<PAGE> 1
VANGUARD
ASSET ALLOCATION
FUND
Semiannual Report
March 31, 1997
[THE VANGUARD GROUP LOGO]
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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; 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.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Adviser
6
Performance
Summary
7
Financial
Statements
8
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
<PAGE> 3
[PHOTO]
FELLOW SHAREHOLDER,
Vanguard Asset Allocation Fund, benefiting from a tilt toward common stocks
in a continuing bull market, provided a solid total return of +7.9% during the
six months ended March 31, 1997, the first half of our fiscal year. While the
stock market chalked up another strong return, bond returns during the period
were lackluster because of a moderate increase in interest rates.
As you know, the Fund may hold three classes of financial assets in its
allocation strategy: common stocks (as represented by the unmanaged Standard &
Poor's 500 Composite Stock Price Index), long-term U.S. Treasury bonds, and cash
reserves. A portfolio equally divided among the three classes would have
provided a total return (capital change plus reinvested dividends) of +5.2%
during the half-year. The adjacent table compares our six-month return with
those of the average asset allocation fund and the three asset classes. The
Fund's total return is based on net asset values of $18.27 per share on
September 30, 1996, and $18.13 per share on March 31, 1997, adjusted for the
reinvestment of a semiannual dividend of $0.52 per share from net investment
income and a distribution of $1.05 per share from net realized capital gains.
<TABLE>
<CAPTION>
- --------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
MARCH 31, 1997
- --------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund + 7.9%
- --------------------------------------------------
Average Asset Allocation Fund + 5.0%
- --------------------------------------------------
S&P 500 Index +11.2%
Long-Term U.S. Treasury Bonds + 1.4
90-Day U.S. Treasury Bills + 3.1
- --------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
Financial markets provided a bumpy ride during the six months ended March 31.
Stocks rose sharply in October and November, fell in December, then rocketed to
record highs in January and the first half of February. In the final six weeks
of the period, however, the stock market gave back most of its gains from the
preceding six weeks. Rising interest rates--and the fear that further rate
increases were to come--were the apparent culprit in the stock market's retreat.
The bond market shared in the volatility. The yield on the benchmark
30-year U.S. Treasury bond started the period on a downward path, falling from
6.92% on September 30, 1996, to 6.35% on November 30. But from there, the long
bond's yield rose steadily, ending the six-month period at 7.10%. Partly
responsible for the increase was the Federal Reserve Board's decision to raise
short-term interest rates by 25 basis points (0.25%).
Our investment adviser, Mellon Capital Management, made only marginal
changes in the Fund's allocation of assets during the six-month period. But
those changes modestly enhanced the Fund's return in comparison with our neutral
position of 60% stocks and 40% bonds. The Fund entered the period with a 60%
stocks/40% bonds allocation. As bond prices rose and bond yields fell, the
allocation was changed to 70% stocks/30% bonds on December 5. But after bond
yields rebounded, the asset mix returned to 60/40 on March 26.
The marginal shifts in allocations made during the period are
representative of the Fund's strategy, which is based on rigorous adherence to
Mellon Capital Management's
1
<PAGE> 4
asset allocation model. The model tends to signal gradual, modest shifts in
allocations rather than sudden shifts entirely out of one asset class and into
another.
Another hallmark of the Fund is its reliance on three "plain vanilla" asset
classes: common stocks as represented by the S&P 500 Index, long-term Treasury
bonds, and cash reserves. This focus on broad asset classes means that, although
we bear the risks of those asset classes, we run essentially no risk of making
poor selections of individual securities.
Our relatively conservative strategy has served your Fund well. While the
Fund's balanced structure and investment policies do not eliminate the
possibility of negative returns--indeed, we expect negative returns from time to
time--during our nearly nine-year history they have enabled us to provide not
only a strongly positive return, but a return that was well in excess of those
achieved by mutual funds with similar investment objectives.
We regularly suggest that individual investors "stay the course" toward
their objectives with investment programs appropriately balanced among stocks,
bonds, and cash reserves. Vanguard Asset Allocation Fund will do the same,
maintaining a balance among the three asset classes in our effort to achieve
strong long-term returns while moderating short-term risk. We look forward to
reporting to you in further detail six months hence in our 1997 Annual Report.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
April 16, 1997
2
<PAGE> 5
INVESTMENT ADVISORY AGREEMENT REVISED
The Board of Directors of Vanguard Asset Allocation Fund has agreed with Mellon
Capital Management Corporation, the Fund's investment adviser, to revise the
Fund's investment advisory agreement. The revised agreement changes the
benchmark used to determine adjustments to the advisory fee paid to Mellon
Capital.
Previously, the fee's incentive increases or penalty decreases were based
on the Fund's investment performance in relation to the Standard & Poor's 500
Composite Stock Price Index. In the future, adjustments to the advisory fee will
be based on the Fund's performance in relation to a composite blend consisting
of 65% of the return on the S&P 500 Index and 35% of the return on the Lehman
Brothers Long-Term U.S. Treasury Index (the "Composite Index").
The Fund pays Mellon Capital a basic fee at the end of each fiscal quarter.
The fee is calculated by applying a quarterly rate, based on the annual rates
shown at right, to the Fund's average month-end assets for the quarter. This fee
may be adjusted up or down by applying an adjustment formula based on the Fund's
performance in comparison with that of the Composite Index. The fee payment will
be increased (or decreased) by 0.05% of average net assets if the Fund's
cumulative total return for the 36 months preceding the end of the quarter is at
least six percentage points above (or below) the cumulative total return of the
Composite Index for the same period.
<TABLE>
<CAPTION>
- --------------------------------
NET ASSETS RATE
- --------------------------------
<S> <C>
First $100 million 0.200%
Next $900 million 0.150
Next $500 million 0.125
Over $1.5 billion 0.100
- --------------------------------
</TABLE>
Vanguard proposed the change because the new benchmark provides a better
representation of the Fund's historical asset allocation and of the risks that
Fund shareholders are likely to encounter over time. The change to this
performance benchmark will be phased in over 36 months, beginning April 1, 1997.
