<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the six months ended March 31, the first half of the 1996 fiscal year
for Vanguard Asset Allocation Fund, the stock market continued its upward
march, while the bond market turned downward.
As shown in the table below, our total return (capital change plus
reinvested dividends) for the period was +9.4%, far ahead of the return on U.S.
Treasury bills and long-term U.S. Treasury bonds, and slightly behind the
return on stocks, as measured by the unmanaged Standard & Poor's 500 Composite
Stock Price Index. An equal-weighted (one-third in each) portfolio comprising
these three unmanaged indicators would have provided a total return of +5.3%.
This table compares the Fund's results with each of these indicators, as well
as the average asset allocation mutual fund:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TOTAL RETURN
----------------
SIX MONTHS ENDED
MARCH 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C>
VANGUARD ASSET ALLOCATION FUND + 9.4%
- -------------------------------------------------------------------------------------------
AVERAGE ASSET ALLOCATION FUND + 7.0%
- -------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX + 11.7%
LONG-TERM U.S. TREASURY BONDS + 0.9
90-DAY U.S. TREASURY BILLS + 3.2
- -------------------------------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $17.03 per share on
September 30, 1995, and $17.53 on March 31, 1996, with the latter figure
adjusted to take into account the reinvestment of a semi-annual dividend of
$.46 per share from net investment income, and a distribution of $.61 per share
from net capital gains realized during 1995.
THE FINANCIAL MARKETS
Despite last year's near record-breaking equity returns, the stock market
continued to advance during the past six months. Stocks, after taking a
breather in October (the only month in the past 16 with a negative total
return), climbed higher in each successive month for the remainder of the
semi-annual period. Bond prices followed a deceptively volatile path, ending
the period modestly lower despite wide price swings along the way. The interest
rate on long-term U.S. Treasury bonds, after declining from 6.6% on September
30, 1995, to 6.0% in late December, reversed course and rose to 6.7% by March
31, 1996.
Although the Federal Reserve lowered short-term interest rates in December
and January, the bond market fretted over the strength of the economy and the
possibility of renewed inflationary fears. During February and March, the
performance of the stock and bond markets "decoupled," as long-term Treasury
bonds lost a total of more than -6%, even as stocks continued to creep
higher. It remains to be seen whether the stock market has enough earnings
growth momentum to withstand the competition that higher-yielding bonds might
provide.
During the semi-annual period, our investment adviser, Mellon Capital
Management, made marginal changes in the Fund's allocation of assets, providing
a slight enhancement to our total return. Our equity position initially rose
from 70% of net assets as the fiscal year began to 80% in December, before
declining to 60% by March 31, 1996. The remainder of the portfolio was
allocated mostly to long-term Treasury bonds, but for a brief period, a small
portion was invested in cash reserves, which we have not utilized since 1989.
FUND PERFORMANCE
We would like to emphasize two distinguishing characteristics of Vanguard Asset
Allocation Fund that make the Fund unique with respect to our "flexible" fund
competitors: (1) the rigorous quantitative judgment imposed by Mellon Capital
Management's asset allocation model, which relies on gradual shifts "at the
margin" as opposed to blockbuster moves from one asset class to another (during
the past twelve months, for example, our equity position has stayed in a
relatively narrow range of 60% to 80%); and (2) we invest in three "plain
vanilla" asset classes: the Standard & Poor's 500 Index (stocks), U.S. Treasury
bonds, and cash reserves. By focusing on broad asset classes rather than
individual securities, the Fund
1
<PAGE> 2
enjoys many of the same benefits normally associated with indexed investments
and essentially eliminates the risks associated with poor selection of
individual securities.
The absolute returns experienced by the equity markets during the recent
bull market (an average return of +16% per year during the past three years)
continue to exceed the long-term historical return on stocks of about +10%.
There is virtually no question that such extraordinary returns will not persist
indefinitely. Nonetheless, we would recommend continued exposure to equities as
part of a balanced program that includes bonds and cash reserves as
appropriate. Your Fund's goal is to maintain a delicate balance among these
three asset classes that aims to moderate short-term risk and optimize
long-term return.
The investment techniques embodied by Vanguard Asset Allocation Fund hardly
guarantee positive absolute returns -- indeed we are confident that we will
experience years when returns are negative -- but we believe that the basic
structure of the Fund will provide continued competitive performance relative
to other mutual funds with similar investment objectives. We look forward to
reporting to you in further detail in our 1996 Annual Report six months hence.
Sincerely,
JOHN C. BOGLE
John C. Bogle
Chairman of the Board
JOHN J. BRENNAN
John J. Brennan
President
April 17, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS -- THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1996) 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 +28.89% +13.79% +14.26% +9.67% +4.59%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
Report From
THE INVESTMENT ADVISER
The Vanguard Asset Allocation Fund earned a total return (price change plus
income) of +9.4% for the semi-annual period ended March 31, 1996. For
comparative purposes, the S&P 500 Index rose +11.7% and long-term U.S. Treasury
bonds returned +0.9% during the six-month period. For the quarter ended March
31, 1996, the Fund had a total return of +2.8% while the S&P advanced +5.4% and
the Lehman Long-Term Treasury Index fell -6.7%.
