<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Both the stock market and the bond market rose smartly during the six
months ended March 31, the first half of the 1995 fiscal year for Vanguard
Asset Allocation Fund. Fully invested in stocks and bonds, your Fund provided
an excellent return for the period.
As shown in the table below, our total return (capital change
plus income) for the period was +9.1%, far ahead of the return on Treasury
bills, slightly above the return on long-term Treasury bonds, and only a
bit short of the return on stocks. An equal-weighted composite portfolio
(one-third in each asset class) comprising the three unmanaged market
indicators would have provided a total return of +6.9%. The table below
compares the Fund's results with those of each asset class:
<TABLE>
<CAPTION>
---------------------------------------------------------
Total Return
----------------
Six Months Ended
March 31, 1995
---------------------------------------------------------
<S> <C>
VANGUARD ASSET ALLOCATION FUND +9.1%
---------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +9.7%
LONG-TERM U.S. TREASURY BONDS +8.3
90-DAY U.S. TREASURY BILLS +2.7
---------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $13.78 per share on
September 30, 1994, and $14.63 on March 31, 1995, with the latter figure
adjusted to take into account the reinvestment of a semi-annual dividend
totaling $.37 per share from net investment income.
THE FINANCIAL MARKETS
During the past six months, the financial markets gave a fine account of
themselves. Stocks, after stumbling a bit during the first two months, marched
upward in a consistent, uninterrupted pattern--virtually a straight line.
Bonds followed an almost identical turnaround. The interest rate on long-term
Treasury bonds, after rising from 7.8% on September 30, 1994, to 8.2% in
mid-November, then reversed direction and fell to 7.4% on March 31,
engendering a commensurate increase in bond prices.
The decline in interest rates was a major force in the rise of stock
prices. Investor sentiment turned positive as market participants were
impressed with both the Federal Reserve Board's discipline in maintaining a
tight monetary policy (helping to hold inflation at bay) and the economy's
ability to maintain a solid growth rate.
Under the direction of our investment adviser, Mellon Capital
Management, the Fund's equity ratio (stocks as a percentage of total net
assets) increased slightly during the semi-annual period, from 50% of assets
six months ago to 60% on March 31. The remainder of the portfolio was
allocated to long-term Treasury bonds. In fact, we have not utilized Treasury
bills as a cash reserve since January 1990. As a long-term strategy, during a
period in which the prices of both stocks and bonds increased on balance,
this decision to remain fully invested has paid off handsomely for
shareholders.
RETURN AND RISK
Now, midway through our seventh year of operations, we can look back on annual
total returns averaging +12.1%. This result compares with a +13.0% return for
the Standard & Poor's 500 Index. What this comparison means, essentially, is
that we have provided a return equal to 93% of the return of the stock market,
with an equity exposure of only about 55% of the portfolio (our average equity
allocation during our history).
The long-term comparison is even more favorable compared to the
average equity mutual fund, which provided an annual return of +11.8%, giving
us a small edge in return against these distinctly riskier portfolios. If we
can continue to provide this kind of return/risk relationship--although we are
hardly in a position to promise it--we will have exceeded our own expectations
and, we hope, yours as well.
When we began operations in November 1988, there was little interest
in asset allocation funds, and hence only a score of such funds existed. Today,
there are 154 such funds with assets aggregating nearly $30 billion. I would
underscore, however, that not all asset allocation funds are created equal.
Many operate under complex and vacillant policies, with some employing
1
<PAGE> 2
investment approaches that are, in my opinion, volatile and
unpredictable--including the use of short-selling--and others holding riskier
securities such as gold, foreign bonds, and, yes, even cattle futures.
While each of these risky financial instruments has their place, we do
not think they belong in the portfolios of basic asset allocation funds. Some
of the riskier funds provided excellent returns during relatively short time
frames, only to relinquish these gains as the financial market winds blew in a
new direction. Over time, the record clearly shows that Vanguard Asset
Allocation Fund has acquitted itself well, all the while maintaining an
investment policy that provides rigorous discipline without such mind-blurring
complexity.
"No surprises" might well be the motto of our Fund. The components of
our portfolio are the essence of quality and simplicity--a stock portfolio that
replicates the Standard & Poor's 500 Index, and long-term bonds and short-term
reserves composed solely of instruments backed by the "full faith and credit"
of the U.S. Treasury. Our risk is simply the unavoidable risk of the financial
markets and the ability of our adviser in setting our asset allocation, which
has ranged in a narrow span, mostly from a 70%/30% stock/bond ratio to a
50%/50% ratio. I look forward to reporting to you six months hence on our full
1995 fiscal year, which has begun so promisingly.
Sincerely,
/s/ JOHN C. BOGLE
---------------------
John C. Bogle
Chairman of the Board
April 17, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
----------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD ASSET ALLOCATION FUND 11/3/88 +10.60% +11.13% +12.14% +7.58% +4.56%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISER
During the first calendar quarter of 1995, the equity market climbed +9.7% and
long-term U.S. Treasuries (as measured by the Lehman Long-Term U.S. Treasury
Index) advanced +6.4%. By comparison, Vanguard Asset Allocation Fund had a
total return (price change plus income) of +8.1% over the same period. With
financial markets essentially "flat" during the Fund's first fiscal quarter,
the Fund returned +9.1% for the six-month period versus +9.7% for the S&P 500
Index and +8.3% for the Lehman Long-Term Treasury Index.