The revised agreement, to be dated July 1, 1997, replaces the Fund's advisory
agreement dated April 1, 1996.
RELATED INFORMATION CONCERNING MELLON CAPITAL MANAGEMENT
Mellon Capital Management Corporation, located at 595 Market Street, Suite 3000,
San Francisco, CA 94105, is a wholly owned subsidiary of MBC Investment
Corporation, which itself is a wholly owned subsidiary of Mellon Bank
Corporation. Mellon Capital is a professional counseling firm that manages
diversified stock and bond portfolios for institutional clients. As of December
31, 1996, Mellon Capital provided investment advisory services to 218 clients
and managed approximately $50 billion in assets. Mellon Capital's asset
allocation strategy--developed by its cofounder, William L. Fouse, in 1972--is
used by 84 of its clients and accounts for approximately $14 billion of the
assets the firm manages. During the fiscal year ended September 30, 1996, the
Fund paid Mellon Capital investment advisory fees of approximately $2,691,000
(before a decrease of $515,000 based on performance).
3
<PAGE> 6
[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MARCH 31, 1997
U.S. EQUITY MARKETS
Three key ingredients continued to provide the foundation for the U.S. stock
market's solid performance during the past six months: moderate economic growth,
quiescent inflation, and solid increases in corporate profits. Concern grew that
continued economic expansion could lead to higher inflation, although as of the
period's end there was no confirmed sign that inflation had increased. The
result has been an erratic upward drift in interest rates amid continued strong
returns from domestic equities.
Those strong returns have, however, been concentrated in the shares of
large companies. The Standard & Poor's 500 Composite Stock Price Index, for
example, gained 11.2% over the six-month period, compared to a -0.2% loss for
the Russell 2000 Index. Larger companies have outperformed their
smaller-capitalization counterparts fairly consistently since the end of 1993.
There are a variety of theories as to why, including better earnings growth,
greater productivity, and more foreign sales for the biggest firms.
The recent gap in performance between large and small is particularly
noticeable in two sectors: technology and health care. Over the past six months,
technology issues in the S&P 500 Index have gained 15.0% while those in the
Russell 2000 Index have dropped -15.3%. In health care, the S&P's holdings
gained 9.7%, compared to a decline of -11.9% in the Russell 2000 Index. Within
these sectors, the larger companies' dominant products and the predictable
earnings they generate appear to be the primary difference.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED MARCH 31, 1997
-----------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 11.2% 19.8% 16.4%
Russell 2000 Index -0.2 5.1 12.8
MSCI-EAFE Index 0.1 1.8 10.9
- -------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 2.4% 4.9% 7.2%
Lehman 10-Year Municipal
Bond Index 2.8 5.2 7.5
Salomon 90-Day U.S. Treasury Bills 3.1 5.2 4.4
- -------------------------------------------------------------------
OTHER
Consumer Price Index 1.4% 2.8% 2.8%
- -------------------------------------------------------------------
</TABLE>
*Average annual.
Financial-service firms, by contrast, have generally fared well regardless
of size, with gains of 16.6% in the S&P 500 Index and 13.2% in the Russell 2000
Index since September. The strength of the economy, which helps to keep bad-debt
levels at a minimum, and the overall growth of consumer credit have helped these
stocks greatly. It's worth noting, however, that financial services was the
S&P's worst-performing sector (-7.1%) during March's -4.1% decline. This
weakness reflects concern that the Federal Reserve's recent interest rate
increase may lead to narrower profit margins for lenders.
U.S. FIXED-INCOME MARKETS
The erratic rise in interest rates during the past six months reflected rising
and falling expectations regarding economic growth and inflation. During October
and November,
4
<PAGE> 7
investors seemed to expect a slowing of growth, and the 10-year U.S. Treasury's
yield declined from 6.70% to 6.04% at the end of November. The same note's yield
then rose to 6.67% in late January, riding a perception that growth was markedly
stronger than analysts had expected, only to fall to 6.26% in mid-February. Then
the consensus shifted once again, and renewed expectations of higher inflation
pushed the 10-year's yield to 6.90% at the end of March.
There is a simple explanation for this interest rate seesaw. Many investors
consider it a paradox that the economy has continued to expand at a robust pace
accompanied by strong job growth and low unemployment--but no increase in
inflation. Bond investors have therefore been particularly sensitive to economic
reports that might reveal inflation to be creeping up at last. The data have
been variable, tilting the consensus back and forth between expectations of
higher or continued stable inflation rates. The past six months have witnessed
several such shifts, culminating in the Federal Reserve's decision to increase
its target federal funds rate from 5.25% to 5.50% on March 25, due to concerns
about strong growth in demand across the economy.
The net result for bond investors has been mediocre returns. The 2.4%
generated by the Lehman Brothers Aggregate Bond Index over the past six months,
for example, consists of an income return of 3.4% and a capital decline of
- -1.0%, reflecting the modest increase in interest rates. During this period,
investors who favored shorter-maturity and higher-quality issues achieved
somewhat better returns. Mortgage-backed securities performed well on a relative
basis, as higher rates led to fewer mortgage refinancings. Municipal issues also
tended to perform better than their taxable counterparts.
INTERNATIONAL EQUITY MARKETS
With the dollar strengthening by 8% to 13% against most major currencies, U.S.
investors who held foreign equities faced a headwind during the past six months.
(The major exception was the pound sterling, which appreciated 5% against the
dollar.) The Morgan Stanley Capital International-Europe, Australasia, Far East
Index gained a mere 0.1% in dollar terms, while in local terms the return was
6.7%. Those who favored Europe over the Pacific region did not feel the pain as
much, due to the strong (21.0%) return generated by the local markets. For U.S.
investors, European markets provided 15.1%. The strength of the European markets
can be attributed to several factors, including (1) ongoing efforts to lower
government deficits consistent with the Maastricht Treaty guidelines, (2)
improving economic growth, and (3) a greater commitment by corporate executives
to increasing "shareholder value."
