<PAGE> 1
[VANGUARD ASSET ALLOCATION FUND]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to
John J. Brennan, who, on January 31, 1996, will assume my responsibilities
as Chief Executive Officer of Vanguard Asset Allocation Fund and the other
Funds in The Vanguard Group. Mr. Brennan will continue to serve as President
of the Funds, and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and
confident that Jack Brennan is exactly the right person to succeed me as
Chief Executive Officer. To use yet another Vanguard nautical metaphor, he
will be the new captain. He has the qualities of leadership, integrity,
intelligence, and vision that must continue to be Vanguard's hallmark as we
move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have been
working closely together since he joined Vanguard in 1982. He is a graduate
of Dartmouth College and Harvard Business School. He started as Assistant to
the Chairman and, rising like a rocket, became President in 1989. While, at
age 41, he may seem young, he is in fact older than I was when I became Chief
Executive Officer of Vanguard's predecessor organization in 1967, at the age
of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our
costs of operation to a minimum, and in retaining our position as the
lowest-cost provider of financial services in the world. He is a true
competitor, who shares Vanguard's dedication to providing highly competitive
returns to our investors relative to the returns provided by other mutual
funds with comparable objectives. He also believes in reporting our results
to shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you
to Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of
our shareholders, our crew, and our investment policies. I shall also speak
out on industry affairs, reminding all who will listen of the primacy of the
interests of mutual fund shareholders. I will be readily available to provide
Jack Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of
Vanguard since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me
in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
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 THAT 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:
During our fiscal year ended September 30, 1995, Vanguard Asset Allocation
Fund, with a total return of +28.6%, enjoyed the best year in its seven-year
history. Stocks and bonds alike rose steadily and sharply, a pattern quite the
opposite of fiscal 1994, when virtually any combination of these two asset
classes provided a negative return. It was a welcome reversal of fortune.
As you know, the Fund may hold three classes of financial assets in
its allocation strategy: common stocks (as represented by the unmanaged
Standard & Poor's 500 Composite Stock Price Index), long-term U.S. Treasury
bonds, and cash reserves. An equal-weighted portfolio of each class would have
resulted in a total return (capital change plus income) of +19.5% during the
year. Hence, our tactical asset allocations added substantial value to our
return. Here are the summary results:
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURN
-------------------
FISCAL YEAR ENDED
SEPTEMBER 30, 1995
- --------------------------------------------------------
<S> <C>
VANGUARD ASSET ALLOCATION FUND +28.6%
- --------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +29.7%
LONG-TERM U.S. TREASURY BONDS +23.0
90-DAY U.S. TREASURY BILLS + 5.7
- --------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $13.78 per share on
September 30, 1994, and $17.03 on September 30, 1995, with the latter figure
adjusted to take into account the reinvestment of our two semi-annual dividends
totaling $.57 per share from net investment income.
THE FINANCIAL MARKETS IN FISCAL 1995
Both stocks and bonds enjoyed a remarkable bull market during the past twelve
months. In fact, the past fiscal year provided one of the best combined returns
of any year in the modern history of the financial markets going all the way
back to 1926. (The combined return assumes a mix of one-third each in stocks,
bonds, and bills.) The strong recovery from a lackluster 1994 delighted the
bulls even as it astonished the bears.
During the first three months of the fiscal period, both markets went
essentially nowhere. Then, as January began, they sprang to life. During the
ensuing seven months, stocks and bonds alike moved upward, week after week,
virtually without interruption. Following a brief respite during the summer,
both markets reaccelerated in September to close the fiscal year on a positive
note. On balance, it was a year to savor, even as it should remind us that
participation in fluctuating securities markets inevitably entails not only
reward, but risk as well.
There were, as always, many opinions as to the source of the surprising
strength in the financial markets. In my view, it resulted from a combination
of: (1) record-breaking corporate profits; (2) the sharp decline in long-term
interest rates; (3) the diminishing threat of additional increases in
short-term interest rates by the Federal Reserve Board; (4) a slight softening
in U.S. economic growth, resulting in continued optimism about the outlook for
inflation; and (5) a hint of speculative fever in the marketplace.
Among the most dominant of these factors was the sharp drop in interest
rates and the commensurate increase in the prices of long-term bonds. On
balance for the fiscal year, the yield on the long-term U.S. Treasury bond
tumbled from 7.8% to 6.6%, a precipitous drop of 120 basis points, equivalent
to a +16% price increase excluding the generous interest coupon. Short-term
rates, however, continued to rise, with the Treasury bill yield beginning the
fiscal year at 4.7% and closing at 5.4%.
This dichotomy, of course, reflects the way things are supposed to work
(although they often do not). When the Federal Reserve Bank raises short-term
rates, it is generally read as a signal of the Bank's willingness to fight
inflation. This determination, in turn, often increases confidence that the
outlook for the real return (yield minus the rate of inflation) on long-term
bonds will be viewed with increased optimism by investors, which would
ultimately reduce long-term rates.
Since the three classes of financial assets compete with one another for
investors' assets, lower
1
<PAGE> 4
[FIGURE 2]
yields on long-term bonds tend to engender lower yields on stocks. At fiscal
year-end, the average yield on the stocks in the Standard & Poor's 500 Index
had tumbled to 2.3%, the lowest in modern market history. Whether the level of
investor optimism--or perhaps even greed--suggested by this low yield will be
justified by future dividend growth or even lower yields (however unlikely)
remains to be seen.
To place fiscal 1995 in the perspective of recent history, the chart above
shows the returns on stocks, long-term bonds, and bills over our past five
fiscal years. For the full period, the results surely justify the
"greater-the-risk, greater-the-reward" theory, with annual rates of return as
follows: stocks +17.2%, bonds +12.7%, and bills +4.6% -all far above historical
norms. Given that the chart encompasses a five-year rally in the financial
markets, it would be imprudent to assume that the future returns of stocks and
bonds will match these extraordinary past returns.
THE FUND IN FISCAL 1995
It would be difficult to imagine a better year for Vanguard Asset Allocation
Fund than fiscal 1995. Our basic strategy of employing the long-term U.S.
Treasury bond as a proxy for the bond market was a major plus, as long
Treasuries--almost always the most volatile of the bond offerings--led the
parade of high bond returns (just as they lagged when rates rose so sharply
last year). By the same token, our use of the Standard & Poor's 500 Stock Index
was also a major plus, as large blue-chip stocks- the backbone of the
Index--led the equity market parade, with smaller and riskier stocks trailing
behind. And, once again, the decision of our adviser, Mellon Capital Management
Corporation, not to hold cash reserves during 1995 eliminated the drag on our
return that would otherwise have existed.
