<PAGE> 1
VANGUARD
ASSET ALLOCATION
FUND
Annual Report
September 30, 1996
THE VANGUARD GROUP:
LINKING TRADITION
AND INNOVATION
At Vanguard, we treasure our
rich nautical heritage--even as
we steer our course toward the
twenty-first century. Our Report
cover reflects that blending of
tradition and innovation
of past, present, and future
The montage includes a bronze
medallion with a likeness of our
namesake, HMS Vanguard
(Lord Nelson's flagship at The
Battle of the Nile); a clock built
circa 1816 in Scotland, featuring
a portrait of Nelson (who is also
shown, accepting a surrender, in
a detail from a nineteenth-
century engraving); and several
views of our recently completed
campus, which is steeped in
nautical imagery--from our
buildings named after Nelson's
warships (Victory, Majestic, and
Goliath are three shown), to our
artwork and ornamental
compass rose.
[HMS VANGUARD LOGO]
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide
a candid assessment of the Fund's performance relative to an
appropriate unmanaged market benchmark and a peer group of mutual funds
with similar investment policies. It also reviews the principal factors
contributing to--and detracting from--the returns earned by the Fund.
To help you evaluate your Fund's current-year performance, the Message
includes a discussion of the Fund's long-term investment results, as
well as a look ahead to the prospects for the coming year. A recap of
the financial markets, which had been included as part of the
Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of
the Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to
evaluate their mutual fund holdings, and our new Portfolio Profile
furnishes shareholders with comprehensive data on key
characteristics--sector diversification, volatility, top-ten holdings,
among others--that ultimately define how a Fund is likely to perform in
various market environments. For this information to be used
effectively, we include a brief description of the profiled
characteristics. The Report From The Adviser (for our traditionally
managed Funds) now covers specific topics that we have defined as being
the important ones for the adviser to address--and we do our best to
ensure that this Report is written in the same simple and candid manner
that characterizes all Vanguard communications. Finally, each Adviser's
Report will include an inset reminder of the adviser's basic investment
philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results
and a thorough portfolio review. We welcome any comments that you might
have at any time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
7
Portfolio
Profile
8
Financial
Statements
11
Report Of
Independent
Accountants
22
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO]
[PHOTO]
During Vanguard Asset Allocation Fund's fiscal year ended September
30, 1996, stocks enjoyed a continuation of the long-running bull market, while
bonds provided subdued total returns. Fortunately, the Fund's allocation was
tilted toward stocks during the year, and we earned a solid total return of
+15.3%.
The Fund, as you know, 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. A portfolio equally weighted in each class would have
provided a total return (capital change plus reinvested dividends) of +9.3%
during fiscal 1996. The table at right compares our twelve-month return with
those of the average asset allocation fund and the three asset classes.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOTAL RETURN
FISCAL YEAR ENDED
SEPTEMBER 30, 1996
- -------------------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund +15.3%
- -------------------------------------------------------------------
Average Asset Allocation Fund +12.3%
- -------------------------------------------------------------------
S&P 500 Index +20.3%
Long-Term U.S. Treasury Bonds + 2.3
90-Day U.S. Treasury Bills + 5.3
- -------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $17.03 per
share on September 30, 1995, and $18.27 per share on September 30, 1996,
adjusted for the reinvestment of our semi-annual dividends totaling $.66 per
share from net investment income and a distribution of $.61 per share from net
capital gains realized during 1995.
FISCAL 1996 PERFORMANCE OVERVIEW
Fiscal 1996 was a challenging period for asset allocation funds. Market
expectations and perceptions of the economy, inflation, and interest rates
shifted repeatedly. The stock market, buoyed by continued strong growth in
corporate earnings, proved remarkably resilient for most of the year. The bond
market, on the other hand, rallied during the first quarter of the fiscal year
but subsequently slumped amid fears that the economy was overheating and that
inflation would rekindle.
Our Fund's use of the stocks in the S&P 500 Index as the basis for its
equity position was an advantage in fiscal 1996, since the large, blue-chip
stocks that dominate the Index handily outpaced their smaller-capitalization
cousins. Details of allocation shifts made during the year are provided in the
"Report From The Adviser," starting on page 5. Suffice it to say that these
changes provided considerable "value added" for the Fund. If we had maintained
our "neutral" position of 60% stocks and 40% bonds throughout the year, our
return would have been roughly +13%, more than two full percentage points below
our actual return.
Our +15.3% return in fiscal 1996 significantly bettered the +12.3%
return of the average asset allocation fund. We should note that our
competitors in the asset allocation field are a diverse lot, employing many
different strategies, some of them quite exotic (for example, funds that invest
in "hard" assets such as gold, engage in short-selling, or use borrowed money
to "leverage" their returns). Our Fund was helped, relative to its com-
1
<PAGE> 4
petitors, by holding a somewhat larger exposure to common stocks, particularly
large-capitalization stocks. We also benefited considerably by having an
expense ratio (expenses as a percentage of average net assets) approximately
one-third that of the average asset allocation fund: 0.47% for our Fund versus
1.35% for our peers.
LONG-TERM PERFORMANCE OVERVIEW
The table below presents our record since we began operations eight years ago,
compared to those of the average competitor and the three asset classes in
which we invest. Clearly, our excellent performance relative to our peer group
in fiscal 1996 was not an isolated occurrence. We should emphasize that future
returns from financial assets may be less generous than those of the past eight
years, which were quite high by historical standards.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TOTAL RETURN*
NOV. 3, 1988, TO SEP. 30, 1996
-------------------------------
CUMULATIVE ANNUAL RATE
- ------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Asset Allocation Fund +183.0% +14.1%
- ------------------------------------------------------------------------------------
Average Asset Allocation Fund +126.9% +10.9%
- ------------------------------------------------------------------------------------
S&P 500 Index +212.5% +15.5%
Long-Term U.S. Treasury Bonds +113.8 +10.1
90-Day U.S. Treasury Bills + 52.8 + 5.5
- ------------------------------------------------------------------------------------
</TABLE>
*Assumes reinvestment of all dividends and distributions, and excludes sales
charges, if any, on the other mutual funds.
That said, we believe there are good reasons to anticipate that the
Fund will continue to provide strong relative returns. We think our basic
strategies, which have served us well since our founding in 1988, should
continue to do so in the future. Those key strategies are: 1) using
computer-modeled forecasts, not intuition, to estimate future returns on the
three asset classes; 2) changing our stock/bond ratio relatively infrequently
and making changes gradually rather than suddenly; and 3) relying on our asset
allocation process to add value rather than trying to pick the best securities
within each asset class (we use the S&P 500 Index for our equity holdings
rather than picking individual stocks, and we use long-term Treasury bonds
rather than trying to select bonds with the "best" maturities or the "right"
credit-quality characteristics). These three strategies have helped to account
for much of our past performance advantage; our low expenses have also
helped--and will continue to help--enhance our returns, without adding to our
risk in any way.
IN SUMMARY
We consider Vanguard Asset Allocation Fund to be an excellent representation of
Vanguard's basic investment philosophy, namely that a long term investor should
hold a balanced portfolio that provides exposure to common stocks, bonds, and
cash reserves.
Such portfolios are not without risk, and our Fund is no exception.
Financial markets are not one-way streets, and after a rewarding period such as
the past eight years, it is not unreasonable to expect rougher traveling ahead.
