. 29,200 1,814
Reebok International Ltd. 18,500 444
Reynolds Metals Co. 13,100 545
Rite Aid Corp. 18,200 284
Roadway Services, Inc. 8,200 488
Rockwell International Corp. 47,200 1,699
Rohm & Haas Co. 14,500 730
Rollins Environmental Services, Inc. 10,700 64
* Rowan Cos., Inc. 17,500 166
Royal Dutch Petroleum Co. 115,700 11,758
Rubbermaid, Inc. 34,900 1,156
Russell Corp. 8,700 244
* Ryan's Family Steak Houses, Inc. 11,200 95
Ryder System, Inc. 16,600 504
SCE Corp. 96,700 2,260
SPX Corp. 2,600 45
Safeco Corp. 13,400 822
Safety-Kleen Corp. 12,000 182
St. Jude Medical, Inc. 9,900 287
St. Paul Cos., Inc. 9,200 838
Salomon, Inc. 24,100 1,151
Santa Fe Energy Resources Inc. 18,571 195
Santa Fe Pacific Corp. 39,262 717
Sara Lee Corp. 105,100 2,483
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Schering-Plough Corp. 42,200 $ 2,780
Schlumberger Ltd. 52,500 3,498
Scientific-Atlanta, Inc. 7,750 267
Scott Paper Co. 16,200 531
The Seagram Co. Ltd. 80,800 2,070
Sears, Roebuck & Co. 75,600 4,073
Service Corp. International 18,250 454
Shared Medical Systems Corp. 5,100 123
Shawmut National Corp. 20,500 502
Sherwin-Williams Co. 19,400 698
* Shoney's Inc. 8,300 186
Skyline Corp. 1,300 22
Snap-On Tools Corp. 9,000 345
Sonat, Inc. 19,000 665
Southern Co. 69,100 3,110
Southwestern Bell Corp. 129,100 5,567
Springs Industries Inc. Class A 3,400 120
Sprint Corp. 73,700 2,699
The Stanley Works 9,500 393
* Stone Container Corp. 14,910 108
Stride Rite Corp. 9,400 133
Sun Co., Inc. 23,200 661
* Sun Microsystems, Inc. 23,000 552
Suntrust Banks, Inc. 26,700 1,188
SuperValu, Inc. 15,700 516
Syntex Corp. 47,800 837
Sysco Corp. 39,400 1,084
TJX Cos., Inc. 15,200 458
TRW, Inc. 13,700 921
* Tandem Computers, Inc. 23,300 285
Tandy Corp. 13,932 514
Tektronix, Inc. 6,600 158
* Tele-Communications, Inc. Class A 93,000 2,325
Teledyne Inc. 11,700 322
Temple-Inland Inc. 12,200 500
Tenneco, Inc. 36,700 1,936
Texaco, Inc. 56,000 3,794
Texas Instruments, Inc. 18,100 1,367
Texas Utilities Co. 49,125 2,254
Textron, Inc. 18,700 1,087
Thomas & Betts Corp. 4,100 257
Time Warner, Inc. 81,000 3,301
The Times Mirror Co. Class A 28,100 808
The Timkin Co. 6,500 193
Torchmark Corp. 15,800 893
* Toys R Us, Inc. 63,100 2,327
Transamerica Corp. 17,000 997
Transco Energy Co. 8,800 150
The Travelers Corp. 31,765 1,195
The Tribune Co. 14,700 786
Trinova Corp. 6,200 167
Tyco Labs, Inc. 9,600 415
* UAL Corp. 5,400 $ 741
USF&G Corp. 17,500 247
UST, Inc. 44,500 1,196
USX-Marathon Group 62,000 1,240
USX-U.S. Steel Group 15,140 484
Unilever NV 34,700 3,704
Union Camp Corp. 15,000 636
Union Carbide Corp. 32,800 631
Union Electric Corp. 21,800 962
Union Pacific Corp. 44,400 2,775
* Unisys Corp. 33,400 397
U.S. Bancorp 21,650 568
* USAir Group, Inc. 12,100 153
United States Surgical Corp. 11,600 244
U.S. West Corp. 90,000 4,433
United Technologies Corp. 27,000 1,499
Unocal Corp. 52,200 1,468
Upjohn Co. 39,000 1,112
USLIFE Corp. 4,950 210
V F Corp. 14,114 623
* Varity Corp. 7,280 261
WMX Technologies Inc. 105,300 3,212
Wachovia Corp. 36,500 1,428
Wal-Mart Stores, Inc. 495,700 12,207
Walgreen Co. 26,200 979
Warner-Lambert Co. 29,400 1,944
Wells Fargo & Co. 12,300 1,554
Wendys International, Inc. 20,400 303
Westinghouse Electric Corp. 75,700 984
Westvaco Corp. 13,800 466
Weyerhaeuser Co. 44,300 1,805
Whirlpool Corp. 15,100 889
Whitman Corp. 22,100 332
Williams Cos., Inc. 11,300 710
Winn Dixie Stores, Inc. 16,400 953
Woolworth Corp. 28,500 713
Worthington Industries, Inc. 12,500 356
Wm. Wrigley, Jr. Co. 25,400 1,156
Xerox Corp. 22,416 1,639
Yellow Corp. 6,000 146
* Zenith Electronics Corp. 6,200 39
Zurn Industries, Inc. 2,300 74
- ---------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $644,265) 695,006
- ---------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ---------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (27.9%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BONDS
11.875%, 11/15/03 $ 1,000 $ 1,494
11.625%, 11/15/04 85 127
10.75%, 8/15/05 2,000 2,886
10.375%, 11/15/12 4,250 6,071
9.25%, 2/15/16 4,729 6,434
7.25%, 5/15/16 6,018 6,727
7.5%, 11/15/16 9,400 10,794
8.75%, 5/15/17 15,913 20,744
8.875%, 8/15/17 17,312 22,855
9.125%, 5/15/18 21,698 29,408
8.875%, 2/15/19 20,410 27,088
8.125%, 8/15/19 17,560 21,637
8.5%, 2/15/20 24,930 31,977
8.75%, 8/15/20 34,140 44,990
8.125%, 5/15/21 31,610 39,196
8.125%, 8/15/21 6,595 8,182
- ---------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $245,952) 280,610
- ---------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.5%)
- ---------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.39%, 10/1/93
(Cost $15,105) 15,105 15,105
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.7%)
(Cost $905,322) 990,721
- ---------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.3%)