Seemingly modest changes in our allocations to stocks and bonds also
provided an advantage to Vanguard Asset Allocation Fund. We began the year
with a 50% stock/50% bond allocation, increased the stock portion to 60% on
March 17 and then to 80% on June 1, before reducing it to 70% in July and 60%
in August, as falling dividend yields were accompanied by rising interest
rates. However, heightened expectations for dividend growth increased Mellon's
projection of stock returns relative to bond returns, and on September 22, the
stock/bond ratio of the Fund was changed to 70%/30%.
These changes in our allocation enhanced the returns of our basic strategy
by about two percentage points. More to the point, however, was the superiority
of each of our asset allocation classes relative to the average mutual fund
within each class. The average general equity fund provided a return of +25.5%
versus the return of +29.2% on our equity portfolio; the average fixed-income
fund provided a return of +11.0% versus the return of +22.5% on our bond
portfolio. The net result: holding a constant 50/50 ratio in the Fund would
have resulted in a gain of +25.9%; maintaining the same ratio in the average
equity and fixed-income mutual funds would have resulted in a gain of +18.3%.
In short, we have both our adviser's strategic choice of asset classes and
tactical shifts in allocation to thank for a remarkably productive year.
Our results for the past twelve months also stand out relative to those of
the average asset allocation fund, which provided a total return of
2
<PAGE> 5
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- ------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD ASSET ALLOCATION FUND +28.57% +15.72% +13.89%
AVERAGE ASSET ALLOCATION FUND +19.38 +12.99 +10.72
STANDARD & POOR'S 500 INDEX +29.71 +17.19 +14.76
</TABLE>
*Inception, November 3, 1988.
Note: Past performance is not predictive of future performance.
+19.4%. Vanguard Asset Allocation Fund's return of +28.6%, on the other hand,
was nearly 50% higher. That said, I should note that the asset allocation fund
category covers "a multitude of sins." The "multitude" is the sheer number of
such funds: there are now 139 of them, compared to but 30 when we began
operations in November 1988. The "sins," if you will, are the remarkable
variety of strategies followed by these funds.
Some asset allocation funds use leverage (borrowed money), some sell
short, and some invest in commodities such as gold. Last year, they had an
equity exposure lower than our Fund (about 50% of net assets compared to our
60%), as well as a far lower commitment to the large blue-chip stocks (about
50% of equities compared to our 100%). Given this variability, the funds in the
asset allocation group provided a wide range of returns, with the top performer
rising +35% and the bottom performer actually declining -2%. Considering our
fine results in fiscal 1995--which led to a rank of eighth among 139 asset
allocation funds--suffice it to say that our "plain vanilla" strategy will
remain intact.
A LONGER-TERM PERSPECTIVE
On the other hand, perhaps I should have said, "irrespective of our 1995
results, our strategy will remain intact." For, in the uncertain world of
investing, our relative results in another year may not be a reprise of the
excellence we achieved in 1995. It is the long-term record that is the best
measure of how well we serve you. And, over our relatively brief seven-year
history, we measure up snappily to that standard. The chart above, summarized
in the table that follows on page 4, presents the record.
I would note that our future returns may be better or worse than the past
absolute returns reflected in the chart and the table. Indeed, with equity
returns during the period illustrated being well above their long-term norm of
+10.5% and with long-term Treasury bonds currently yielding 6.6%, there are
good reasons to assume that our future absolute returns will be lower than
those earned since the Fund's inception.
That said, we see no reason that our relative returns in the years ahead
cannot remain strong.
(continued)
3
<PAGE> 6
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN*
---------------------------
NOVEMBER 3, 1988, TO
SEPTEMBER 30, 1995
---------------------------
FINAL VALUE
OF AN INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- -----------------------------------------------------------------
<S> <C> <C>
ASSET ALLOCATION FUND +13.9% $24,547
- -----------------------------------------------------------------
AVG. ASSET ALLOCATION FUND +10.7% $20,204
- -----------------------------------------------------------------
STANDARD & POOR'S 500 INDEX +14.8% $25,885
LONG-TERM U.S. TREASURY BONDS +11.3 20,892
90-DAY U.S. TREASURY BILLS + 5.5 14,502
- -----------------------------------------------------------------
</TABLE>
* Assuming reinvestment of all dividends and distributions, and excluding sales
charges, if any, on the other mutual funds.
Our strategy has proved itself thus far, and our excess return over our peers
based on an initial investment of $10,000, was some $4,300--fully 43% of the
initial investment in just seven years! To say the least, this is hardly a
trivial advantage.
In addition to our excellent competitive record relative to our peers, we
have provided about 94% of the annual rate of return of the all-stock Standard
& Poor's 500 Index, even as our equity risk exposure has been far lower. (Our
stock allocation averaged about 60% of assets.) And we have done so by adhering
to strategies that have been in place since our founding, and have been our
adviser's hallmark for two decades:
1. Relying on computer-modeled forecasts, rather than intuition, to estimate
future returns in the financial markets.
2. Making relatively infrequent changes in our stock/bond ratio and making them
gradually rather than precipitously (i.e., we do not engage in active
"market-timing").
3. Counting on our asset allocation process to generate value-added rather than
attempting to pick the winners in each class (i.e., using the Standard &
Poor's Index rather than picking individual stocks; using long Treasuries
rather than guessing about the "best" maturities and credit quality).
These principles have gotten us to where we are today, and we expect that they
will remain intact in the future.
IN SUMMARY
It seems to me that Vanguard Asset Allocation Fund represents the ultimate
"core portfolio." For investors who desire to make marginal changes in their
exposure to the three principal asset classes, it may serve as the centerpiece
of a balanced portfolio. For investors with modest assets, seeking an actively
managed balance among stocks, bonds, and reserves, it may serve as the entire
investment program. In short, the Fund seems to meet the needs of many
different types of investors, as evidenced by our growth from $14 million of
assets at the end of 1988 to $1.6 billion today.