But "staying the course" with a balanced mix of assets appropriate to your
financial objectives has proven a successful strategy for balancing risk and
return in the past. We believe it will prove to be a sound investment approach
for the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
October 14, 1996
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED SEPTEMBER 30, 1996
U.S. EQUITY AND BOND MARKETS
During the past twelve months, expectations about economic growth, inflation,
and Federal Reserve policy shifted markedly, generating some pronounced changes
in the U.S. equity and bond markets. In October 1995, for example, the U.S.
economy was widely considered to be slowing, after exhibiting fairly robust
growth earlier in the year. Reflecting this view, investors were attracted to
long-term U.S. Treasury bonds (the yield on the 30-year maturity fell from 6.5%
to just below 6.0%) and large-capitalization stocks (the Standard & Poor's 500
Composite Stock Price Index advanced 9.6%) from the beginning of October 1995
through the end of January. By contrast, shares of small-capitalization firms
increased only 2.1% in this period.
The view that slow but steady economic growth and minimal inflation
would continue was widely held. Even the Open Market Committee of the Federal
Reserve accepted this outlook, as evidenced by its decision in January to cut
both the discount and Fed funds rates by 0.25% in an effort to stimulate the
economy.
By mid-February, however, reports indicated increases in the demand for
technology goods, the number of new jobs, and consumer spending. As a result,
the outlook among investors changed. Common-stock investors began to look for
opportunities offered by a rapidly expanding economy (e.g., rapid earnings
growth among technology, cyclical, and smaller firms), while bond investors saw
the more rapid growth as an indication of future inflation. The result was a
1.2% rise in the 30-year U.S. Treasury yield and sharp jumps in the prices of
economically sensitive stocks during the next three months.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------------
1 YEAR 3 YEARS 5 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 20.3% 17.4% 15.2%
Russell 2000 Index 13.1 12.7 15.8
MSCI-EAFE Index 8.9 8.4 8.5
- -------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 4.9% 5.0% 7.5%
Lehman 10-Year Municipal
Bond Index 4.8 4.9 7.6
Lipper Money Market 4.9 4.4 3.9
- -------------------------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.8%
- -------------------------------------------------------------------------------
</TABLE>
This outlook proved to be short-lived, too, with signs of a slowdown
appearing by late spring. As a result, blue-chip growth stocks became the
preferred segment of the stock market, while smaller-company issues,
particularly technology stocks, declined--often sharply. Bond investors
benefited from the revised outlook, as long-term yields fell -0.5% between early
July and mid-August. By the end of September, however, the long-term Treasury
yield had retraced half of the summer rally.
The markets moved in reaction to wide swings in consensus expectations
for the economy. Bond investors, in aggregate, suffered somewhat as the Lehman
Brothers Aggregate Bond Index posted a total return of 4.9% for the fiscal
year, with income of 6.9% and a -2.0% decline in capital.
3
<PAGE> 6
Equity investors, on the other hand, saw the S&P 500 Index generate a
strong return of 20.3%, largely due to continued earnings growth; yet the S&P
500's performance trailed by 9.4% the exceptional 29.7% gain generated during
the twelve months ended September 30, 1995. The returns for the S&P 500 Index
for these periods represent approximately two and three times, respectively,
the long-term average returns of the Index.
The best performers among the S&P 500's holdings were often the large
"traditional" growth stocks in the health-care (31.4% over the last twelve
months) and consumer-staples (26.4%) sectors. Such issues have historically
performed especially well during periods of economic uncertainty thanks to the
dependability of their earnings. The utilities (-0.4%), consumer-cyclical
(13.8%), and basic-materials (14.6%) sectors, by contrast, lagged in this year
characterized by uncertain growth and rising interest rates.
A number of the worst--and most volatile--performers among domestic
common stocks could be found among small-capitalization technology issues.
While small-company stocks (as measured by the Russell 2000 Small Stock Index)
gained 13.1% in aggregate, stocks of small technology companies gained only
4.2% for the year, dropping -12.6% in the last four months alone. The most
likely cause was a number of earnings disappointments within the group.
For bond investors, issues of shorter maturity and lower quality
generally performed better than other segments of the bond market.
Mortgage-backed securities also generated attractive relative returns as rising
interest rates reduced prepayment activity. Municipals, however, were strong
compared to their taxable siblings as concern over a "flat-tax" system eased.
INTERNATIONAL EQUITY MARKETS
Returns for international equity investors were solid, as reflected in the 8.9%
return of the Morgan Stanley Capital International-Europe, Australasia, Far
East (EAFE) Index. Performance in the European and Pacific Rim markets differed
widely, however, with returns of 14.6% and 3.2% (measured in U.S. dollars),
respectively. One reason for the disparity was the strength of the U.S. dollar
versus the Japanese yen. The dollar gained 12.9% against the yen, a move that
reduced the Japanese market's 13.5% increase in local terms to a mere 0.5% for
dollar-based investors. The dollar was modestly stronger (3.8%) against the
major European currencies.
The strength of the European markets stemmed, at least in part, from
governments' commitment to the Maastricht Treaty. The Treaty, which seeks to
achieve a common European currency, requires that a nation's budget deficit not
exceed 3% of its GDP. With the Maastricht deadlines approaching, governments
are reaffirming their commitment to the Treaty by reducing spending. These
actions have led to lower interest rates and strong gains, in aggregate, for
many stocks.
In Asian markets, Hong Kong (23.2%) and Malaysia (17.3%) stood out for
their gains. A number of the smaller markets (e.g., Singapore, Thailand)
suffered from slower growth and reduced competitiveness as a result of the
weakened Japanese yen. The Japanese market, despite the 13.5% gain (measured in
yen), proved disappointing to many investors due to slow sustained growth
despite government efforts to spur the economy.
4
<PAGE> 7
REPORT FROM THE ADVISER
[PHOTO]
For the fiscal year ended September 30, 1996, Vanguard Asset Allocation Fund
earned a total return (capital change plus reinvested dividends) of 15.3%,
while the Standard & Poor's 500 Composite Stock Price Index provided a return
of 20.3% and the Lehman Brothers Long-Term U.S. Treasury Index returned 2.3%.
For the second half of the fiscal year, the Fund had a total return of 5.4%,
while the S&P 500 Index advanced 7.7% and the Lehman Long-Term Treasury Index
returned 1.4%.
The fiscal year proved to be both exhilarating and confounding for
investors, as market participants grappled with a changing economic picture and
its implications for Federal Reserve monetary policy and interest rates. At the
start of the fiscal year, moderate economic growth and subdued inflation seemed
to bode quite well for the markets. However, as the year progressed, economic
data pointed to a job market that had heated up considerably, presaging a rise
in inflation. The monthly employment reports gave alternating signals about the
strength of the economy in general and the labor market in particular. The
financial markets reacted to the vagaries of the economic cycle by alternating
between pessimism and optimism. During the final fiscal quarter, two Federal
Reserve Board meetings came and went with no change in interest rates despite
much speculation and fear that the Fed would raise them.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
CHANGES IN THE FUND'S ASSET ALLOCATION DURING FISCAL YEAR 1996
- ------------------------------------------------------------------
. . . . . . . . . . . . . . 1995 . . . . . . . . . . . . . . . . .