Stocks and bonds initially flourished during the first half of the Fund's
fiscal year as a nearly ideal economic scenario seemed to be developing --
namely, moderate growth with subdued inflation. In addition, ongoing Federal
Reserve monetary easing was demonstrated by interest rate cuts in December and
January. As the period progressed, however, the economic data became somewhat
mixed making the underlying economic trends difficult to discern for market
participants. This confusion combined with concerns about the Federal budget
mess in Washington led to swings in market sentiment and a corresponding
increase in market volatility.
Despite the interest rate cut in late January, long-term bond yields rose
considerably in apparent reaction to signs that the economy was beginning to
strengthen, signaling a potential inflation flare-up. The backup in interest
rates continued into March as mixed signals on the economy persisted. The
equity market seemed to take its cue from the bond market and after a strong
performance in the first four months of the period, the stock market reacted to
the higher level of long-term borrowing rates and slowed down substantially in
February and March.
Vanguard Asset Allocation Fund began the fiscal year with a mix of 70%
stocks and 30% bonds. During October and November, as bond yields fell and the
equity market fluctuated, the spread between expected returns on stocks and
bonds varied causing the asset allocation model to signal asset mixes of 80/20
and 70/30 alternately. As the end of 1995 approached, bond yields continued to
decline causing the model to signal an asset mix of 80% stocks, 10% bonds, and
10% cash. Accordingly, the Fund's asset mix was shifted to 80/10/10 in early
December. Incidentally, this is the first time that the model had called for an
allocation to cash since late in 1989.
As the new year began, the yield on cash reserves fell and bond yields
increased. Consequently, the portfolio mix was shifted to 80/20/0 in early
February. The continuing rise in bond yields caused the model to recommend an
increase in the fixed-income exposure to an asset mix of 70/30 in late
February. With the stock market advancing during the quarter and long-term bond
yields rising nearly three-quarters of a percentage point by mid-March, the
model ultimately signaled an asset allocation of 60/40 before the 70/30
allocation had been confirmed. Since this was a 20% move from the Fund's actual
position of 80/20, the Fund's mix was shifted in a two-step process from 80/20
to 60/40 in mid-March.
Sincerely,
William L. Fouse, CFA
Chairman
Mellon Capital Management Corporation
April 16, 1996
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.
3
<PAGE> 4
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD ASSET ALLOCATION FUND since inception through March 31, 1996. 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> <C>
Initial (11/88) $10.00 -- -- $10.00 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
1989 12.11 -- $0.25 12.39 +21.1% +2.8% +23.9% +29.2%
- ---------------------------------------------------------------------------------------------------------------------------------
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 +31.2
- ---------------------------------------------------------------------------------------------------------------------------------
1992 13.79 0.19 0.59 16.89 + 7.2 +5.0 +12.2 +11.1
- ---------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------------
1996 (3/31) 17.53 0.61 0.46 26.84 + 6.6 +2.8 + 9.4 +11.7
- ---------------------------------------------------------------------------------------------------------------------------------
LIFETIME +168.4% +190.1%
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +14.3% +15.5%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
4
<PAGE> 5
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
March 31, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (41.6%)(1)
- ----------------------------------------------------------------------
* AMR Corp. 13,200 $ 1,181
AT&T Corp. 276,084 16,910
Abbott Laboratories, Inc. 137,300 5,595
* Advanced Micro Devices, Inc. 23,500 405
Aetna Life & Casualty Co. 19,600 1,480
H.F. Ahmanson & Co. 19,500 473
Air Products & Chemicals, Inc. 18,800 1,027
* AirTouch Communications 84,900 2,642
Alberto-Culver Co. Class B 4,700 181
Albertson's, Inc. 43,600 1,619
Alcan Aluminium Ltd. 38,750 1,250
Alco Standard Corp. 22,400 1,168
Alexander & Alexander
Services, Inc. 7,200 136
Allergan, Inc. 10,500 387
AlliedSignal Inc. 48,600 2,873
Allstate Corp. 76,977 3,243
ALLTEL Corp. 32,500 1,007
Aluminum Co. of America 30,700 1,923
* ALZA Corp. 13,600 418
* Amdahl Corp. 19,200 163
Amerada Hess Corp. 16,400 902