Let me be clear, however, that no equity fund nor bond fund nor asset
allocation fund can eliminate the risks of participation in the financial
markets today. Indeed, as I noted earlier, given the high returns of bonds and
stocks that we have had the good fortune to enjoy during our seven-year
history, the risks of investing have doubtless increased since the Fund began
operations. That said, perhaps the biggest risk of investing is to follow an
erratic and ever-changing course. In my Annual Report a year ago, I urged you,
rather, to "stay the course." It proved wise counsel then; I reiterate it
today.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
October 4, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD ASSET ALLOCATION FUND since inception through September 30, 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 TOTAL INVESTMENT RETURN*
- -----------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund S&P 500
Value with Income ---------------------------- -------
September 30 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (11/88) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
1989 12.11 -- $0.25 12.39 21.1% +2.8% +23.9% +29.0%
- -----------------------------------------------------------------------------------------------------------------------
1990 10.93 $0.15 0.51 11.83 - 8.6 +4.0 - 4.6 - 9.2
- -----------------------------------------------------------------------------------------------------------------------
1991 13.06 0.13 0.62 15.06 +20.9 +6.4 +27.3 +31.1
- -----------------------------------------------------------------------------------------------------------------------
1992 13.79 0.19 0.59 16.89 + 7.2 +5.0 +12.2 +11.0
- -----------------------------------------------------------------------------------------------------------------------
1993 15.08 0.17 0.59 19.49 +10.7 +4.7 +15.4 +13.0
- -----------------------------------------------------------------------------------------------------------------------
1994 13.78 0.53 0.48 19.09 - 5.2 +3.1 - 2.1 + 3.7
- -----------------------------------------------------------------------------------------------------------------------
1995 17.03 -- 0.57 24.55 +23.6 +5.0 +28.6 +29.7
- -----------------------------------------------------------------------------------------------------------------------
LIFETIME +145.5% +158.8%
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +13.9% +14.8%
- -----------------------------------------------------------------------------------------------------------------------
</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.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED SEPTEMBER 30, 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 +28.57% +15.72% +13.89% +9.39% +4.50%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
The fiscal year ended September 30, 1995, saw both the stock and the bond
market exhibit strong positive performance. The Standard & Poor's 500 Stock
Index returned +29.7% and the Lehman Long-Term U.S. Treasury Index returned
+23.0% for the twelve-month period. By comparison, the Vanguard Asset
Allocation Fund earned a total return (price change plus income) of +28.6% for
the fiscal year ended September 30, 1995. Furthermore, it should be noted that
the Fund's rate of return was obtained at a lower level of risk than that of
the stock market.
The stock market hit record levels throughout the fiscal year, as the
Standard & Poor's 500 Index turned in ten consecutive months of positive
performance beginning in December 1994. Evidently, strong corporate earnings,
coupled with a moderate slowing of the economy, spurred the stock market. The
bond market also rallied through the first six months of the calendar year, as
long rates fell in response to subdued inflation. As the markets expected, the
Federal Reserve's September 1995 meeting came and went with no policy change.
Indeed, as the fiscal year drew to a close, inflation remained subdued and the
economy seemed to be returning to a modest growth rate.
Vanguard Asset Allocation Fund began the fiscal year with an asset mix of
50% stocks and 50% bonds. Over the course of the first three quarters, bond
yields fell significantly (by nearly one and one-half percentage points) as the
bond market rallied. On the other hand, the expected return for equities fell
only slightly in spite of the rising market, as equity analysts raised their
earnings forecasts for the stocks comprising the S&P 500 Index. Therefore, on a
relative basis, the asset allocation model increasingly identified equities as
the more attractive asset class.
In response to this valuation shift, the Fund raised its equity allocation
from its starting asset mix of 50% stocks and 50% bonds to a mix of 80%/20% by
early June, thus participating in much of the robust equity market rally.
During the fourth fiscal quarter, bond yields fluctuated within a wide range,
as yields rose substantially in July and August and then fell back in
September. Therefore, as bond yields rose, the asset allocation model began to
identify bonds as the more attractive asset class. Then, as bond yields fell,
the model began to favor equities again. As a result, the Fund made several
asset allocation moves over the course of the quarter. In both July and August,
the Fund shifted toward bonds as it moved from an 80%/20% stock/bond allocation
to 70/30, and then to 60/40. In September, as the spread between expected
returns on stocks and bonds increased, the model began to recommend a shift
back to 70/30. Accordingly, the asset mix of the Fund was shifted to 70% stocks
and 30% bonds in late September.
Sincerely,
William L. Fouse, CFA
Chairman
Mellon Capital Management Corporation
October 4, 1995
Note: The Mellon Capital Management asset allocation model is forward looking,
and it takes as inputs the expected returns for stocks, bonds, and cash, the
risks of each asset class, and the correlations among the asset class returns.
Given the trade-off between risk and return, the model selects that mix of
stocks, bonds, and cash that best integrates total fund risk and return with
the risk aversion of the average investor. As the model's inputs change over
time, and as stock and bond prices fluctuate, so will the model's recommended
optimal solution. It is to this allocation that the Fund's assets are
periodically rebalanced.