STOCKS BONDS CASH
<S> <C> <C> <C>
October 70% 30%
November 70% 30%
December 80% 10% 10%
<CAPTION>
. . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . .
<S> <C> <C> <C>
January 80% 10% 10%
February 80% 20%
March 60% 40%
April 60% 40%
May 60% 40%
June 60% 40%
July 60% 40%
August 70% 30%
September 60% 40%
- ------------------------------------------------------------------
</TABLE>
In the face of these uncertainties, the equity market posted very good
returns for the year, largely on the continued strength of corporate America.
Both expected and reported corporate earnings advanced as the economy continued
its growth. Prices of fixed-income securities, on the other hand, retreated
early in calendar 1996 as signs of inflation continued to appear. For the rest
of the fiscal year, the bond market essentially held its ground, although prices
and yields frequently fluctuated within fairly narrow ranges.
In managing Vanguard Asset Allocation Fund, Mellon Capital Management
uses an asset allocation model that is forward-looking. The model takes as
inputs the expected returns for common stocks, bonds, and cash, the risk of
each asset class, and the correlations among the asset class returns. Given the
tradeoff between risk and return, the model selects the mix of
INVESTMENT PHILOSOPHY
The adviser believes that, although the financial markets are very efficient,
imbalances can be identified in the relative pricing of stocks, bonds, and
money market instruments. Implicit in this approach is a belief that such
imbalances occur only periodically and do not persist for long periods. The
adviser attempts to identify these windows of opportunity and to structure the
portfolio to take advantage of them.
5
<PAGE> 8
stocks, bonds, and cash that best integrates total Fund risk and return with
the average investor's risk aversion. As the inputs to the model change over
time and stock and bond prices fluctuate, so does the model's recommendation
for the optimal mix of stocks, bonds, and cash. The Fund's assets are
periodically rebalanced to the allocation recommended by the model. We
should note that when it is more efficient and cost-effective to do so, the Fund
uses S&P 500 Index futures contracts in addition to the actual underlying stocks
to maintain our desired exposure to the stock market. Doing so allows us to
maintain a significant liquidity reserve for the Fund while adhering to the
target equity allocation recommended by our model.
The Fund began the fiscal year with a mix of 70% stocks and 30% bonds.
As bond yields declined, the Fund moved to an asset mix of 80% stocks, 10%
bonds, and 10% cash at the end of calendar year 1995. When interest rates on
cash investments fell and bond yields increased, the portfolio mix was shifted
to 80% stocks and 20% bonds in early February. Bond yields continued to rise,
so the fixed-income exposure was increased in March by changing the mix, in two
steps, from 80/20 to 60/40. We held this mix of 60% stocks and 40% bonds for
several months, as bond yields traded within a narrow range and the expected
return on stocks remained relatively consistent.
In mid-July, our model identified equities as the favored asset class
due to a combination of falling stock prices and moderate increases in expected
corporate earnings. InAugust, bond yields at first decreased, prompting a shift
in the Fund's mix from 60/40 to 70/30 in mid-August. After that move, stocks
rallied and bond yields rose again, leading our model to recommend a shift back
to 60/40. This signal continued into September, as the continued rise in the
equity market decreased expected returns from stocks. Accordingly, we changed
the mix of Vanguard Asset Allocation Fund to 60/40 in late September.
William L. Fouse, CFA
Mellon Capital Management Corporation
October 8, 1996
6
<PAGE> 9
PERFORMANCE SUMMARY: ASSET ALLOCATION FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 11/3/88-9/30/96
- --------------------------------------------------------------------
ASSET ALLOCATION FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1989 21.1% 2.8% 23.9% 29.2%
1990 -8.6 4.0 -4.6 -9.2
1991 20.9 6.4 27.3 31.2
1992 7.2 5.0 12.2 11.1
1993 10.7% 4.7% 15.4% 13.0%
1994 -5.2 3.1 -2.1 3.7
1995 23.6 5.0 28.6 29.7
1996 11.1 4.2 15.3 20.3
- --------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 19 for dividend and capital gains
information for the past five years.
[FIGURE]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUND 15.27% 13.45% 14.06% $28,295
AVERAGE ASSET ALLOCATION FUND 12.33 10.98 10.92 22,691
S&P 500 INDEX 20.33 15.23 15.50 31,245
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- ------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund 11/3/88 15.27% 13.45% 9.60% 4.46% 14.06%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
PORTFOLIO PROFILE: ASSET ALLOCATION FUND
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Fund's equity and fixed-income
characteristics, where appropriate, compared to an unmanaged index. Key
elements of this Profile are defined on pages 9 and 10.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- ----------------------------------------------------------------------
<S> <C>
Turnover Rate 47%
Expense Ratio 0.47%
Cash Reserves 0%
</TABLE>
<TABLE>
<CAPTION>
Portfolio Allocation
- ------------------------
<S> <C>
BONDS 40%
STOCKS 60%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- ----------------------------------------------------------------------
ASSET ALLOCATION S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.87 1.00
Beta 0.82 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF COMMON STOCK)
- --------------------------------------------------------------------
<S> <C>
General Electric Co. 2.9%
The Coca-Cola Co. 2.4
Exxon Corp. 2.0
Merck & Co., Inc. 1.6
AT&T Corp. 1.6
Royal Dutch Petroleum Co. ADR 1.6
Microsoft Corp. 1.5
Intel Corp. 1.5
Philip Morris Cos., Inc. 1.4
Johnson & Johnson 1.3
- --------------------------------------------------------------------
Top Ten 17.8%
Top Ten as % of Total Net Assets 6.3
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------------------------------------------------------
ASSET ALLOCATION ASSET ALLOCATION S&P 500
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................... 7.0% 6.4% 6.4%
Capital Goods & Construction .................. 7.9 8.5 8.7
Consumer Cyclical ............................. 13.8 13.1 13.0
Consumer Staples............................... 12.1 12.2 12.5
Energy ........................................ 9.2 9.2 9.2
Financial ..................................... 12.8 14.1 14.1
Health Care ................................... 9.7 10.6 10.6
Technology .................................... 10.9 12.1 11.7
Transport & Services .......................... 1.6 1.6 1.5
Utilities ..................................... 12.6 10.2 10.1
Miscellaneous ................................. 2.4 2.0 2.2
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------------------
ASSET ALLOCATION S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 500 500
Median Market Cap $21.8B $21.8B
Price/Earnings Ratio 18.4x 18.4x
Price/Book Ratio 3.2x 3.2x
Dividend Yield 2.2% 2.2%
Return on Equity 19.6% 19.6%
Earnings Growth Rate 13.2% 13.2%
Foreign Holdings 3.7% 3.7%
</TABLE>
EQUITY INVESTMENT FOCUS
- ---------------------------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- ----------------------------------------------------------------------
<S> <C>
Number of Bonds 34
Average Coupon 8.7%
Average Maturity 22.8 years
Average Quality U.S. Treasury
Average Duration 10.3 years
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------
[FIGURE]
[PHOTO]
TOTAL FUND CHARACTERISTICS
TURNOVER RATE. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors). The
average turnover rate for asset allocation mutual funds is about 90%.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for an asset allocation mutual
fund was 1.35% in 1995.
TOTAL FUND VOLATILITY MEASURES
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
9
<PAGE> 12
SECTOR DIVERSIFICATION
Indicates the percentage of a portfolio's common stocks invested in each of the
major industry classifications that compose the stock market.