The Federal Reserve's tightening of monetary policy, last exhibited on
February 1, 1995, with a 50-basis-point hike in the discount rate, did not,
unlike previous moves, unsettle investors. In fact, the increasing evidence
that inflation is under control and the much sought "soft landing" is in the
offing has been reassuring to market participants and even acknowledged by
Federal Reserve officials. Both the stock and bond market rallies attest to the
improving sentiment. The S&P 500 Index had its strongest quarter in three years
and reached record levels.
Vanguard Asset Allocation Fund began the second quarter of the fiscal
year with an asset mix of 50% stocks and 50% bonds. Notwithstanding the
superior performance of the stock market last quarter, bond yields declined
further than did the expected return from equities. This apparent contradiction
was caused by analysts raising, on balance, their short- and intermediate-term
forecasts for the stocks composing the S&P 500 Index. With sharply lower bond
yields being the predominant swing factor, the asset allocation model
identified equities as an improved alternative to bonds and cash. Accordingly
the asset mix of the Fund was shifted to 60% stocks and 40% bonds.
Sincerely,
William L. Fouse, CFA
Chairman
Mellon Capital Management Corporation
April 6, 1995
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
tradeoff between risk and return, the model selects that mix of stocks, bonds,
and cash that best integrates total fund risk and return with the risk aversion
of the average investor. As the model's inputs change over time, and as stock
and bond prices fluctuate, so will the model's recommended optimal solution. It
is to this allocation that the Fund's assets are periodically rebalanced.
3
<PAGE> 4
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD ASSET ALLOCATION FUND since inception through March 31, 1995. During
the period illustrated, stock and bond prices fluctuated widely; these results
should not be considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PERIOD PER SHARE DATA
--------------------------------------------------------------------------------
Value with Income
September 30 Net Asset Capital Gains Income Dividends & Capital
Fiscal Year Value Distributions Dividends Gains Reinvested
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INITIAL (11/88) $10.00 -- -- $10.00
--------------------------------------------------------------------------------
1989 12.11 -- $0.25 12.39
--------------------------------------------------------------------------------
1990 10.93 $0.15 0.51 11.83
--------------------------------------------------------------------------------
1991 13.06 0.13 0.62 15.06
--------------------------------------------------------------------------------
1992 13.79 0.19 0.59 16.89
--------------------------------------------------------------------------------
1993 15.08 0.17 0.59 19.49
--------------------------------------------------------------------------------
1994 13.78 0.53 0.48 19.09
--------------------------------------------------------------------------------
1995 (3/31) 14.63 -- 0.37 20.83
--------------------------------------------------------------------------------
LIFETIME
--------------------------------------------------------------------------------
AVERAGE ANNUAL
RATE OF RETURN
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PERIOD TOTAL INVESTMENT RETURN*
--------------------------------------------------------------------------------
Asset Allocation Fund
----------------------------------------
September 30 Capital Income Total S&P 500 Index
Fiscal Year Return Return Return Total Return
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INITIAL (11/88) -- -- -- --
--------------------------------------------------------------------------------
1989 +21.1% +2.8% + 23.9% + 29.0%
--------------------------------------------------------------------------------
1990 - 8.6 +4.0 - 4.6 - 9.2