6
<PAGE> 9
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
September 30, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (36.2%)(1)
- ----------------------------------------------------------------------
*AMR Corp. 9,900 $ 714
AT&T Corp. 212,284 13,958
Abbott Laboratories, Inc. 109,300 4,659
Advanced Micro Devices, Inc. 13,900 405
Aetna Life & Casualty Co. 14,700 1,079
H.F. Ahmanson & Co. 15,300 388
Air Products & Chemicals, Inc. 14,800 771
*Airtouch Communications 65,600 2,009
Alberto-Culver Co. Class B 3,700 113
Albertson's, Inc. 33,100 1,130
Alcan Aluminium Ltd. 29,350 950
Alco Standard Corp. 7,000 593
Alexander & Alexander Services, Inc. 5,600 136
Allergan, Inc. 8,200 274
AlliedSignal Inc. 37,600 1,659
Allstate Corp. 59,777 2,115
ALLTEL Corp. 24,700 738
Aluminum Co. of America 23,800 1,258
*ALZA Corp. 10,700 246
*Amdahl Corp. 15,000 144
Amerada Hess Corp. 12,200 593
American Brands, Inc. 26,700 1,128
American Electric Power Co., Inc. 24,100 877
American Express Co. 68,545 3,042
American General Corp. 27,500 1,028
American Greetings Corp. Class A 9,700 296
American Home Products Corp. 41,400 3,514
American International Group, Inc. 63,405 5,389
American Stores Co. 20,000 568
Ameritech Corp. 74,300 3,873
*Amgen, Inc. 35,000 1,746
Amoco Corp. 66,100 4,239
AMP, Inc. 29,444 1,134
*Andrew Corp. 4,900 299
Anheuser-Busch Co., Inc. 35,507 2,215
Apple Computer, Inc. 16,300 607
*Applied Materials, Inc. 11,100 1,135
Archer-Daniels-Midland Co. 71,976 1,107
*Armco, Inc. 13,500 88
Armstrong World Industries Inc. 4,900 272
ASARCO, Inc. 5,500 173
Ashland Inc. 7,800 260
Atlantic Richfield Co. 21,400 2,298
Autodesk, Inc. 6,100 267
Automatic Data Processing, Inc. 19,300 1,315
Avery Dennison Corp. 7,500 315
Avon Products, Inc. 9,400 674
Baker Hughes, Inc. 18,400 375
Ball Corp. 3,800 113
*Bally Entertainment Corp. 7,900 86
Baltimore Gas & Electric Co. 19,250 498
Banc One Corp. 54,884 2,003
Bank of Boston Corp. 14,951 712
The Bank of New York Co., Inc. 24,900 1,158
BankAmerica Corp. 50,251 3,009
Bankers Trust New York Corp. 10,500 738
C.R. Bard, Inc. 6,700 204
Barnett Banks, Inc. 12,700 719
Barrick Gold Corp. 46,600 1,206
Bassett Furniture Industries, Inc. 1,925 48
Bausch & Lomb, Inc. 7,800 323
Baxter International, Inc. 37,800 1,555
Becton, Dickinson & Co. 9,500 597
Bell Atlantic Corp. 58,100 3,566
BellSouth Corp. 66,200 4,841
Bemis Co., Inc. 6,700 185
Beneficial Corp. 6,800 355
*Bethlehem Steel Corp. 14,300 202
*Beverly Enterprises Inc. 10,300 142
*Biomet, Inc. 15,000 259
Black & Decker Corp. 11,000 375
H & R Block, Inc. 14,000 532
Boatmen's Bancshares, Inc. 16,900 625
The Boeing Co. 45,425 3,100
Boise Cascade Corp. 6,300 254
*Boston Scientific Corp. 19,800 844
Briggs & Stratton Corp. 3,700 149
Bristol-Myers Squibb Co. 67,940 4,951
Brown-Forman Corp. Class B 9,000 350
Brown Group, Inc. 2,400 44
Browning-Ferris Industries, Inc. 28,600 869
Brunswick Corp. 12,500 253
Burlington Northern Santa Fe Corp. 19,733 1,430
Burlington Resources, Inc. 17,000 659
CBS, Inc. 7,930 633
CIGNA Corp. 9,400 979
CPC International, Inc. 19,900 1,313
CSX Corp. 13,900 1,169
*CUC International, Inc. 22,600 788
*Cabletron Systems, Inc. 9,500 626
Campbell Soup Co. 33,400 1,678
Capital Cities/ABC, Inc. 20,600 2,423
Carolina Power & Light Co. 21,100 709
Caterpillar, Inc. 27,300 1,553
Centex Corp. 4,300 125
Central & South West Corp. 24,700 630
*Ceridian Corp. 5,800 257
Champion International Corp. 12,200 657
Charming Shoppes, Inc. 13,400 60
The Chase Manhattan Corp. 25,881 1,582
Chemical Banking Corp. 34,293 2,088
Chevron Corp. 86,800 4,221
Chrysler Corp. 49,340 2,615
</TABLE>
7
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
The Chubb Corp. 11,800 $ 1,133
Cincinnati Milacron, Inc. 4,400 139
CINergy Corp. 20,918 583
Circuit City Stores, Inc. 12,600 398
*Cisco Systems, Inc. 36,100 2,491
Citicorp 53,404 3,778
The Clorox Co. 7,000 500
Coastal Corp. 13,750 462
The Coca-Cola Co. 172,600 11,909
Colgate-Palmolive Co. 19,700 1,313
*Columbia Gas Systems, Inc. 6,600 255
Columbia/HCA Healthcare Corp. 59,497 2,893
Comcast Corp. Class A Special 31,200 624
Community Psychiatric Centers 5,600 66
*COMPAQ Computer Corp. 35,100 1,698
Computer Associates
International, Inc. 31,800 1,344
*Computer Sciences Corp. 7,300 470
ConAgra, Inc. 32,500 1,288
Conrail, Inc. 10,300 708
Consolidated Edison Co.
of New York, Inc. 30,700 933
Consolidated Freightways, Inc. 4,500 111
Consolidated Natural Gas Co. 12,200 493
Cooper Cameron Corp. 24 1
Cooper Industries, Inc. 11,357 400
Cooper Tire & Rubber Co. 10,900 264
Adolph Coors Co. Class B 5,000 89
CoreStates Financial Corp. 18,709 685
Corning, Inc. 30,300 867
Crane Co. 3,950 136
*Cray Research, Inc. 3,400 75
*Crown Cork & Seal Co., Inc. 11,600 450
Cummins Engine Co., Inc. 5,400 208
Cyprus Amax Minerals Co. 12,111 341
*DSC Communications Corp. 14,500 859
Dana Corp. 12,800 370
Darden Restaurants Inc. 21,100 243
*Data General Corp. 6,000 62
Dayton-Hudson Corp. 9,303 706
Dean Witter Discover & Co. 22,420 1,261
Deere & Co. 11,500 936
Delta Air Lines, Inc. 6,600 457
Deluxe Corp. 10,700 354
Detroit Edison Co. 19,300 622
The Dial Corp. 12,000 297
*Digital Equipment Corp. 19,700 899
Dillard Department Stores Class A 14,800 472
The Walt Disney Co. 69,900 4,011
Dominion Resources, Inc. 22,950 863
R.R. Donnelley & Sons Co. 20,300 792
Dover Corp. 15,000 574
Dow Chemical Co. 36,750 2,738
Dow Jones & Co., Inc. 13,100 483
Dresser Industries, Inc. 24,100 575
E.I. du Pont de Nemours & Co. 74,100 5,094
Duke Power Co. 26,800 1,162
The Dun & Bradstreet Corp. 22,600 1,308
EG & G, Inc. 7,300 142
Eastern Enterprises 2,700 87
Eastman Chemical 10,750 688
Eastman Kodak Co. 45,200 2,678
Eaton Corp. 10,500 557
Echlin, Inc. 7,700 275
Echo Bay Mines Ltd. 14,700 160
Ecolab, Inc. 8,200 227
Emerson Electric Co. 31,400 2,245
Engelhard Corp. 19,050 483
Enron Corp. 33,800 1,132
ENSERCH Corp. 8,700 144
Entergy Corp. 29,900 781
Exxon Corp. 166,700 12,044
*FMC Corp. 4,700 357
FPL Group, Inc. 25,100 1,026
*Federal Express Corp. 7,300 606
Federal Home Loan Mortgage Corp. 24,000 1,659
Federal National Mortgage Assn. 36,400 3,767
Federal Paper Board Co., Inc. 5,500 211
First Chicago Corp. 12,246 840
First Data Corp. 16,100 998
First Fidelity Bancorp. 11,067 747
First Interstate Bancorp. 11,000 1,108
First Mississippi Corp. 2,600 104
First Union Corp. 23,812 1,214
