<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-23444) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
[X]
POST-EFFECTIVE AMENDMENT NO. 11
[X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 14
[X]
VANGUARD ASSET ALLOCATION FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is proposed that this filing become effective
pursuant to paragraph (b) of Rule 485
(acceleration of the effective date to January 17, 1997 has been requested).
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant filed
its Rule 24(f )(2) for the year ended September 30, 1996, on November 27,
1996.
===============================================================================
<PAGE>
VANGUARD ASSET ALLOCATION FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<S> <C> <C>
Item 1. Cover Page.......................................... Cover Page
Item 2. Synopsis............................................ Not Applicable
Item 3. Condensed Financial Information..................... Financial Highlights; Performance Record
Item 4. General Description................................. Investment Objective; Investment Policies,
Investment Risks; Investment Limitations;
General Information
Item 5. Management of the Fund.............................. Management of the Fund; Investment
Adviser
Item 6. Capital Stock and Other Securities.................. Opening an Account and Purchasing Shares;
Selling Your Shares; The Fund's Share Price;
Dividends, Capital Gains and Taxes; General
Information
Item 7. Purchase of Securities Being Offered................ Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase............................ Selling Your Shares
Item 9. Pending Legal Proceedings........................... Not Applicable
Form N-1A Location in Statement
Item Number of Additional Information
Item 10. Cover Page.......................................... Cover Page
Item 11. Table of Contents................................... Cover Page
Item 12. General Information and History..................... Management of the Fund
Item 13. Investment Objective and Policies................... Investment Limitations; Description of U.S.
Government Securities; Description of
Repurchase Agreements; Futures Contracts
Item 14. Management of the Fund ............................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities......................................... Management of the Fund
Item 16. Investment Advisory and Other Services............. Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation .............................. Not Applicable
Item 18. Capital Stock and Other Securities ................ General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered........................... Purchase of Shares; Redemption of Shares
Item 20. Tax Status......................................... Not Applicable
Item 21. Underwriters....................................... Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund........................................ Not Applicable
Item 23. Financial Statements............................... Financial Statements
</TABLE>
<PAGE>
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A Member of The Vanguard Group
===============================================================================
PROSPECTUS -- January 17, 1997
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NEW ACCOUNT INFORMATION: Investor Information Department--1-800-662-7447 (SHIP)
- -------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: Client Services Department--1-800-662-2739 (CREW)
- -------------------------------------------------------------------------------
INVESTMENT Vanguard Asset Allocation Fund, Inc. (the "Fund") is an
OBJECTIVE & open-end diversified investment company that seeks to
POLICIES maximize total return (i.e., capital change plus income).
The Fund invests in common stocks, bonds and money market
instruments in proportions consistent with their expected
returns and risks as evaluated by the Fund's adviser. The
Fund should not be considered a complete investment program.
There is no assurance that the Fund will achieve its stated
objective. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
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OPENING AN To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need
assistance in completing this Form, please call our Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment is $3,000 or $1,000 for Uniform
Gifts/Transfers to Minors Act accounts. The Fund is offered
on a no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, the Fund incurs expenses for
investment advisory, management, administrative and
distribution services.
- -------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. Such Statement is dated
January 17, 1997 and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to the Fund or by calling the Investor Information
Department.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <S> <C> <S> <C>
Fund Expenses....................... 2 Implementation of Policies ............. 7 SHAREHOLDER GUIDE
Financial Highlights................ 2 Investment Limitations ................. 9 Opening an Account and
Yield and Total Return.............. 3 Management of the Fund ................. 9 Purchasing Shares............. 15
FUND INFORMATION Investment Adviser ..................... 10 When Your Account Will Be
Investment Objective................ 4 Performance Record ..................... 11 Credited..................... 18
Investment Policies................. 4 Dividends, Capital Gains and Selling Your Shares............. 18
Investment Risks ................... 5 Taxes................................. 12 Exchanging Your Shares ......... 20
Who Should Invest .................. 6 The Share Price of the Fund............. 13 Important Information About
General Information .................... 14 Telephone Transactions........ 22
Transferring Registration ...... 23
Other Vanguard Services ........ 23
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- ------------------------------------------------------------------------------
<PAGE>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1996 fiscal
year.
Shareholder Transaction Expenses
------------------------------------------------------------
Sales Load Imposed on Purchases .............. None
Sales Load Imposed on Reinvested Dividends ... None
Redemption Fees .............................. None
Exchange Fees ................................ None
Annual Fund Operating Expenses
------------------------------------------------------------
Management & Administrative Expenses 0.32%
Investment Advisory Fees ........... 0.11
12b-1 Fees ......................... None
Other Expenses
Distribution Costs ................. 0.02%
Miscellaneous Expenses ............. 0.02
------
Total Other Expenses ............... 0.04
-------
Total Operating Expenses ....... 0.47%
=======
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above, the
Fund charges no redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $15 $26 $59
This example should not be considered a representation of
past or future expenses or performance. Actual expenses may
be higher or lower than those shown.
- -------------------------------------------------------------------------------
FINANCIAL The following financial highlights information, for a share
HIGHLIGHTS outstanding throughout each period, insofar as it relates to
each of the five years in the period ended September 30,
1996, has been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial
statements and notes thereto, which, together with the
remaining portions of the Fund's 1996 Annual Report to
Shareholders, are incorporated by reference in the Statement
of Additional Information and this Prospectus, and which
appear, along with the report of Price Waterhouse LLP, in
the Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 Annual Report to Shareholders, which may be
obtained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------- Nov. 3, 1988+ to
1996 1995 1994 1993 1992 1991 1990 Sept. 30, 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.03 $13.78 $15.08 $13.79 $13.06 $10.93 $12.11 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Investment Operations
Net Investment Income ............ .69 .64 .52 .54 .61 .60 .60 .46
Net Realized and Unrealized Gain
(Loss) on Investments ......... 1.82 3.18 (.81) 1.51 .90 2.28 (1.12) 1.90
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations 2.51 3.82 (.29) 2.05 1.51 2.88 (.52) 2.36
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment
Income ........................ (.66) (.57) (.48) (.59) (.59) (.62) (.51) (.25)
Distributions from Realized
Capital Gains ................. (.61) -- (.53) (.17) (.19) (.13) (.15) --
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions ............. (1.27) (.57) (1.01) (.76) (.78) (.75) (.66) (.25)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period ..... $18.27 $17.03 $13.78 $15.08 $13.79 $13.06 $10.93 $12.11
===================================================================================================================================
Total Return ....................... 15.27% 28.57% (2.05)% 15.41% 12.16% 27.32% (4.57)% 23.93%
===================================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $2,341 $1,593 $1,120 $1,003 $ 502 $ 265 $ 160 $ 107
Ratio of Expenses to Average Net
Assets ........................... 0.47% 0.49% 0.50% 0.49% 0.52% 0.44% 0.50% 0.49%*
Ratio of Net Investment Income to
Average Net Assets ............... 4.17% 4.41% 3.68% 4.07% 4.95% 5.28% 5.53% 5.53%*
Portfolio Turnover Rate ............ 47% 34% 51% 31% 18% 44% 12% 52%
Average Commission Rate Paid ....... $.0160 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
* Annualized.
+Commencement of operations.
- -------------------------------------------------------------------------------
YIELD AND TOTAL From time to time the Fund may advertise its yield and total
RETURN return. Both yield and total return figures are based on
historical earnings and are not intended to indicate future
performance. The "total return" of the Fund refers to the
average annual compounded rates of return over one-, five-
and ten-year periods or for the life of the Fund (which
periods will be stated in the advertisement) that would
equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of
the Fund is calculated by dividing the net investment income
per share earned during a 30-day period by the net asset
value per share on the last day of the period. Net
investment income includes interest and dividend income
earned on the Fund's securities; it is net of all expenses
and all recurring and nonrecurring charges that have been
applied to all shareholder accounts. The yield calculation
assumes that the net investment income earned over thirty
days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by the
Fund to maintain its books and records, and so the
advertised thirty-day yield may not fully reflect the income
paid to an investor's account. Additionally, the Fund may
compare its performance to that of the Standard & Poor's 500
Composite Stock Price Index.
- -------------------------------------------------------------------------------
3
<PAGE>
INVESTMENT The objective of the Fund is to maximize total return
OBJECTIVE (i.e., capital change plus income) while exhibiting less
investment risk than a portfolio consisting entirely of
The Fund seeks to common stocks. There is no assurance that the Fund will
maximize total achieve its stated objective.
return
- -------------------------------------------------------------------------------
INVESTMENT
POLICIES
The Fund invests The Fund will allocate its assets among a common stock
in stocks, bonds portfolio, a bond portfolio, and money market instruments.
and money market The Fund's adviser, Mellon Capital Management, allocates the
instruments in Fund's assets among stocks, bonds and money market
varying instruments in proportions which reflect the anticipated
proportions returns and risks of each asset class. The estimates of
return and risk are developed based upon the adviser's
disciplined valuation methodology. There are no limitations
on the amount of the Fund's assets which may be allocated to
each of the three asset classes (stocks, bonds and money
market instruments). The Fund is managed without regard to
tax ramifications.