--------------------------------------------------------------------------------
1991 +20.9 +6.4 + 27.3 + 31.1
--------------------------------------------------------------------------------
1992 + 7.2 +5.0 + 12.2 + 11.0
--------------------------------------------------------------------------------
1993 +10.7 +4.7 + 15.4 + 13.0
--------------------------------------------------------------------------------
1994 - 5.2 +3.1 - 2.1 + 3.7
--------------------------------------------------------------------------------
1995 (3/31) + 6.2 +2.9 + 9.1 + 9.7
--------------------------------------------------------------------------------
LIFETIME +108.3% +118.9%
--------------------------------------------------------------------------------
AVERAGE ANNUAL
RATE OF RETURN + 7.6% +4.5% + 12.1% + 13.0%
--------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
4
<PAGE> 5
FINANCIAL STATEMENTS
(unaudited)
March 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
---------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (50.7%)(1)
---------------------------------------------------------------------------------------------------
* AMR Corp. 12,600 $ 816
AT&T Corp. 265,084 13,718
Abbott Laboratories, Inc. 137,800 4,909
* Advanced Micro Devices, Inc. 15,700 532
Aetna Life & Casualty Co. 18,700 1,066
H.F. Ahmanson & Co. 19,500 351
Air Products & Chemicals, Inc. 18,800 980
* Airtouch Communications 83,300 2,270
Alberto-Culver Co. Class B 4,700 139
Albertson's, Inc. 42,200 1,361
Alcan Aluminium Ltd. 37,350 994
Alco Standard Corp. 9,000 652
Alexander & Alexander Services, Inc. 7,200 170
Allergan, Inc. 10,500 310
Allied-Signal, Inc. 47,800 1,876
ALLTEL Corp. 31,500 906
Aluminum Co. of America 30,200 1,249
* ALZA Corp. 13,600 289
* Amdahl Corp. 19,200 211
Amerada Hess Corp. 15,500 765
American Brands, Inc. 33,500 1,315
American Electric Power Co., Inc. 30,700 975
American Express Co. 86,244 3,008
American General Corp. 34,800 1,122
American Greetings Corp. Class A 12,400 369
American Home Products Corp. 51,700 3,684
American International Group, Inc. 53,537 5,581
American Stores Co. 23,800 610
Ameritech Corp. 92,800 3,828
* Amgen, Inc. 22,200 1,490
Amoco Corp. 83,900 5,338
AMP, Inc. 35,600 1,282
* Andrew Corp. 6,300 255
Anheuser-Busch Co., Inc. 44,707 2,621
Apple Computer, Inc. 19,700 692
* Applied Materials, Inc. 14,100 775
Archer-Daniels-Midland Co. 87,050 1,621
* Armco, Inc. 17,300 119
Armstrong World Industries Inc. 6,200 283
ASARCO, Inc. 7,000 185
Ashland Inc. 10,000 356
Atlantic Richfield Co. 27,200 3,128
Autodesk, Inc. 7,800 328
Automatic Data Processing, Inc. 23,900 1,506
Avery Dennison Corp. 9,400 375
Avon Products, Inc. 11,800 714
Baker Hughes, Inc. 23,400 477
Ball Corp. 4,900 168
* Bally Entertainment Corp. 9,600 82
Baltimore Gas & Electric Co. 24,550 580
Banc One Corp. 68,984 1,966
Bank of Boston Corp. 17,751 528
The Bank of New York Co., Inc. 31,700 1,042
BankAmerica Corp. 62,751 3,028
Bankers Trust New York Corp. 13,300 695
C.R. Bard, Inc. 8,600 237
Barnett Banks, Inc. 16,200 737
Barrick Gold Corp. 59,200 1,480
Bassett Furniture Industries, Inc. 2,425 63
Bausch & Lomb, Inc. 9,900 354
Baxter International, Inc. 47,800 1,565
Becton, Dickinson & Co. 11,900 645
Bell Atlantic Corp. 73,700 3,888
BellSouth Corp. 83,900 4,992
Bemis Co., Inc. 8,500 250
Beneficial Corp. 8,700 341
* Bethlehem Steel Corp. 18,200 293
* Beverly Enterprises Inc. 13,800 200
* Biomet, Inc. 19,200 322
Black & Decker Corp. 14,000 404
H & R Block, Inc. 17,700 768
Boatmen's Bancshares, Inc. 17,400 526
The Boeing Co. 57,625 3,104
Boise Cascade Corp. 8,000 278
* Boston Scientific Corp. 25,200 620
Briggs & Stratton Corp. 4,800 177
Bristol-Myers Squibb Co. 86,040 5,420
Brown-Forman Corp. Class B 11,500 384
Brown Group, Inc. 3,000 87
Browning-Ferris Industries, Inc. 32,600 1,108
Bruno's Inc. 13,000 117
Brunswick Corp. 15,900 320
Burlington Northern, Inc. 14,900 885
Burlington Resources, Inc. 21,500 876
CBS, Inc. 10,130 648