Fleet Financial Group, Inc. 18,727 707
Fleetwood Enterprises, Inc. 6,100 121
Fleming Cos., Inc. 4,900 118
Fluor Corp. 10,700 599
Ford Motor Co. 144,800 4,507
Foster Wheeler Corp. 4,700 166
Freeport-McMoRan
Copper & Gold Inc. Class B 27,800 712
*Fruit of the Loom, Inc. 10,100 208
GTE Corp. 130,200 5,110
Gannett Co., Inc. 19,500 1,065
The Gap, Inc. 19,200 691
General Dynamics Corp. 8,200 450
General Electric Co. 228,600 14,573
General Mills, Inc. 21,100 1,176
General Motors Corp. 100,600 4,716
General Public Utilities Corp. 15,400 479
General Re Corp. 11,000 1,661
General Signal Corp. 6,200 181
Genuine Parts Co. 16,300 654
Georgia-Pacific Corp. 12,100 1,059
Giant Food, Inc. Class A 7,800 245
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
Giddings & Lewis, Inc. 4,500 $ 78
Gillette Co. 59,000 2,810
Golden West Financial Corp. 8,200 414
The BF Goodrich Co. 3,400 224
The Goodyear Tire & Rubber Co. 19,800 780
W.R. Grace & Co. 12,200 814
W.W. Grainger, Inc. 6,600 398
Great Atlantic & Pacific Tea Co., Inc. 5,000 140
Great Lakes Chemical Corp. 9,500 642
Great Western Financial Corp. 17,547 417
Guidant Corp. 8,279 242
Halliburton Co. 14,900 622
Handleman Co. 4,350 39
Harcourt General, Inc. 9,563 400
John H. Harland Co. 4,000 89
Harnischfeger Industries Inc. 5,700 190
*Harrah's Entertainment, Inc. 13,300 389
Harris Corp. 5,200 285
Hasbro, Inc. 11,500 358
H.J. Heinz Co. 33,400 1,528
Helmerich & Payne, Inc. 3,200 90
Hercules, Inc. 16,200 940
Hershey Foods Corp. 11,700 753
Hewlett-Packard Co. 68,500 5,711
Hilton Hotels Corp. 6,300 402
Home Depot, Inc. 64,100 2,556
Homestake Mining Co. 18,000 306
Honeywell, Inc. 17,100 733
Household International, Inc. 12,800 794
Houston Industries, Inc. 17,100 755
ITT Corp. 15,600 1,934
Illinois Tool Works, Inc. 14,800 871
Inco Ltd. 15,498 531
Ingersoll-Rand Co. 13,800 518
Inland Steel Industries, Inc. 5,700 130
Intel Corp. 112,200 6,746
*Intergraph Corp. 5,900 71
International Business
Machines Corp. 76,700 7,239
International Flavors &
Fragrances, Inc. 14,500 700
International Paper Co. 34,200 1,436
Interpublic Group of Cos., Inc. 9,800 390
James River Corp. 10,700 342
Jefferson-Pilot Corp. 6,500 418
Johnson & Johnson 86,600 6,419
Johnson Controls, Inc. 5,300 335
Jostens Inc. 6,000 141
Kmart Corp. 59,600 864
Kaufman & Broad Home Corp. 4,200 53
Kellogg Co. 30,000 2,171
Kerr-McGee Corp. 6,800 377
KeyCorp 32,200 1,103
Kimberly-Clark Corp. 21,600 1,450
*King World Productions, Inc. 4,900 179
Knight-Ridder, Inc. 7,100 416
*The Kroger Co. 15,800 539
Laidlaw Inc. Class B 36,800 322
Eli Lilly & Co. 35,501 3,191
The Limited, Inc. 46,800 889
Lincoln National Corp. 12,400 584
Liz Claiborne, Inc. 10,400 263
Lockheed Martin Corp. 28,741 1,929
Loews Corp. 7,800 1,135
Longs Drug Stores, Inc. 2,800 116
Loral Corp. 10,900 621
Louisiana Land & Exploration Co. 4,300 153
Louisiana-Pacific Corp. 15,100 364
Lowes Cos., Inc. 21,200 636
Luby's Cafeterias, Inc. 3,400 73
MBNA Corp. 19,400 808
MCI Communications Corp. 90,500 2,353
Mallinckrodt Group, Inc. 10,100 400
Manor Care Inc. 8,200 279
Marriott International 16,300 609
Marsh & McLennan Cos., Inc. 9,900 870
Masco Corp. 21,400 589
Mattel, Inc. 29,290 860
May Department Stores Co. 33,100 1,448
Maytag Corp. 14,000 245
McDermott International, Inc. 7,000 138
McDonald's Corp. 93,900 3,592
McDonnell Douglas Corp. 16,000 1,324
The McGraw-Hill Cos. 6,400 523
The Mead Corp. 7,900 463
Medtronic, Inc. 31,200 1,677
Melville Corp. 13,900 480
Mercantile Stores Co., Inc. 4,800 216
Merck & Co., Inc. 168,700 9,447
Meredith Corp. 3,600 143
Merrill Lynch & Co., Inc. 26,100 1,631
Micron Technology Inc. 27,600 2,194
*Microsoft Corp. 77,600 7,023
Millipore Corp. 6,600 248
Minnesota Mining &
Manufacturing Co. 56,400 3,187
Mobil Corp. 53,200 5,300
Monsanto Co. 15,900 1,602
Moore Corp. Ltd. 13,000 262
J.P. Morgan & Co., Inc. 25,442 1,969
Morgan Stanley Group, Inc. 10,300 990
Morrison-Knudsen Co., Inc. 4,100 32
Morton International, Inc. 19,300 598
Motorola, Inc. 79,100 6,041
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
NACCO Industries, Inc. Class A 1,200 $ 71
NBD Bancorp 21,000 803
Nalco Chemical Co. 9,100 311
National City Corp. 19,853 613
National Semiconductor Corp. 16,100 445
National Service Industries, Inc. 6,600 193
NationsBank, Inc. 38,209 2,570
*Navistar International Corp. 9,780 117
New York Times Co. Class A 14,000 383
Newell Co. 20,700 512
Newmont Mining Corp. 11,246 478
Niagara Mohawk Power Corp. 18,700 245
NICOR, Inc. 7,000 191
Nike, Inc. Class B 9,700 1,078
NorAm Energy Corp. 15,900 125
Nordstrom, Inc. 10,800 451
Norfolk Southern Corp. 18,400 1,375
Northern States Power Co. 8,700 395
Northern Telecom Ltd. 33,600 1,197
Northrop Grumman Corp. 6,400 390
Norwest Corp. 43,500 1,425
*Novell, Inc. 48,500 885
Nucor Corp. 11,400 510
NYNEX Corp. 57,200 2,731
Occidental Petroleum Corp. 42,700 939
Ogden Corp. 5,600 132
Ohio Edison Co. 19,900 453
ONEOK, Inc. 3,400 79
*Oracle Corp. 57,200 2,188
*Oryx Energy Co. 12,400 161
Outboard Marine Corp. 2,600 56
*Owens-Corning Fiberglas Corp. 6,400 286
PECO Energy Corp. 29,000 830
PNC Bank Corp. 30,900 861
PPG Industries, Inc. 28,000 1,302
Paccar, Inc. 5,070 237
Pacific Enterprises 10,700 269
Pacific Gas & Electric Co. 57,400 1,715
Pacific Telesis Group 56,500 1,737
PacifiCorp 36,700 697
Pall Corp. 14,966 348
Panhandle Eastern Corp. 19,745 538
Parker Hannifin Corp. 9,550 363
J.C. Penney Co., Inc. 31,500 1,563
Pennzoil Co. 6,000 263
Peoples Energy Corp. 4,600 127
Pep Boys (Manny, Moe & Jack) 8,000 217
PepsiCo, Inc. 105,700 5,391
Perkin-Elmer Corp. 5,800 207
Pfizer, Inc. 84,800 4,526
Phelps Dodge Corp. 9,300 582
Philip Morris Cos., Inc. 115,100 9,611
Phillips Petroleum Co. 34,800 1,131
Pioneer Hi Bred International 11,800 543
Pitney Bowes, Inc. 20,800 874
Pittston Services Group 5,400 146
Placer Dome Group, Inc. 31,200 819
Polaroid Corp. 6,162 245
Potlatch Corp. 3,900 159
Praxair, Inc. 17,700 473
Premark International, Inc. 8,400 427
*Price/Costco Inc. 29,556 506
Procter & Gamble Co. 92,222 7,101
Providian Corp. 13,000 540
Public Service Enterprise Group Inc. 31,900 949
Pulte Corp. 3,600 102
The Quaker Oats Co. 17,400 576
Ralston-Purina Group 13,100 758
Raychem Corp. 5,500 248
Raytheon Co. 18,400 1,564
Reebok International Ltd. 10,800 371
Republic New York Corp. 6,900 404
Reynolds Metals Co. 8,100 468
