<PAGE> 1
VANGUARD
ASSET ALLOCATION
FUND
Annual Report - September 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--some 6,000 highly motivated men
and women--who form the cornerstone of our operations. As with any cornerstone,
we could not survive long--let alone prosper--without it. That's why we chose
this fiscal year's annual report to celebrate the spirit, enthusiasm, and
achievements of our crew. (We call those who work at Vanguard crew members, not
employees, because they operate as a team to accomplish our mission of serving
you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO]
JOHN J. BRENNAN
President
JOHN C. BOGLE
Chairman
- ---------------------------------------------------
CONTENTS
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A MESSAGE TO OUR SHAREHOLDERS 1
THE MARKETS IN PERSPECTIVE 4
REPORT FROM THE ADVISER 6
PORTFOLIO PROFILE 8
PERFORMANCE SUMMARY 11
FINANCIAL STATEMENTS 12
REPORT OF INDEPENDENT ACCOUNTANTS 23
All comparative mutual fund data are from Lipper Analytical Services,
Inc., or Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
During Vanguard Asset Allocation Fund's fiscal year ended September 30,
1997, the U.S. stock market extended its relentless run and the bond market
turned in a solid performance. The Fund was weighted toward stocks for most of
the period and thus provided a remarkable return of +29.4%.
As you know, the Fund may hold three classes of financial assets in its
allocation strategy: common stocks (as represented by the Standard & Poor's 500
Composite Stock Price Index), long-term U.S. Treasury bonds, and cash reserves.
A portfolio equally weighted in each class would have provided a total return
(capital change plus reinvested dividends) of +19.6% in fiscal 1997. The table
at right compares our twelve-month return with those of the average asset
allocation fund, a benchmark composite index, and the three asset classes.
The Fund's total return is based on net asset values of $18.27 per share
on September 30, 1996, and $21.53 per share on September 30, 1997, adjusted for
the reinvestment of dividends totaling $0.72 per share from net investment
income and a distribution of $1.05 per share from net realized capital gains.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
SEPTEMBER 30, 1997
- ----------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund +29.4%
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Average Asset Allocation Fund +23.8%
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Composite Index* +30.4%
- ----------------------------------------------------------
S&P 500 Index +40.4%
Lehman Brothers Long U.S. Treasury
Bond Index +13.2
Salomon Brothers Three-Month
U.S. Treasury Bill Index + 5.2
- ----------------------------------------------------------
</TABLE>
*65% S&P 500 Index and 35% Lehman Long U.S.
Treasury Index.
FISCAL 1997 PERFORMANCE OVERVIEW
For the third year in a row, the U.S. stock market shot higher in the twelve
months ended September 30, earning a return of +40.4% (including dividends) for
the year. Economic conditions remained ideal for equity investors, as business
activity rose smartly and corporate profits soared without engendering increases
in inflation or long-term interest rates.
Long-term Treasury bonds provided a return of +13.2% (including interest)
for the year--a satisfactory gain indeed. The yield on the benchmark 30-year
U.S. Treasury bond declined by 0.49 percentage point to 6.43%. Short-term yields
remained fairly flat, closing at 5.11% for the three-month U.S. Treasury bill.
This splendid combination of business conditions, earnings, and interest rates
elevated the already-high spirits of investors, and by fiscal year-end stock
prices were at or near historic highs in relation to such fundamentals as
dividends, earnings, and book values.
Our Fund's concentration on large-capitalization stocks for its equity
position was a distinct advantage during the twelve months, since the blue chip
stocks that dominate the S&P 500 Index outperformed the stocks of small- and
medium-sized companies. The Fund's use of long-term U.S. Treasury bonds was also
beneficial, as the long end of the bond maturity spectrum gained the most from
the decline in interest rates.
Our investment adviser, Mellon Capital Management, made several changes
in the Fund's allocation of assets during the fiscal year, setting the stock
allocation as high as 70% (during December, January, and February) and as low as
50%, where it stood when the year ended. Our +29.4% return for the fiscal year
modestly lagged the +30.4% return we
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would have earned had we maintained a weighting of 65% stocks and 35% bonds--the
composition of our benchmark index--throughout the year. Further details on
allocation shifts made during the year are provided in the adviser's report,
which starts on page 6.