CIGNA Corp. 12,000 897
CPC International, Inc. 25,100 1,358
CSX Corp. 17,700 1,394
Campbell Soup Co. 42,300 2,046
Capital Cities/ABC, Inc. 26,100 2,303
Carolina Power & Light Co. 26,700 724
Caterpillar, Inc. 34,400 1,913
Centex Corp. 5,300 128
Central & South West Corp. 31,500 764
* Ceridian Corp. 7,400 247
Champion International Corp. 15,500 670
Charming Shoppes, Inc. 17,100 92
The Chase Manhattan Corp. 31,544 1,124
Chemical Banking Corp. 42,893 1,619
Chevron Corp. 110,100 5,285
Chrysler Corp. 59,900 2,508
The Chubb Corp. 14,900 1,177
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cincinnati Milacron, Inc. 5,600 $ 128
CINergy Corp. 24,718 615
Circuit City Stores, Inc. 16,000 422
* Cisco Systems, Inc. 43,500 1,653
Citicorp 66,504 2,826
* Clark Equipment Co. 2,900 239
Clorox Co. 8,900 534
Coastal Corp. 17,450 502
The Coca-Cola Co. 217,900 12,311
Colgate-Palmolive Co. 24,900 1,643
* Columbia Gas Systems, Inc. 8,400 249
Columbia/HCA Healthcare Corp. 60,697 2,610
Comcast Corp. Class A Special 39,800 617
Community Psychiatric Centers 7,200 93
* COMPAQ Computer Corp. 43,600 1,504
Computer Associates
International, Inc. 26,900 1,597
* Computer Sciences Corp. 9,300 459
ConAgra, Inc. 41,300 1,368
Conrail, Inc. 13,100 735
Consolidated Edison Co. of
New York, Inc. 39,100 1,065
* Consolidated Freightways, Inc. 6,000 160
Consolidated Natural Gas Co. 15,500 599
* Continental Corp. 9,200 180
Cooper Industries, Inc. 19,200 744
Cooper Tire & Rubber Co. 13,900 394
Adolph Coors Co. Class B 6,400 105
CoreStates Financial Corp. 23,909 765
Corning, Inc. 38,500 1,386
Crane Co. 5,050 153
* Cray Research, Inc. 4,300 79
* Crown Cork & Seal Co., Inc. 14,800 649
Cummins Engine Co., Inc. 6,900 309
Cyprus Amax Minerals Co. 15,411 437
* DSC Communications Corp. 18,600 605
Dana Corp. 16,400 418
* Data General Corp. 7,300 54
Dayton-Hudson Corp. 11,903 851
Dean Witter Discover & Co. 28,420 1,158
Deere & Co. 14,600 1,186
Delta Air Lines, Inc. 8,400 527
Deluxe Corp. 13,700 390
Detroit Edison Co. 24,500 671
The Dial Corp. 15,300 388
* Digital Equipment Corp. 24,100 913
Dillard Department Stores Class A 18,800 519
The Walt Disney Co. 87,500 4,670
Dominion Resources, Inc. 29,150 1,049
R.R. Donnelley & Sons Co. 25,700 883
Dover Corp. 9,500 615
Dow Chemical Co. 46,650 3,405
Dow Jones & Co., Inc. 16,600 629
Dresser Industries, Inc. 30,600 650
E.I. du Pont de Nemours & Co. 115,000 6,958
Duke Power Co. 34,100 1,313
The Dun & Bradstreet Corp. 28,700 1,510
EG & G, Inc. 9,200 138
E-Systems, Inc. 5,700 259
Eastern Enterprises 3,400 94
Eastman Chemical 13,750 765
Eastman Kodak Co. 57,400 3,049
Eaton Corp. 12,700 689
Echlin, Inc. 9,800 377
Echo Bay Mines Ltd. 18,700 194
Ecolab, Inc. 10,500 255
Emerson Electric Co. 37,900 2,520
Engelhard Corp. 16,100 477
Enron Corp. 42,800 1,412
ENSERCH Corp. 11,100 165
Entergy Corp. 38,000 793
Exxon Corp. 209,800 14,004
* FMC Corp. 6,000 363
FPL Group, Inc. 31,700 1,153
* Federal Express Corp. 9,300 629
Federal Home Loan Mortgage Corp. 30,500 1,845
Federal National Mortgage Assn. 46,200 3,760
Federal Paper Board Co., Inc. 7,000 200
First Chicago Corp. 15,446 774
First Data Corp. 18,300 949
First Fidelity Bancorp. 13,967 691
First Interstate Bancorp. 13,700 1,082
First Mississippi Corp. 3,300 87
First Union Corp. 30,012 1,302
Fleet Financial Group, Inc. 23,727 768
Fleetwood Enterprises, Inc. 7,700 182
Fleming Cos., Inc. 6,200 140
Fluor Corp. 13,700 661
Ford Motor Co. 172,400 4,655
Foster Wheeler Corp. 6,000 203
GTE Corp. 162,400 5,400
Gannett Co., Inc. 24,500 1,308
The Gap, Inc. 24,300 863
General Dynamics Corp. 10,500 494
General Electric Co. 289,200 15,653
General Mills, Inc. 26,800 1,598
General Motors Corp. 127,300 5,633
General Public Utilities Corp. 19,500 568
General Re Corp. 13,900 1,835
General Signal Corp. 7,900 281
Genuine Parts Co. 20,700 825
Georgia-Pacific Corp. 15,300 1,220
Giant Food, Inc. Class A 9,900 236
Giddings & Lewis, Inc. 5,700 97
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Gillette Co. 37,400 $ 3,053