American Brands, Inc. 33,100 1,403
American Electric Power Co., Inc. 32,000 1,336
American Express Co. 85,745 4,234
American General Corp. 34,800 1,201
American Greetings Corp. Class A 12,300 340
American Home Products Corp. 54,100 5,863
American International Group, Inc. 82,005 7,678
American Stores Co. 25,200 832
Ameritech Corp. 95,100 5,183
* Amgen, Inc. 45,500 2,639
Amoco Corp. 85,900 6,206
AMP, Inc. 37,144 1,537
* Andrew Corp. 9,450 361
Anheuser-Busch Co., Inc. 44,507 2,999
Apple Computer, Inc. 20,600 505
* Applied Materials, Inc. 30,400 1,056
Archer-Daniels-Midland Co. 92,576 1,701
* Armco, Inc. 17,300 93
Armstrong World Industries Inc. 6,200 385
ASARCO, Inc. 7,000 245
Ashland Inc. 11,000 422
Atlantic Richfield Co. 27,700 3,296
Autodesk, Inc. 7,800 296
Automatic Data Processing, Inc. 50,500 1,988
Avery Dennison Corp. 9,400 508
Avon Products, Inc. 11,800 1,012
Baker Hughes, Inc. 25,200 737
Ball Corp. 4,900 152
* Bally Entertainment Corp. 9,600 166
Baltimore Gas & Electric Co. 24,450 $ 675
Banc One Corp. 78,862 2,809
Bank of Boston Corp. 19,249 955
The Bank of New York Co., Inc. 34,800 1,792
BankAmerica Corp. 64,051 4,964
Bankers Trust New York Corp. 13,300 943
C.R. Bard, Inc. 9,600 342
Barnett Banks, Inc. 16,700 1,040
Barrick Gold Corp. 60,600 1,841
Bausch & Lomb, Inc. 9,800 363
Baxter International, Inc. 47,600 2,154
* Bay Networks 31,200 959
Becton, Dickinson & Co. 11,800 966
Bell Atlantic Corp. 75,000 4,631
BellSouth Corp. 171,900 6,360
Bemis Co., Inc. 8,600 270
Beneficial Corp. 8,700 501
* Bethlehem Steel Corp. 18,300 240
* Beverly Enterprises Inc. 17,000 187
* Biomet, Inc. 19,100 267
Black & Decker Corp. 15,300 579
H & R Block, Inc. 17,700 639
Boatmen's Bancshares Inc. 26,900 1,056
The Boeing Co. 59,425 5,148
Boise Cascade Corp. 8,000 336
* Boston Scientific Corp. 30,400 1,398
Briggs & Stratton Corp. 4,700 203
Bristol-Myers Squibb Co. 87,040 7,453
Brown-Forman Corp. Class B 11,400 457
Brown Group, Inc. 3,000 41
Browning-Ferris Industries, Inc. 36,100 1,137
Brunswick Corp. 15,900 366
Burlington Northern Santa Fe Corp. 24,732 2,031
Burlington Resources, Inc. 21,500 798
CIGNA Corp. 13,200 1,508
CPC International, Inc. 25,100 1,741
CSX Corp. 36,200 1,652
* CUC International, Inc. 32,000 936
* Cabletron Systems, Inc. 12,100 802
Caliber System Inc. 6,500 279
Campbell Soup Co. 42,800 2,605
Carolina Power & Light Co. 26,600 991
Case Corp. 12,600 641
Caterpillar, Inc. 34,300 2,332
Centex Corp. 5,300 164
Central & South West Corp. 36,300 1,034
* Ceridian Corp. 11,800 507
Champion International Corp. 16,600 751
Charming Shoppes, Inc. 17,100 88
The Chase Manhattan Corp. 32,181 2,365
Chemical Banking Corp. 43,193 3,045
Chevron Corp. 112,800 6,331
Chrysler Corp. 65,740 4,092
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
The Chubb Corp. 14,900 $ 1,399
Cincinnati Milacron, Inc. 5,600 147
CINergy Corp. 26,518 796
Circuit City Stores, Inc. 16,000 478
* Cisco Systems, Inc. 95,700 4,438
Citicorp 84,104 6,728
The Clorox Co. 8,900 767
Coastal Corp. 17,450 689
The Coca-Cola Co. 216,100 17,855
Colgate-Palmolive Co. 24,900 1,939
Columbia Gas Systems, Inc. 9,700 445
Columbia/HCA Healthcare Corp. 77,097 4,452
Comcast Corp. Class A Special 41,200 726
Comerica, Inc. 20,900 873
* Community Psychiatric Centers 7,100 59
* COMPAQ Computer Corp. 45,400 1,754
Computer Associates
International, Inc. 41,400 2,965
* Computer Sciences Corp. 9,300 654
ConAgra, Inc. 42,000 1,706
Conrail, Inc. 13,600 974
Consolidated Edison Co. of
New York, Inc. 40,300 1,285
Consolidated Freightways, Inc. 7,500 192
Consolidated Natural Gas Co. 15,500 674
Cooper Industries, Inc. 18,557 724
Cooper Tire & Rubber Co. 13,900 358
Adolph Coors Co. Class B 6,300 113
CoreStates Financial Corp. 23,609 1,000
Corning, Inc. 39,400 1,379
Crane Co. 5,050 204
* Cray Research, Inc. 4,300 125
Crown Cork & Seal Co., Inc. 21,300 1,038
Cummins Engine Co., Inc. 6,800 275
Cyprus Amax Minerals Co. 15,411 435
* DSC Communications Corp. 19,800 532
DTE Energy Co. 24,400 820
Dana Corp. 17,500 584
Darden Restaurants Inc. 26,700 360
* Data General Corp. 7,300 107
Dayton-Hudson Corp. 12,403 1,053
Dean Witter Discover & Co. 29,020 1,661
Deere & Co. 45,000 1,879
Delta Air Lines, Inc. 9,100 699
Deluxe Corp. 13,600 427
The Dial Corp. 15,300 428
* Digital Equipment Corp. 26,700 1,472
Dillard Department Stores Class A 18,800 651
The Walt Disney Co. 117,100 7,480
Dominion Resources, Inc. 29,850 1,183
R.R. Donnelley & Sons Co. 27,000 932
Dover Corp. 19,000 869
Dow Chemical Co. 46,050 4,001
Dow Jones & Co., Inc. 16,500 $ 635
Dresser Industries, Inc. 30,600 933
E.I. du Pont de Nemours & Co. 96,000 7,968
Duke Power Co. 35,300 1,783
The Dun & Bradstreet Corp. 29,100 1,764
EG & G, Inc. 9,200 206
* EMC Corp. 38,800 849
* Earthgrains Co. 1,780 53
Eastern Enterprises 3,400 121