In estimating the relative attractiveness of each asset
class, the adviser takes into account various factors. Common
stocks are evaluated using a "dividend- discount" model. This
model provides an estimate of the expected return of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index") based upon earnings forecasts for companies whose
stocks are included in the S&P 500 Index. The expected bond
return is the current yield-to-maturity of long-term U.S.
Treasury bonds, while the return on money market instruments
reflects the current yield on three-month U.S. Treasury bills
and long-term inflation forecasts.
Once expected return and volatility (risk) estimates are
developed for each asset class, the adviser attempts to
identify apparent imbalances in the relative pricing of
common stocks, bonds and money market instruments, using a
computer model. Implicit in the adviser's approach is the
belief that such short-term imbalances occur periodically but
tend to be corrected fairly quickly. The Fund's allocation
among the three asset classes is then structured to take
advantage of these perceived imbalances.
To implement a particular allocation strategy, the Fund may
invest in the following securities: a diversified portfolio
of common stocks selected by the adviser to parallel the
performance of the S&P 500 Index; long-term U.S. Treasury
bonds with maturities generally in excess of 20 years; and
selected money market instruments, including repurchase
agreements. The Fund may also invest in futures contracts on
stock indexes and bonds. See "Implementation of Policies" for
a description of the securities in which the Fund invests and
other investment practices of the Fund.
The Fund is responsible for voting the shares of all
securities it holds.
The investment objective and policies of the Fund are not
fundamental and so may be changed by the Board of Directors
without shareholder approval. However, shareholders would be
notified prior to a material change in either.
- -------------------------------------------------------------------------------
4
<PAGE>
INVESTMENT RISKS Depending on the adviser's allocation of the Fund's assets
The Fund is among stocks, bonds and cash reserves, investors in the Fund
subject to stock may be exposed to the market risk of common stocks and bonds.
and bond market
risk Stock market risk is the possibility that stock prices in
general will decline over short or even extended periods. The
stock market tends to be cyclical, with periods when stock
prices generally rise and periods when stock prices generally
decline. To illustrate the volatility of domestic stock
prices, the following table sets forth the extremes for U.S.
stock market returns as well as the average return for the
period from 1926 to 1995, as measured by the Standard &
Poor's 500 Composite Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 -0.9 +3.1
Average +12.5 +10.3 +10.7 +10.7
As shown, from 1926 to 1995, U.S. common stocks as measured
by the Index provided an average annual total return (capital
appreciation plus dividend income) for 10 years, of +10.7%.
Average return may not be useful for forecasting future
returns in any particular period, as stock returns are quite
volatile from year to year.
Bond market risk is the potential for fluctuations in the
market value of bonds. Bond prices vary inversely with
changes in the level of interest rates. When interest rates
rise, the prices of bonds fall; conversely, when interest
rates fall, bond prices rise. While bonds normally fluctuate
less in price than stocks, there have been extended periods
of cyclical increases in interest rates that have caused
significant declines in bond prices. For example, long-term
bond prices fell 48% from December 1976 to September 1981.
The risk of bonds declining in value, however, may be offset
in whole or in part by the higher level of income that bonds
provide.
While the Fund invests in stocks, bonds and money market
instruments in varying proportions, investors should not
construe the Fund as a balanced investment program offering
relatively stable allocations among these asset classes.
Because the allocation strategy of the adviser may, at
certain times, result in a portfolio with a primary emphasis
on common stocks, the Fund may from time to time exhibit a
level of volatility which is more consistent with a common
stock portfolio than a balanced portfolio. However, under
normal circumstances, the volatility of the Fund's total
return is expected to be less than that of a common stock
portfolio, as represented, for example, by the S&P 500 Index.
5
<PAGE>
The adviser may Investors should also be aware that the investment results of
fail to the Fund depend upon the adviser's ability to anticipate
anticipate market correctly the relative performance and risk of stocks, bonds
advances or and money market instruments. Historical evidence indicates
declines that correctly timing portfolio allocations among these asset
classes has been an extremely difficult strategy to implement
successfully. While the adviser has substantial experience in
asset allocation, there can be no assurance that the adviser
will correctly anticipate relative asset class performance in
the future on a consistent basis. The Fund's short-term
investment results would suffer, for example, if only a small
portion of the Fund's assets were allocated to stocks during
a significant stock market advance, or if a major portion of
its assets were allocated to stocks during a market decline.
Similarly, the Fund's short-term investment results would
also suffer if the Fund were substantially invested in bonds
at a time when interest rates increased.
WHO SHOULD The Fund is designed for investors seeking maximum total
INVEST return through an investment vehicle which provides an
actively managed mix of stocks, bonds and money market
Long-term instruments. Because the Fund can and may have a large
investors percentage of its portfolio invested in common stocks,
seeking investors in the Fund should be willing to accept the risk of
maximum total an all-stock portfolio, including the potential for sudden,
return sometimes substantial declines in market value.
Due to the risks associated with common stock and bond
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term stock and bond
market movements. Investors who engage in excessive account
activity generate additional costs which are borne by all of
the Fund's shareholders. In order to minimize such costs the
Fund has adopted the following policies. The Fund reserves
the right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund has
adopted exchange privilege limitations as described in the
section "Exchange Privilege Limitations." Finally, the Fund
reserves the right to suspend the offering of its shares.
No assurance can be given that the Fund will achieve its
objective or that shareholders will be protected from the
risk of loss that is inherent in equity investing. Also,
there can be no guarantee that the adviser will correctly
anticipate fluctuations in the stock and bond markets in its
effort to maximize total return while minimizing risk.
The Fund should be considered part of a well-rounded
investment program and not its sole component. Investors may
wish to reduce the potential risk of investing in the Fund by
purchasing shares on a regular, periodic basis (dollar-cost
averaging) rather than making an investment in one lump sum.
- -------------------------------------------------------------------------------
6
<PAGE>
IMPLEMENTATION In an effort to maximize its total investment return, the
OF Fund utilizes a number of investment practices.
POLICIES
The Fund may The Fund invests in stocks, bonds and money market
invest in stocks, instruments in varying proportions. For common stocks, the
bonds and Fund will invest in a diversified portfolio of common stocks
money market selected to parallel the investment performance of the S&P
instruments 500 Index. The Fund may also invest in stock index futures
and options to a limited extent, as described below.
Bond investments for the Fund will consist of long-term U.S.
Treasury bonds (those with maturities generally in excess of
20 years) and, as described below, futures contracts and
options on such bonds. As part of its bond portfolio, the
Fund may also invest in other long-term "full faith and
credit" obligations of the U.S. Government.
The money market instruments held by the Fund will have an
average weighted maturity of less than 90 days. Money market
instruments may include obligations of the United States
Government and its agencies and instrumentalities; commercial
paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by
these securities.
A repurchase agreement is a means of investing monies for a
short period. In a repurchase agreement, a seller -- a U.S.
commercial bank or recognized U.S. securities dealer -- sells
securities to the Fund and agrees to repurchase the
securities at the Fund's cost plus interest within a
specified period (normally one day). In these transactions,
the securities purchased by the Fund will have a total value
equal to, or in excess of, the value of the repurchase
agreement, and will be held by the Fund's Custodian Bank
until repurchased.
The Fund may lend The Fund may lend its investment securities to qualified
its securities institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of securities
by the Fund will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities.
The Fund may The Fund may borrow money, subject to the limitations set
borrow money forth below, for temporary or emergency purposes, including
under unusual the meeting of redemption requests which might otherwise
circumstances require selling securities at a loss.
Portfolio turnover Due to the active asset allocation approach employed by the
may be high Fund, the Fund's portfolio turnover rate may be high,
approximately 100% per year. A 100% portfolio turnover rate
would occur, for example, if all of the Fund's securities
were replaced within one year. Further, in order to comply
with the "short-short" test of the Internal Revenue Service,
it may be necessary for the Fund to modify its investment
strategy and refrain from securities sales that it would
otherwise make. Under the IRS's "short-short" test, a mutual
fund must not receive more than 30% of its gross income from
gains realized on securities held for less than 90 days.
7
<PAGE>
Derivative Derivatives are instruments whose values are linked to or
Investing derived from an underlying security or index. The most common
and conventional types of derivative securities are futures
and options.
The Fund may use The Fund may utilize stock and bond futures contracts and
futures contracts options to a limited extent. Specifically, the Fund may enter
and options into futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options only to the extent that obligations under such
contracts or transactions represent not more than 50% of the
Fund's assets. However, under unusual circumstances, the Fund
may maintain futures positions that are equivalent in value
to up to 100% of the Fund's assets, so that the Fund may
remain effectively fully invested in proportions consistent
with the adviser's current asset allocation strategy.
Futures contracts and options may be used for several
reasons: to reallocate the Fund's assets among stocks, bonds
and money market instruments while minimizing transaction
costs; to maintain cash reserves while simulating full
investment; to facilitate trading; or to seek higher
investment returns when a futures contract is priced more
attractively than the underlying security or index.