Investors with a focus in the Pacific markets were less fortunate, as the
aggregate return for this region was -9.4% in local currency and -16.3% in
dollars. The primary source of the weakness was Japan, whose market fell -13.2%,
producing a -21.9% drop for dollar-based investors. Despite positive news,
including reports of growth in exports, lower inventories, and higher industrial
production, the focus in the Japanese market has been the poor quality of many
banks' balance sheets and the likely effects of an increase in the consumption
tax.
5
<PAGE> 8
[PHOTO]
REPORT FROM THE ADVISER
Vanguard Asset Allocation Fund had a total return (capital change plus
reinvested dividends) of 7.9% for the six months ended March 31, 1997, the first
half of our fiscal year. By comparison, the Standard & Poor's 500 Composite
Stock Price Index had a total return of 11.2% and the Lehman Brothers Long-Term
U.S. Treasury Index provided a return of 1.4%.
Early in the fiscal year, which began October 1, 1996, economic data were
indicating that the economy was cooling off. With inflation remaining in check
and monetary policy on hold, both the stock and bond markets prospered during
October and November. Then--while economic data continued to indicate that the
economy was growing at a moderate and sustainable pace--investor confidence was
shaken early in December by the comments of Federal Reserve Board chairman Alan
Greenspan regarding "irrational exuberance" in the financial markets.
Consequently, both markets pulled back a bit in late December.
The equity market subsequently jumped by 7% in the first two months of 1997
only to fall by -4% in March. Bond yields rose on investors' increased fears of
inflation and in anticipation of action by the Federal Reserve. Finally, at the
end of March, the Federal Reserve tightened monetary policy as a preemptive
strike against inflation.
Vanguard Asset Allocation Fund, which had increased its allocation to bonds
late in September 1996, left its asset mix at 60% stocks and 40% bonds through
October and November. As the bond market rallied during those months, yields
correspondingly fell. With these reduced yields, the asset allocation model
began to signal that a reallocation from bonds to equities was in order. Hence,
the asset mix of the Fund was changed to 70% stocks and 30% bonds in early
December. The model continued to recommend this 70/30 mix into the early months
of calendar 1997.
Despite expectations of higher corporate earnings, a positive factor for
stocks, the increase in bond yields during the second quarter of our fiscal year
made bonds more attractive relative to equities. During March, the asset
allocation model began to recommend selling a portion of the Fund's equities
and purchasing bonds with the proceeds. By late March, the signal was strong
enough to warrant a shift in the Fund's actual mix to 60% stocks and 40% bonds,
a step we took on March 26.
William L. Fouse, CFA
Mellon Capital Management Corporation
April 9, 1997
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.
6
<PAGE> 9
PERFORMANCE SUMMARY
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.
ASSET ALLOCATION FUND
TOTAL INVESTMENT RETURNS: NOVEMBER 3, 1988-MARCH 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------
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
1997* 5.0 2.9 7.9 11.2
- --------------------------------------------
</TABLE>
*Six months ended March 31, 1997.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund 11/3/88 13.76% 14.26% 9.65% 4.55% 14.20%
- ------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
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>
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MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (44.5%)**
- -------------------------------------------------------------------------
General Electric Co. 353,300 $ 35,065
The Coca-Cola Co. 533,400 29,804
Exxon Corp. 265,800 28,640
Intel Corp. 176,000 24,464
- - Microsoft Corp. 256,000 23,456
Merck & Co., Inc. 260,100 21,913
Royal Dutch Petroleum Co. ADR 114,800 20,090
Philip Morris Cos., Inc. 175,000 19,972
Procter & Gamble Co. 146,622 16,861
International Business
Machines Corp. 112,600 15,468
Johnson & Johnson 285,100 15,075
Wal-Mart Stores, Inc. 490,900 13,684
E.I. du Pont de Nemours & Co. 120,000 12,720
Bristol-Myers Squibb Co. 214,680 12,666
AT&T Corp. 345,284 11,999
American International
Group, Inc. 100,505 11,797
Hewlett-Packard Co. 218,700 11,646
Pfizer, Inc. 137,500 11,567
Citicorp 102,504 11,096
Mobil Corp. 84,300 11,012
PepsiCo, Inc. 335,000 10,929
The Walt Disney Co. 145,200 10,600
Chevron Corp. 139,600 9,720
GTE Corp. 207,000 9,651
Eli Lilly & Co. 117,000 9,623
Abbott Laboratories 166,900 9,367
NationsBank Corp. 167,934 9,299
Amoco Corp. 106,400 9,217
BellSouth Corp. 212,700 8,987
General Motors Corp. 161,731 8,956
Chase Manhattan Corp. 93,461 8,750
Fannie Mae 233,700 8,442
Gillette Co. 115,000 8,352
American Home Products Corp. 136,100 8,166
Ford Motor Co. 253,200 7,944
BankAmerica Corp. 77,051 7,763
Motorola, Inc. 126,800 7,655
Minnesota Mining &
Manufacturing Co. 89,700 7,580