EQUITY CHARACTERISTICS
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of stocks in the portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
PRICE/BOOK RATIO. The share price of a stock, divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a portfolio, the weighted
average yield for stocks it holds.
RETURN ON EQUITY. The rate of return generated by a company during the past
year for each dollar of shareholder's equity (net income for the year divided
by shareholder's equity). For a portfolio, the weighted average return on
equity for the companies represented in the portfolio.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EQUITY INVESTMENT FOCUS
This grid indicates the focus of a balanced portfolio's equity segment in terms
of two attributes--market capitalization and relative valuation (growth, value,
or a blend). For instance, if the upper right box of the grid is shaded, it
indicates that this segment emphasizes large capitalization growth stocks.
FIXED-INCOME CHARACTERISTICS
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the bonds held by the fixed-income segment of a portfolio.
AVERAGE MATURITY. The average length of time until bonds in a balanced
portfolio's fixed-income segment reach maturity and are repaid. In general, the
longer the average maturity, the more a bond portfolio's market value will
fluctuate in response to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
credit ratings assigned to a portfolio's fixed-income securities by bond-rating
agencies. Agencies assign credit ratings after an appraisal of a bond issuer's
ability to meet its obligations. Quality is graded on a scale, with Aaa
indicating the most creditworthy bond issuers.
AVERAGE DURATION. A measure of how much the market value of a portfolio's
fixed-income segment would fluctuate in response to a change in interest rates.
To estimate the price sensitivity of a portfolio, multiply its duration by the
change in rates. If interest rates rise by one percentage point, the market
value of a portfolio's bond holdings with an average duration of five years
will decline by about 5%. If rates decrease by a percentage point, the
portfolio's market value will rise by 5%.
FIXED-INCOME INVESTMENT FOCUS
This grid indicates the focus of a balanced portfolio's fixed-income segment in
terms of two attributes--average maturity (short, medium, or long) and average
credit quality (high, medium, or low).
10
<PAGE> 13
[PHOTO]
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.), with the
Fund's S&P 500 Index common stocks listed in descending market value order.
Other assets are added to, and liabilities are subtracted from, the value of
Total Investments to calculate the Fund's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the Fund to arrive at its share price, or
Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends
or capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (35.2%)**
- ---------------------------------------------------------------------
<S> <C> <C>
General Electric Co. 260,500 $ 23,706
The Coca-Cola Co. 393,300 20,009
Exxon Corp. 196,000 16,317
Merck & Co., Inc. 191,900 13,505
AT&T Corp. 254,484 13,297
Royal Dutch Petroleum Co. ADR 84,600 13,208
# Microsoft Corp. 94,300 12,424
Intel Corp. 129,800 12,380
Philip Morris Cos., Inc. 129,100 11,587
Johnson & Johnson 210,200 10,773
Procter & Gamble Co. 108,122 10,542
International Business
Machines Corp. 83,100 10,346
Wal-Mart Stores, Inc. 361,900 9,545
Pfizer, Inc. 101,300 8,015
Hewlett-Packard Co. 161,300 7,863
E.I. du Pont de Nemours & Co. 88,400 7,801
Bristol-Myers Squibb Co. 79,140 7,627
American International Group, Inc. 74,105 7,466
Mobil Corp. 62,100 7,188
PepsiCo, Inc. 247,200 6,983
Citicorp 75,704 6,861
The Walt Disney Co. 107,000 6,781
Chevron Corp. 102,900 6,444
American Home Products Corp. 100,300 6,394
# Cisco Systems, Inc. 102,100 6,330
Abbott Laboratories 123,000 6,058
Federal National Mortgage Assn. 172,300 6,009
GTE Corp. 152,600 5,875
Ford Motor Co. 186,600 5,831
BellSouth Corp. 156,800 5,802
General Motors Corp. 119,231 5,723
Eli Lilly & Co. 86,202 5,560
Amoco Corp. 78,400 5,527
Chase Manhattan Corp. 68,861 5,517
McDonald's Corp. 110,300 5,225
The Boeing Co. 54,925 5,190
Gillette Co. 70,300 5,070
Motorola, Inc. 93,400 4,822
BankAmerica Corp. 56,751 4,661
SBC Communications Inc. 96,100 4,625
Minnesota Mining &
Manufacturing Co. 66,100 4,619
Ameritech Corp. 86,600 4,557
# Oracle Corp. 103,200 4,386
Home Depot, Inc. 75,600 4,300
Eastman Kodak Co. 53,100 4,168
Bell Atlantic Corp. 69,100 4,137
Columbia/HCA Healthcare Corp. 70,497 4,009
NationsBank Corp. 45,909 3,988
Unilever NV ADR 25,300 3,988
Kimberly-Clark Corp. 44,446 3,917
Wells Fargo & Co. 14,781 3,843
Texaco Inc. 41,600 3,827
Travelers Group Inc. 75,822 3,725
Schering-Plough Corp. 58,300 3,585
American Express Co. 74,745 3,457
Allstate Corp. 70,177 3,456
Computer Associates
International, Inc. 57,400 3,430
Monsanto Co. 92,400 3,373
Pharmacia & Upjohn, Inc. 80,190 3,308
Chrysler Corp. 114,880 3,288
Schlumberger Ltd. 38,600 3,262
Atlantic Richfield Co. 25,400 3,238
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Emerson Electric Co. 35,300 $ 3,181