For example, in order to reallocate 10% of the Fund's assets
from stocks to bonds while minimizing transaction costs, the
adviser may sell stock index futures and purchase bond
futures. Because the transaction costs of futures contracts
and options may be lower than the costs of investing in
stocks or bonds directly, it is expected that the use of
futures contracts and options may reduce the Fund's total
transaction costs. Also, because futures contracts only
require a small initial margin deposit, the Fund would then
be able to simultaneously maintain a cash reserve for
potential redemptions and simulate full investment. In the
event of net redemptions from the Fund, sufficient futures
contracts would be sold to avoid any leveraging of the Fund's
assets.
Futures contracts The primary risks associated with the use of futures
and options pose contracts and options are: (i) imperfect correlation between
certain risks the change in market value of the securities held by the Fund
and the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of the
Fund's underlying securities. The risk that the Fund will be
unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with
an active and liquid secondary market. While futures
contracts and options can be used as leveraged instruments,
the Fund may not use futures contracts or options to leverage
its net assets.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate
8
<PAGE>
and substantial loss (or gain) to the investor. When
investing in futures contracts, the Fund will segregate cash
or other liquid portfolio securities in the amount of the
underlying obligation.
INVESTMENT The Fund has adopted certain in an attempt to reduce its
LIMITATIONS exposure to specific situations. Some of these limitations
are that the Fund will not:
The Fund has (a) with respect to 75% of the value of its total assets,
adopted certain purchase the securities of any issuer (except obligations of
fundamental the United States government and its instrumentalities) if as
limitations a result the Fund would hold more than 10% of the outstanding
voting securities of the issuer, or more than 5% of the value
of the Fund's total assets would be invested in the
securities of such issuer;
(b) invest more than 25% of its assets in any one industry;
(c) borrow money except from banks (or through reverse
repurchase agreements) for temporary or emergency purposes
(not leveraging), and then only in an amount not in excess of
15% of the value of the Fund's net assets at the time the
borrowing is made. Whenever borrowing exceeds 5% of the value
of the Fund's assets, the Fund will not make any additional
investments; and
(d) pledge, mortgage or hypothecate any of its assets to an
extent greater than 5% of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The investment
limitations described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
- -------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment
THE FUND Companies, a family of more than 30 investment companies with
more than 90 distinct investment portfolios and total assets
Vanguard in excess of $230 billion. Through their jointly-owned
administers and subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
distributes the and the other funds in the Group obtain at cost virtually all
Fund of their corporate management, administrative and
distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1995, the average expense
ratio (annual costs including advisory fees divided by
average net assets) for the Vanguard funds amounted to
approximately .31% compared to an average of 1.11% for the
mutual fund industry (data provided by Lipper Analytical
Services).
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays a share of Vanguard's total expenses, which are
allocated among the funds under methods approved by the Board
of Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
9
<PAGE>
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of Directors and Officers of the Fund and a
statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard provides distribution and marketing services to the
funds. However, each fund bears its share of the Group's
distribution costs.
- -------------------------------------------------------------------------------
INVESTMENT The Fund employs Mellon Capital Management Corporation, 595
ADVISER Market St., Suite 3000, San Francisco, CA 94105, as its
investment adviser. Under an investment advisory agreement
Mellon Capital dated January 15, 1996, the adviser manages the investment
Management and reinvestment of the assets of the Fund and continuously
manages the reviews, supervises and administers the Fund's investment
Fund's program. The adviser discharges its responsibilities subject
investments to the control of the Officers and Directors of the Fund.
The adviser is a professional counseling firm which manages
well-diversified stock and bond portfolios for institutional
clients. As of September 30, 1996 the adviser provided
investment advisory services to 212 clients and managed
assets with an approximate value of $46.4 billion. The
adviser's asset allocation strategy was developed by the
adviser's co-founder, William Fouse, in 1972, and is used by
84 of its clients and accounts for approximately $13.6
billion of the assets that it manages. For its asset
allocation clients, including the Fund, the adviser employs a
proprietary asset allocation model in managing client
investment portfolios and an indexing approach in selecting
individual equity securities. The Fund is one of the
adviser's two investment company clients.
The adviser was founded in October 1983 by William Fouse and
Thomas Loeb. They have been responsible for overseeing the
implementation of the firm's strategy for the Fund since the
Fund's inception in 1988. The adviser is a wholly-owned
subsidiary of MBC Investment Corporation, which itself is a
subsidiary of Mellon Bank Corporation.
The Fund pays the adviser a basic fee at the end of each
fiscal quarter, calculated by applying a quarterly rate,
based on the following annual percentage rates, to the Fund's
average month-end net assets for the quarter:
Net Assets Rate
---------- ----
First $100 million .200%
Next $900 million .150%
Next $500 million .125%
Over $1.5 billion .100%
This fee may be increased or decreased by applying an
adjustment formula based on the performance of the Fund
relative to the investment record of the S&P 500 Index. The
fee payment will be increased (decreased) by an incentive
(penalty) of 0.05% of average net assets if the Fund's
10
cumulative investment performance for the thirty-six months
preceding the end of the quarter is at least six percentage
points above (below) the cumulative investment record of the
S&P 500 Index for the same period. For the year ended
September 30, 1996, the investment advisory fee paid by the
Fund represented an effective annual rate of .14 of 1% of
average net assets, before a decrease of .03 of 1% based on
performance.
The investment advisory agreement authorizes the adviser to
select brokers or dealers to execute purchases and sales of
the Fund's portfolio securities, and directs the adviser to
use its best efforts to obtain the best available price and
most favorable execution with respect to all transactions.
The full range and quality of brokerage services available
are considered in making these determinations.
The Fund has authorized the adviser to pay higher commissions
in recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, the Fund may place orders
with qualified broker-dealers who recommend the Fund to
clients if the Officers of the Fund believe that the quality
of the transaction and the commission are comparable to what
they would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser or
as an additional adviser; (b) a change in the terms of an
advisory agreement; and (c) the continued employment of an
existing adviser on the same advisory contract terms where a
contract has been assigned because of a change in control of
the adviser. Any such change will only be made upon not less
than 30 days prior written notice to shareholders of the Fund
which shall include substantially the information concerning
the adviser that would have normally been included in a proxy
statement.
- -------------------------------------------------------------------------------
PERFORMANCE The table below provides investment results for the Fund for
RECORD several periods throughout the Fund's lifetime. The results
shown represent "total return" investment performance, which
assumes the reinvestment of all capital gains and income
dividends for the indicated periods. Also included is
comparative information with respect to the unmanaged
Standard & Poor's 500 Composite Stock Price Index, a
widely-used barometer of stock market activity, and the
Consumer Price Index, a statistical measure of changes in the
prices of goods and services. The tables do not make any
allowance for federal, state or local income taxes, which
shareholders must pay on a current basis.
The results should not be considered a representation of the
total return from an investment made in the Fund today. This
information is provided to help investors better understand
the Fund and may not provide a basis for comparison with
other investments or mutual funds which use a different
method to calculate performance.
11
<PAGE>
AVERAGE ANNUAL RETURN FOR VANGUARD ASSET ALLOCATION FUND
Fiscal Periods Vanguard Asset S&P 500 Consumer
Ended 9/30/96 Allocation Fund Index Price Index
------------- --------------- ----- -----------
1 Year +15.3% +20.3% +2.8%
5 Years +13.4 +15.2 +2.8
Lifetime* +14.1 +15.5 --
* November 3, 1988, to September 30, 1996.
- -------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay dividends semi-annually from ordinary
CAPITAL GAINS income. Net capital gains distributions, if any, will be
AND TAXES distributed annually.
The Fund pays In addition, in order to satisfy certain distribution
sem-annual requirements of the Tax Reform Act of 1986, the Fund may
dividends and declare special year-end dividend and capital gains
any capital distributions during December. Such distributions, if
gains annually received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these distribution methods.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax to
the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income and net
short-term capital gains, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income and net short-term
capital gains will generally qualify in part for the
intercorporate dividends-received deduction. However, the
portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by the
Fund from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital gains,
whether received in cash or reinvested in additional shares,
are taxable as long-term capital gains, regardless of the
length of time you have owned shares in the Fund. Capital
gains distributions are made when the Fund realizes net
capital gains on sales of portfolio securities during the
year. The Fund does not seek to realize any particular amount
of capital gains during a year; rather, realized gains are a
by-product of portfolio management activities. Consequently,
capital gains distributions may be expected to vary
considerably from year to year; there will be no capital
gains distributions in years when the Fund realizes net
capital losses.
Note that if you accept capital gains distributions in cash,
instead of reinvesting them in additional shares, you are in
effect reducing the capital at work for you in the Fund.
12
<PAGE>
Also, keep in mind that if you purchase shares in the Fund
shortly before the record date for a dividend or capital
gains distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving
them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A capital gain A sale of shares of the Fund is a taxable event and may
or loss may result in a capital gain or loss. A capital gain or loss may
be realized upon be realized from an ordinary redemption of shares or an
exchange or exchange of shares between two mutual funds (or two
redemption portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may be
subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification Number
and by certifying that you are not subject to backup
withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Fund. The Fund is managed without regard to
tax ramifications.