The Fund's return easily outstripped the +23.8% average return of its
asset allocation competitors. While our peers vary widely in investment
policies, on average their portfolios are invested 59% in stocks, 28% in bonds,
and 13% in cash reserves. This composition is quite similar to ours in concept,
but quite different in execution. We hold no cash reserves, and that
difference--along with our commitment to large stocks--accounted for most of our
large margin of advantage.
We also benefited, as usual, from our low expense ratio of 0.49% (annual
expenses as a percentage of average net assets). According to Lipper Analytical
Services, our average peer has an expense ratio of 1.44%, conceding to us an
edge of almost 1% in annual returns. It is a generous concession indeed.
LONG-TERM PERFORMANCE OVERVIEW
The table below presents our results over a longer and, we believe, more
meaningful period of nearly nine years--the entire operating history of the
Fund. Since the inception of the Fund in November 1988, our advantage over the
average asset allocation fund amounts to a significant sum. An initial $10,000
investment in the Fund would have grown to $36,621 during the period, earning
our shareholders $8,250 more than the $28,371 earned by the average fund in our
peer group. The difference in returns is equal to an astonishing 82.5% of the
initial investment.
<TABLE>
<CAPTION>
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TOTAL RETURNS
NOV. 3, 1988, TO SEPT. 30, 1997
----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ---------------------------------------------------------------------------
<S> <C> <C>
Vanguard Asset Allocation Fund +15.7% $36,621
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Average Asset Allocation Fund +12.4% $28,371
- ---------------------------------------------------------------------------
Composite Index* +15.9% $37,352
- ---------------------------------------------------------------------------
</TABLE>
*65% S&P 500 Index and 35% Lehman Long U.S. Treasury
Index.
During its lifetime, Vanguard Asset Allocation Fund has earned a
remarkable return of +15.7% annually. That span has coincided with a good
portion of the greatest bull market in history, and we caution that it is highly
unlikely that absolute returns from the financial markets will be so generous in
years to come. Our relative advantage of 3.3 percentage points per year may come
under pressure, too, but given our significant cost advantage, we are optimistic
that we can maintain a solid edge.
Our confidence is buttressed by the soundness of our disciplined
investment approach. Our key strategies are: (1) using computer-modeled
forecasts, not intuition, to estimate future returns on the three asset classes;
(2) changing our stock/bond ratio relatively infrequently in gradual, not
sudden, steps; and (3) relying on our asset allocation process to add value,
rather than trying to pick the best securities within each asset class. We use
the S&P 500 Index for our equity holdings instead of selecting individual
stocks, and we use long-term Treasury bonds rather than trying to select bonds
with the "best" maturities or the "right" credit-quality characteristics.
IN SUMMARY
The spectacular bull market in U.S. stocks and bonds has lasted a decade and a
half. Whereas investors have every reason to be thankful for the market's
bounty, they also have reason to be mindful of the accompanying risks. Today,
with bond yields far lower
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than 15 years ago and with stock market valuations at high levels, the
ever-present risks of investing are especially evident.
That said, the greatest risk associated with investing is not investing
in the first place. We believe a sound method for dealing with risk is to
construct a balanced investment program suited to your objectives, financial
situation, tolerance for risk, and time horizon--a belief that is the foundation
of Vanguard Asset Allocation Fund. If you have such a program in place, you are
prepared to "stay the course" toward your investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
October 16, 1997
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
Year Ended September 30, 1997
U.S. EQUITY MARKETS
For stock investors, the fiscal year ended September 30, 1997, was nothing short
of spectacular. Indeed, it was a very good year for almost all types of
investors: Virtually across the board, returns in the equity and bond markets
ranged from quite strong to exceptional, relative to historical averages. These
results can be attributed to three factors: continued solid economic growth;
harnessed inflation, remaining at levels not experienced since the 1960s; and
growth in corporate profits that was not only impressive but exceeded
expectations. The most surprising aspect of this remarkable period is that the
rate of inflation actually continued to decline despite robust growth and a very
low level of unemployment. According to traditional economic theory, inflation
should instead have accelerated at this point in the economic cycle. The most
widely accepted explanation for this paradox involves substantial productivity
gains that are not apparent from the measures in use today. Reports indicate
that even the Federal Reserve Board is otherwise at a loss to explain the
current "economic nirvana."