Rite Aid Corp. 11,200 314
Roadway Services, Inc. 5,100 254
Rockwell International Corp. 29,400 1,389
Rohm & Haas Co. 8,900 537
*Rowan Cos., Inc. 10,900 82
Royal Dutch Petroleum Co. ADR 71,900 8,826
Rubbermaid, Inc. 21,300 588
Russell Corp. 5,300 135
*Ryan's Family Steak Houses, Inc. 9,300 72
Ryder System, Inc. 10,100 256
SBC Communications Inc. 81,600 4,488
SCEcorp 58,500 1,038
SAFECO Corp. 8,200 537
Safety-Kleen Corp. 7,500 110
*St. Jude Medical, Inc. 6,000 380
St. Paul Cos., Inc. 11,000 642
Salomon, Inc. 13,800 528
*Santa Fe Energy Resources, Inc. 11,771 112
Santa Fe Pacific Gold Corp. 17,437 220
Sara Lee Corp. 63,700 1,895
Schering-Plough Corp. 51,700 2,663
Schlumberger Ltd. 32,400 2,114
Scientific-Atlanta, Inc. 9,800 165
Scott Paper Co. 20,000 970
The Seagram Co. Ltd. 49,700 1,783
Sears, Roebuck & Co. 52,200 1,925
Service Corp. International 12,550 491
Shared Medical Systems Corp. 3,000 125
Shawmut National Corp. 17,300 582
Sherwin-Williams Co. 11,200 392
*Shoney's Inc. 5,300 58
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
Sigma Aldrich Corp. 6,500 $ 315
*Silicon Graphics, Inc. 18,300 629
Snap-On Inc. 5,700 217
Sonat, Inc. 11,400 365
Southern Co. 89,300 2,110
Southwest Airlines Co. 18,700 472
Springs Industries Inc. Class A 2,300 90
Sprint Corp. 45,900 1,607
The Stanley Works 5,900 256
Stone Container Corp. 11,810 224
Stride Rite Corp. 6,500 74
Sun Co., Inc. 11,867 306
*Sun Microsystems, Inc. 12,300 775
SunTrust Banks, Inc. 16,300 1,078
SuperValu Inc. 9,400 276
Sysco Corp. 24,100 657
TJX Cos., Inc. 9,600 114
TRW, Inc. 8,500 632
*Tandem Computers, Inc. 14,900 183
Tandy Corp. 9,932 603
Tektronix, Inc. 3,800 224
*Tele-Communications Inc. Class A 87,700 1,535
Teledyne Inc. 7,200 195
Teledyne Inc. Pfd. 'E' 72 1
*Tellabs, Inc. 11,700 491
Temple-Inland Inc. 7,200 383
*Tenet Healthcare Corp. 26,900 467
Tenneco, Inc. 23,900 1,105
Texaco Inc. 34,600 2,236
Texas Instruments, Inc. 24,800 1,981
Texas Utilities Co. 30,066 1,049
Textron, Inc. 11,800 805
Thomas & Betts Corp. 2,500 162
Time Warner, Inc. 50,285 1,999
Times Mirror Co. Class A 17,400 500
The Timkin Co. 4,000 171
Torchmark Corp. 9,500 400
*Toys R Us, Inc. 38,700 1,045
Transamerica Corp. 9,200 656
Travelers Group Inc. 43,648 2,319
Tribune Co. 8,800 584
Trinova Corp. 3,800 128
Tyco International Ltd. 10,800 680
USX-Marathon Group 39,900 788
UST Inc. 26,900 770
UNUM Corp. 10,000 528
USF&G Corp. 12,800 248
USX-U.S. Steel Group 9,640 299
Unilever NV ADR 21,400 2,782
Unicom Corp. 27,900 844
Union Camp Corp. 9,100 524
Union Carbide Corp. 20,300 807
Union Electric Co. 13,300 497
Union Pacific Corp. 27,400 1,815
*Unisys Corp. 22,300 176
United Healthcare Corp. 22,800 1,114
U.S. Bancorp 13,050 369
*USAir Group, Inc. 7,700 89
U.S. Healthcare, Inc. 20,900 739
United States Surgical Corp. 7,400 198
U S West, Inc. 63,230 2,980
United Technologies Corp. 16,600 1,467
Unocal Corp. 32,400 923
The Upjohn Co. 22,600 1,009
USLIFE Corp. 4,575 134
VF Corp. 8,414 429
*Varity Corp. 5,780 257
*Viacom International Class B 48,300 2,403
WMX Technologies Inc. 64,400 1,835
Wachovia Corp. 22,400 966
Wal-Mart Stores, Inc. 308,300 7,669
Walgreen Co. 32,200 902
Warner-Lambert Co. 17,800 1,695
Wells Fargo & Co. 7,400 1,374
Wendy's International, Inc. 13,200 279
*Western Atlas Inc. 6,900 327
Westinghouse Electric Corp. 46,300 695
Westvaco Corp. 8,800 402
Weyerhaeuser Co. 27,400 1,250
Whirlpool Corp. 9,800 566
Whitman Corp. 13,700 283
Willamette Industries, Inc. 7,400 494
Williams Cos., Inc. 13,800 538
Winn Dixie Stores, Inc. 9,700 578
Woolworth Corp. 17,300 272
Worthington Industries, Inc. 11,850 218
Wrigley, (Wm.) Jr. 15,200 768
Xerox Corp. 14,416 1,937
Yellow Corp. 3,700 50
*Zenith Electronics Corp. 5,600 48
Zurn Industries, Inc. 1,600 41
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $392,903) 576,758
- ----------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (28.5%)
- ----------------------------------------------------------------------
U.S. TREASURY BONDS
6.25%, 8/15/23 $ 34,425 $ 32,767
7.125%, 2/15/23 31,145 33,058
7.25%, 8/15/22 39,700 42,609
7.50%, 11/15/16 5,000 5,485
7.50%, 11/15/24 46,850 52,143
7.625%, 11/15/22 26,145 29,335
8.00%, 11/15/21 28,800 33,530
8.125%, 8/15/19 17,060 20,013
8.125%, 5/15/21 23,955 28,200
8.125%, 8/15/21 16,655 19,624
8.50%, 2/15/20 5,362 6,536
8.75%, 5/15/20 18,000 22,492
8.75%, 8/15/20 41,195 51,507
8.875%, 2/15/19 11,815 14,894
9.125%, 5/15/18 26,400 33,973
9.875%, 11/15/15 4,000 5,422
10.625%, 8/15/15 13,480 19,384
11.25%, 2/15/15 2,700 4,060
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $421,168) 455,032
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (33.3%)
- ----------------------------------------------------------------------
U.S. TREASURY BILLS--Note E
5.23%, 3/7/96 6,740 6,580
5.40%, 12/21/95 2,255 2,227
6.75%, 12/14/95 11,060 10,941
COMMERCIAL PAPER
Abbey National N.A. Corp.
5.66%, 12/7/95 30,900 30,558
Asset Securitization
Cooperative Corp.
5.74%, 11/16/95 30,000 29,780
Banc One Corp.
5.70%, 11/15/95 15,000 14,887
Ciesco L.P.
5.70%, 10/31/95 25,955 25,832
R. R. Donnelly & Sons Inc.
5.72%, 10/25/95 33,600 33,472
E.I. du Pont de Nemours & Co.
5.70%, 12/6/95 23,500 23,244
Ford Motor Credit Co.
5.68%, 12/8/95 30,000 29,662
General Electric Capital Corp.
5.72%, 11/3/95 30,000 29,843
Merrill Lynch & Co., Inc.
5.58%, 3/5/96 40,000 39,005
New Center Asset Trust Series
A-1 5.71%, 12/5/95 30,000 29,678
Societe Generale N.A.
5.65%, 3/18/96 35,000 34,057
Kingdom of Sweden
5.64%, 3/25/96 30,000 29,154
Toronto Dominion Holdings
5.70%, 12/8/95 3,500 3,460
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations
in a Pooled Cash
Account 6.41%, 10/2/95 157,962 157,962
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $530,468) 530,342
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (98.0%)
(Cost $1,344,539) 1,562,132
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.0%)
- ----------------------------------------------------------------------
Other Assets--Notes C and F 112,798
Liabilities--Note F (81,551)
31,247
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 93,574,170 outstanding
$0.001 par value shares
(authorized 1,000,000,000 shares) $1,593,379
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $17.03
======================================================================