- -------------------------------------------------------------------------------
THE SHARE PRICE The Fund's share price or "net asset value" per share is
OF THE FUND calculated by dividing the total assets of the Fund, less any
liabilities, by the total number of outstanding shares. The
net asset value is determined as of the close of the New York
Stock Exchange (generally, 4:00 p.m. Eastern time) on each
day that the Exchange is open for trading.
Common stocks that are listed on a securities exchange are
valued at the last quoted sales price on the day the
valuation is made. Price information on listed stocks is
taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange but which
are not traded on the valuation date are valued at the mean
of the bid and ask prices. Unlisted securities for which
market quotations are readily available are valued at the
latest quoted bid price. Bonds are valued at the latest bid
prices and on the basis of a matrix system (which considers
such factors as security prices, yields, maturities and
13
<PAGE>
ratings), both as furnished by independent pricing services.
Other assets and securities for which no quotations are
readily available are valued at fair value as determined in
good faith by the Directors. Securities may be valued on the
basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of such
securities. Pricing services do not always consider each
security's bid or last sale price when providing prices.
However, prices reflect significant (that is,
institutional-sized) transactions of similar securities as
well as any developments involving specific securities.
Instruments with remaining maturities of 60 days or less may
be valued at cost (that is, after adding or subtracting any
amortized discount or premium), which approximates market
value.
The Fund's share price can be found daily in the mutual fund
listings of most major newspapers under the heading of
Vanguard.
- -------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of
INFORMATION Incorporation permit the Directors to issue 1,000,000,000
shares of common stock, with a $.001 par value. The Board of
Directors has the power to designate one or more classes
("series") of shares of common stock and to classify or
reclassify any unissued shares with respect to such series.
Currently the Fund is offering one class of shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive rights.
Such shares have non-cumulative voting rights, meaning that
the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they
so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Fund if requested
in writing by the holders of not less than 10% of the
outstanding shares of the Fund.
All securities and cash are held by State Street Bank and
Trust Company, Boston, MA. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and audits its financial statements
annually. The Fund is not involved in any litigation.
- ------------------------------------------------------------------------------
14
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account
PURCHASING Registration Form and any required legal documentation,
SHARES indicating the amount you wish to invest. Your purchase must
be equal to or greater than the $3,000 minimum initial
investment requirement or $1,000 for Uniform Gifts/Transfers
to Minors Act accounts. You must open a new Individual
Retirement Account by mail (IRAs may not be opened by wire)
using a Vanguard IRA Adoption Agreement. Your purchase must
be equal to or greater than the $1,000 minimum initial
investment requirement, but no more than $2,000 if you are
making a regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past 60
days from an IRA or other qualified Retirement Plan. If you
need assistance with the forms or have any questions about
the Fund, please call our Investor Information Department at
1-800-662-7447. Note: For other types of account
registrations (e.g. corporations, associations, other
organizations, trusts or powers of attorney), please call us
to determine which additional forms you may need.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The Fund
is offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees).
Purchase 1) Because of the risks associated with common stock and bond
Restrictions investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Consequently, the Fund reserves the right to
reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check is
made payable to the Vanguard Group.
Additional Subsequent investments to regular accounts may be made by
Investments mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account, or Vanguard Fund Express.
Subsequent investments to Individual Retirement Accounts may
be made by mail ($100 minimum) or exchange from another
Vanguard Fund account. In some instances, contributions may
be made by wire or Vanguard Fund Express. Please call us for
more information on these options.
------------------------------------------------------------
15
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
<S> <C> <C>
Purchasing By Mail Please include the amount of your Additional investments should
Complete and sign the initial investment on the registration include the Invest-by-Mail
enclosed Account form. make your check payable to remittance form attached to
Registration Form The Vanguard Group-78 and mail to: your Fund confirmation
statements. Please make your
Vanguard Financial Center check payable to The Vanguard
P.O. Box 2600 Group-78, write your account
Valley Forge, PA 19482 number on your check and,
using the return envelope
provided, mail to the address
indicated on the
Invest-by-Mail Form.
For express Vanguard Financial Center All written requests should be
or registered mail, 455 Devon Park Drive mailed to one of the addresses
send to: Wayne, PA 19087 indicated for new accounts. Do not
send registered or express mail
to the post office box address.
----------------------------------------------------------------------------------
</TABLE>
Purchasing By Wire CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD ASSET ALLOCATION FUND
Before Wiring ACCOUNT NUMBER
ACCOUNT REGISTRATION
Please contact
Client Services
(1-800-662-2739)
To ensure proper receipt, please be sure your bank includes
the name of the Fund, the account number Vanguard has
assigned to you and the eight-digit CoreStates number. If you
are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address
after completing your wire arrangement. Note: Federal Funds
wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
------------------------------------------------------------
Purchasing By You may open an account or purchase additional shares by
Exchange (from a making an exchange from another Vanguard Fund account.
Vanguard account) However, the Fund reserves the right to refuse any exchange
purchase request. Call our Client Services Department toll-
free at 1-800-662-2739. The new account will have the same
registration as the existing account.
------------------------------------------------------------
Purchasing By The Fund Express Special Purchase option lets you move money
Fund Express from your bank account to your Vanguard account at your
request. Or if you choose the Automatic Investment option,
Special Purchase money will be moved from your bank account to your Vanguard
and Automatic account on the schedule (monthly, bimonthly [every other
Investment quarterly, semiannually or yearly) you select. To establish
16
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please wait
two weeks before using the service.
- -------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. Automatic Reinvestment Option -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected for
you unless you specify one of the other options.
2. Cash Dividend Option -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. All Cash Option -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800- 662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash
dividends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- -------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
Investors should net capital gains and dividend income to Fund shareholders.
ask about the These distributions are made to all shareholders who own Fund
timing of capital shares as of the distribution's record date, regardless of
gains and dividend how long the shares have been owned. Purchasing shares just
distributions prior to the record date could have a significant impact on
before investing your tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Fund shares for just a short period of time. (Taxes are due
on the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total value
of your investment will be the same after the distribution --
the amount of the distribution will offset the drop in the
net asset value of the shares -- you should be aware of the
tax implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's annual
capital gains distributions normally occur in December, while
income dividends are generally paid semi-annually in June and
December. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains and
Taxes."
- -------------------------------------------------------------------------------
17
<PAGE>
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. If you wish to add
Optional Services shareholder options later, you may need to provide Vanguard
with additional information and a signature guarantee. Please
call our Client Services Department (1-800-662-2739) for
further assistance.
Signature For our mutual protection, we may require a signature
Guarantees guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A signature
guarantee cannot be provided by a notary public.
Certificates Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace it.
Broker-Dealer If you purchase shares in Vanguard Funds through a registered
Purchases broker-dealer or investment adviser, the broker-dealer or
adviser may charge a service fee.
Cancelling Trades The Fund will not cancel any trade (e.g., a purchase,
exchange, or redemption) believed to be authentic, received
in writing or by telephone, once the trade has been received.
Electronic You may receive a prospectus for the Fund or any of the
Prospectus Vanguard Funds in an electronic format. Please call
Delivery 1-800-231-7870 for additional information, or see "Other
Vanguard Services-Computer Access." You may also receive a
paper copy of the prospectus, by calling 1-800-662-7447.
- -------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is
ACCOUNT WILL BE credited. If your purchase is made by check, Federal Funds
CREDITED wire, or exchange, and is received by the close of regular
trading on the New York Stock Exchange, (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your
trade date is the next business day. Your shares are
purchased at the net asset value determined on your trade
date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent bank.
The name of the U.S. correspondent bank must be printed on
the face of the foreign check.
- -------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time (please see "Important
Redemption Information"). You generally may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed within two business days after
the receipt of the request in Good Order.
------------------------------------------------------------
Selling By Mail Requests should be mailed to Vanguard Financial Center,
Vanguard Asset Allocation Fund, P.O. Box 1120, Valley Forge,
18
<PAGE>
PA 19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Asset Allocation Fund,
455 Devon Park Drive, Wayne, PA 19087.) The redemption price
of shares will be the Fund's net asset value next determined
after Vanguard has received all required documents in Good
Order.
------------------------------------------------------------
Definition of Good Order means that the request includes the following:
Good Order
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts and
certain other accounts.
6. Any certificates you hold for the account.
If you have questions about this definition as it pertains to
your request, please call our Client Services Department at
1-800-662-2739.
------------------------------------------------------------
Selling By To sell shares by telephone, you or your pre-authorized
Telephone representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
Please Note: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 15 calendar
days following any expedited address change to your account.
An expedited address change is one that is made by telephone,
by Vanguard Online or, in writing, without the signatures of
all account owners. Please see "Important Information About
Telephone Transactions."
------------------------------------------------------------
Selling By Fund If you select the Fund Express Automatic Withdrawal option,
Express money will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
have selected. The Special Redemption option lets you move
Automatic money from your Vanguard account to your bank account on your
Withdrawal request. You may elect Fund Express on the Account
& Special Registration Form or call our Investor Information Department
Redemption at 1-800-662-7447 for a Fund Express application.