Large-capitalization U.S. common stocks performed extraordinarily well
during the past year, as illustrated by the 40.4% gain of the Standard & Poor's
500 Composite Stock Price Index. This advance ranks among the top 5% for all
12-month periods in the last 20 years. Among the best-performing sectors were
technology and financial services, with increases of 67.5% and 54.1%,
respectively. The surge in technology reflects robust corporate spending on this
industry's products, particularly desktop computers, networking equipment, and
software. Despite posting an aggregate gain of 24.4%, consumer discretionary
stocks could be considered laggards. (Clearly, the market has shown amazing
gains when a 24% advance over a one-year period can be viewed as inadequate.)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
---------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 40.4% 29.9% 20.8%
Russell 2000 Index 33.2 23.0 20.5
MSCI EAFE Index 12.5 9.1 12.7
- ------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 9.7% 9.5% 6.9%
Lehman 10-Year Municipal Bond Index 9.5 8.7 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.6
- ------------------------------------------------------------------------
OTHER
Consumer Price Index 2.2% 2.6% 2.7%
- ------------------------------------------------------------------------
</TABLE>
The performance of small-company stocks, while they failed to match
the outsized advance of the S&P 500 Index, was more than respectable during this
period--the Russell 2000 Index gained 33.2%. The difference in return between
large and small companies is partly the result of the superior earnings growth
achieved by larger companies during the past 24 months. In addition, large
companies generated better-than-expected earnings 60% of the time over the past
year, compared to only 40% for small firms. Within sectors, the most dramatic
difference between large and small companies appeared in technology issues. In
the Russell 2000 Index, technology stocks advanced "only" 26.0% in aggregate,
over 40 percentage points less than their large-company counterparts.
4
<PAGE> 7
U.S. FIXED-INCOME MARKETS
In the fixed-income markets, rates fell across the yield curve, rewarding
investors with higher total returns. For example, the rates on 1-, 5-, 10-, and
30-year U.S. Treasury issues fell 0.25%, 0.47%, 0.58%, and 0.49%, respectively,
from September 30, 1996, to September 30, 1997. These declines reflect the
continued good news regarding inflation and the relative dormancy of the Federal
Reserve. The benefit of the drop in rates can be seen in the 9.7% return of the
Lehman Brothers Aggregate Bond Index, the broadest measure of investment-grade
issues. Investors in lower-quality securities fared even better, as illustrated
by the 14.5% gain of the Lehman High Yield Bond Index. The strength of the
economy combined with the lack of inflationary pressure produced an ideal
environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
Investments in non-U.S. common stocks did not match the gains in domestic
equities, with the Morgan Stanley Capital International Europe, Australasia, Far
East Index advancing 12.5% in dollars. This Index's relatively modest
performance masks the fact that the European markets were very strong during the
past year, gaining 48.1% in local currency terms and 35.4% in dollars, while
many of the Pacific Basin markets were weak, down 5.4% in local currency and
13.1% in dollars. The Japanese market declined 15.7% in dollars and 8.6% in yen
terms. Despite the competitive benefits of a weak currency, Japan continued to
struggle with a weak domestic economy and an oversupply of equities. Smaller
Asian markets, such as Malaysia (losing 28.5% in local terms and 44.7% in
dollars), suffered from a variety of challenges, chiefly overvalued currencies
and high interest rates.
5
<PAGE> 8
REPORT FROM THE ADVISER
Vanguard Asset Allocation Fund had a total return (price change plus
reinvested dividends) of 29.4% for the fiscal year ended September 30, 1997. By
comparison, the Standard & Poor's 500 Composite Stock Price Index returned 40.4%
during the period, while the Lehman Long U.S. Treasury Index earned 13.2%.
Early in the fiscal year, a variety of data indicated that economic
growth was cooling off. With the economy slowing, inflation remaining in check,
and monetary policy on hold, both the stock and bond markets prospered during
October and November, the first two months of the fiscal year. However, investor
confidence was shaken early in December when Federal Reserve Board Chairman Alan
Greenspan suggested that there was "irrational exuberance" in the financial
markets. Consequently, both markets pulled back a bit in late December.
The equity market jumped by 7% in January and February, only to fall by
4% in March. Bond yields rose in response to investors' increased fears of
inflation and in anticipation of tighter monetary policy by the Federal Reserve.