Golden West Financial Corp. 10,300 394
The BF Goodrich Co. 4,300 191
The Goodyear Tire & Rubber Co. 25,200 926
W.R. Grace & Co. 15,600 831
W.W. Grainger, Inc. 8,400 529
Great Atlantic & Pacific Tea Co., Inc. 6,400 145
Great Lakes Chemical Corp. 11,900 742
Great Western Financial Corp. 22,100 414
Halliburton Co. 19,000 691
Handleman Co. 5,550 60
Harcourt General, Inc. 12,963 506
John H. Harland Co. 5,100 115
Harnischfeger Industries Inc. 7,300 204
Harris Corp. 6,600 316
* Hartmarx Corp. 7,700 41
Hasbro, Inc. 14,600 493
H.J. Heinz Co. 42,100 1,621
Helmerich & Payne, Inc. 4,100 111
Hercules, Inc. 20,400 951
Hershey Foods Corp. 14,500 741
Hewlett-Packard Co. 43,000 5,176
Hilton Hotels Corp. 8,000 593
Home Depot, Inc. 76,200 3,372
Homestake Mining Co. 22,900 424
Honeywell, Inc. 21,700 811
Household International, Inc. 16,300 709
Houston Industries, Inc. 21,800 831
ITT Corp. 17,900 1,837
Illinois Tool Works, Inc. 18,900 924
Inco Ltd. 19,698 549
Ingersoll-Rand Co. 17,600 579
* Inland Steel Industries, Inc. 7,400 204
Intel Corp. 70,900 6,009
* Intergraph Corp. 7,500 89
International Business Machines Corp. 99,200 8,122
International Flavors &
Fragrances, Inc. 18,500 955
International Paper Co. 21,100 1,585
Interpublic Group of Cos., Inc. 12,600 471
James River Corp. 13,600 354
Jefferson-Pilot Corp. 8,200 485
Johnson & Johnson 108,700 6,468
Johnson Controls, Inc. 6,800 346
Jostens Inc. 7,600 151
Kmart Corp. 75,900 1,044
Kaufman & Broad Home Corp. 5,400 64
Kellogg Co. 37,900 2,212
Kerr-McGee Corp. 8,600 439
KeyCorp 40,700 1,150
Kimberly-Clark Corp. 27,300 1,420
* King World Productions, Inc. 6,200 244
Knight-Ridder, Inc. 8,900 503
* The Kroger Co. 19,800 522
Laidlaw Inc. Class B 46,700 409
Eli Lilly & Co. 49,500 3,620
The Limited, Inc. 59,600 1,378
Lincoln National Corp. 15,800 636
Liz Claiborne, Inc. 13,100 233
* Lockheed Martin Corp. 38,541 2,038
Longs Drug Stores, Inc. 3,500 116
Loral Corp. 13,900 591
* Lotus Development Corp. 7,600 287
Louisiana Land & Exploration Co. 5,500 206
Louisiana-Pacific Corp. 19,000 525
Lowes Cos., Inc. 26,900 928
Luby's Cafeterias, Inc. 4,200 89
* M/A-Com, Inc. 4,800 47
MBNA Corp. 24,700 716
MCI Communications Corp. 114,800 2,353
Mallinckrodt Group, Inc. 12,800 432
Manor Care Inc. 10,400 316
Marriott International 20,700 719
Marsh & McLennan Cos., Inc. 12,500 1,027
Masco Corp. 27,000 746
Mattel, Inc. 37,190 916
May Department Stores Co. 42,000 1,554
Maytag Corp. 17,800 305
McDermott International, Inc. 8,900 244
McDonald's Corp. 118,700 4,051
McDonnell Douglas Corp. 20,100 1,121
McGraw-Hill, Inc. 8,200 588
The Mead Corp. 9,900 531
Medtronic, Inc. 19,700 1,367
Melville Corp. 17,600 656
Mercantile Stores Co., Inc. 6,100 272
Merck & Co., Inc. 212,900 9,075
Meredith Corp. 4,600 120
Merrill Lynch & Co., Inc. 32,400 1,381
Micron Technology Inc. 16,900 1,284
* Microsoft Corp. 98,400 6,986
Millipore Corp. 4,100 229
Minnesota Mining &
Manufacturing Co. 71,400 4,150
Mobil Corp. 67,300 6,234
Monsanto Co. 20,000 1,605
Moore Corp. Ltd. 16,600 324
J.P. Morgan & Co., Inc. 32,142 1,961
* Morrison-Knudsen Co., Inc. 5,300 32
Morton International, Inc. 24,600 713
Motorola, Inc. 98,600 5,386
NBD Bancorp, Inc. 26,700 868
NACCO Industries, Inc. Class A 1,500 82
Nalco Chemical Co. 11,500 387
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
---------------------------------------------------------------------------------------------------
<S> <C> <C>
National City Corp. 25,000 $ 666
* National Medical Enterprises, Inc. 27,600 438
* National Semiconductor Corp. 20,500 359
National Service Industries, Inc. 8,300 224
NationsBank, Inc. 47,425 2,407
* Navistar International Corp. 12,480 159
New York Times Co. Class A 17,500 405
Newell Co. 26,300 671
Newmont Mining Corp. 14,346 613
Niagara Mohawk Power Corp. 23,900 329
NICOR, Inc. 8,800 220
Nike, Inc. Class B 12,300 918
NorAm Energy Corp. 20,300 109
Nordstrom, Inc. 13,700 551
Norfolk Southern Corp. 23,100 1,545
Northern States Power Co.