Eastman Chemical 13,550 937
Eastman Kodak Co. 58,700 4,168
Eaton Corp. 13,300 801
Echlin, Inc. 9,800 355
Echo Bay Mines Ltd. 23,000 311
Ecolab, Inc. 10,500 315
Edison International 76,600 1,312
Emerson Electric Co. 39,400 3,182
Engelhard Corp. 24,150 565
Enron Corp. 42,700 1,575
ENSERCH Corp. 11,100 180
Entergy Corp. 39,200 1,098
Exxon Corp. 214,400 17,500
* FMC Corp. 6,000 451
FPL Group, Inc. 31,700 1,434
* Federal Express Corp. 9,700 678
Federal Home Loan Mortgage Corp. 31,100 2,651
Federal National Mortgage Assn. 187,600 5,980
* Federated Department Stores 34,200 1,103
Fifth Third Bancorp 17,400 1,007
First Bank System, Inc. 25,500 1,520
First Chicago NBD Corp. 55,765 2,314
First Data Corp. 38,700 2,728
First Interstate Bancorp. 13,700 2,377
First Union Corp. 49,466 2,993
Fleet Financial Group, Inc. 46,278 1,874
Fleetwood Enterprises, Inc. 7,700 191
Fleming Cos., Inc. 6,200 88
Fluor Corp. 14,300 976
Ford Motor Co. 185,800 6,387
Foster Wheeler Corp. 7,300 324
Freeport-McMoRan Copper &
Gold Inc. Class B 35,000 1,107
* Fruit of the Loom, Inc. 12,800 331
GTE Corp. 167,500 7,348
Gannett Co., Inc. 24,500 1,648
The Gap, Inc. 25,100 1,390
General Dynamics Corp. 10,400 608
General Electric Co. 288,300 22,451
* General Instrument 21,000 575
General Mills, Inc. 27,300 1,594
General Motors Corp. 130,370 6,942
General Public Utilities Corp. 21,200 700
General Re Corp. 14,300 2,084
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
General Signal Corp. 7,900 $ 286
Genuine Parts Co. 20,700 932
Georgia-Pacific Corp. 16,100 1,117
Giant Food, Inc. Class A 9,900 327
Giddings & Lewis, Inc. 5,700 108
Gillette Co. 76,100 3,938
Golden West Financial Corp. 10,300 552
The BF Goodrich Co. 4,300 342
The Goodyear Tire & Rubber Co. 26,200 1,336
W.R. Grace & Co. 17,000 1,330
W.W. Grainger, Inc. 8,400 564
Great Atlantic & Pacific Tea Co., Inc. 6,400 198
Great Lakes Chemical Corp. 11,800 795
Great Western Financial Corp. 24,416 589
Green Tree Financial Corp. 23,400 804
Halliburton Co. 19,700 1,120
Harcourt General, Inc. 12,163 552
John H. Harland Co. 5,100 112
Harnischfeger Industries Inc. 8,300 322
* Harrah's Entertainment, Inc. 16,900 496
Harris Corp. 6,600 408
Hasbro, Inc. 14,600 540
H.J. Heinz Co. 63,200 2,094
Helmerich & Payne, Inc. 4,100 138
Hercules, Inc. 20,200 1,252
Hershey Foods Corp. 14,400 1,073
Hewlett-Packard Co. 87,800 8,253
Hilton Hotels Corp. 8,500 799
Home Depot, Inc. 81,800 3,916
Homestake Mining Co. 22,900 444
Honeywell, Inc. 21,600 1,193
Household International, Inc. 16,903 1,137
Houston Industries, Inc. 45,300 980
* Humana, Inc. 28,600 719
* ITT Corp. 20,800 1,248
ITT Hartford Group, Inc. 20,900 1,024
ITT Industries, Inc. 19,700 502
Illinois Tool Works, Inc. 20,300 1,312
Inco Ltd. 19,698 623
Ingersoll-Rand Co. 19,200 782
Inland Steel Industries, Inc. 7,400 183
Intel Corp. 141,400 8,024
* Intergraph Corp. 7,500 120
International Business
Machines Corp. 98,300 10,924
International Flavors &
Fragrances, Inc. 19,100 914
International Paper Co. 50,500 1,988
Interpublic Group of Cos., Inc. 13,500 638
James River Corp. 13,600 350
Jefferson-Pilot Corp. 12,300 663
Johnson & Johnson 115,100 10,618
Johnson Controls, Inc. 6,800 507
Jostens Inc. 7,400 $ 166
Kmart Corp. 81,200 761
Kaufman & Broad Home Corp. 5,300 85
Kellogg Co. 37,700 2,856
Kerr-McGee Corp. 8,600 546
KeyCorp 40,600 1,568
Kimberly-Clark Corp. 48,346 3,602
* King World Productions, Inc. 6,200 257
Knight-Ridder, Inc. 8,800 600
* The Kroger Co. 21,200 859
* LSI Logic Corp. 22,900 613
Laidlaw Inc. Class B 50,500 537
Eli Lilly & Co. 94,802 6,162
The Limited, Inc. 46,195 878
Lincoln National Corp. 17,900 908
Liz Claiborne, Inc. 13,000 445
Lockheed Martin Corp. 35,841 2,719
Loews Corp. 20,400 1,543
Longs Drug Stores, Inc. 3,500 165
Loral Corp. 29,500 1,446
Louisiana Land & Exploration Co. 5,500 256
Louisiana-Pacific Corp. 18,900 461
Lowes Cos., Inc. 28,200 1,008
Luby's Cafeterias, Inc. 4,200 97
MBNA Corp. 38,400 1,138
MCI Communications Corp. 118,100 3,573
Mallinckrodt Group, Inc. 12,800 482
Manor Care Inc. 10,400 408
Marriott International 21,500 1,021
Marsh & McLennan Cos., Inc. 12,500 1,161
Masco Corp. 27,100 786
Mattel, Inc. 47,488 1,288
May Department Stores Co. 42,700 2,060
Maytag Corp. 17,800 360
McDermott International, Inc. 8,900 171
McDonald's Corp. 120,500 5,784
McDonnell Douglas Corp. 20,000 1,833
The McGraw-Hill Cos. 8,700 755
The Mead Corp. 9,800 529
Medtronic, Inc. 40,400 2,409
Mellon Bank Corp. 20,200 1,114
Melville Corp. 17,600 631
Mercantile Stores Co., Inc. 6,100 374
Merck & Co., Inc. 212,500 13,228
Meredith Corp. 4,600 190
Merrill Lynch & Co., Inc. 32,300 1,962
Micron Technology Inc. 35,400 1,111
* Microsoft Corp. 102,600 10,568
Millipore Corp. 8,200 314
Minnesota Mining &
Manufacturing Co. 72,100 4,677