The Boeing Co. 76,493 7,544
Ameritech Corp. 117,500 7,226
Lucent Technologies, Inc. 134,574 7,099
McDonald's Corp. 149,600 7,069
SBC Communications Inc. 130,200 6,852
- - Cisco Systems, Inc. 138,600 6,670
Travelers Group Inc. 137,096 6,563
Unilever NV ADR 34,300 6,388
Texaco Inc. 56,500 6,187
American Express Co. 101,445 6,074
Kimberly-Clark Corp. 60,246 5,987
Schering-Plough Corp. 79,100 5,754
Bell Atlantic Corp. 93,700 5,704
Wells Fargo & Co. 19,981 5,677
Allstate Corp. 95,277 5,657
Schlumberger Ltd. 52,400 5,620
Home Depot, Inc. 102,600 5,489
Eastman Kodak Co. 72,000 5,463
- - Oracle Corp. 140,000 5,390
Time Warner, Inc. 121,700 5,263
MCI Communications Corp. 147,100 5,222
Warner-Lambert Co. 57,900 5,008
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
Columbia/HCA Healthcare Corp. 143,445 $ 4,823
Monsanto Co. 125,400 4,796
First Union Corp. 59,048 4,790
Chrysler Corp. 155,780 4,673
Atlantic Richfield Co. 34,500 4,657
Campbell Soup Co. 99,200 4,600
Anheuser-Busch Cos., Inc. 106,114 4,470
- - Compaq Computer Corp. 57,600 4,414
AlliedSignal Inc. 60,600 4,318
Emerson Electric Co. 95,800 4,311
NYNEX Corp. 93,900 4,284
Sara Lee Corp. 103,900 4,208
Sears, Roebuck & Co. 83,700 4,206
Sprint Corp. 92,200 4,195
Dow Chemical Co. 52,350 4,188
Federal Home Loan
Mortgage Corp. 152,800 4,164
Pharmacia & Upjohn, Inc. 108,790 3,984
Xerox Corp. 69,448 3,950
United Technologies Corp. 52,100 3,920
J.P. Morgan & Co., Inc. 39,842 3,914
- - WorldCom, Inc. 175,700 3,843
Nike, Inc. Class B 61,400 3,807
Banc One Corp. 92,862 3,691
Norwest Corp. 79,200 3,663
First Chicago NBD Corp. 67,665 3,662
Northern Telecom Ltd. 55,200 3,609
Lockheed Martin Corp. 42,641 3,582
US WEST Communications
Group 102,230 3,476
Pacific Telesis Group 91,700 3,462
Caterpillar, Inc. 41,100 3,298
First Data Corp. 95,800 3,245
Fleet Financial Group, Inc. 56,377 3,228
WMX Technologies Inc. 105,000 3,216
Medtronic, Inc. 51,100 3,181
- - Amgen, Inc. 56,600 3,163
Colgate-Palmolive Co. 31,500 3,138
H.J. Heinz Co. 79,000 3,120
Merrill Lynch & Co., Inc. 35,900 3,083
The Seagram Co. Ltd. 80,200 3,068
Southern Co. 144,200 3,046
Kellogg Co. 45,200 3,040
The Bank of New York Co., Inc. 82,600 3,035
Texas Instruments, Inc. 40,500 3,032
Rockwell International Corp. 46,700 3,030
Computer Associates
International, Inc. 77,900 3,028
Union Pacific Corp. 52,200 2,962
PNC Bank Corp. 72,900 2,916
ConAgra, Inc. 52,000 2,821
McDonnell Douglas Corp. 46,000 2,806
Aetna Inc. 32,306 2,774
General Re Corp. 17,000 2,686
- - Dell Computer 38,600 2,610
Automatic Data Processing, Inc. 62,000 2,596
Gannett Co., Inc. 30,200 2,593
CPC International, Inc. 30,900 2,534
- - Viacom International Inc. Class B 76,200 2,524
Aluminum Co. of America 37,100 2,523
Baxter International, Inc. 58,200 2,510
International Paper Co. 64,200 2,496
- - U S WEST Media Group 133,730 2,491
- - AirTouch Communications, Inc. 106,900 2,459
Dean Witter Discover & Co. 70,040 2,443
May Department Stores Co. 53,400 2,430
Burlington Northern Santa Fe Corp. 32,732 2,422
Deere & Co. 55,200 2,401
KeyCorp 49,100 2,394
CIGNA Corp. 16,300 2,382
Westinghouse Electric Corp. 133,600 2,371
- - Boston Scientific Corp. 37,800 2,334
Phillips Petroleum Co. 56,300 2,301
J.C. Penney Co., Inc. 48,200 2,296
Norfolk Southern Corp. 26,800 2,285
Raytheon Co. 50,400 2,274
- - Sun Microsystems, Inc. 78,700 2,263
CoreStates Financial Corp. 47,509 2,257
SunTrust Banks, Inc. 47,700 2,212
National City Corp. 47,391 2,210
Walgreen Co. 52,700 2,207
First Bank System, Inc. 30,000 2,190
Corning, Inc. 49,100 2,179
Bank of Boston Corp. 32,501 2,178
Loews Corp. 24,500 2,177
PPG Industries, Inc. 39,800 2,149
Illinois Tool Works, Inc. 26,200 2,139
General Mills, Inc. 34,000 2,112
Edison International 93,700 2,108
CSX Corp. 45,300 2,106
PG&E Corp. 88,900 2,089
Archer-Daniels-Midland Co. 116,804 2,088
Enron Corp. 54,300 2,063
The Gap, Inc. 61,300 2,053
- - Seagate Technology 45,500 2,042
Unocal Corp. 53,139 2,026
Mellon Bank Corp. 27,700 2,015
The Chubb Corp. 37,300 2,009
MBNA Corp. 71,400 1,990
Wachovia Corp. 35,600 1,940
Dayton-Hudson Corp. 46,209 1,929
Barnett Banks, Inc. 41,200 1,916
Duke Power Co. 43,200 1,906
Morgan Stanley Group, Inc. 32,400 1,903
Weyerhaeuser Co. 42,400 1,892
United Healthcare Corp. 39,300 1,872
Pitney Bowes, Inc. 31,700 1,862
Honeywell, Inc. 27,200 1,846
American Brands, Inc. 36,400 1,843
Albertson's, Inc. 53,900 1,833
Barrick Gold Corp. 76,400 1,814
Textron, Inc. 17,200 1,806
- - CUC International, Inc. 80,250 1,806
ITT Hartford Group, Inc. 25,000 1,803
Micron Technology Inc. 44,500 1,802
Tyco International Ltd. 32,700 1,798
Household International, Inc. 20,703 1,783
American General Corp. 43,700 1,781
- - Applied Materials, Inc. 38,400 1,776
Ralston-Ralston Purina Group 22,600 1,766
- - EMC Corp. 49,600 1,761
U.S. Bancorp 32,850 1,757
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
Fifth Third Bancorp 22,600 $ 1,751
Marsh & McLennan Cos., Inc. 15,400 1,744
The Goodyear Tire & Rubber Co. 33,300 1,740
FPL Group, Inc. 39,100 1,725
Conrail, Inc. 15,204 1,714
USX-Marathon Group 61,400 1,712
Occidental Petroleum Corp. 69,200 1,704
Halliburton Co. 25,100 1,701
- - Tele-Communications, Inc.