- ---------------------------------------------------------------------------------------------
Other Assets--Notes C and E 29,180
Liabilities--Note E (16,549)
----------
12,631
- ---------------------------------------------------------------------------------------------
NET ASSETS (100.0%)
- ---------------------------------------------------------------------------------------------
Applicable to 66,530,907 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,003,352
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.08
=============================================================================================
+See Note A to Financial Statements.
*Non-Income Producing Securities.
- ---------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- ---------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
Paid in Capital $878,272 $13.20
Undistributed Net Investment Income 11,544 .17
Accumulated Net Realized Gains 28,137 .42
Unrealized Appreciation of Investments 85,399 1.29
- ---------------------------------------------------------------------------------------------
NET ASSETS $1,003,352 $15.08
- ---------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
September 30, 1993
(000)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,164
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,201
- ----------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . 33,365
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,176
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . 48 1,224
------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . 2,008
Marketing and Distribution . . . . . . . . . . . . . . . . . . . 173 2,181
-----
Taxes (other than income taxes)--Note A . . . . . . . . . . . . . . 59
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . 60
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . 9
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . 2
- ----------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,615
- ----------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . 29,750
- ----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD--Note D . . . . . . . . . . . . . . . . . . . . . . . . . 28,347
- ----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES--Note D . . . . . . . . . . . . . 47,284
- ----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . $105,381
===============================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 1993 September 30, 1992
(000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 29,750 $ 19,247
Realized Net Gain--Note D . . . . . . . . . . . . . . . . . . . . . . 28,347 6,841
Change in Unrealized Appreciation (Depreciation)--Note D . . . . . . 47,284 18,254
- -----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . 105,381 44,342
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (27,401) (15,374)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . (6,895) (4,466)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (34,296) (19,840)
- -----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . 333,431 191,097
-- In Lieu of Cash Distributions . . . . . . . . . . . . . . 32,231 18,592
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . 205,392 88,317
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . (49,779) (34,590)
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . (91,424) (50,844)
- -----------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . . . 429,851 212,572
- -----------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . . . 500,936 237,074
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 502,416 265,342
- -----------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,003,352 $502,416
=================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $.59 $.59
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . $.17 $.19
- -----------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,613 21,120
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 2,318 1,464
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,834) (6,470)
- -----------------------------------------------------------------------------------------------------------------
30,097 16,114
- -----------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . . $ 11,544 $ 9,195
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------- November 3, 1988+ to
For a Share Outstanding Throughout Each Period 1993 1992 1991 1990 September 30, 1989
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $15.08 $13.79 $13.06 $10.93 $12.11
==============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +15.41% +12.16% +27.32% -4.57% +23.93%
- --------------------------------------------------------------------------------------------------------------
RATIOS/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>
+Commencement of Operations.