Dow Chemical Co. 38,650 3,102
Campbell Soup Co. 39,100 3,050
NYNEX Corp. 69,200 3,010
Anheuser-Busch Co., Inc. 78,114 2,939
AlliedSignal Inc. 44,600 2,938
First Union Corp. 43,347 2,893
First Data Corp. 35,300 2,881
Lockheed Martin Corp. 31,541 2,843
Warner-Lambert Co. 42,700 2,818
Union Pacific Corp. 38,400 2,813
Banc One Corp. 68,562 2,811
MCI Communications Corp. 108,500 2,767
Sears, Roebuck & Co. 61,700 2,761
Federal Home Loan
Mortgage Corp. 28,100 2,750
Xerox Corp. 51,248 2,748
Nike, Inc. Class B 22,600 2,746
Sara Lee Corp. 76,600 2,738
# COMPAQ Computer Corp. 42,400 2,719
Sprint Corp. 67,900 2,640
# Amgen, Inc. 41,700 2,632
J.P. Morgan & Co., Inc. 29,342 2,608
WMX Technologies Inc. 77,500 2,548
Medtronic, Inc. 37,700 2,418
Southern Co. 106,300 2,405
Norwest Corp. 58,400 2,387
Time Warner, Inc. 61,800 2,387
Northern Telecom Ltd. 40,700 2,350
United Technologies Corp. 19,200 2,306
Kellogg Co. 33,300 2,293
Caterpillar, Inc. 30,300 2,284
Pacific Telesis Group 67,600 2,273
First Chicago NBD Corp. 49,865 2,256
U S WEST Communications Group 75,330 2,241
The Seagram Co. Ltd. 59,100 2,209
# AirTouch Communications 78,700 2,174
Raytheon Co. 37,100 2,064
Burlington Northern Santa Fe Corp. 24,132 2,036
Colgate-Palmolive Co. 23,200 2,015
International Paper Co. 47,300 2,010
Baxter International, Inc. 42,900 2,005
# Viacom International Class B 56,200 1,995
Automatic Data Processing, Inc. 45,700 1,994
H.J. Heinz Co. 58,300 1,968
Rockwell International Corp. 34,400 1,939
J.C. Penney Co., Inc. 35,400 1,916
May Department Stores Co. 39,300 1,911
ConAgra, Inc. 38,300 1,886
Fleet Financial Group, Inc. 41,378 1,841
Norfolk Southern Corp. 19,800 1,809
# Sun Microsystems, Inc. 29,000 1,798
PNC Bank Corp. 53,700 1,792
The Bank of New York Co., Inc. 60,700 1,783
McDonnell Douglas Corp. 33,900 1,780
Phillips Petroleum Co. 41,500 1,774
General Re Corp. 12,400 1,758
Merrill Lynch & Co., Inc. 26,500 1,739
Deere & Co. 40,700 1,709
CPC International, Inc. 22,800 1,707
CSX Corp. 33,300 1,682
Aetna Inc. 23,806 1,675
Albertson's, Inc. 39,700 1,672
Archer-Daniels-Midland Co. 86,104 1,657
Texas Instruments, Inc. 29,800 1,643
Enron Corp. 40,000 1,630
Aluminum Co. of America 27,400 1,617
# Boston Scientific Corp. 27,900 1,604
The Dun & Bradstreet Corp. 26,800 1,598
KeyCorp 36,300 1,597
# 3 Com Corp. 26,600 1,596
PPG Industries, Inc. 29,300 1,593
Gannett Co., Inc. 22,200 1,562
# CUC International, Inc. 38,700 1,543
# Tele-Communications, Inc.
Class A 103,000 1,532
General Mills, Inc. 25,100 1,515
CoreStates Financial Corp. 35,009 1,514
Duke Power Co. 31,900 1,487
First Bank System, Inc. 22,200 1,485
National City Corp. 34,891 1,470
SunTrust Banks, Inc. 35,100 1,439
Weyerhaeuser Co. 31,200 1,439
CIGNA Corp. 12,000 1,438
Walgreen Co. 38,800 1,436
Pacific Gas & Electric Co. 65,600 1,427
Dean Witter Discover & Co. 25,820 1,420
Barrick Gold Corp. 56,300 1,414
Corning, Inc. 36,200 1,412
Unocal Corp. 39,139 1,409
Texas Utilities Co. 35,366 1,401
Loews Corp. 18,100 1,400
Illinois Tool Works, Inc. 19,300 1,392
Bank of Boston Corp. 23,901 1,383
Boatmen's Bancshares, Inc. 24,700 1,377
Tenneco, Inc. 26,900 1,348
AMP, Inc. 34,544 1,338
# WorldCom, Inc. 61,200 1,308
The Gap, Inc. 45,200 1,305
# HFS Inc. 19,400 1,297
Wachovia Corp. 26,200 1,297
The Chubb Corp. 27,500 1,265
Honeywell, Inc. 20,000 1,262
# U S WEST Media Group 74,730 1,261
Household International, Inc. 15,303 1,259
# Toys R Us, Inc. 43,100 1,255
FPL Group, Inc. 28,800 1,246
Edison International 69,200 1,237
Westinghouse Electric Corp. 66,400 1,237
Pitney Bowes, Inc. 23,400 1,234
MBNA Corp. 35,100 1,220
Hershey Foods Corp. 24,200 1,216
American General Corp. 32,200 1,216
Mellon Bank Corp. 20,400 1,209
United Healthcare Corp. 28,900 1,203
American Electric Power Co., Inc. 29,500 1,198
Occidental Petroleum Corp. 50,900 1,190
Morgan Stanley Group, Inc. 23,900 1,189
Ralston-Ralston Purina Group 16,700 1,144
Georgia-Pacific Corp. 14,400 1,139
# AMR Corp. 14,300 1,139
American Brands, Inc. 26,800 1,132
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
The Goodyear Tire & Rubber Co. 24,500 $ 1,130
Dayton-Hudson Corp. 34,009 1,122
Service Corp. International 37,100 1,122
Mattel, Inc. 43,087 1,115
Marriott International 20,200 1,114
Lowe's Cos., Inc. 27,200 1,112
Marsh & McLennan Cos., Inc. 11,400 1,107
Wrigley, (Wm.) Jr. Co. 18,300 1,103
# Dell Computer 14,200 1,102
# Federated Department Stores 32,700 1,095
ITT Hartford Group, Inc. 18,400 1,086
Textron, Inc. 12,700 1,079
Alcan Aluminium Ltd. 35,650 1,070
Dominion Resources, Inc. 28,050 1,059
Praxair, Inc. 24,600 1,058
Avon Products, Inc. 20,900 1,037
Tyco International Ltd. 24,000 1,035
# W.R. Grace & Co. 13,800 1,035
Public Service Enterprise
Group Inc. 38,500 1,030
Alco Standard Corp. 20,600 1,027
Consolidated Edison Co. of
New York, Inc. 37,000 1,027
Air Products & Chemicals, Inc. 17,600 1,025
Barnett Banks, Inc. 30,300 1,023
Micron Technology Inc. 32,800 1,000
Bankers Trust New York Corp. 12,600 991
# Tellabs, Inc. 14,000 987
USX-Marathon Group 45,300 980
Entergy Corp. 35,900 969
Fifth Third Bancorp 16,700 969
Sysco Corp. 28,600 962
Freeport-McMoRan Copper &
Gold Inc. Class B 30,700 959
PacifiCorp 46,400 957
U.S. Bancorp 24,250 955
TRW, Inc. 10,100 939
Halliburton Co. 18,100 934
Crown Cork & Seal Co., Inc. 20,200 932
Union Carbide Corp. 20,400 931
# Seagate Technology 16,600 928
Comerica, Inc. 18,000 927
Conrail, Inc. 12,800 926
Aon Corp. 17,000 922
American Stores Co. 23,000 920
Hercules, Inc. 16,800 920