</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 69.5% of net assets. See Note E.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT SEPTEMBER 30, 1995
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
Amount Per
(000) Share
----------- ------
<S> <C> <C>
Paid in Capital $1,291,235 $13.80
Undistributed Net
Investment Income 26,018 .28
Accumulated Net
Realized Gains--Note E 40,497 .43
Unrealized Appreciation of
Investments--Note E 235,629 2.52
- ----------------------------------------------------------------------
NET ASSETS $1,593,379 $17.03
- ----------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
September 30, 1995
(000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends........................................................ $16,138
Interest......................................................... 46,617
- ------------------------------------------------------------------------------------------------------
Total Income................................................ 62,755
- ------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee................................................... $ 1,954
Performance Adjustment...................................... (131) 1,823
--------
The Vanguard Group--Note C
Management and Administrative............................... 3,966
Marketing and Distribution.................................. 277 4,243
--------
Taxes (other than income taxes).................................. 102
Custodians' Fees................................................. 45
Auditing Fees.................................................... 18
Shareholders' Reports............................................ 79
Annual Meeting and Proxy Costs................................... 20
Directors' Fees and Expenses..................................... 5
- ------------------------------------------------------------------------------------------------------
Total Expenses........................................... 6,335
- ------------------------------------------------------------------------------------------------------
Net Investment Income............................. 56,420
- ------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold....................................... 28,151
Futures Contracts................................................ 24,131
- ------------------------------------------------------------------------------------------------------
Realized Net Gain........................................... 52,282
- ------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities............................................ 201,778
Futures Contracts................................................ 18,036
- ------------------------------------------------------------------------------------------------------
Change In Unrealized Appreciation (Depreciation)............ 219,814
- ------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $328,516
======================================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 1995 September 30, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income.................................................... $ 56,420 $ 42,155
Realized Net Gain (Loss)................................................. 52,282 (1,422)
Change in Unrealized Appreciation (Depreciation)......................... 219,814 (69,584)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations....................................... 328,516 (28,851)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income.................................................... (47,354) (36,747)
Realized Net Gain........................................................ -- (38,500)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions.................................................. (47,354) (75,247)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular................................................... 304,494 296,504
-- In Lieu of Cash Distributions............................. 42,720 71,439
-- Exchange.................................................. 82,738 225,157
Redeemed -- Regular................................................... (103,356) (193,927)
-- Exchange.................................................. (134,375) (178,431)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions......................... 192,221 220,742
- -------------------------------------------------------------------------------------------------------------------
Total Increase....................................................... 473,383 116,644
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year........................................................ 1,119,996 1,003,352
- -------------------------------------------------------------------------------------------------------------------
End of Year (3).......................................................... $ 1,593,379 $ 1,119,996
===================================================================================================================
(1) Distributions Per Share
Net Investment Income................................................ $.57 $.48
Realized Net Gain.................................................... -- $.53
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued............................................................... 25,633 36,017
Issued in Lieu of Cash Distributions................................. 2,992 5,029
Redeemed............................................................. (16,349) (26,278)
- -------------------------------------------------------------------------------------------------------------------
12,276 14,768
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income.................................. $ 26,018 $ 16,952
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR. . . . . . . . . . . . . . $13.78 $15.08 $13.79 $13.06 $10.93
------- ------ ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income. . . . . . . . . . . . . . . . . . . . .64 .52 .54 .61 .60
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . . . 3.18 (.81) 1.51 .90 2.28
------- ------ ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS. . . . . . . . . . 3.82 (.29) 2.05 1.51 2.88
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . (.57) (.48) (.59) (.59) (.62)