------------------------------------------------------------
Selling By You may sell shares by making an exchange to another Vanguard
Exchange Fund account. Please see "Exchanging Your Shares" for
details.
------------------------------------------------------------
Important Shares purchased by check or Fund Express may be redeemed at
Redemption any time. However, your redemption proceeds will not be paid
Information until payment for the purchase is collected, which may take
up to ten calendar days.
------------------------------------------------------------
Delivery of Redemption requests received by telephone prior to the close
Redemption of regular trading on the New York Stock Exchange (generally,
Proceeds 4:00 p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
19
<PAGE>
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt. The Fund reserves the right
to revise or terminate the telephone redemption privilege at
any time.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order except as described in
"Important Redemption Information."
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good
Order.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
------------------------------------------------------------
Vanguard's If you make a redemption from a qualifying account, Vanguard
Average Cost will send you an Average Cost Statement which provides you
Statement with the cost and tax basis of the shares you redeemed.
Please see "Statements and Reports" for additional
information.
------------------------------------------------------------
Low Balance Fee Due to the relatively high cost of maintaining smaller
and Minimum accounts, the Fund will automatically deduct a $10 annual fee
Account Balance from non-retirement accounts with balances falling below
Requirement $2,500 ($500 for Uniform Gifts/Transfers to Minors Act
accounts). The fee generally will be waived for investors
whose aggregate Vanguard assets exceed $50,000. In addition,
the Fund reserves the right to liquidate any non-retirement
account that is below the minimum initial investment. In such
a case, you may be notified that the value of your account is
below the Fund's minimum account balance requirement. You
would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets (i.e., a
decline in a Portfolio's net asset value).
- -------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Asset Allocation Fund for those of other
available Vanguard Funds.
Exchanging by In addition to the details below, please see "Important
Telephone Information About Telephone Transactions."
Call Client When exchanging shares by telephone, please have ready the
Services Fund name, account number, Social Security number or Employer
(1-800-662-2739) Identification number listed on the account, and the exact
20
<PAGE>
name and address in which the account is registered. Only the
registered shareowner (or his or her preauthorized
representative) may complete such an exchange. Requests for
telephone exchanges received prior to the close of the New
York Stock Exchange (generally, 4:00 p.m. Eastern time) are
processed at the close of business that same day.
Requests received after the close of the Exchange are
processed the next business day. Telephone exchanges are not
accepted into or from Vanguard Balanced Index Fund, Vanguard
Index Trust, Vanguard International Equity Index Fund and
Vanguard Quantitative Portfolios. If you experience
difficulty in making a telephone exchange, your exchange
request may be made by regular or express mail, and it will
be implemented at the closing net asset value on the date
received by Vanguard provided the request is received in Good
Order.
Neither the Fund nor Vanguard is responsible for the
authenticity of exchange instructions received by telephone.
Investors bear the full risk of any loss arising from
unauthorized telephone exchanges. To prohibit telephone
exchanges on your account, please notify the Fund in writing.
Otherwise, the telephone exchange privilege will be
automatically established for your account.
------------------------------------------------------------
Exchanging By Please be sure to include on your exchange request the name
Mail and account number of your current Fund, the name of the Fund
you wish to exchange into, the amount you wish to exchange,
and the signatures of all registered account holders. Send
your request to Vanguard Financial Center, Vanguard Asset
Allocation Fund, P.O. Box 1120, Valley Forge, PA 19482. (For
express or registered mail, send your request to Vanguard
Financial Center, Vanguard Asset Allocation Fund, 455 Devon
Park Drive, Wayne, PA 19087.)
------------------------------------------------------------
Important Before you make an exchange, you should consider the
Exchange following:
Information
o Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
o An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
o Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
o The shares to be exchanged must be on deposit and not held
in certificate form.
o New accounts are not currently accepted in Vanguard/Windsor
Fund.
o The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
the required documentation in Good Order.
o When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
21
<PAGE>
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
The exchange privilege is only available in states in which
the shares of the Fund are registered for sale. The Fund's
shares are currently registered for sale in all 50 states and
the Fund intends to maintain such registration.
- -------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if
limited to two substantive exchange redemptions (at least 30
days apart) from the Fund during any twelve month period.
"Substantive" means either a dollar amount large enough to
have a negative impact on the Portfolio or a series of
movements between Vanguard Funds. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- -------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT TELEPHONE your account unless you request in writing that telephone
TRANSACTIONS transactions on your account not be permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. Security Check. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the
10-digit account number; (iii) the exact name and address
used in the registration; and (iv) the Social Security or
Employer Identification number listed on the account.
2. Payment Policy. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security procedures
described above are reasonable and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account. If Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on your
account.
- -------------------------------------------------------------------------------
22
<PAGE>
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: Vanguard Financial Center, P.O. Box 1110, Valley
Forge, PA 19482, Attention: Transfers Department. The request
must be in Good Order. To receive a transfer form and full
instructions, please call our Client Services Department
(1-800-662-2739).
- -------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account, except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter
statement will be a year- end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account during the
calendar year, using the average cost single category method.
This service is available for most taxable accounts opened
since January 1, 1986. In general, investors who redeemed
shares from a qualifying Vanguard account may expect to
receive their Average Cost Statement along with their Fund
Summary Statement. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- -------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
Vanguard Direct With Vanguard's Direct Deposit Service, most U.S. Government
Deposit Service checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
Vanguard Automatic Vanguard's Automatic Exchange Service allows you to move
Exchange Service money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan. Please contact
our Client Services Department at 1-800-662-2739 for
additional information.
Vanguard Fund Vanguard's Fund Express allows you to transfer money between
Express your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
23
<PAGE>
Vanguard Dividend Vanguard's Dividend Express allows you to transfer your
Express dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
Vanguard Vanguard's Tele-Account is a convenient, automated service
Tele-Account that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TM) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. In addition, you may perform
investment exchanges of Vanguard Fund shares and redemptions
by check using Tele-Account. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A
brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
Computer Access
Vanguard Online Vanguard Online allows you to obtain information via your
Keyword: vanguard personal computer on Fund share price, yield, and total
return. Vanguard Online is offered through America Online
(AOL). To establish an AOL account, call 1-800-238-6336.
Vanguard on the Vanguard sponsors an education-oriented website offering news
World Wide Web and information about Vanguard Funds and services, as well as
interactive, easy-to-use investment planning tools.
http://www.vanguard.com
- -------------------------------------------------------------------------------
24
<PAGE>
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- --------------------------
The Vanguard Group
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
Investor Information
Department:
1-800-662-7447 (SHIP) PROSPECTUS
Client Services JANUARY 17, 1997
Department:
1-800-622-2739 (CREW)
Tele-Account for
24-Hour Access:
1-800-662-6273 (ON-BOARD)
Telecommunication Service
for the Hearing-Impaired:
1-800-662-2738
Transfer Agent:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P078
<PAGE>
PART B
VANGUARD ASSET ALLOCATION FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 17, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated January 17, 1997). To obtain the
Prospectus please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447 (SHIP)
TABLE OF CONTENTS
Page
----
Investment Limitations ....................... B-1
Purchase of Shares ........................... B-2
Redemption of Shares ......................... B-3
Management of the Fund ....................... B-4
Performance Measures ......................... B-7
Total Return ................................. B-9
Investment Advisory Services ................. B-9
Portfolio Transactions ....................... B-10
Description of U.S. Government Securities .... B-11
Description of Repurchase Agreements ......... B-11
Futures Contracts ............................ B-12
Glossary ..................................... B-15
Financial Statements ......................... B-15
INVESTMENT LIMITATIONS
The following restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority of the outstanding shares of
the Fund, as defined in the Investment Company Act of 1940 (the "1940 Act").
The Fund may not under any circumstances:
1) Borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency purposes (not leveraging), and
then only in an amount not in excess of 15% of the value of the Fund's
net assets at the time the borrowing is made. Whenever borrowing
exceeds 5% of the value of the Fund's assets, the Fund will not make
any additional investments;
2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would
hold more than 10% of the outstanding voting securities of the issuer,
or more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer;
3) Invest for the purpose of exercising control of management of any
company;
4) Purchase the securities of any other investment company, except as they
may be acquired as part of a merger, consolidation or acquisition of
assets or otherwise to the extent permitted by Section 12 of the 1940
Act. The Fund will invest only in investment companies which have
investment objectives consistent with those of the Fund;
B-1
<PAGE>
5) The Fund will not engage in the business of underwriting securities
issued by other persons except to the extent that the Fund may
technically be deemed to be an underwriter under the Securities Act of
1933 in disposing of portfolio securities. Additionally, the Fund will
not purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid (included in this limitation is the Fund's investment in The
Vanguard Group, Inc.);
6) Invest in commodities, except that the Fund may invest in futures
contracts, options and options on futures contracts to the extent that
not more than 5% of the Fund's assets are required as margin deposit
for futures contracts;
7) Invest in real estate or real estate limited partnership interests
although the Fund may purchase and sell securities of companies which
invest in real estate, or interests therein;
8) Purchase securities on margin or sell any securities short except as
specified in investment limitation No. 6 above;
9) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) which are either
publicly distributed or customarily purchased by institutional
investors, and (ii) by lending its securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the Investment Company Act or the Rules and
Regulations or interpretations of the Securities and Exchange
Commission thereunder. No loan of securities will be made if, as a
result the aggregate of such loans in the Fund would exceed 33 1/3 %
of the value of the Fund's total assets;
10) Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 5% of its total assets; and
11) Invest more than 25% of the value of its total assets in any one
industry.