of Minnesota 11,100 488
Northern Telecom Ltd. 42,700 1,617
Northrop Grumman Corp. 8,200 401
Norwest Corp. 53,000 1,345
* Novell, Inc. 61,600 1,163
Nucor Corp. 14,500 816
NYNEX Corp. 71,100 2,817
Occidental Petroleum Corp. 52,000 1,138
Ogden Corp. 7,300 147
Ohio Edison Co. 25,400 508
ONEOK, Inc. 4,400 83
* Oracle Systems Corp. 72,600 2,260
* Oryx Energy Co. 16,100 203
Oshkosh B Gosh, Inc. Class A 2,900 41
Outboard Marine Corp. 3,300 69
* Owens-Corning Fiberglas Corp. 7,200 259
PECO Energy Corp. 36,900 927
PNC Bank Corp. 39,100 953
PPG Industries, Inc. 35,400 1,336
Paccar, Inc. 6,470 272
Pacific Enterprises 13,600 337
Pacific Gas & Electric Co. 72,800 1,811
Pacific Telesis Group 71,700 2,169
PacifiCorp 46,900 909
Pall Corp. 19,166 402
Panhandle Eastern Corp. 25,045 576
Parker Hannifin Corp. 8,100 358
J.C. Penney Co., Inc. 39,800 1,786
Pennzoil Co. 7,700 365
Peoples Energy Corp. 5,800 145
Pep Boys (Manny, Moe & Jack) 10,200 316
PepsiCo, Inc. 133,900 5,222
Perkin-Elmer Corp. 7,300 213
Pfizer, Inc. 52,900 4,536
Phelps Dodge Corp. 11,800 671
Philip Morris Cos., Inc. 147,200 9,605
Phillips Petroleum Co. 44,200 1,619
Pioneer Hi Bred International 14,800 529
Pitney Bowes, Inc. 26,200 943
Pittston Services Group 6,900 190
Placer Dome Group, Inc. 39,700 968
Polaroid Corp. 7,762 270
Potlatch Corp. 4,900 206
Praxair, Inc. 22,600 525
Premark International, Inc. 10,600 468
* Price/Costco Inc. 36,556 535
Procter & Gamble Co. 115,522 7,653
* Promus Co. Inc. 17,000 638
Providian Corp. 16,400 576
Public Service Enterprise Group Inc. 40,700 1,114
Pulte Corp. 4,600 108
Quaker Oats Co. 22,200 735
Ralston-Purina Group 16,700 797
Raychem Corp. 7,100 288
Raytheon Co. 22,800 1,662
Reebok International Ltd. 13,700 488
Reynolds Metals Co. 10,300 507
Rite Aid Corp. 14,200 348
Roadway Services, Inc. 6,500 310
Rockwell International Corp. 37,100 1,447
Rohm & Haas Co. 11,300 667
* Rowan Cos., Inc. 13,900 90
Royal Dutch Petroleum Co. ADR 90,600 10,872
Rubbermaid, Inc. 27,100 894
Russell Corp. 6,700 198
* Ryan's Family Steak Houses, Inc. 11,200 76
Ryder System, Inc. 12,900 310
SCEcorp 74,500 1,164
SPX Corp. 2,600 38
Safeco Corp. 10,500 572
Safety-Kleen Corp. 9,600 172
* St. Jude Medical, Inc. 7,700 329
St. Paul Cos., Inc. 14,000 700
Salomon, Inc. 17,600 596
* Santa Fe Energy Resources Inc. 14,971 144
Santa Fe Pacific Corp. 24,923 573
* Santa Fe Pacific Gold Corp. 22,137 279
Sara Lee Corp. 80,900 2,114
Schering-Plough Corp. 32,500 2,417
Schlumberger Ltd. 41,100 2,451
Scientific-Atlanta, Inc. 12,500 292
Scott Paper Co. 12,700 1,135
The Seagram Co. Ltd. 63,000 2,000
Sears, Roebuck & Co. 65,400 3,491
Service Corp. International 15,950 447
Shared Medical Systems Corp. 3,800 139
Shawmut National Corp. 19,600 517
Sherwin-Williams Co. 14,200 481
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
---------------------------------------------------------------------------------------------------
<S> <C> <C>
* Shoney's Inc. 6,800 $ 73
Sigma Aldrich Corp. 8,300 320
* Silicon Graphics, Inc. 24,000 852
Skyline Corp. 1,900 34
Snap-On Inc. 7,100 259
Sonat, Inc. 14,500 435
Southern Co. 109,700 2,235
Southwest Airlines Co. 23,800 425
SBC Communications, Inc. 101,700 4,284
Springs Industries Inc. Class A 3,000 113
Sprint Corp. 58,400 1,767
The Stanley Works 7,500 295
* Stone Container Corp. 15,010 343
Stride Rite Corp. 8,300 105
Sun Co., Inc. 17,800 507