Mobil Corp. 67,900 7,868
Monsanto Co. 20,000 3,070
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
Moore Corp. Ltd. 16,500 $ 322
J.P. Morgan & Co., Inc. 32,142 2,668
Morgan Stanley Group, Inc. 27,100 1,402
Morton International, Inc. 25,500 979
Motorola, Inc. 102,300 5,422
NACCO Industries, Inc. Class A 1,500 85
Nalco Chemical Co. 11,500 354
National City Corp. 25,091 881
* National Semiconductor Corp. 24,600 341
National Service Industries, Inc. 8,300 301
NationsBank Corp. 51,309 4,111
* Navistar International Corp. 12,480 129
New York Times Co. Class A 17,400 505
Newell Co. 26,300 704
Newmont Mining Corp. 16,546 937
Niagara Mohawk Power Corp. 23,800 158
NICOR, Inc. 8,800 235
Nike, Inc. Class B 24,500 1,991
NorAm Energy Corp. 20,300 188
Nordstrom, Inc. 13,700 663
Norfolk Southern Corp. 23,000 1,955
Northern States Power Co. 12,100 590
Northern Telecom Ltd. 43,600 2,082
Northrop Grumman Corp. 8,200 522
Norwest Corp. 61,400 2,256
* Novell, Inc. 63,400 848
Nucor Corp. 15,400 911
NYNEX Corp. 74,500 3,716
Occidental Petroleum Corp. 54,000 1,445
Ogden Corp. 7,300 142
Ohio Edison Co. 25,300 572
ONEOK, Inc. 4,400 105
* Oracle Corp. 75,400 3,534
* Oryx Energy Co. 16,100 223
Outboard Marine Corp. 3,300 63
* Owens Corning 8,200 329
PECO Energy Corp. 38,200 1,016
PNC Bank Corp. 59,400 1,827
PP&L Resources Inc. 27,100 661
PPG Industries, Inc. 35,000 1,711
Paccar, Inc. 6,470 315
Pacific Enterprises 13,700 354
Pacific Gas & Electric Co. 72,400 1,638
Pacific Telesis Group 73,600 2,033
PacifiCorp 51,300 1,071
Pall Corp. 19,066 489
PanEnergy Corp. 25,045 780
Parker Hannifin Corp. 12,150 456
J.C. Penney Co., Inc. 39,500 1,965
Pennzoil Co. 7,600 302
Peoples Energy Corp. 5,800 188
Pep Boys (Manny, Moe & Jack) 10,200 342
PepsiCo, Inc. 136,200 8,615
Perkin-Elmer Corp. 7,300 $ 395
Pharmacia & Upjohn, Inc. 86,490 3,449
Pfizer, Inc. 110,000 7,370
Phelps Dodge Corp. 11,800 810
Philip Morris Cos., Inc. 144,400 12,671
Phillips Petroleum Co. 45,000 1,778
Pioneer Hi Bred International 14,800 779
Pitney Bowes, Inc. 26,200 1,284
Placer Dome Group, Inc. 41,100 1,187
Polaroid Corp. 7,762 349
Potlatch Corp. 4,900 209
Praxair, Inc. 26,500 1,057
Premark International, Inc. 10,600 568
* Price/Costco Inc. 36,456 684
Procter & Gamble Co. 118,622 10,053
Providian Corp. 16,400 732
Public Service Enterprise Group Inc. 42,100 1,157
Pulte Corp. 4,600 124
The Quaker Oats Co. 23,100 771
Ralston-Ralston Purina Group 18,100 1,210
Raychem Corp. 7,900 510
Raytheon Co. 45,400 2,327
Reebok International Ltd. 13,500 373
Republic New York Corp. 9,700 577
Reynolds Metals Co. 10,900 644
Rite Aid Corp. 14,200 438
Rockwell International Corp. 37,100 2,184
Rohm & Haas Co. 11,300 751
* Rowan Cos., Inc. 13,900 177
Royal Dutch Petroleum Co. ADR 92,600 13,080
Rubbermaid, Inc. 26,900 763
Russell Corp. 6,700 179
* Ryan's Family Steak Houses, Inc. 11,200 101
Ryder System, Inc. 12,900 351
SBC Communications Inc. 105,500 5,552
SAFECO Corp. 21,900 734
Safety-Kleen Corp. 9,600 138
* St. Jude Medical, Inc. 11,500 428
St. Paul Cos., Inc. 14,600 810
Salomon, Inc. 18,800 705
* Santa Fe Energy Resources, Inc. 14,971 157
Santa Fe Pacific Gold Corp. 22,137 354
Sara Lee Corp. 84,000 2,741
Schering-Plough Corp. 64,700 3,761
Schlumberger Ltd. 41,600 3,292
Scientific-Atlanta, Inc. 12,500 222
The Seagram Co. Ltd. 63,900 2,069
Sears, Roebuck & Co. 66,900 3,261
Service Corp. International 20,550 1,002
Shared Medical Systems Corp. 3,800 228
Sherwin-Williams Co. 14,200 630
* Shoney's Inc. 6,800 61
Sigma Aldrich Corp. 8,300 473
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
* Silicon Graphics, Inc. 27,400 $ 685
Snap-On Inc. 7,100 332
Sonat, Inc. 14,500 522
Southern Co. 114,200 2,727
Southwest Airlines Co. 25,400 752
Springs Industries Inc. Class A 3,000 138
Sprint Corp. 59,900 2,276
The Stanley Works 7,500 413
Stone Container Corp. 15,210 213
Stride Rite Corp. 8,200 75
Sun Co., Inc. 14,567 421
* Sun Microsystems, Inc. 32,900 1,439
SunTrust Banks, Inc. 20,300 1,421
SuperValu Inc. 11,800 364
Sysco Corp. 32,200 1,059
TJX Cos., Inc. 12,200 307
TRW, Inc. 11,200 998
* Tandem Computers, Inc. 19,000 169
Tandy Corp. 12,232 566
Tektronix, Inc. 5,800 189
* Tele-Communications, Inc. Class A 113,500 2,100
Teledyne Inc. 9,200 258
* Tellabs, Inc. 14,800 714
Temple-Inland Inc. 9,200 431
* Tenet Healthcare Corp. 36,900 775
Tenneco, Inc. 31,000 1,732
Texaco Inc. 45,800 3,939
Texas Instruments, Inc. 32,400 1,648
Texas Utilities Co. 38,766 1,604
Textron, Inc. 14,800 1,184
Thomas & Betts Corp. 3,200 240
* 3 Com Corp. 28,800 1,145
Time Warner, Inc. 66,285 2,709
Times Mirror Co. Class A 21,400 843
The Timkin Co. 5,100 235
Torchmark Corp. 12,000 540
* Toys R Us, Inc. 48,400 1,307
Transamerica Corp. 11,600 869
Travelers Group Inc. 54,948 3,627