These investment limitations are considered at the time Fund securities
are purchased.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of any company which will be wholly- owned by the Fund
and one or more other investment companies and is primarily engaged in the
business of providing, at-cost, management, administrative, distribution or
related services to the Fund and other investment companies. See "Management
of the Fund."
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment
of management such rejection is in the best interest of the Fund, and (iii)
to reduce or waive the minimum investment for or any other restrictions on
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
B-2
<PAGE>
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is
not reasonably practicable for the Fund to dispose of securities owned by it,
or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in cash,
as the Directors may deem advisable; however, payment will be made wholly in
cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Fund. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Prospectus under "The Fund's Share Price" and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
B-3
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad
policies for the Fund and choose its Officers. The following is a list of
Directors and Officers of the Fund and a statement of their present positions
and principal occupations during the past five years. The mailing address of
the Directors and Officers of the Fund is Post Office Box 876, Valley Forge,
PA 19482.
JOHN C. BOGLE, Chairman and Director
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group; Director of the Mead
Corporation, General Accident Insurance and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer & Director*
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, Director
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc; Director of Sun
Company, Inc. and Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President Emeritus of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and National Steel
Corporation.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, Jr., Director
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company and The Standard Products Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; and President, New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company and NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc. and Kmart Corporation.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
------
* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
B-4
<PAGE>
The Fund is a member of The Vanguard Group of Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost
virtually all of their corporate management, administrative and distribution
services. Vanguard also provides investment advisory services on an at-cost
basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's total expenses which are allocated
among the Funds under methods approved by the Board of Directors (Trustees)
of each Fund. In addition, each Fund bears its own direct expenses such as
legal, auditing and custodian fees.
The Fund's officers are also officers and employees of Vanguard. No
officer or employee owns, or is permitted to own, any securities of any
external adviser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to
Rule 17j-1 under the Investment Company Act of 1940. The Code is designed to
prevent unlawful practices in connection with the purchase or sale of
securities by persons associated with Vanguard. Under Vanguard's Code of
Ethics certain officers and employees of Vanguard who are considered access
persons are permitted to engage in personal securities transactions. However,
such transactions are subject to procedures and guidelines substantially
similar to those recommended by the mutual fund industry and approved by the
U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. The Fund's
Service Agreement provides that: (a) each Vanguard Fund may invest up to .40%
of its current assets in Vanguard, and (b) there is no limit on the amount
that each Vanguard Fund may contribute to Vanguard's capitalization. At
September 30, 1996, the Fund had contributed capital of $219,000,
representing 1.1% of Vanguard's capitalization.
MANAGEMENT
Corporate management and administrative services include: (1) executive
staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During
the fiscal year ended September 30, 1996, the Fund's allocated share of
Vanguard's actual net costs of operations relating to management and
administrative services (including transfer agency) totaled approximately
$6,402,000.
DISTRIBUTION
Vanguard provides all distribution and marketing activities for the Funds
in the Group. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, acts as Sales Agent for the shares of the Funds in connection with
any sales made directly to investors in the states of Florida, Missouri, New
York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors
and Officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Fund, and
whether to organize new investment companies.
B-5
<PAGE>
One-half of the distribution expenses of a marketing and promotional
nature is allocated among the Funds based upon relative net assets. The
remaining one-half of those expenses is allocated among the Funds based upon
each Fund's sales for the preceding 24 months relative to the total sales of
the Funds as a Group, provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets. During the fiscal year ended
September 30, 1996, the Fund paid approximately $421,000 of the Group's
distribution and marketing expenses, which represented an effective annual
rate of .02 of 1% of the Fund's average net assets.
INVESTMENT ADVISORY SERVICES
Vanguard provides investment advisory services to Vanguard Money Market
Reserves, Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed
Income Securities Fund, Vanguard California Tax- Free Fund, Vanguard Florida
Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York
Insured Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Ohio
Tax-Free Fund, Vanguard Admiral Funds, Vanguard Tax-Managed Fund, Vanguard
Balanced Index Fund, Vanguard Bond Index Fund, Vanguard Index Trust, Vanguard
International Equity Index Fund, Total International Portfolio of Vanguard
STAR Fund, Aggressive Growth Portfolio of Vanguard Horizon Fund, several
Portfolios of Vanguard Variable Insurance Fund, a portion of Vanguard/Windsor
II, Vanguard Institutional Index Fund, Vanguard REIT Index Portfolio of
Vanguard Specialized Portfolios, and a portion of Vanguard/Morgan Growth Fund
as well as several indexed separate accounts. These services are provided on
an at-cost basis from a money management staff employed directly by Vanguard.
The compensation and other expenses of this staff are paid by the Funds
utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not also an Officer, an annual fee plus
travel and other expenses incurred in attending Board meetings. The Fund's
Officers and employees are paid by Vanguard which, in turn, is reimbursed by
the Fund, and each other Fund in the Group, for its proportionate share of
Officers' and employees' salaries and retirement benefits. During the year
ended September 30, 1996 the Fund's proportionate share of remuneration paid
to all Officers of the Fund, as a group, was approximately $60,746 including
Directors.
Retired Directors who are not officers are paid an annual fee based on the
number of years of service. The fee is equal to $1,000 for each year of
service and each investment company member of The Vanguard Group contributes
a proportionate amount to this fee based on its relative net assets. Under
its retirement plan, Vanguard contributes annually an amount equal to 10% of
each eligible officer's annual compensation plus 5.7% of that part of an
eligible officer's compensation during the year, if any, that exceeds the
Social Security Taxable Wage Base then in effect. Under its thrift plan, all
eligible officers are permitted to make pre- tax contributions in an amount
up to 4% of total compensation, subject to federal tax limitations, which are
matched by Vanguard on a 100% basis. The Fund's proportionate share of
retirement contributions made by Vanguard under its retirement and thrift
plans on behalf of all Officers of the Fund, as a group, during the 1996
fiscal year was approximately $1,650.
B-6
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended September
30, 1996.
VANGUARD ASSET ALLOCATION FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Retirement Estimated
Aggregate Benefits Accrued as Annual Benefits Total Compensation
Compensation Part of Fund Upon From All Vanguard Funds
Names of Directors From Fund Expenses Retirement Paid to Directors(2)
-------------------------- -------------- --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $677 $105 $15,000 $65,000
Robert E. Cawthorn $677 $ 88 $13,000 $65,000
Bruce K. MacLaury $734 $103 $12,000 $60,000
Burton G. Malkiel $677 $ 70 $15,000 $65,000
Alfred M. Rankin, Jr. $677 $ 55 $15,000 $65,000
John C. Sawhill $677 $ 66 $15,000 $65,000
James O. Welch, Jr. $677 $ 81 $15,000 $65,000
J. Lawrence Wilson $677 $ 58 $15,000 $65,000
</TABLE>
- ------
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no
compensation for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid
to each Director for their service as Director or Trustee of 34 Vanguard
Funds (33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Asset Allocation Fund, may, from time to time, use one or more of
the following unmanaged indices for comparative performance purposes.
Standard and Poor's 500 Composite Stock Price Index -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
Wilshire 5000 Equity Index -- consists of nearly 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
Morgan Stanley Capital International EAFE Index -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Goldman Sachs 100 Convertible Bond Index -- currently includes 71 bonds and
29 preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Salomon Brothers GNMA Index -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
B-7
<PAGE>
Salomon Brothers High-Grade Corporate Bond Index -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
Lehman Brothers Aggregate Bond Index -- is a market weighted index that
contains over 4,000 individually priced U.S. Treasury, agency, corporate, and
mortgage pass-through securities corporate rated BBB - or better. The Index
has a market value of over $4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index -- is a
market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate investment grade bonds rated BBB - or better
with maturities between 1 and 5 years. The index has a market value of over
$1.3 trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index --
is a market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate securities rated BBB - or better with
maturities between 5 and 10 years. The index has a market value of over $600
billion.
Lehman Brothers Mutual Fund Long (10+) Government/Corporate Index -- is a
market weighted index that contains over 1,900 individually priced U.S.
Treasury, agency, and corporate securities rated BBB - or better with
maturities greater than 10 years. The index has a market value of over $900
billion.
Lehman Long-Term Treasury Bond -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
Merrill Lynch Corporate & Government Bond -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
Lehman Corporate (Baa) Bond Index -- all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
Lehman Brothers Long-Term Corporate Bond Index -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
Bond Buyer Municipal Index (20 year) Bond -- is a yield index on current
coupon high grade general obligation municipal bonds.