*Annualized.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Asset Allocation Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Common stocks listed on an exchange are valued
at the latest quoted sales prices as of 4:00 PM on the valuation date; such
securities not traded are valued at the mean of the latest quoted bid and
asked prices; those securities not listed are valued at the latest quoted
bid prices. Bonds are valued utilizing the latest quoted bid prices and on
the basis of a matrix system (which considers such factors as security
prices, yields, maturities and ratings), both as furnished by independent
pricing services. Temporary cash investments are valued at cost which
approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify
as a regulated investment company and distribute all of its
taxable income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of
The Vanguard Group of Investment Companies, transfers uninvested
cash balances into a Pooled Cash Account, the daily aggregate
of which is invested in repurchase agreements secured
by U.S. Government obligations. Securities pledged as collateral for
repurchase agreements are held by the Fund's custodian bank until maturity
of the repurchase agreement. Provisions of the agreement ensure that the
market value of the collateral is sufficient in the event of default;
however, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
4. OTHER: Security transactions are accounted for on
the date the securities are purchased or sold. Costs used in determining
realized gains and losses on sales of investment securities are those of
specific securities sold. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Discounts and premiums on debt
securities purchased are amortized to interest income over the lives of the
respective securities.
* B. Under the terms of a contract which expires July 31, 1994, the Fund pays
Mellon Capital Management Corporation an advisory fee calculated at an annual
percentage rate of average net assets. The basic fee thus computed is subject
to quarterly adjustments based on performance relative to the Standard & Poor's
500 Stock Index. For the year ended September 30, 1993, the advisory fee
represented an effective annual rate of .16 of 1% of average net assets before
an increase of $48,000 (.01 of 1%) based on performance.
* C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At September 30, 1993, the Fund had contributed capital of $161,000
to Vanguard (included in Other Assets), representing .8% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
- ----------------------------------------------------------------------------
* D. During the year ended September 30, 1993, the Fund made purchases of
$430,556,000 and sales of $17,171,000 of investment securities other than
U.S. Government securities and temporary cash investments. Purchases and
sales of U.S. Government securities were $200,089,000 and $207,212,000
respectively.
At September 30, 1993, unrealized appreciation for financial reporting
and Federal income tax purposes aggregated $85,399,000 of which
$108,847,000 related to appreciated securities and $23,448,000 related
to depreciated securities.
* E. The market value of securities on loan to broker/dealers at September
30, 1993, was $185,000 for which the Fund had received cash collateral of
$194,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Asset Allocation Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Asset Allocation Fund (the "Fund") at September 30, 1993, the results
of its operations, the changes in its net assets and the financial highlights
for each of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereinafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes exam ining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 25, 1993
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD ASSET ALLOCATION FUND, INC.
Corporate shareholders should note that for the fiscal year ended September 30,
1993, 34.5% of the investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
19
<PAGE> 22
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., and The St. Paul Companies,
Inc.
BURTON G. MALKIEL, Chemical Bank Chairman'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., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company and Vanderbilt University; Trustee of the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
20
<PAGE> 23
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced
portfolio of stock, bond, and money market funds, stay the course.
Even if withdrawing from the stock market proves to be justified, the
next decision--when to return--will one day be required. "Being right
twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly. By
doing so, you buy more shares of a mutual fund when its price falls,
and fewer shares when its price rises, virtually assuring a reasonable
average cost.
* For risk-averse investors who are highly confident that stock prices
are "too high," make only marginal--not "all or nothing"--changes in
your portfolio balance. Given the perils of predicting the future, any
changes should be limited to, say, 15 percentage points. That is, if
your normal portfolio allocation is 60% in stock funds, it might be
reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of
the added principal risk involved in shifting from money market funds
to bond funds. Long-term bond funds provide a generous and durable
income stream, but their prices are highly volatile. Short- term and
intermediate-term bond funds offer a "middle way" of increasing income
with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously
replacing certificates of deposit with broad-based common stock funds
verges on the irrational. Funds investing in other securities
markets--emerging nations, international stocks and bonds, and small
U.S. companies--carry their own special risks. Generally, limit such
alternative investments to, say, 20% of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors
in the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money
market funds. Each asset class has its own risk and reward
characteristics. By allocating your resources among the three asset
classes according to your own requirements, you can build a portfolio
providing appropriate elements of capital appreciation, capital
conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many
mutual funds carry hefty sales charges or high expense ratios, or
both. Other factors held equal, expenses reduce returns, dollar for
dollar. Put another way, high-cost funds must select investments with
higher prospective gross returns--which entail higher risks--to match
the net returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
GROWTH FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellington Fund
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
Vanguard/Wellesley Income Fund
TAX-FREE INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUND
Vanguard Money Market Reserves
[VANGUARD LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q780-9/93
<PAGE> 25
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 20.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index and
Standard & Poor's Value Index) of the U.S. Growth Portfolio for the Fiscal
Years 1988 through 1993 appears at the upper-right of page two.
Line charts illustrating cumulative performance of the Vanguard U.S.
Growth Portfolio and the Vanguard International Portfolio compared to (i) the
S&P 500 Index and (ii) Average Growth and International Funds for the Fiscal
Years 1984 through 1993 appear on page four.