Finally, on March 25, the Federal Reserve tightened monetary policy by pushing
up short-term interest rates in a "preemptive strike" against inflation.
During the third fiscal quarter, which ended June 30, the stock and bond
markets reacted enthusiastically as economic statistics indicated that the pace
of economic activity was slowing. Fears of imminent inflation pressures and of
tighter monetary policy were decidedly reduced. As the quarter closed, the
markets were buoyed by low inflation, low unemployment, and continued high
corporate earnings.
The financial markets' solid performance during the final quarter of
fiscal 1997 occurred amid the highest level of stock market volatility in the
past five years. The financial markets have been concerned that tight labor
markets will soon bring faster wage growth, which in turn would inevitably lead
to higher prices. The sustainability of the current pace of economic growth also
has been questioned.
However, economic statistics released during the July-September quarter
revealed little evidence of an overheating economy, greater price inflation, or
an acceleration in wage increases. Restated third fiscal-quarter figures show
that productivity gains continue to outpace real wages, with nonfarm
productivity growing at an annual rate of 2.7%--the biggest advance since the
final quarter of 1993. After weighing all the evidence, policymakers chose to
leave both the overnight and discount rates unchanged at the Federal Reserve
Board's Open Market Committee meeting on September 30.
After increasing its bond allocation in September 1996, Vanguard Asset
Allocation Fund remained at the resulting mix of 60% stocks/40% bonds through
October and November 1996. As the bond market rallied during October and
November, yields fell correspondingly. Given these reduced yields, the asset
allocation model began to signal a reallocation from bonds to equities. Hence,
the
6
<PAGE> 9
Fund's asset mix was changed to an allocation of 70% stocks/30% bonds in
early December. The model continued to recommend this mix into the early months
of calendar 1997.
Despite an increase in the expected earnings of corporations, rising bond
yields over the second fiscal quarter made the long-term return expected from
bonds increasingly attractive relative to the return expected from equities.
During March, the asset allocation model began to recommend selling a portion of
the Fund's equities and purchasing bonds with the proceeds. By late March, the
signal was strong enough to warrant a shift in the Fund's actual mix to 60%
stocks/40% bonds, a step we took on March 26.
Throughout the third fiscal quarter, the Fund remained at an asset mix of
60% stocks and 40% bonds. Over the course of the quarter, the spread between the
expected return on stocks and the expected return on bonds fell, primarily as a
result of the rise in the stock market.
For much of June, the asset allocation model had been signaling a 10%
shift out of equities into bonds. This signal was confirmed in early July, at
the start of the final fiscal quarter, and on July 9 the Fund's asset allocation
was shifted from the 60%/40% stock/bond mix to 50%/50%. Toward the end of
September, the sharp rally in the bond market had lowered bond yields and raised
the spread between the expected return on stocks and the expected return on
bonds. Consequently, the asset allocation model ended the year again
recommending a stock/bond allocation of 60%/40%. The Fund was awaiting
confirmation of the signal as the fiscal year ended.
William L. Fouse, CFA
Mellon Capital Management Corporation
October 10, 1997
INVESTMENT PHILOSOPHY
The adviser believes that, although the financial markets are very efficient,
imbalances can be identified in the relative pricing of stocks, bonds, and money
market instruments. Implicit in this approach is a belief that such imbalances
occur only periodically and do not persist for long periods. The adviser
attempts to identify these windows of opportunity and to structure the portfolio
to take advantage of them.