Standard & Poor's Preferred Index -- is a yield index based upon the average
yield of four high grade, noncallable preferred stock issues.
NASDAQ Industrial Index -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
Composite Index -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
Composite Index -- 65% Lehman Long-Term Corporate AA or Better Bond Index and
a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 25% Standard & Poor's Utilities Index.)
B-8
<PAGE>
Lehman Long-Term Corporate AA or Better Bond Index -- consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
TOTAL RETURN
The average annual total return for the Fund for one and five years ended
September 30, 1996 and for the period from inception (November 3, 1988) to
September 30, 1996 was +15.27%, +13.45% and +14.06%, respectively.
Total return is computed by determining the average compounded rates of
return over the periods set forth above that would equate an initial amount
invested at the beginning of the periods to the ending redeemable value of
the investment.
INVESTMENT ADVISORY SERVICES
The Fund employs Mellon Capital Management Corporation ("MCM"), 595 Market
St., Suite 3000, San Francisco, California (the "Adviser") under an
investment advisory agreement dated as of January 15, 1996 to manage the
investment and reinvestment of the assets of the Fund and to continuously
review, supervise and administer the Fund's investment program. The Adviser
discharges its responsibilities subject to the control of the Officers and
Directors of the Fund.
The Fund pays the Adviser a Basic fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Fund's average month-end net assets for the quarter:
Net Assets Rate
---------- ----
First $100 million .......... .200%
Next $900 million .......... .150%
Next $500 million .......... .125%
Over $1.5 billion .......... .100%
This fee may be increased or decreased by applying an adjustment formula
based on the performance of the Fund's portfolio relative to the investment
record of the S&P 500 Index. The fee payment will be increased (decreased) by
an incentive (penalty) of 0.05% of average net assets, if the Fund's
cumulative investment performance for the thirty-six months preceding the end
of the quarter is at least six percentage points above (below) the cumulative
investment record of the S&P 500 Index for the same period.
The agreement will continue until March 31, 1998 and will be renewable
thereafter for successive one- year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including
the affirmative votes of a majority of the Directors who are not parties to
the contract or "interested persons" (as defined in the Investment Company
Act of 1940) of any such party, cast in person at a meeting called for the
purpose of considering such approval. In addition, the question of
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. The agreement is
automatically terminated if assigned, and may be terminated without penalty
at any time (1) either by vote of the Board of Directors of the Fund or by
vote of its outstanding voting securities on 60 days' written notice to the
Adviser, or (2) by the Adviser upon 90 days' written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or as
an additional adviser.
B. A change in the terms of an advisory agreement.
B-9
<PAGE>
C. The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in
control of the adviser.
Any such change will only be made upon not less than 30 days' prior
written notice to shareholders, which shall include the information
concerning the adviser that would have normally been included in a proxy
statement.
Because the Adviser provides only investment advisory services to the Fund
and has no control over the Fund's expenses, the Adviser has not undertaken
to guarantee expenses of the Fund. The Officers of the Fund have worked out
alternative arrangements with state authorities which do require an expense
guarantee.
Description of the Adviser. The Adviser is a professional counseling firm
which manages well diversified stock and bond portfolios for institutional
clients. As of September 30, 1996 the Adviser provided investment advisory
services to 212 clients and managed assets with an approximate value of $46.4
billion. The Adviser's asset allocation strategy was developed by the
Adviser's co-founder, William Fouse, in 1972, and is used by 84 of its
clients and accounts for approximately $13.6 billion of the assets that it
manages. The Adviser is a wholly-owned subsidiary of MBC Investment
Corporation, which itself is a wholly-owned subsidiary of Mellon Bank
Corporation. For the fiscal years ended September 30, 1994, September 30,
1995 and September 30, 1996, the Fund paid approximately $1,785,000,
$1,954,000 (before a decrease of $131,000 based on performance), and
$2,691,000 (before a decrease of $515,000 based on performance) respectively,
to the Adviser for investment advisory services. The basic fee paid to the
Adviser for the fiscal year ended September 30, 1996 reflects a fee waiver of
$146,000 during the period October 1, 1995 to March 31, 1996.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the
approval of the Fund's Board of Directors) to select the brokers or dealers
that will execute the purchases and sales of portfolio securities for the
Fund and directs the Adviser to use its best efforts to obtain the best
available price and most favorable execution as to all transactions for the
Fund. The Adviser undertakes to execute each investment transaction at a
price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
In placing portfolio transactions, the Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The
full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed
to obtain the best available price and most favorable execution,
consideration may be given to those brokers which supply investment research
and statistical information and provide other services in addition to
execution services to the Fund and/or the Adviser. The Adviser considers such
information useful in the performance of its obligations under the agreement,
but is unable to determine the amount by which such services may reduce its
expenses.
The investment advisory agreement also incorporates the concepts of
Section 28(e) of the Securities Exchange Act of 1934 by providing that,
subject to the approval of the Fund's Board of Directors, the Adviser may
cause the Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction; provided that such
commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of the Adviser to the Fund.
Currently, it is the Fund's policy that the Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for
the achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be
B-10
<PAGE>
in the best interest of the Fund. Some brokers or dealers who may receive
such higher commissions in recognition of brokerage services related to
execution of securities transactions are also providers of research
information to the Adviser and/or the Fund. However, the Adviser has informed
the Fund that it will not pay higher commission rates specifically for the
purpose of obtaining research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers
who recommend the Fund to other clients, or who act as agent in the purchase
of the Fund's shares for their clients, and may, when a number of brokers and
dealers can provide comparable best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in
selecting among qualified broker-dealers.
The total brokerage commissions paid by the Fund for the fiscal years
ended September 30, 1994, September 30, 1995 and September 30, 1996, totaled
$482,595, $92,177 and $127,528 respectively.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Fund and one or
more of these other clients serviced by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among
the Fund and such other clients in a manner deemed equitable by the Adviser.
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
As used in this prospectus, the term "U.S. Government Securities" refers
to a variety of securities which are issued or guaranteed by the United
States Treasury, by various agencies of the United States Government, and by
various instrumentalities which have been established or sponsored by the
United States Government. The term also refers to "repurchase agreements"
collateralized by such securities.
U.S. Treasury Securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration,
Small Business Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing
or guaranteeing securities include, among others, Federal Home Loan Banks,
the Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate
Credit Banks, and the Federal National Mortgage Association.
DESCRIPTION OF REPURCHASE AGREEMENTS
Repurchase agreements are transactions by which a person purchases a
security and simultaneously commits to resell that security to the seller (a
member bank of the Federal Reserve System or recognized securities dealer) at
an agreed upon price on an agreed upon date within a number of days (usually
not more
B-11
<PAGE>
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
The use of repurchase agreements involves certain risks. For example, if
the seller of the agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has
declined, the Portfolio may incur a loss upon disposition of them. If the
seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court
may determine that the underlying securities are collateral not within the
control of the Portfolio and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the Portfolio may not be able to
substantiate its interest in the underlying securities. While the Fund's
management acknowledges these risks, it is expected that they can be
controlled through stringent security selection criteria and careful
monitoring procedures.
FUTURES CONTRACTS
The Fund may enter into stock index and fixed-income futures contracts,
stock index and fixed income options, and options on such futures contracts
to remain fully invested, to reduce transactions costs. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security or index at a specified future time
and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. Government Agency. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
Although many fixed-income futures contracts call for actual delivery or
acceptance of the underlying securities at a specified date (stock index
futures contracts do not permit delivery of securities), the contracts are
normally closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold,"
"selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash
or government securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the specified delivery date.
Minimal initial margin requirements are established by the futures exchange
and may be changed. Brokers may establish deposit requirements which are
higher than the exchange minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to
and from the futures broker for as long as the contract remains open. The
Fund expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes (anticipated or potential) in the value of securities
currently owned or expected to be acquired by them. Speculators are less
inclined to own the securities underlying the futures contracts which they
trade, and use futures contracts with the expectation of realizing profits
from fluctuations in the value of the underlying securities. The Fund intends
to use futures contracts only for bona fide hedging purposes.
B-12
<PAGE>
Regulations of the CFTC applicable to the Portfolio require that all of
its futures transactions constitute bona fide hedging transactions. The
Portfolio will only sell futures contracts to protect securities it owns
against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this
hedging interest, the Portfolio expects that approximately 75% of its futures
contract purchases will be "completed," that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Fund upon sale of open futures contracts.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Fund will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Portfolio's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures may be closed out only on an Exchange which provides
a secondary market for such futures. However, there can be no assurance that
a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position.
In the event of adverse price movements, the Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. The inability to close options and futures
positions also could have an adverse impact on the ability to hedge
effectively.
A Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures contracts. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss (or gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result
in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. The Fund also bears
the risk that the Adviser will incorrectly predict future market trends.