Distributions from Realized Capital Gains. . . . . . . . . . -- (.53) (.17) (.19) (.13)
------- ------ ------- ------- -------
TOTAL DISTRIBUTIONS. . . . . . . . . . . . . . . . . (.57) (1.01) (.76) (.78) (.75)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR. . . . . . . . . . . . . . . . . $17.03 $13.78 $15.08 $13.79 $13.06
=============================================================================================================================
TOTAL RETURN. . . . . . . . . . . . . . . . . . . . . . . . . +28.57% -2.05% +15.41% +12.16% +27.32%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions). . . . . . . . . . . . . . $1,593 $1,120 $1,003 $502 $265
Ratio of Expenses to Average Net Assets . . . . . . . . . . . 49% .50% .49% .52% .44%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . . . 4.41% 3.68% 4.07% 4.95% 5.28%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 34% 51% 31% 18% 44%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
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: Securities 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; securities not traded are valued
at the mean of the latest quoted bid and asked prices. Securities not listed
are valued at the latest quoted bid prices. Bonds and temporary cash
investments acquired over sixty days to maturity, 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. Other 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 a custodian bank until
maturity of each repurchase agreement. Provisions of the agreement require
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.
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.
16
<PAGE> 19
B. Under the terms of a contract which expires July 31, 1996, 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, 1995, the advisory fee represented
an effective annual rate of .15 of 1% of average net assets, before a decrease
of $131,000 (.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, 1995, the Fund had contributed capital of $192,000
to Vanguard (included in Other Assets), representing 1.0% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
D. During the year ended September 30, 1995, the Fund made purchases of
$34,237,000 and sales of $158,534,000 of investment securities other than U.S.
Government securities and temporary cash investments. Purchases and sales of
U.S. Government securities were $340,789,000 and $519,457,000, respectively.
E. At September 30, 1995, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $217,593,000, of which $221,520,000
related to appreciated securities and $3,927,000 related to depreciated
securities.
At September 30, 1995, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring through March, 1996, and the market value
of U.S. Treasury Bills deposited as initial margin for those contracts were
$530,176,000, and $19,748,000, respectively. Unrealized appreciation related to
open futures contracts of $18,036,000 is required to be treated as realized gain
for tax purposes. After adjusting accumulated net realized gains of $40,497,000
for the unrealized appreciation on futures contracts, the Fund had $58,533,000
of tax basis capital gains available for distribution.
F. The market value of securities on loan to broker/dealers at September 30,
1995, was $77,157,000 for which the Fund has received as collateral cash of
$31,064,000 and U.S. Treasury securities with a market value of $47,402,000.
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; 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.
17
<PAGE> 20
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, 1995, and the
results of its operations, the changes in its net assets, and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 30, 1995
18
<PAGE> 21
SPECIAL 1995 TAX INFORMATION
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD ASSET ALLOCATION FUND, INC.
Corporate shareholders should note that for the fiscal year ended September 30,
1995, 20.4% 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 of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts Mutual
Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of 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 Corp., Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and The
Standard Products Co.
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 Co. 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. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each
of the 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
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY Ralph K. Packard
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
20
<PAGE> 23
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q780-9/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet decimated Napoleon Bonaparte's ships of the line in what is still
considered to be the most complete victory ever recorded in naval history. Our
Report's cover illustration is Thomas Luny's 1830 painting, The Battle Of The
Nile, in which the French flagship, L'Orient, is shown as it exploded at 10:00
p.m. under a gibbous moon.
<PAGE> 24
[FIGURE 4]
<PAGE> 25
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle of the Nile"
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet and gloves and battleships in the
background appear at the top of pages one through four.
A line chart of the Indexed Value (Standard & Poor's 500 Stock Index) of
Vanguard Asset Allocation Fund for the fiscal years 1991 through 1995 appears
at the upper left of page two.
Line charts illustrating cumulative performance between Vanguard Asset
Allocation Fund, Standard & Poor's 500 Index and Average Asset Allocation Fund,
average Annual Total Returns for the period November 3, 1988 to September 30,
1995 appear at the top of page three.
A running head featuring a cannon with battleships in the background appears
at the top of page five.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of page six.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages seven through eighteen.
A running head featuring an hour glass, a compass, a telescope and battleships
in the background appears at the top of page nineteen.
A running head featuring a sextant, a map and battleships in the background
appears at the top of page twenty.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