Tribune Co. 11,100 731
Trinova Corp. 4,800 153
Tyco International Ltd. 27,000 965
UNUM Corp. 12,600 750
USF&G Corp. 19,300 299
UST Inc. 33,800 1,077
USX-Marathon Group 50,100 964
USX-U.S. Steel Group 14,140 490
Unicom Corp. 36,900 996
Unilever NV ADR 27,600 3,747
Union Camp Corp. 11,600 576
Union Carbide Corp. 25,200 1,251
Union Electric Co. 18,000 738
Union Pacific Corp. 35,300 2,422
* Unisys Corp. 28,400 $ 170
United Healthcare Corp. 29,900 1,839
U.S. Bancorp 25,950 882
U.S. Healthcare, Inc. 26,300 1,210
* USAir Group, Inc. 9,900 181
United States Surgical Corp. 9,400 308
U S WEST Communications Group 81,730 2,646
* U S WEST Media Group 82,130 1,694
United Technologies Corp. 20,900 2,346
Unocal Corp. 42,939 1,433
USLIFE Corp. 5,775 170
VF Corp. 10,714 592
* Varity Corp. 7,280 315
* Viacom International Class B 64,000 2,696
WMX Technologies Inc. 83,200 2,642
Wachovia Corp. 29,400 1,316
Walgreen Co. 42,300 1,380
Wal-Mart Stores, Inc. 396,500 9,169
Warner-Lambert Co. 23,200 2,395
Wells Fargo & Co. 9,201 2,401
Wendy's International, Inc. 21,400 388
* Western Atlas Inc. 8,800 528
Westinghouse Electric Corp. 72,500 1,396
Westvaco Corp. 16,800 494
Weyerhaeuser Co. 34,600 1,596
Whirlpool Corp. 12,400 685
Whitman Corp. 17,400 422
Willamette Industries, Inc. 9,400 562
Williams Cos., Inc. 17,400 876
Winn Dixie Stores, Inc. 26,100 878
* Woolworth Corp. 22,000 344
* WorldCom, Inc. 32,900 1,513
Worthington Industries, Inc. 15,050 299
Wrigley, (Wm.) Jr. 20,000 1,173
Xerox Corp. 18,516 2,324
Yellow Corp. 4,700 59
TOTAL COMMON STOCKS
(Cost $589,086) 839,549
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (38.0%)
- ----------------------------------------------------------------------
U.S. TREASURY BONDS
6.25%, 8/15/23 $33,725 $ 31,180
7.125%, 2/15/23 24,405 25,164
7.25%, 5/15/16 5,000 5,216
7.25%, 8/15/22 9,500 9,918
7.50%, 11/15/16 28,170 30,177
7.50%, 11/15/24 38,990 42,170
7.625%, 11/15/22 35,120 38,297
7.625%, 2/15/25 39,550 43,523
8.00%, 11/15/21 68,780 77,915
8.125%, 8/15/19 38,260 43,724
8.125%, 5/15/21 32,145 36,851
8.125%, 8/15/21 29,860 34,255
8.50%, 2/15/20 28,300 33,615
8.75%, 5/15/17 8,600 10,397
8.75%, 5/15/20 25,670 31,261
8.75%, 8/15/20 15,530 18,927
8.875%, 8/15/17 28,020 34,303
8.875%, 2/15/19 34,495 42,375
9.125%, 5/15/18 22,060 27,682
9.25%, 2/15/16 23,375 29,441
9.875%, 11/15/15 4,000 5,306
10.625%, 8/15/15 9,860 13,866
11.25%, 2/15/15 16,770 24,644
11.75%, 11/15/14 15,740 22,784
12.00%, 8/15/13 8,600 12,415
12.50%, 8/15/14 5,000 7,535
12.75%, 11/15/10 15,140 21,792
13.875%, 5/15/11 7,000 10,753
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $772,842) 765,486
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (20.3%)
U.S. TREASURY BILLS -- NOTE E
4.835%, 9/19/96 6,100 5,954
5.20%, 6/27/96 9,710 9,592
COMMERCIAL PAPER
Abbey National North
America Corp.
5.12%, 6/17/96 30,000 29,645
Arco Coal Australia Inc.
5.32%, 4/26/96 16,015 15,947
Asset Securitization
Cooperative Corp.
5.28%, 4/29/96 30,000 29,860
Daimler-Benz North America Corp.
5.00%, 6/26/96 30,000 29,605
Ford Motor Credit Co.
5.13%, 6/6/96 20,000 19,794
General Electric Capital Corp.
5.22%, 9/20/96 30,000 29,239
Hewlett Packard Co.
5.15%, 6/4/96 $20,000 $ 19,801
John Deere Capital Corp.
5.17%, 5/22/96 20,000 19,838
New Center Asset Trust Series A-1
5.00%, 6/14/96 40,000 39,542
Toshiba America Inc.
5.17%, 6/20/96 25,000 24,691
Transamerica Finance Corp.
5.22%, 9/24/96 42,000 40,904
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.40%, 4/1/96 94,004 94,004
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $408,661) 408,416
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $1,770,589) 2,013,451
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.1%)
- ----------------------------------------------------------------------
Other Assets -- Notes C and F 55,879
Liabilities -- Note F (53,654)
----------
2,225
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 114,993,760 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $2,015,676
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $17.53
======================================================================
</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 59.6% of net assets. See Note E.
ADR -- American Depository Receipt.
AT MARCH 31, 1996, NET ASSETS CONSISTED OF:
<TABLE>
<CAPTION>
Amount Per
(000) Share
--------- ------
<S> <C> <C>
PAID IN CAPITAL $1,663,637 $14.47
UNDISTRIBUTED NET
INVESTMENT INCOME 17,304 .15
ACCUMULATED NET
REALIZED GAINS 86,465 .75
UNREALIZED APPRECIATION --
NOTE E:
INVESTMENT SECURITIES 242,862 2.11
FUTURES CONTRACTS 5,408 .05
NET ASSETS $2,015,676 $17.53
</TABLE>
10
<PAGE> 11
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1996
(000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,056