However, because the futures strategies of the Portfolio are engaged in only
for hedging purposes, the adviser does not believe that the Fund is subject
to the risks of loss frequently associated with futures transactions. The
Fund would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying financial instrument and
sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of
a broker with whom the Fund has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in some
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type
of contract, no trades may be made on that day at a price beyond
B-13
<PAGE>
that limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
future positions and subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
The Fund is required for Federal income tax purposes to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and
40% short-term capital gain or loss, without regard to the holding period of
the contract. Furthermore, sales of futures contracts which are intended to
hedge against a change in the value of securities held by the Fund may affect
the holding period of such securities and, consequently, the nature of the
gain or loss on such securities upon disposition. The Fund may be required to
defer the recognition of losses on futures contracts to the extent of any
unrecognized gains on related positions held by the Fund.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to its
business of investing in such securities or currencies. In addition, gains
realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Fund's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order
to avoid realizing excessive gains on securities held less than three months,
the Fund may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less
than three months as of the end of the Fund's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities held
less than three months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes including
unrealized gains at the end of the Fund's fiscal year on futures
transactions. Such distributions will be combined with distributions of
capital gains realized on the Fund's other investments and shareholders will
be advised on the nature of the payments.
B-14
<PAGE>
GLOSSARY
a. Historical Market Returns -- Total returns of broad asset class
benchmarks. As examples, the returns of well-known benchmarks for domestic
stocks, bonds, and money market instruments are given below.
<TABLE>
<CAPTION>
Money Market
Asset Class Common Stocks Bonds Instruments
Standard & Poor's
500 Composite Stock Lehman Brothers 90 Day
U.S. Treasury
Benchmark Price Index Long Treasury Index Bills
------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
1979 18.4 -0.5 10.0
1980 32.4 -2.9 11.4
1981 -4.9 0.4 14.7
1982 21.5 41.8 10.9
1983 22.5 2.0 9.0
1984 6.2 14.8 10.0
1985 31.6 31.6 7.8
1986 18.6 24.1 6.2
1987 5.2 -2.7 5.9
1988 16.5 9.2 6.8
1989 31.6 18.9 8.6
1990 -3.1 6.3 7.9
1991 30.4 18.5 5.8
1992 7.6 8.0 3.6
1993 10.1 17.3 3.1
1994 1.3 -7.6 4.2
1995 37.6 30.7 5.8
1996(9/30) 13.5 -5.4 3.9
</TABLE>
b. Asset Allocation -- Asset allocation -- in its most generic sense -- is
the allotment of an investor's monies to broad asset classes such as
stocks or bonds. Investors establish percentage allocation guidelines for
stocks, bonds, and money market instruments which are consistent with
their particular long-term investment needs. These needs will include
current income, potential growth in capital, and willingness to accept
risk.
In implementing their asset allocation targets, some investors attempt to
maintain a stable mix -- such as 50% stocks and 50% bonds -- while others
will actively manage the stock/bond mix in pursuit of higher returns, lower
risk, or other investment objectives. The key difference between investors
who maintain a stable mix and those who actively change allocations is their
willingness to forecast the risks and returns of individual asset classes,
their forecasting abilities, and their comfort in making investment decisions
based upon such forecasts. Historically, investors who actively managed the
mix based upon conjecture have often underperformed both investors with
relatively stable allocations and investors with logical, disciplined methods
for assessing relative value and risk. Institutional investors commonly refer
to active asset allocation approaches which are based upon disciplined
methodologies as tactical asset allocation.
FINANCIAL STATEMENTS
The Fund's financial statements, including the financial highlights for
each of the five fiscal years in the period ended September 30, 1996,
appearing in the Fund's 1996 Annual Report to Shareholders and the report
thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference into this Statement of Additional
Information. The Fund's 1996 Annual Report to Shareholders is enclosed with
this Statement of Additional Information.
B-15
<PAGE>
PART C
VANGUARD ASSET ALLOCATION FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The Registrant's audited financial statements for the year ended September
30, 1996, including Price Waterhouse LLP's report thereon, are incorporated
by reference, in the Statement of Additional Information, from the
Registrant's 1996 Annual Report which has been filed with the Commission as
an Exhibit to this Registration Statement. The financial statements included
in the Annual Report are:
1. Statement of Net Assets as of September 30, 1996.
2. Statement of Operations for the year ended September 30, 1996.
3. Statement of Changes in Net Assets for the years ended September
30, 1995 and September 30, 1996.
4. Financial Highlights for each of the five years in the period ended
September 30, 1996.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(b) Exhibits
11. Consent of Independent Accountants
12. Financial Statements -- See (a) above
16. Schedule for computation of performance quotations
27. Financial Data Schedule
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant, the investment companies in The Vanguard
Group of Investment Companies and The Vanguard Group, Inc. are identical.
Reference is made to the caption "Management of the Fund" in the Prospectus
constituting Part A and "Management of the Fund" in the Statement of
Additional Information constituting Part B of this Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
75,126 (9/30/96).
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
C-1
<PAGE>
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers of Mellon Capital Management Corporation are as follows:
William Fouse, Chairman
Thomas Loeb, Chairman, Executive Committee and Chief Executive Officer
Brenda Joyce Oakley, Executive Vice President and Chief Administrative
Officer
Mary Catherine Shouse, Executive Vice President
Thomas Bernard Hazuka, Executive Vice President and Chief Investment
Officer
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under
the Investment Company Act and the rules promulgated thereunder will be
maintained in the physical possession of Registrant; Registrant's Transfer
Agent, The Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley
Forge, Pennsylvania 19482; and the Registrant's Custodian, State Street Bank
and Trust Company, Boston, Mass.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which has been previously filed as Exhibit 9 and
described in Part B hereof under "Management of the Fund;" the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of section
16(c) of the Investment Company Act in regard to shareholders' rights to call
a meeting of shareholders for the purpose of voting on the removal of
directors and to assist in shareholder communications in such matters, to the
extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders
or prospective investors, free of charge, upon request.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
the requirements for effectiveness of this Registration Statement pursuant to
paragraph (b) of Rule 485 under the Securities Act of 1933 and that it has
duly caused this Post-Effective Amendment to this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Valley Forge and the Commonwealth of Pennsylvania on the 10th day of
January, 1997.
<TABLE>
<CAPTION>
Signatures Title Date
-------------------------- ------------------------------------ -------------------
<S> <C> <C>
BY: (Signature) John C. Bogle*, Chairman January 10, 1997
------------------------- of the Board and Director
(Raymond J. Klapinsky)
BY: (Signature) John J. Brennan*, January 10, 1997
------------------------- President, Chief Executive
(Raymond J. Klapinsky) Officer and Director
BY: (Signature) Robert E. Cawthorn*, January 10, 1997
------------------------- Director
(Raymond J. Klapinsky)
BY: (Signature) Barbara B. Hauptfuhrer*, January 10, 1997
------------------------- Director
(Raymond J. Klapinsky)
BY: (Signature) Burton G. Malkiel*, Director January 10, 1997
-------------------------
(Raymond J. Klapinsky)
BY: (Signature) Bruce K. MacLaury,* Director January 10, 1997
-------------------------
(Raymond J. Klapinsky)
BY: (Signature) Alfred M. Rankin, Jr.*, Director January 10, 1997
-------------------------
(Raymond J. Klapinsky)
BY: (Signature) John C. Sawhill*, Director January 10, 1997
-------------------------
(Raymond J. Klapinsky)
BY: (Signauture) James O. Welch, Jr.*, Director January 10, 1997
-------------------------
(Raymond J. Klapinsky)
BY: (Signature) J. Lawrence Wilson*, Director January 10, 1997
-------------------------
(Raymond J. Klapinsky)
BY: (Signature) Richard F. Hyland*, Treasurer January 10, 1997
------------------------- and Principal Financial
(Raymond J. Klapinsky) Officer and Accounting
Officer
</TABLE>
- ------
*By Power of Attorney. See 1933 Act File No. 2-14336, January 23, 1990.
Incorporated by Reference.
<PAGE>
VANGUARD ASSET ALLOCATION FUND, INC.
INDEX TO EXHIBITS
Consent of Independent Accountants................................ EX-99.B11
Schedule for computation of performance quotations................ EX-99.B16
Financial Data Schedule........................................... EX-27
<PAGE>
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
the Statement of Additional Information constituting parts of this
Post-Effective Amendment No. 11 to the Registration Statement on Form N-1A
(the "Registration Statement") of our report dated October 31, 1996, relating
to the financial statements and financial highlights appearing in the
September 30, 1996 Annual Report to Shareholders of Vanguard Asset Allocation
Fund, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings
"Financial Highlights" and "General Information" in the Prospectus and under
the heading "Financial Statements" in the Statement of Additional
Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 9, 1997
<PAGE>
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
1. Average Annual Total Return (As of September 30, 1996)
P (1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE: One Year
P = $1,000
T = +15.27%
N = 1
ERV = $1,152.70
Five Year
P = $1,000
T = +13.45%
N = 5
ERV = $1,879.11
Since inception
P = $1,000
T = +14.06%*
N = *
ERV = $2,829.51*
- ------
* Since Inception, November 3, 1988.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000836906
<NAME> VANGUARD ASSET ALLOCATION FUND, INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
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</TABLE>