* Sun Microsystems, Inc. 15,700 542
SunTrust Banks, Inc. 20,400 1,091
SuperValu, Inc. 11,900 318
Sysco Corp. 30,600 803
TJX Cos., Inc. 12,200 160
TRW, Inc. 10,800 744
* Tandem Computers, Inc. 19,100 296
Tandy Corp. 10,532 503
Tektronix, Inc. 5,000 200
* Tele-Communications Inc. Class A 103,400 2,158
Teledyne Inc. 9,200 242
Temple-Inland Inc. 9,200 413
Tenneco, Inc. 30,400 1,433
Texaco, Inc. 43,900 2,919
Texas Instruments, Inc. 15,700 1,389
Texas Utilities Co. 38,165 1,212
Textron, Inc. 14,800 838
Thomas & Betts Corp. 3,200 207
Time Warner, Inc. 63,885 2,412
Times Mirror Co. Class A 21,400 412
The Timkin Co. 5,100 181
Torchmark Corp. 12,100 502
* Toys R Us, Inc. 48,600 1,245
Transamerica Corp. 11,700 663
Travelers Inc. 55,048 2,126
Tribune Co. 11,200 619
Trinova Corp. 4,800 147
Tyco International Ltd. 13,500 714
UNUM Corp. 12,600 570
USF&G Corp. 14,200 199
UST, Inc. 33,900 1,076
USX-Marathon Group 47,700 835
USX-U.S. Steel Group 12,540 423
Unicom Corp. 35,600 846
Unilever NV 27,100 3,557
Union Camp Corp. 11,600 602
Union Carbide Corp. 25,200 772
Union Electric Corp. 17,000 601
Union Pacific Corp. 34,700 1,909
* Unisys Corp. 28,400 263
United Healthcare Corp. 29,000 1,356
* USAir Group, Inc. 9,900 61
U.S. Bancorp 16,550 430
U.S. Healthcare, Inc. 26,600 1,170
USLIFE Corp. 3,850 147
U.S. West Inc. 76,830 3,073
United States Surgical Corp. 9,400 214
United Technologies Corp. 21,000 1,452
Unocal Corp. 41,100 1,182
Upjohn Co. 28,800 1,030
VF Corp. 10,714 569
* Varity Corp. 7,280 277
* Viacom International Class B 60,400 2,703
WMX Technologies Inc. 81,700 2,247
Wachovia Corp. 28,500 1,012
Wal-Mart Stores, Inc. 388,000 9,894
Walgreen Co. 20,500 987
Warner-Lambert Co. 22,600 1,768
Wells Fargo & Co. 9,200 1,439
Wendy's International, Inc. 16,800 275
* Western Atlas Inc. 8,800 380
Westinghouse Electric Corp. 59,100 835
Westvaco Corp. 11,200 465
Weyerhaeuser Co. 34,800 1,353
Whirlpool Corp. 12,400 679
Whitman Corp. 17,500 335
Williams Cos., Inc. 17,400 533
Winn Dixie Stores, Inc. 12,400 693
Woolworth Corp. 22,000 404
Worthington Industries, Inc. 15,050 297
Wm. Wrigley, Jr. Co. 19,400 861
Xerox Corp. 17,916 2,103
Yellow Corp. 4,700 75
* Zenith Electronics Corp. 7,300 57
Zurn Industries, Inc. 2,000 37
---------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $510,982) 618,259
---------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
---------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (38.2%)
---------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS
7.125%, 2/15/23 $50,645 $ 48,263
7.50%, 11/15/16 9,400 9,328
7.50%, 11/15/24 11,100 11,121
7.625%, 11/15/22 46,145 46,692
8.00%, 11/15/21 64,000 67,090
8.125%, 8/15/19 9,060 9,591
8.125%, 5/15/21 38,955 41,341
8.125%, 8/15/21 52,655 55,921
8.50%, 2/15/20 15,362 16,908
8.75%, 5/15/17 12,613 14,164
8.75%, 5/15/20 42,000 47,401
8.75%, 8/15/20 13,055 14,738
8.875%, 8/15/17 23,712 26,954
8.875%, 2/15/19 36,815 41,963
9.125%, 5/15/18 3,000 3,497
10.375%, 11/15/12 5,250 6,468
11.25%, 2/15/15 2,700 3,717
12.00%, 5/15/05 800 1,065
---------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $475,292) 466,222
---------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (10.5%)
---------------------------------------------------------------------------------------------------
U.S. TREASURY BILL--Note E
5.73%, 6/15/95 5,170 5,108
COMMERCIAL PAPER
Hertz Funding Corp.