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,343
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . 40,399
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee -- Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,266
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . . (157) 1,109
------
The Vanguard Group -- Note C
Management and Administrative . . . . . . . . . . . . . . . . . . 2,930
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . 179 3,109
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . 60
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . 35
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . 15
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . 3
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 4,358
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . 36,041
- ------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . 40,949
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 64,369
- ------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . 105,318
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . 25,269
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . (12,628)
- ------------------------------------------------------------------------------------------------------------------
Change In Unrealized Appreciation (Depreciation) . . . 12,641
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . $154,000
==================================================================================================================
</TABLE>
11
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1996 September 30, 1995
(000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $ 36,041 $ 56,420
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . 105,318 52,282
Change in Unrealized Appreciation (Depreciation) . . . . . . . . 12,641 219,814
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . . 154,000 328,516
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . (44,755) (47,354)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . (59,350) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . (104,105) (47,354)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . 322,186 304,494
-- In Lieu of Cash Distributions . . . . . . . . . . 98,614 42,720
-- Exchange . . . . . . . . . . . . . . . . . . . . 114,526 82,738
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . (55,199) (103,356)
-- Exchange . . . . . . . . . . . . . . . . . . . . (107,725) (134,375)
- ------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . 372,402 192,221
- ------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . 422,297 473,383
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . 1,593,379 1,119,996
- ------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . $ 2,015,676 $ 1,593,379
==================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . $.46 $.57
Realized Net Gain . . . . . . . . . . . . . . . . . . . . $.61 --
- ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 25,075 25,633
Issued in Lieu of Cash Distributions . . . . . . . . . . . 5,750 2,992
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (9,405) (16,349)
- ------------------------------------------------------------------------------------------------------------------
21,420 12,276
- ------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . $ 17,304 $ 26,018
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $17.03 $13.78 $15.08 $13.79 $13.06 $10.93
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .33 .64 .52 .54 .61 .60
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . 1.24 3.18 (.81) 1.51 .90 2.28
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . 1.57 3.82 (.29) 2.05 1.51 2.88
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.46) (.57) (.48) (.59) (.59) (.62)
Distributions from Realized Capital Gains . . (.61) -- (.53) (.17) (.19) (.13)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (1.07) (.57) (1.01) (.76) (.78) (.75)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $17.53 $17.03 $13.78 $15.08 $13.79 $13.06
==========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +9.36% +28.57% - 2.05% +15.41% +12.16% +27.32%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) . . . . . . $2,016 $1,593 $1,120 $1,003 $502 $265
Ratio of Expenses to Average Net Assets . . . . . .48%* .49% .50% .49% .52% .44%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 4.00%* 4.41% 3.68% 4.07% 4.95% 5.28%
Portfolio Turnover Rate . . . . . . . . . . . . . 57%* 34% 51% 31% 18% 44%
Average Commission Rate Paid . . . . . . . . . . $.0099+ N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by
the total number of shares purchased or sold on which commissions were
charged. This disclosure is required by the SEC beginning in 1996.