Houston Industries, Inc. 41,400 916
# Computer Sciences Corp. 11,800 907
Delta Air Lines, Inc. 12,500 900
Placer Dome, Inc. 37,700 891
Morton International, Inc. 22,400 890
# The Kroger Co. 19,800 886
Burlington Resources, Inc. 19,800 879
UST Inc. 29,600 877
# Digital Equipment Corp. 24,500 876
Hilton Hotels Corp. 30,800 874
Becton, Dickinson & Co. 19,500 863
Central & South West Corp. 33,100 861
Dover Corp. 18,000 860
Unicom Corp. 33,900 852
Green Tree Financial Corp. 21,700 852
Dresser Industries, Inc. 28,300 842
Williams Cos., Inc. 16,500 842
Browning-Ferris Industries, Inc. 33,500 838
Genuine Parts Co. 19,100 836
Winn Dixie Stores, Inc. 23,900 834
PECO Energy Corp. 35,000 831
Consolidated Natural Gas Co. 15,500 831
ALLTEL Corp. 29,800 831
# EMC Corp. 36,600 828
# Cabletron Systems, Inc. 12,100 826
PanEnergy Corp. 23,845 826
Carolina Power & Light Co. 23,900 825
Ingersoll-Rand Co. 17,200 817
The Limited, Inc. 42,695 817
Inco Ltd. 26,498 815
Fluor Corp. 13,200 812
# Bay Networks Inc. 29,700 809
# ITT Corp. 18,500 807
Pioneer Hi Bred International 13,000 787
Kmart Corp. 76,700 786
The Quaker Oats Co. 21,400 784
# Applied Materials, Inc. 28,300 782
Amerada Hess Corp. 14,700 777
R.R. Donnelley & Sons Co. 24,100 777
The Clorox Co. 8,100 777
CINergy Corp. 24,918 769
International Flavors &
Fragrances, Inc. 17,500 763
Masco Corp. 25,300 759
Salomon, Inc. 16,600 757
# Tenet Healthcare Corp. 34,000 757
Newell Co. 25,100 753
Tribune Co. 9,600 749
Lucent Technologies, Inc. 16,300 748
Newmont Mining Corp. 15,646 739
Cooper Industries, Inc. 17,057 738
UNUM Corp. 11,500 737
Melville Corp. 16,700 737
Eaton Corp. 12,200 737
St. Paul Cos., Inc. 13,200 733
Northrop Grumman Corp. 9,100 730
Transamerica Corp. 10,400 727
Eastman Chemical 12,350 721
Times Mirror Co. Class A 16,200 721
Coastal Corp. 17,450 720
Lincoln National Corp. 16,400 720
General Dynamics Corp. 10,400 716
# Federal Express Corp. 9,000 713
Nucor Corp. 13,800 700
Champion International Corp. 15,100 693
SAFECO Corp. 19,900 692
Baker Hughes, Inc. 22,700 690
The McGraw-Hill Cos. 15,700 669
Rohm & Haas Co. 10,200 668
Phelps Dodge Corp. 10,300 660
Sherwin-Williams Co. 14,200 659
DTE Energy Co. 22,900 641
Baltimore Gas & Electric Co. 24,450 639
Interpublic Group of Cos., Inc. 13,500 638
Harcourt General, Inc. 11,463 633
# Price/Costco Inc. 30,856 633
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Providian Corp. 14,700 $ 632
Whirlpool Corp. 12,400 628
# Silicon Graphics, Inc. 28,346 627
MGIC Investment Corp. 9,300 627
Allegheny Teledyne Inc. 27,310 618
# Novell, Inc. 55,700 613
Dillard Department Stores Class A 18,800 606
VF Corp. 10,014 602
Sonat, Inc. 13,600 602
Republic New York Corp. 8,700 601
Union Electric Co. 16,100 594
PP&L Resources Inc. 27,100 593
W.W. Grainger, Inc. 8,400 590
GPU Inc. 19,000 584
Jefferson-Pilot Corp. 11,200 580
Circuit City Stores, Inc. 16,000 578
Rubbermaid, Inc. 23,500 576
Black & Decker Corp. 13,800 573
Great Western Financial Corp. 21,516 570
Great Lakes Chemical Corp. 10,000 570
Dow Jones & Co., Inc. 15,300 566
Comcast Corp. Class A Special 36,800 566
Willamette Industries, Inc. 8,700 566
Case Corp. 11,400 556
Laidlaw Inc. Class B 50,500 556
Engelhard Corp. 24,150 555
Knight-Ridder, Inc. 15,000 555
Torchmark Corp. 12,000 551
# Western Atlas Inc. 8,800 548
# Ceridian Corp. 10,800 540
Pall Corp. 19,066 539
Golden West Financial Corp. 9,100 531
Union Camp Corp. 10,800 528
Raychem Corp. 7,000 525
Nordstrom, Inc. 13,700 521
New York Times Co. Class A 15,400 520
# General Instrument Corp. 21,000 520
Southwest Airlines Co. 22,700 519
# Humana, Inc. 25,500 516
Rite Aid Corp. 14,200 515
Deluxe Corp. 13,600 513
# St. Jude Medical, Inc. 12,700 513
Reynolds Metals Co. 10,000 511
Parker Hannifin Corp. 12,150 510
Johnson Controls, Inc. 6,800 510
Hasbro, Inc. 13,600 505
Northern States Power Co. 10,800 504
Beneficial Corp. 8,700 500
Westvaco Corp. 16,800 498
Ohio Edison Co. 25,300 490
Columbia Gas Systems, Inc. 8,700 487
Mallinckrodt Group, Inc. 11,700 487
Temple-Inland Inc. 9,200 485
H & R Block, Inc. 16,300 485
Dana Corp. 16,000 484
The Mead Corp. 8,200 481
Tupperware Corp. 9,800 480
ITT Industries, Inc. 19,700 475
Sigma Aldrich Corp. 8,300 473
# LSI Logic Corp. 20,300 472
H.F. Ahmanson & Co. 16,800 470
# Andrew Corp. 9,450 470
Kerr-McGee Corp. 7,700 469
# DSC Communications Corp. 18,400 462
Avery Dennison Corp. 8,300 461
Wendy's International, Inc. 21,400 460
Apple Computer, Inc. 20,600 456
# Woolworth Corp. 22,000 454
Brown-Forman Corp. Class B 11,400 446
TJX Cos., Inc. 12,200 438
Ashland Inc. 11,000 437
# National Semiconductor Corp. 21,700 437
Harris Corp. 6,600 430
Liz Claiborne, Inc. 11,500 428
Perkin-Elmer Corp. 7,300 422
The Stanley Works 15,000 422
Nalco Chemical Co. 11,500 417
Pacific Enterprises 13,700 414
# FMC Corp. 6,000 407
USX-U.S. Steel Group 14,140 403
Whitman Corp. 17,400 402
Pennzoil Co. 7,600 402
Allergan, Inc. 10,500 400
United States Surgical Corp. 9,400 400
Manor Care Inc. 10,400 399
# Fruit of the Loom, Inc. 12,800 397
Louisiana-Pacific Corp. 17,100 389
The BF Goodrich Co. 8,600 388
Armstrong World Industries Inc. 6,200 387
Ryder System, Inc. 12,900 382
Brunswick Corp. 15,900 382
James River Corp. 13,600 376
Tandy Corp. 9,232 373
# ALZA Corp. 13,600 366
Pep Boys (Manny, Moe & Jack) 10,200 363
Bausch & Lomb, Inc. 9,800 360
USF&G Corp. 19,300 357
Ecolab, Inc. 10,500 354
Paccar, Inc. 6,470 354
American Greetings Corp. Class A 12,300 352
General Signal Corp. 7,900 348
Maytag Corp. 17,800 347