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<PAGE> 10
PORTFOLIO PROFILE
Asset Allocation Fund
This Profile provides a snapshot of the Fund's characteristics as of September
30, 1997, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 9 and 10.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- -----------------------------------
<S> <C>
Turnover Rate 10%
Expense Ratio 0.49%
Cash Reserves 0%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- -----------------------------------
<S> <C>
BONDS 50%
STOCKS 50%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- ------------------------------------------
ASSET ALLOCATION S&P 500
- ------------------------------------------
<S> <C> <C>
R-Squared 0.92 1.00
Beta 0.75 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- ----------------------------------------------
<S> <C>
General Electric Co. 3.0%
Exxon Corp. 2.2
Microsoft Corp. 2.2
The Coca-Cola Co. 2.1
Intel Corp. 2.1
Merck & Co., Inc. 1.6
Royal Dutch Petroleum Co. ADR 1.6
International Business Machines Corp. 1.4
Philip Morris Cos., Inc. 1.4
Procter & Gamble Co. 1.3
- ----------------------------------------------
Top Ten 18.9%
- ----------------------------------------------
</TABLE>
Top Ten as % of Total Net Assets 8.0%
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
----------------------------------------------------
ASSET ALLOCATION ASSET ALLOCATION S&P 500
----------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation............. 4.1% 3.6% 3.6%
Consumer Discretionary............ 10.2 9.6 9.6
Consumer Staples.................. 11.8 10.8 10.8
Financial Services................ 15.3 17.0 16.8
Health Care....................... 10.6 10.7 10.7
Integrated Oils................... 7.9 7.8 7.8
Materials & Processing............ 7.6 6.8 6.8
Other Energy...................... 1.1 1.5 1.5
Producer Durables................. 5.1 4.6 4.6
Technology........................ 10.5 13.1 13.2
Utilities......................... 10.6 9.1 9.2
Other............................. 5.2 5.4 5.4
- ------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- -------------------------------------------------
ASSET ALLOCATION S&P 500
- -------------------------------------------------
<S> <C> <C>
Number of Stocks 503 500
Median Market Cap $35.4B $35.4B
Price/Earnings Ratio 21.9x 21.9x
Price/Book Ratio 4.0x 4.0x
Dividend Yield 1.6% 1.6%
Return on Equity 20.3% 20.3%
Earnings Growth Rate 18.2% 18.2%
Foreign Holdings 2.1% 2.1%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- -------------------------------------------------
<S> <C>
[GRAPHIC]
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -------------------------------------------------
<S> <C>
Number of Bonds 33
Average Coupon 8.4%
Average Duration 10.9 years
Average Maturity 22.1 years
Average Quality Aaa
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- -------------------------------------------------
<S> <C>
[GRAPHIC]
</TABLE>
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by one percentage point, the share price of a portfolio with an
average duration of five years would decline by about 5%. If rates decrease by
a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments--after
adjusting for cash held as collateral for futures contracts.
9
<PAGE> 12
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a portfolio, the weighted average
yield for stocks it holds.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over
the past five years for the stocks now in a portfolio.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms
of two attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio in
terms of two attributes: average maturity (short, medium, or long) and average
credit quality (high, medium, or low).
FOREIGN HOLDINGS. The percentage of assets represented by stocks or American
Depository Receipts of companies based outside the United States.
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
PORTFOLIO ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of assets.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that
come from each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of a portfolio's equity holdings invested in
its ten largest stocks. (The average for stock mutual funds is about 30%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to distribute capital gains (which are taxable to investors).
10
<PAGE> 13
PERFORMANCE SUMMARY
Asset Allocation Fund
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely so that an investment in the Fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: NOVEMBER 3, 1988-SEPTEMBER 30, 1997
- -------------------------------------------------------------
COMPOSITE
ASSET ALLOCATION FUND INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------
<S> <C> <C> <C> <C>
1989 21.1% 2.8% 23.9% 27.8%
1990 -8.6 4.0 -4.6 -5.1
1991 20.9 6.4 27.3 27.5
1992 7.2 5.0 12.2 12.2
1993 10.7 4.7 15.4 15.5
1994 -5.2% 3.1% -2.1% -1.5%
1995 23.6 5.0 28.6 27.4
1996 11.1 4.2 15.3 13.9
1997 24.7 4.7 29.4 30.4
- --------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long U.S. Treasury Index.
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: NOVEMBER 3, 1988-SEPTEMBER 30, 1997
[GRAPHIC]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Fund 29.42% 16.74% 15.69% $36,621
Average Asset Allocation Fund 23.82 13.63 12.42 28,371
Asset Allocation Composite Index* 30.42 16.57 15.95 37,352
S&P 500 Index 40.45 20.77 18.06 43,883
- -----------------------------------------------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long U.S. Treasury Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
- ---------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund 11/3/88 29.42% 16.74% 11.21% 4.48% 15.69%
- ---------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL STATEMENTS
September 30, 1997
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.), with the
Fund's S&P 500 Index common stocks listed in descending market value order.