13
<PAGE> 14
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 each 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 redeeming 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.
14
<PAGE> 15
B. Under the terms of a contract which expires January 15, 1998, the Fund
pays Mellon Capital Management Corporation an advisory fee calculated at an
annual percentage rate of average net assets. The basic fee thus computed is
subject to quarterly adjustments based on performance relative to the Standard
& Poor's 500 Stock Index. For the six months ended March 31, 1996, the advisory
fee represented an effective annual rate of .14 of 1% of average net assets,
before a decrease of $157,000 (an annual rate of .02 of 1%) based on
performance. The base fee reflects a fee waiver of $69,000 (an annual rate of
.01 of 1%).
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At March 31, 1996, the Fund had contributed capital of $214,000 to
Vanguard (included in Other Assets), representing 1.1% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
D. During the six months ended March 31, 1996, the Fund made purchases of
$200,742,000 and sales of $7,013,000 of investment securities other than U.S.
Government securities and temporary cash investments. Purchases and sales of
U.S. Government securities were $627,990,000 and $314,486,000, respectively.
E. At March 31, 1996, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $242,862,000, of which $260,717,000
related to appreciated securities and $17,855,000 related to depreciated
securities.
At March 31, 1996, the aggregate settlement value of open Standard & Poor's 500
Index futures contracts expiring through September 1996, the related unrealized
appreciation, and the market value of U.S. Treasury bills deposited as initial
margin for those contracts were $362,002,000, $5,408,000, and $15,546,000
respectively.
F. The market value of securities on loan to broker/dealers at March 31,
1996, was $55,320,000 for which the Fund has received as collateral cash of
$36,326,000 and U.S. Treasury securities with a market value of $21,710,000.
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.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS TAX-EXEMPT INCOME FUNDS
Vanguard Admiral Funds Vanguard Municipal Bond Fund
U.S. Treasury Money Vanguard State Tax-Free Funds
Market Portfolio Insured Longer-Term Portfolios
Vanguard Money Market Reserves (CA, FL, NJ, NY, OH, PA)
TAX-EXEMPT MONEY MARKET FUNDS INCOME FUNDS
Vanguard Municipal Bond Fund Vanguard Admiral Funds
Money Market Portfolio Vanguard Fixed Income
Vanguard State Tax-Free Funds Securities Fund
Money Market Portfolios Vanguard Preferred Stock Fund
(CA, NJ, OH, PA)
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS Vanguard/Wellesley Income Fund
Vanguard Convertible Vanguard/Wellington Fund
Securities Fund GROWTH FUNDS
Vanguard Equity Income Fund Vanguard/Morgan Growth Fund
Vanguard Quantitative Portfolios Vanguard/PRIMECAP Fund
Vanguard Selected Value Portfolio Vanguard U.S. Growth Portfolio
Vanguard/Trustees' Equity Fund AGGRESSIVE GROWTH FUNDS
U.S. Portfolio Vanguard Explorer Fund
Vanguard/Windsor Fund Vanguard Horizon Fund
Vanguard/Windsor II Global Equity Portfolio
BALANCED FUNDS Global Asset Allocation Portfolio
Vanguard Asset Allocation Fund Capital Opportunity Portfolio
Vanguard LifeStrategy Funds Aggressive Growth Portfolio
Income Portfolio Vanguard Specialized Portfolios
Conservative Growth Portfolio INTERNATIONAL FUNDS
Moderate Growth Portfolio Vanguard International
Growth Portfolio Growth Portfolio
Vanguard STAR Portfolio Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust Vanguard International Equity
Total Stock Market Portfolio Index Fund
500 Portfolio European Portfolio
Extended Market Portfolio Pacific Portfolio
Growth Portfolio Emerging Markets Portfolio
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Portfolio Vanguard Balanced Index Fund
THE VANGUARD GROUP
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
This Report has been prepared for shareholders and may be
distributed to others only if preceded or accompanied
by a current prospectus. All Funds in the Vanguard
Family are offered by prospectus only.
Q782-3/96
VANGUARD
ASSET
ALLOCATION
FUND
SEMI-ANNUAL REPORT
MARCH 31, 1996