Class A 140,000 1,680
American Electric Power Co., Inc. 40,000 1,650
Texas Utilities Co. 47,966 1,643
Alcan Aluminium Ltd. 48,450 1,641
Hershey Foods Corp. 32,800 1,640
- - Toys R Us, Inc. 58,500 1,638
Air Products & Chemicals, Inc. 23,800 1,615
AMP, Inc. 46,844 1,610
- - AMR Corp. 19,400 1,600
- - Tenet Healthcare Corp. 63,400 1,561
- - HFS Inc. 26,400 1,554
Consolidated Edison Co. of
New York, Inc. 50,200 1,506
Service Corp. International 50,400 1,499
Praxair, Inc. 33,400 1,499
Williams Cos., Inc. 33,600 1,495
Avon Products, Inc. 28,400 1,491
ITT Corp. 25,000 1,472
- - Federated Department Stores 44,400 1,460
Wrigley, (Wm.) Jr. Co. 24,800 1,448
Union Pacific Resources
Group, Inc. 53,422 1,429
Tenneco, Inc. 36,500 1,423
TRW, Inc. 27,500 1,423
Aon Corp. 23,100 1,415
Crown Cork & Seal Co., Inc. 27,400 1,415
Georgia-Pacific Corp. 19,500 1,414
Delta Air Lines, Inc. 16,700 1,405
Bankers Trust New York Corp. 17,100 1,402
Mattel, Inc. 58,387 1,401
PanEnergy Corp. 32,345 1,395
American Stores Co. 31,200 1,388
Dominion Resources, Inc. 38,150 1,388
Lowe's Cos., Inc. 36,900 1,379
- - Tellabs, Inc. 38,100 1,372
Comerica, Inc. 24,300 1,370
Public Service Enterprise
Group Inc. 52,100 1,368
The Kroger Co. 26,900 1,365
Marriott International 27,400 1,363
PacifiCorp 63,000 1,347
Sysco Corp. 38,800 1,324
ALLTEL Corp. 40,500 1,316
Browning-Ferris Industries, Inc. 45,500 1,314
- - Advanced Micro Devices, Inc. 31,200 1,295
- - HEALTHSOUTH Corp. 67,200 1,285
Morton International, Inc. 30,400 1,284
Dover Corp. 24,400 1,281
Hilton Hotels Corp. 52,700 1,278
- - Federal Express Corp. 24,400 1,272
Freeport-McMoRan Copper &
Gold Inc. Class B 41,700 1,267
TransAmerica Corp. 14,100 1,262
- - Kmart Corp. 104,000 1,261
The Clorox Co. 11,000 1,233
Masco Corp. 34,400 1,230
Union Carbide Corp. 27,700 1,226
Genuine Parts Co. 25,900 1,208
Times Mirror Co. Class A 21,900 1,196
Entergy Corp. 48,800 1,196
Lincoln National Corp. 22,300 1,193
Becton, Dickinson & Co. 26,500 1,192
Baker Hughes, Inc. 30,800 1,182
Comcast Corp. Class A Special 70,000 1,181
- - 3Com Corp. 36,200 1,181
Great Western Financial Corp. 29,216 1,180
Carolina Power & Light Co. 32,400 1,175
Inco Ltd. 35,898 1,171
Eaton Corp. 16,500 1,169
Conseco Co., Inc. 32,600 1,161
St. Paul Cos., Inc. 17,900 1,161
Dresser Industries, Inc. 38,300 1,159
- - Costco Cos., Inc. 41,856 1,156
CINergy Corp. 33,718 1,151
Houston Industries, Inc. 55,100 1,150
Burlington Resources, Inc. 26,800 1,146
R.R. Donnelley & Sons Co. 32,700 1,140
Newell Co. 34,000 1,139
UNUM Corp. 15,600 1,139
Salomon, Inc. 22,600 1,127
Coastal Corp. 23,350 1,121
UST Inc. 40,100 1,118
Pioneer Hi-Bred International, Inc. 17,600 1,107
Rite Aid Corp. 26,300 1,105
The McGraw-Hill Cos. 21,300 1,089
SAFECO Corp. 26,900 1,076
Providian Corp. 20,000 1,070
Winn-Dixie Stores, Inc. 32,400 1,069
The Limited, Inc. 57,895 1,064
The Quaker Oats Co. 29,100 1,062
Tribune Co. 26,200 1,061
Cognizant Corp. 36,400 1,060
Amerada Hess Corp. 20,000 1,060
Consolidated Natural Gas Co. 20,800 1,048
Allegheny Teledyne Inc. 37,110 1,044
CVS Corp. 22,600 1,042
Republic New York Corp. 11,800 1,040
International Flavors &
Fragrances, Inc. 23,700 1,037
Rohm & Haas Co. 13,800 1,033
Sherwin-Williams Co. 38,000 1,026
Phelps Dodge Corp. 14,000 1,024
Ingersoll-Rand Co. 23,300 1,016
Cooper Industries, Inc. 23,157 1,004
Sonat, Inc. 18,400 1,003
Green Tree Financial Corp. 29,400 992
- - Computer Sciences Corp. 16,000 988
Guidant Corp. 15,900 978
PECO Energy Corp. 47,500 968
Hercules, Inc. 22,800 963
Central & South West Corp. 44,900 960
- - Cabletron Systems, Inc. 32,800 959
- - LSI Logic Corp. 27,500 956
Interpublic Group of Cos., Inc. 18,100 955
Fluor Corp. 17,900 940
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
General Dynamics Corp. 13,900 $ 937
Laidlaw Inc. Class B 68,100 936
IKON Office Solutions 27,900 935
Champion International Corp. 20,500 933
Northrop Grumman Corp. 12,300 930
Placer Dome, Inc. 51,100 926
The Dun & Bradstreet Corp. 36,400 924
New York Times Co. Class A 20,800 918