# Advanced Micro Devices, Inc. 23,500 347
Snap-On Inc. 10,650 342
Polaroid Corp. 7,762 342
Giant Food, Inc. Class A 9,900 337
Homestake Mining Co. 22,900 335
Cyprus Amax Minerals Co. 15,411 331
Mercantile Stores Co., Inc. 6,100 329
SuperValu Inc. 11,800 325
Reebok International Ltd. 9,100 316
# Harrah's Entertainment, Inc. 16,900 315
Harnischfeger Industries Inc. 8,300 313
# Biomet, Inc. 19,100 308
Echlin, Inc. 9,800 307
Moore Corp. Ltd. 16,500 303
Worthington Industries, Inc. 15,050 303
Owens Corning 8,200 302
NorAm Energy Corp. 20,300 302
Battle Mountain Gold Co. Class A 38,800 301
Cooper Tire & Rubber Co. 13,900 301
C.R. Bard, Inc. 9,600 299
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
NICOR, Inc. 8,800 $ 297
Bemis Co., Inc. 8,600 291
National Service Industries, Inc. 8,300 291
Louisiana Land & Exploration Co. 5,500 289
# Oryx Energy Co. 16,100 286
Foster Wheeler Corp. 6,400 280
Santa Fe Pacific Gold Corp. 22,137 277
Boise Cascade Corp. 8,000 272
Millipore Corp. 6,800 269
Cummins Engine Co., Inc. 6,800 268
Sun Co., Inc. 11,567 266
Thomas & Betts Corp. 6,400 262
# Rowan Cos., Inc. 13,900 259
Stone Container Corp. 15,210 238
Tektronix, Inc. 5,800 237
ENSERCH Corp. 11,100 232
Darden Restaurants Inc. 26,700 230
# King World Productions, Inc. 6,200 229
Meredith Corp. 4,600 227
# Bally Entertainment Corp. 8,000 227
Crane Co. 5,050 224
Russell Corp. 6,700 216
Shared Medical Systems Corp. 3,800 215
# Santa Fe Energy Resources, Inc. 14,971 213
Briggs & Stratton Corp. 4,700 209
Tandem Computers, Inc. 19,000 204
Alberto-Culver Co. Class B 4,700 204
Echo Bay Mines Ltd. 23,000 203
Autodesk, Inc. 7,800 202
The Timkin Co. 5,100 200
Scientific-Atlanta, Inc. 12,500 198
Peoples Energy Corp. 5,800 197
McDermott International, Inc. 8,900 194
Niagara Mohawk Power Corp. 23,800 190
Potlatch Corp. 4,900 190
ASARCO, Inc. 7,000 186
# Beverly Enterprises Inc. 17,000 185
Consolidated Freightways, Inc. 7,500 184
# Bethlehem Steel Corp. 18,300 183
# Amdahl Corp. 19,200 181
Helmerich & Payne, Inc. 4,100 179
Fleetwood Enterprises, Inc. 5,775 178
# Unisys Corp. 28,400 174
USLIFE Corp. 5,775 173
Centex Corp. 5,300 173
Great Atlantic & Pacific Tea
Co., Inc. 6,400 166
# USAir Group, Inc. 9,900 163
Safety-Kleen Corp. 9,600 158
Jostens Inc. 7,400 154
John H. Harland Co. 5,100 153
Longs Drug Stores, Inc. 3,500 152
Trinova Corp. 4,800 151
Adolph Coors Co. Class B 6,300 138
Springs Industries Inc. Class A 3,000 134
EG & G, Inc. 7,400 132
Inland Steel Industries, Inc. 7,400 132
Eastern Enterprises 3,400 128
ONEOK, Inc. 4,400 121
Ball Corp. 4,900 120
Alexander & Alexander
Services, Inc. 7,200 120
Pulte Corp. 4,600 118
Fleming Cos., Inc. 6,200 108
Navistar International Corp. 12,480 106
Cincinnati Milacron, Inc. 5,600 106
Caliber System Inc. 6,500 105
# Data General Corp. 7,300 102
# Charming Shoppes, Inc. 17,100 102
Luby's Cafeterias, Inc. 4,200 101
# Ryan's Family Steak Houses, Inc. 11,200 83
# Intergraph Corp. 7,500 81
# Armco, Inc. 17,300 78
Stride Rite Corp. 8,200 74
NACCO Industries, Inc. Class A 1,500 72
Kaufman & Broad Home Corp. 5,300 69
# Community Psychiatric Centers 7,195 67
Giddings & Lewis, Inc. 5,700 66
# Shoney's Inc. 6,800 62
# Yellow Corp. 4,700 61
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $526,039) 823,624
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (38.8%)
- ---------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BONDS
6.00%, 2/15/26 $ 70,500 61,952
6.25%, 8/15/23 53,725 48,545
6.875%, 8/15/25 23,000 22,659
7.125%, 2/15/23 47,405 47,753
7.25%, 5/15/16 22,650 23,142
7.25%, 8/15/22 16,500 16,851
7.50%, 11/15/16 28,170 29,504
7.50%, 11/15/24 24,690 26,090
7.625%, 11/15/22 5,120 5,458
7.625%, 2/15/25 39,550 42,467
8.00%, 11/15/21 28,780 31,887
8.125%, 8/15/19 4,360 4,876
8.125%, 5/15/21 32,145 36,053
8.125%, 8/15/21 44,860 50,334
8.50%, 2/15/20 28,300 32,877
8.75%, 5/15/17 23,200 27,427
8.75%, 5/15/20 25,670 30,571
8.75%, 8/15/20 26,530 31,616
8.875%, 8/15/17 24,320 29,104
8.875%, 2/15/19 34,495 41,464
9.125%, 5/15/18 37,060 45,468
9.25%, 2/15/16 10,375 12,786
9.875%, 11/15/15 10,100 13,095
10.375%, 11/15/09 20,500 25,000
10.375%, 11/15/12 7,600 9,614
10.625%, 8/15/15 9,860 13,548
11.25%, 2/15/15 21,770 31,264
11.75%, 11/15/14 23,465 33,122
12.00%, 8/15/13 33,800 47,531
12.50%, 8/15/14 5,000 7,338
12.75%, 11/15/10 7,140 9,984
13.875%, 5/15/11 7,000 10,439
14.00%, 11/15/11 5,400 8,201
- ---------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $921,712) 908,020
- ---------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
ASSET ALLOCATION FUND (000) (000)
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (25.2%)
- ---------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILLS--NOTE E
5.25%, 3/20/97 $ 7,020 $ 6,850
5.26%, 12/19/96 21,860 21,625
5.305%, 3/6/97 100 98
COMMERCIAL PAPER
AT&T Corp.
5.26%, 12/20/96 39,000 38,529
CPC International, Inc.
5.30%, 11/25/96 17,345 17,199
Daimler-Benz North America Corp.
5.43%, 10/10/96 35,000 34,948
E.I. du Pont de Nemours & Co.
5.27%, 12/19/96 20,000 19,761
5.44%, 12/6/96 24,000 23,760
Ford Motor Credit Co.
5.43%, 10/17/96 20,000 19,949
Hertz Corp.
5.45%, 12/18/96 30,000 29,645
Hewlett-Packard Co.
5.27%, 11/13/96 18,500 18,379
5.40%, 10/16/96 25,000 24,944
International Lease Finance Corp.
5.28%, 11/19/96 25,000 24,813
Eli Lilly & Co.
5.28%, 12/20/96 19,000 18,770
MetLife Funding Corp.
5.27%, 11/19/96 24,000 23,822
Kingdom of Sweden
5.30%, 12/13/96 14,700 14,538
5.49%, 12/16/96 33,200 32,819
Warner-Lambert Co.
5.27%, 12/18/96 33,500 33,105
Xerox Corp.