6.05%, 6/14/95 47,000 46,407
Merrill Lynch
6.07%, 6/14/95 50,000 49,366
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 6.27%, 4/3/95 27,896 27,896
---------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $128,777) 128,777
---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.4%)
(Cost $1,115,051) 1,213,258
---------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.6%)
---------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 55,415
Liabilities--Note F (47,732)
-----------
7,683
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
---------------------------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
---------------------------------------------------------------------------------------------------
Applicable to 83,454,043 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $1,220,941
---------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.63
===================================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) The combined market value of common stocks and Standard & Poor's 500 Index
futures contracts represents 60.3% of net assets.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
AT MARCH 31, 1995,
NET ASSETS CONSISTED OF:
---------------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $1,128,417 $13.52
Undistributed Net
Investment Income 13,536 .16
Accumulated Net
Realized Losses (21,050) (.25)
Unrealized Appreciation
of Investments--Note E 100,038 1.20
---------------------------------------------------------------------------------------------------
NET ASSETS $1,220,941 $14.63
---------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1995
(000)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,872
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,680
-------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,552
-------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 893
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . -- 893
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . . 1,689
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 123 1,812
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . ------- 47
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 9
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 2
-------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,834
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . 26,718
-------------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . (9,265)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
-------------------------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . (9,265)
-------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,392
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,831
-------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . 84,223
-------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . $101,676
=========================================================================================================================
</TABLE>
11
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MARCH 31, 1995 September 30, 1994
(000) (000)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,718 $ 42,155
Realized Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,265) (1,422)
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . . 84,223 (69,584)
-------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . . 101,676 (28,851)
-------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,134) (36,747)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (38,500)
-------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . (30,134) (75,247)
-------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,943 296,504
--In Lieu of Cash Distributions . . . . . . . . . . . . . . . . . 26,991 71,439
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,141 225,157
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,319) (193,927)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . (83,353) (178,431)
-------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . . . 29,403 220,742
-------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . . . 100,945 116,644
-------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,119,996 1,003,352
-------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,220,941 $1,119,996
=========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . $.37 $.48
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $.53
-------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,615 36,017
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . 2,007 5,029
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,466) (26,278)
-------------------------------------------------------------------------------------------------------------------------
2,156 14,768
-------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . . . . . . $ 13,536 $ 16,952
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
SIX MONTHS ENDED -----------------------------------------------
For a Share Outstanding Throughout Each Period MARCH 31, 1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $13.78 $15.08 $13.79 $13.06 $10.93 $12.11
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .32 .52 .54 .61 .60 .60
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . .90 (.81) 1.51 .90 2.28 (1.12)
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 1.22 (.29) 2.05 1.51 2.88 (.52)
-------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.37) (.48) (.59) (.59) (.62) (.51)
Distributions from Realized Capital Gains . . . . . . -- (.53) (.17) (.19) (.13) (.15)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.37) (1.01) (.76) (.78) (.75) (.66)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $14.63 $13.78 $15.08 $13.79 $13.06 $10.93
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +9.09% -2.05% +15.41% +12.16% +27.32% -4.57%
-------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $1,221 $1,120 $1,003 $502 $265 $160
Ratio of Expenses to Average Net Assets . . . . . . . . . .49%* .50% .49% .52% .44% .50%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . 4.64%* 3.68% 4.07% 4.95% 5.28% 5.53%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 6%* 51% 31% 18% 44% 12%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
13
<PAGE> 14
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 the close of the New York Stock
Exchange (generally 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 amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of
each repurchase agreement. Provisions of the agreement ensure that the
market value of the collateral is sufficient in the event of default;
however, in the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures
contracts to a limited extent, with the objectives of maintaining full
exposure to the stock market, maintaining liquidity, and minimizing
transaction costs. The Fund may purchase futures contracts to
immediately position incoming cash in the market, thereby simulating a
fully invested position in the underlying index while maintaining a
cash balance for liquidity. In the event of redemptions, the Fund may
pay departing shareholders from its cash balance and reduce its
futures position accordingly.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of stocks held
by the Fund and the prices of futures contracts, and the possibility
of an illiquid market. Futures contracts are valued based upon their
quoted daily settlement prices. Fluctuations in the values of futures
contracts are recorded as unrealized appreciation (depreciation) until
terminated, at which time realized gains (losses) are recognized.
Unrealized appreciation (depreciation) related to open futures
contracts is required to be treated as realized gain (loss) for
Federal income tax purposes.
5. 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.
14
<PAGE> 15
B. Under the terms of a contract which expires July 31, 1995, the Fund
pays Mellon Capital Management Corporation an advisory fee calculated at an
annual percentage rate of average net assets. The basic fee thus computed is
subject to quarterly adjustments based on performance relative to the Standard
& Poor's 500 Stock Index. For the six months ended March 31, 1995, the advisory
fee represented an effective annual rate of .16 of 1% of average net assets. No
performance adjustments were required during the period.
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 March 31, 1995, the Fund had contributed capital of $176,000 to
Vanguard (included in Other Assets), representing .9% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
D. During the six months ended March 31, 1995, the Fund made purchases of
$19,577,000 and sales of $5,282,000 of investment securities other than U.S.
Government securities and temporary cash investments. Purchases and sales of
U.S. Government securities were $13,786,000 and $121,688,000, respectively.
E. At March 31, 1995, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $98,207,000, of which $121,734,000
related to appreciated securities and $23,527,000 related to depreciated
securities.
At March 31, 1995, the aggregate settlement value of open Standard & Poor's 500
Index futures contracts expiring in September 1995, the related unrealized
appreciation, and the market value of securities deposited as initial margin
for those contracts were $118,261,000, $1,831,000, and $5,108,000,
respectively.
F. The market value of securities on loan to broker/dealers at March 31,
1995, was $128,481,000 for which the Fund had received as collateral cash of
$42,696,000 and U.S. Treasury securities with a market value of $89,022,000.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q782-3/95
[VANGUARD ASSET ALLOCATION FUND LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 1995