- - Digital Equipment Corp. 33,300 912
VF Corp. 13,514 904
Eastman Chemical 16,750 900
Unicom Corp. 46,000 897
MGIC Investment Corp. 12,600 891
W.R. Grace & Co. 18,800 891
Torchmark Corp. 16,000 886
MBIA, Inc. 9,200 882
Baltimore Gas & Electric Co. 32,750 876
Avery Dennison Corp. 22,400 862
Nucor Corp. 18,700 856
Dow Jones & Co., Inc. 20,700 841
Reynolds Metals Co. 13,500 837
W.W. Grainger, Inc. 11,300 836
DTE Energy Co. 31,100 836
H.F. Ahmanson & Co. 22,800 832
Jefferson-Pilot Corp. 15,200 827
GPU Inc. 25,700 826
Newmont Mining Corp. 21,246 823
Knight-Ridder, Inc. 20,400 813
- - National Semiconductor Corp. 29,500 811
Union Electric Co. 21,800 804
Dillard Department Stores Class A 25,200 794
Rubbermaid, Inc. 31,900 794
Whirlpool Corp. 16,600 791
Case Corp. 15,500 787
Raychem Corp. 9,500 783
Thermo Electron Corp. 25,100 775
Golden West Financial Corp. 12,300 772
- - Humana, Inc. 34,600 761
The Stanley Works 20,000 758
Beneficial Corp. 11,700 756
Hasbro, Inc. 27,600 756
- - Silicon Graphics, Inc. 38,146 744
Johnson Controls, Inc. 9,200 741
Willamette Industries, Inc. 11,800 738
PP&L Resources Inc. 36,200 733
Brown-Forman Corp. Class B 15,200 726
Harcourt General, Inc. 15,563 724
- - Bay Networks Inc. 40,400 722
Circuit City Stores, Inc. 21,500 718
Ohio Edison Co. 33,900 716
- - Western Atlas Inc. 11,800 715
Dana Corp. 21,700 713
- - Novell, Inc. 75,300 711
- - Fruit of the Loom, Inc. 17,100 710
TJX Cos., Inc. 16,400 701
Parker Hannifin Corp. 16,350 699
Nordstrom, Inc. 18,300 693
Union Camp Corp. 14,700 693
Northern States Power Co. 14,600 692
- - Woolworth Corp. 29,500 690
- - Andrew Corp. 19,275 689
Columbia Gas Systems, Inc. 11,800 683
Southwest Airlines Co. 30,800 681
Liz Claiborne, Inc. 15,600 681
Sigma-Aldrich Corp. 22,200 680
Engelhard Corp. 32,250 677
Harris Corp. 8,800 677
- - General Instrument Corp. 28,700 657
Mallinckrodt, Inc. 15,900 654
Temple-Inland Inc. 12,400 651
H & R Block, Inc. 22,100 649
Kerr-McGee Corp. 10,400 644
Tandy Corp. 12,532 628
Perkin-Elmer Corp. 9,700 624
Great Lakes Chemical Corp. 13,500 621
Black & Decker Corp. 18,700 601
Ashland Inc. 14,700 592
Pall Corp. 25,566 591
Wendy's International, Inc. 28,600 590
Deluxe Corp. 18,200 589
ITT Industries, Inc. 26,300 588
The Mead Corp. 11,100 588
Brunswick Corp. 21,500 578
Paccar, Inc. 8,670 577
- - St. Jude Medical, Inc. 17,200 574
Nalco Chemical Co. 15,300 572
Whitman Corp. 23,300 571
Westvaco Corp. 22,500 565
Pacific Enterprises 18,500 560
Armstrong World Industries Inc. 8,600 557
USF&G Corp. 25,800 555
Reebok International Ltd. 12,300 552
Snap-On Inc. 14,050 544
Ecolab, Inc. 14,200 540
James River Corp. 18,400 536
Pennzoil Co. 10,200 528
American Greetings Corp. Class A 16,500 524
- - Ceridian Corp. 14,600 524
- - DSC Communications Corp. 25,000 522
Bausch & Lomb, Inc. 13,000 514
Ryder System, Inc. 17,500 512
Harnischfeger Industries Inc. 11,000 512
- - ALZA Corp. 18,400 506
USX-U.S. Steel Group 18,940 504
- - Apple Computer, Inc. 27,600 504
- - AutoZone, Inc. 22,100 497
- - FMC Corp. 8,100 496
Cyprus Amax Minerals Co. 20,711 492
Santa Fe Pacific Gold Corp. 29,537 487
Maytag Corp. 23,500 485
Louisiana-Pacific Corp. 23,200 481
Homestake Mining Co. 31,200 472
SuperValu Inc. 15,600 464
Bemis Co., Inc. 11,600 464
Cummins Engine Co., Inc. 9,000 461
Echlin, Inc. 13,300 452
Owens Corning 11,100 447
Tupperware Corp. 13,300 446
Moore Corp. Ltd. 22,100 442
Biomet, Inc. 25,600 432
National Service Industries, Inc. 11,000 430
Giant Food, Inc. Class A 13,300 426
The BF Goodrich Co. 11,600 425
- - Oryx Energy Co. 22,000 424
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
- - Rowan Cos., Inc. 18,700 $ 423
Frontier Corp. 23,500 420
General Signal Corp. 10,700 419
Allergan, Inc. 14,200 414
Polaroid Corp. 10,362 412
Pep Boys (Manny, Moe & Jack) 13,700 411
NorAm Energy Corp. 28,000 410
Sun Co., Inc. 15,667 409
United States Surgical Corp. 12,900 393
Millipore Corp. 9,200 390
Tektronix, Inc. 7,700 389
- - Harrah's Entertainment, Inc. 22,700 389