Other assets are added to, and liabilities are subtracted from, the value of
Total Investments to calculate the Fund's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the Fund to arrive at its share price, or
Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends
or capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -----------------------------------------------------------------------------------
COMMON STOCK (42.5%)**
- -----------------------------------------------------------------------------------
<S> <C> <C>
General Electric Co. 709,300 $ 48,277
Exxon Corp. 535,900 34,331
- - Microsoft Corp. 258,200 34,163
The Coca-Cola Co. 537,300 32,742
Intel Corp. 353,400 32,645
Merck & Co., Inc. 261,700 26,154
Royal Dutch Petroleum Co. ADR 464,000 25,752
International Business Machines Corp. 215,600 22,840
Philip Morris Cos., Inc. 525,000 21,820
Procter & Gamble Co. 293,244 20,252
Wal-Mart Stores, Inc. 490,900 17,979
Bristol-Myers Squibb Co. 215,780 17,856
Pfizer, Inc. 280,000 16,817
Johnson & Johnson 287,400 16,561
American International Group, Inc. 151,958 15,680
Hewlett-Packard Co. 225,300 15,672
AT&T Corp. 352,484 15,619
E.I. du Pont de Nemours & Co. 245,000 15,083
Eli Lilly & Co. 119,900 14,440
PepsiCo, Inc. 335,000 13,588
Bell Atlantic Corp. 168,115 13,523
Citicorp 100,004 13,394
Mobil Corp. 169,800 12,565
- - Compaq Computer Corp. 163,740 12,240
SBC Communications Inc. 197,273 12,108
The Boeing Co. 216,886 11,807
Chevron Corp. 141,000 11,729
The Walt Disney Co. 145,200 11,707
Ford Motor Co. 258,700 11,706
Lucent Technologies, Inc. 139,074 11,317
BankAmerica Corp. 154,102 11,298
Chase Manhattan Corp. 93,461 11,028
Fannie Mae 229,000 10,763
Abbott Laboratories 166,900 10,671
General Motors Corp. 157,331 10,531
- - Cisco Systems, Inc. 143,200 10,463
Gillette Co. 121,200 10,461
American Home Products Corp. 140,500 10,256
Amoco Corp. 106,400 10,254
BellSouth Corp. 212,700 9,837
NationsBank Corp. 156,434 9,679
Travelers Group Inc. 138,396 9,446
GTE Corp. 207,000 9,393
Motorola, Inc. 128,200 9,214
Schlumberger Ltd. 106,600 8,974
American Express Co. 101,445 8,306
Minnesota Mining & Manufacturing Co. 89,700 8,297
Home Depot, Inc. 157,200 8,194
Schering-Plough Corp. 158,200 8,147
Ameritech Corp. 119,100 7,920
Warner-Lambert Co. 58,600 7,907
- - Oracle Corp. 211,500 7,707
Allstate Corp. 95,277 7,658
Unilever NV ADR 34,300 7,293
McDonald's Corp. 149,600 7,125
Texaco Inc. 114,400 7,028
- - Dell Computer Corp. 72,400 7,009
Banc One Corp. 125,362 6,997
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Morgan Stanley, Dean Witter, Discover and Co. 127,200 $ 6,877
- - WorldCom, Inc. 192,700 6,805
Time Warner, Inc. 121,700 6,595
First Union Corp. 123,496 6,183
Northern Telecom Ltd. 56,900 5,914
Kimberly-Clark Corp. 120,492 5,897
Atlantic Richfield Co. 69,000 5,895
Xerox Corp. 69,448 5,847
Computer Associates International, Inc. 79,000 5,673
Emerson Electric Co. 95,800 5,520
Texas Instruments, Inc. 40,500 5,473
Chrysler Corp. 148,480 5,466
Freddie Mac 152,800 5,386
Sara Lee Corp. 103,900 5,351
Merrill Lynch & Co., Inc. 71,800 5,327
Wells Fargo & Co. 19,281 5,302