5.40%, 10/22/96 34,852 34,742
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account
5.74%, 10/1/96 153,683 153,683
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $592,036) 591,979
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(COST $2,039,787) 2,323,623
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.8%)
- ----------------------------------------------------------------------
Other Assets--Notes C and F $ 54,582
Liabilities--Note F (37,020)
-----------
17,562
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 128,161,803 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $2,341,185
======================================================================
NET ASSET VALUE PER SHARE $18.27
======================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
**The combined market value of common stocks and S&P 500 Index futures
contracts represents 59.4% of net assets. See Note E in Notes to Financial
Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,896,408 $14.80
Undistributed Net
Investment Income 39,451 .31
Accumulated Net
Realized Gains 111,714 .87
Unrealized Appreciation--Note E
Investment Securities 283,836 2.21
Futures Contracts 9,776 .08
- ---------------------------------------------------------------------
NET ASSETS $2,341,185 $18.27
=====================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Asset Allocation Fund
YEAR ENDED SEPTEMBER 30, 1996
(000)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 17,924
Interest 73,771
-------------
Total Income 91,695
-------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,691
Performance Adjustment (515)
The Vanguard Group--Note C
Management and Administrative 6,402
Marketing and Distribution 421
Taxes (other than income taxes) 135
Custodian Fees 46
Auditing Fees 21
Shareholders' Reports 76
Annual Meeting and Proxy Costs 26
Directors' Fees and Expenses 6
-------------
Total Expenses 9,309
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 82,386
- ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 44,608
Futures Contracts 85,959
- ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 130,567
- ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 66,243
Futures Contracts (8,260)
- ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 57,983
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $270,936
==========================================================================================================
</TABLE>
17
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995
(000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 82,386 $ 56,420
Realized Net Gain 130,567 52,282
Change in Unrealized Appreciation (Depreciation) 57,983 219,814
-------------------------------------
Net Increase in Net Assets Resulting from Operations 270,936 328,516
-------------------------------------
DISTRIBUTIONS
Net Investment Income (68,953) (47,354)
Realized Capital Gain (59,350) --
-------------------------------------
Total Distributions (128,303) (47,354)
-------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 814,326 387,232
Issued in Lieu of Cash Distributions 121,514 42,720
Redeemed (330,667) (237,731)
-------------------------------------
Net Increase from Capital Share Transactions 605,173 192,221
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase 747,806 473,383
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 1,593,379 1,119,996
-------------------------------------
End of Year $2,341,185 $1,593,379
==============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 46,473 25,633
Issued in Lieu of Cash Distributions 7,051 2,992
Redeemed (18,936) (16,349)
-------------------------------------
Net Increase in Shares Outstanding 34,588 12,276
==============================================================================================================================
</TABLE>
18
<PAGE> 21
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.03 $13.78 $15.08 $13.79 $13.06
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .69 .64 .52 .54 .61
Net Realized and Unrealized Gain (Loss) on Investments 1.82 3.18 (.81) 1.51 .90
----------------------------------------------------------
Total From Investment Operations 2.51 3.82 (.29) 2.05 1.51
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.66) (.57) (.48) (.59) (.59)
Distributions from Realized Capital Gains (.61) -- (.53) (.17) (.19)
----------------------------------------------------------
Total Distributions (1.27) (.57) (1.01) (.76) (.78)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $18.27 $17.03 $13.78 $15.08 $13.79
===============================================================================================================================
TOTAL RETURN 15.27% 28.57% -2.05% 15.41% 12.16%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,341 $1,593 $1,120 $1,003 $502
Ratio of Total Expenses to Average Net Assets 0.47% 0.49% 0.50% 0.49% 0.52%
Ratio of Net Investment Income to Average Net Assets 4.17% 4.41% 3.68% 4.07% 4.95%
Portfolio Turnover Rate 47% 34% 51% 31% 18%
Average Commission Rate Paid $.0160 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
Vanguard Asset Allocation Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform with generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Bonds, and temporary cash investments acquired
over 60 days to maturity, are valued using the latest bid prices or using
valuations based on 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, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. Government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund uses S&P 500 Index futures contracts, with the
objectives of maintaining full exposure to the stock market, enhancing returns,
maintaining liquidity, and minimizing transaction costs. The Fund may purchase
futures contracts to immediately invest incoming cash in the market, or sell
futures in response to cash outflows, thereby simulating a fully invested
position in the underlying index while maintaining a cash balance for
liquidity. The Fund may seek to enhance returns by using futures contracts
instead of the underlying securities when futures are believed to be priced
more attractively than the underlying securities.
Futures contracts are valued at their quoted daily settlement prices.
The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Under a contract that expires March 31, 1998, the Fund pays Mellon
Capital Management Corporation an investment advisory fee calculated at an
annual percentage rate of average net assets. The basic fee is subject to
quarterly adjustments based on performance relative to the S&P 500 Stock Index.
For the year ended September 30, 1996, the advisory fee represented an
effective annual basic rate of 0.14% of the Fund's average net assets before a
decrease of $515,000 (0.03%) based on performance. The base fee reflects a fee
waiver of $146,000 (0.01%) during the period October 1, 1995, to March 31, 1996.
20
<PAGE> 23
C. The Vanguard Group 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, 1996, the Fund had contributed capital of $219,000 to Vanguard
(included in Other Assets), representing 1.1% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
D. During the year ended September 30, 1996, the Fund purchased
$214,701,000 of investment securities and sold $91,623,000 of investment
securities, not counting U.S. Government securities and temporary cash
investments. Purchases and sales of U.S. Government securities were
$1,017,123,000 and $549,383,000, respectively.
E. At September 30, 1996, net unrealized appreciation of investment
securities for financial reporting and Federal income tax purposes was
$283,836,000, consisting of unrealized gains of $308,636,000 on securities
that had risen in value since their purchase and $24,800,000 in unrealized
losses on securities that had fallen in value since their purchase.
At September 30, 1996, the aggregate settlement value of open S&P 500
Index futures contracts expiring through March 1996, the unrealized appreciation
on those contracts, and the market value of U.S. Treasury bills deposited as
initial margin for those contracts were $565,961,000, $9,776,000, and
$28,573,000, respectively. Unrealized appreciation on open futures contracts is
required to be treated as realized gain for Federal income tax purposes.
F. The market value of securities on loan to broker/dealers at September
30, 1996, was $102,976,000, for which the Fund had received as collateral cash
of $31,931,000 and U.S. Treasury securities with a market value of $73,300,000.
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, retention of the
collateral may be subject to legal proceedings.
21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
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, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the 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 at September 30, 1996 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 31, 1996
22
<PAGE> 25
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD ASSET ALLOCATION FUND
This information for the fiscal year ended September 30, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $70,559,000 as capital gain dividends (from net
long-term capital gains), of which $237,000 was distributed to shareholders in
December 1995. The balance of $70,322,000, along with any additional gains
realized through October 31, 1996, will be distributed in December 1996.
For corporate shareholders, 12.7% of investment income (dividend
income plus short-term gains, if any) qualifies for the dividends-received
deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
23
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director
of The Vanguard Group, Inc. and of
each of the investment companies in
The Vanguard Group; Director of
Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer,
and Director of The Vanguard Group,
Inc. and of each of the investment
companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and
Director of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc.
and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco
Standard Corp., Raytheon Co.,
Knight-Ridder, Inc., and Massa-
chusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The
Brookings Institution; Director of
American Express Bank Ltd., The St.
Paul Companies, Inc., and National
Steel Corp.
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., Procter & Gamble
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; Principal of The
Vanguard Group, Inc.; Treasurer of
each of the investment companies in
The Vanguard Group.
KAREN E. WEST, Controller; Principal of The
Vanguard Group, Inc.; Controller of
each of the investment companies in
The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
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.
<PAGE> 27
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 Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q780-9/96