Worthington Industries, Inc. 20,150 385
Thomas & Betts Corp. 8,900 380
Mercantile Stores Co., Inc. 8,200 380
NICOR, Inc. 11,600 371
The Timken Co. 6,900 369
C.R. Bard, Inc. 12,800 365
USLIFE Corp. 7,675 359
Louisiana Land & Exploration Co. 7,400 351
Cooper Tire & Rubber Co. 18,500 342
Battle Mountain Gold Co. Class A 51,400 341
Manor Care Inc. 13,900 339
Alberto-Culver Co. Class B 12,600 329
- - US Airways Group Inc. 13,400 328
Boise Cascade Corp. 10,700 326
Autodesk, Inc. 10,400 322
- - Beverly Enterprises, Inc. 22,600 322
Crane Co. 10,225 321
Russell Corp. 8,900 318
Foster Wheeler Corp. 8,700 308
ENSERCH Corp. 15,000 308
- - Tandem Computers, Inc. 25,600 304
- - King World Productions, Inc. 8,300 303
Meredith Corp. 12,400 287
Briggs & Stratton Corp. 6,300 283
Darden Restaurants Inc. 35,600 280
- - Santa Fe Energy Resources, Inc. 20,071 278
- - Niagara Mohawk Power Corp. 31,900 271
Potlatch Corp. 6,500 267
ASARCO, Inc. 9,400 264
Scientific-Atlanta, Inc. 16,800 256
Peoples Energy Corp. 7,700 255
Helmerich & Payne, Inc. 5,500 254
McDermott International, Inc. 11,900 254
- - Amdahl Corp. 26,100 245
- - Unisys Corp. 38,200 244
Centex Corp. 6,900 243
Shared Medical Systems Corp. 5,100 237
Stone Container Corp. 20,810 232
Caliber System Inc. 8,700 231
Jostens Inc. 9,600 217
Longs Drug Stores, Inc. 9,200 216
Great Atlantic & Pacific Tea
Co., Inc. 8,500 216
Trinova Corp. 6,400 214
EG & G, Inc. 10,100 211
Echo Bay Mines Ltd. 30,800 204
- - Bethlehem Steel Corp. 24,500 202
Inland Steel Industries, Inc. 10,100 197
Fleetwood Enterprises, Inc. 7,775 194
Safety-Kleen Corp. 12,800 189
Springs Industries Inc. Class A 4,100 183
Adolph Coors Co. Class B 8,400 175
Ball Corp. 6,600 175
Pulte Corp. 5,900 173
Stride Rite Corp. 10,900 164
- - Data General Corp. 9,500 162
John H. Harland Co. 6,800 162
ONEOK, Inc. 6,000 156
- - Navistar International Corp. 16,580 155
Cincinnati Milacron, Inc. 7,800 146
Fleming Cos., Inc. 8,300 145
Eastern Enterprises 4,500 139
- - Charming Shoppes, Inc. 23,000 124
Giddings & Lewis, Inc. 7,600 111
Kaufman & Broad Home Corp. 7,500 99
Armco, Inc. 23,300 93
- - Intergraph Corp. 10,200 79
NACCO Industries, Inc. Class A 860 42
- -------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $858,220) 1,241,029
- -------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (39.4%)
- -------------------------------------------------------------------------
U.S. TREASURY BONDS
6.00%, 2/15/26 $ 71,500 61,177
6.25%, 8/15/23 53,725 47,605
6.875%, 8/15/25 46,500 44,684
7.125%, 2/15/23 48,405 47,823
7.25%, 5/15/16 22,650 22,753
7.25%, 8/15/22 21,500 21,533
7.50%, 11/15/16 36,170 37,227
7.50%, 11/15/24 28,190 29,146
7.625%, 11/15/22 41,120 42,990
7.625%, 2/15/25 39,550 41,521
8.00%, 11/15/21 41,780 45,396
8.125%, 8/15/19 23,610 25,905
8.125%, 5/15/21 53,145 58,468
8.125%, 8/15/21 44,860 49,367
8.50%, 2/15/20 13,300 15,158
8.75%, 5/15/17 23,500 27,271
8.75%, 5/15/20 65,670 76,721
8.75%, 8/15/20 21,530 25,167
8.875%, 8/15/17 24,320 28,561
8.875%, 2/15/19 39,995 47,150
9.125%, 5/15/18 49,060 59,056
9.25%, 2/15/16 10,375 12,541
10.375%, 11/15/09 13,500 16,107
10.375%, 11/15/12 12,300 15,250
10.625%, 8/15/15 25,860 34,822
11.25%, 2/15/15 21,770 30,610
11.75%, 11/15/14 23,465 32,382
12.00%, 8/15/13 32,800 45,095
12.50%, 8/15/14 5,000 7,168
12.75%, 11/15/10 15,140 20,640
13.875%, 5/15/11 14,000 20,355
14.00%, 11/15/11 5,400 7,993
- -------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $1,129,601) 1,097,642
- -------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (24.8%)
- -------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILLS--Note E
5.09%, 6/19/97 $ 21,860 $ 21,610
5.28%, 9/18/97 7,020 6,842
COMMERCIAL PAPER
Cargill Inc.
5.30%, 4/14/97 25,000 24,942
Daimler-Benz North
America Corp.
5.38%, 7/8/97 29,560 29,101
Eli Lilly & Co.
5.30%, 6/12/97 29,700 29,363
International Lease Finance Corp.
5.30%, 6/9/97 30,000 29,671
Repsol International Finance
5.36%, 7/9/97 30,000 29,529
Warner Lambert Co.
5.30%, 6/9/97 29,400 29,080
Xerox Credit Corp.
5.32%, 6/13/97 32,440 32,064
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97 460,518 460,518
- -------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $692,888) 692,720
- -------------------------------------------------------------------------
TOTAL INVESTMENTS (108.7%)
(COST $2,680,709) 3,031,391
- -------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-8.7%)
- -------------------------------------------------------------------------
Other Assets--Notes C and F 75,088
Payables for Investment Securities Purchase (253,389)
Other Liabilities--Note F (65,382)
-----------
(243,683)
- -------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------
Applicable to 153,720,054 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $2,787,708
=========================================================================
NET ASSET VALUE PER SHARE $18.13
=========================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**The combined market value of common stocks and
S&P 500 Index futures contracts represents 59.1% of
net assets. See Note E in Notes to Financial Statements.
-Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $2,364,453 $15.38
Undistributed Net
Investment Income 23,385 .15
Accumulated Net
Realized Gains 67,748 .44
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 350,682 2.28
Futures Contracts (18,560) (.12)
- -------------------------------------------------------------------------
NET ASSETS $2,787,708 $18.13
=========================================================================
</TABLE>
13
<PAGE> 16
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
SIX MONTHS ENDED MARCH 31, 1997
(000)
- ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 10,797
Interest 47,516
---------
Total Income 58,313
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,680
Performance Adjustment (419)
The Vanguard Group--Note C
Management and Administrative 4,353
Marketing and Distribution 328
Taxes (other than income taxes) 94
Custodian Fees 36
Auditing Fees 10
Shareholders' Reports 41
Annual Meeting and Proxy Costs 7
Directors' Fees and Expenses 3
---------
Total Expenses 6,133
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 52,180
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 6,530
Futures Contracts 87,308
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN 93,838
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 66,846
Futures Contracts (28,336)
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 38,510
- ----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $184,528
========================================================================================
</TABLE>
14
<PAGE> 17
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
------------------------------------
SIX MONTHS YEAR
ENDED ENDED
MAR. 31, 1997 SEP. 30, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 52,180 $ 82,386
Realized Net Gain 93,838 130,567
Change in Unrealized Appreciation (Depreciation) 38,510 57,983
---------------------------------
Net Increase in Net Assets Resulting from Operations 184,528 270,936
---------------------------------
DISTRIBUTIONS
Net Investment Income (68,246) (68,953)
Realized Capital Gain (137,804) (59,350)
---------------------------------
Total Distributions (206,050) (128,303)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 452,388 814,326
Issued in Lieu of Cash Distributions 198,267 121,514
Redeemed (182,610) (330,667)
---------------------------------
Net Increase from Capital Share Transactions 468,045 605,173
- -------------------------------------------------------------------------------------------------
Total Increase 446,523 747,806
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,341,185 1,593,379
---------------------------------
End of Period $2,787,708 $2,341,185
=================================================================================================
(1)Shares Issued (Redeemed)
Issued 24,291 46,473
Issued in Lieu of Cash Distributions 11,058 7,051
Redeemed (9,791) (18,936)
---------------------------------
Net Increase in Shares Outstanding 25,558 34,588
=================================================================================================
</TABLE>
15
<PAGE> 18
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 SIX MONTHS ENDED ----------------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $18.27 $17.03 $13.78 $15.08 $13.79 $13.06
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .36 .69 .64 .52 .54 .61
Net Realized and Unrealized Gain (Loss)
on Investments 1.07 1.82 3.18 (.81) 1.51 .90
-----------------------------------------------------------------------
Total from Investment Operations 1.43 2.51 3.82 (.29) 2.05 1.51
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.52) (.66) (.57) (.48) (.59) (.59)
Distributions from Realized Capital Gains (1.05) (.61) -- (.53) (.17) (.19)
-----------------------------------------------------------------------
Total Distributions (1.57) (1.27) (.57) (1.01) (.76) (.78)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.13 $18.27 $17.03 $13.78 $15.08 $13.79
==============================================================================================================================
TOTAL RETURN 7.92% 15.27% 28.57% -2.05% 15.41% 12.16%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,788 $2,341 $1,593 $1,120 $1,003 $502
Ratio of Total Expenses to
Average Net Assets 0.47%* 0.47% 0.49% 0.50% 0.49% 0.52%
Ratio of Net Investment Income to
Average Net Assets 3.98%* 4.17% 4.41% 3.68% 4.07% 4.95%
Portfolio Turnover Rate 23%* 47% 34% 51% 31% 18%
Average Commission Rate Paid $.0049 $.0160 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Asset Allocation Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to 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. 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 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. Mellon Capital Management Corporation provides investment advisory services
to the Fund for a 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 Index. For the six months ended March 31, 1997, the
advisory fee represented an effective annual basic rate of 0.13% of the Fund's
average net assets before a decrease of $419,000 (an annual rate of 0.03%) based
on performance.
17
<PAGE> 20
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 March 31, 1997,
the Fund had contributed capital of $233,000 to Vanguard (included in Other
Assets), representing 1.2% of Vanguard's capitalization. The Fund's directors
and officers are also directors and officers of Vanguard.
D. During the six months ended March 31, 1997, the Fund purchased $335,710,000
of investment securities and sold $4,178,000 of investment securities, not
counting U.S. government securities and temporary cash investments. Purchases
and sales of U.S. government securities were $429,607,000 and $226,233,000,
respectively.
E. At March 31, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $350,682,000, consisting
of unrealized gains of $394,445,000 on securities that had risen in value since
their purchase and $43,763,000 in unrealized losses on securities that had
fallen in value since their purchase.
At March 31, 1997, the aggregate settlement value of open S&P 500 Index
futures contracts expiring through September 1997, the unrealized depreciation
on those contracts, and the market value of U.S. Treasury bills deposited as
initial margin for those contracts were $407,796,000, $18,560,000, and
$28,452,000, respectively.
F. The market value of securities on loan to broker/dealers at March 31, 1997,
was $154,200,000, for which the Fund had received as collateral cash of
$44,654,000 and U.S. Treasury securities with a market value of $114,878,000.
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.
18
<PAGE> 21
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.
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.; Trustee Emerita of Wellesley
College.
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
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 22
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 Treasury Money Market Portfolio
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)
Q782-3/97