US Bancorp 54,801 5,288
AlliedSignal Inc. 121,200 5,151
First Chicago NBD Corp. 67,665 5,092
Monsanto Co. 127,600 4,976
Norwest Corp. 80,600 4,937
Campbell Soup Co. 99,200 4,861
Sears, Roebuck & Co. 85,200 4,851
Medtronic, Inc. 102,200 4,803
Anheuser-Busch Cos., Inc. 106,114 4,788
Eastman Kodak Co. 72,000 4,675
Sprint Corp. 92,200 4,610
Dow Chemical Co. 50,350 4,566
Lockheed Martin Corp. 42,641 4,547
J.P. Morgan & Co., Inc. 39,842 4,527
Caterpillar, Inc. 82,200 4,434
Colgate-Palmolive Co. 63,000 4,390
Tyco International Ltd. 52,600 4,316
MCI Communications Corp. 147,100 4,312
United Technologies Corp. 52,100 4,220
Columbia/HCA Healthcare Corp. 143,445 4,124
U S WEST Communications Group 104,430 4,021
Pharmacia & Upjohn, Inc. 108,790 3,971
The Bank of New York Co., Inc. 82,600 3,965
Kellogg Co. 90,400 3,808
Duke Energy Corp. 76,981 3,806
Westinghouse Electric Corp. 140,200 3,794
- - AirTouch Communications, Inc. 106,900 3,788
- - Sun Microsystems, Inc. 80,400 3,759
Washington Mutual, Inc. 53,894 3,752
Fleet Financial Group, Inc. 56,377 3,696
- - Applied Materials, Inc. 38,400 3,658
- - 3Com Corp. 71,200 3,649
H.J. Heinz Co. 79,000 3,649
First Data Corp. 95,800 3,598
PNC Bank Corp. 72,900 3,558
International Paper Co. 64,200 3,535
General Re Corp. 17,400 3,454
ConAgra, Inc. 52,000 3,432
Waste Management Inc. 97,800 3,417
Union Pacific Corp. 53,500 3,350
Southern Co. 148,400 3,348
NIKE, Inc. Class B 62,900 3,334
Gannett Co., Inc. 30,200 3,260
SunTrust Banks, Inc. 47,700 3,241
Automatic Data Processing, Inc. 63,800 3,190
Barnett Banks, Inc. 44,800 3,170
J.C. Penney Co., Inc. 54,400 3,169
Burlington Northern Santa Fe Corp. 32,732 3,163
CoreStates Financial Corp. 47,509 3,144
Baxter International, Inc. 59,900 3,130
KeyCorp 49,100 3,124
- - EMC Corp. 53,100 3,100
The Gap, Inc. 61,300 3,069
Aluminum Co. of America 37,100 3,042
CIGNA Corp. 16,300 3,036
Mellon Bank Corp. 55,400 3,033
- - U S WEST Media Group 133,730 2,984
Raytheon Co. 50,400 2,980
Deere & Co. 55,200 2,967
Rockwell International Corp. 46,700 2,939
Archer-Daniels-Midland Co. 122,644 2,936
National City Corp. 47,391 2,917
May Department Stores Co. 53,400 2,910
Phillips Petroleum Co. 56,300 2,906
MBNA Corp. 71,400 2,892
BankBoston Corp. 32,501 2,874
CPC International, Inc. 30,900 2,862
Dayton-Hudson Corp. 47,509 2,848
Halliburton Co. 54,600 2,839
The Seagram Co. Ltd. 80,200 2,827
Norfolk Southern Corp. 26,800 2,767
Loews Corp. 24,500 2,767
Marsh & McLennan Cos., Inc. 36,100 2,766
CSX Corp. 46,900 2,744
- - CUC International, Inc. 88,150 2,733
- - Amgen, Inc. 56,600 2,710
American General Corp. 52,195 2,708
Walgreen Co. 105,400 2,701
The Chubb Corp. 37,300 2,651
Pitney Bowes, Inc. 31,700 2,637
Aetna Inc. 32,306 2,631
Illinois Tool Works, Inc. 52,400 2,620
Household International, Inc. 22,903 2,592
Wachovia Corp. 35,600 2,563
- - Tele-Communications, Inc. Class A 124,720 2,549
Enron Corp. 66,000 2,541
Weyerhaeuser Co. 42,400 2,518
AMP, Inc. 46,844 2,509
- - HFS Inc. 33,700 2,509
PPG Industries, Inc. 39,800 2,495
- - Viacom Inc. Class B 76,200 2,410
Edison International 93,700 2,366
General Mills, Inc. 34,000 2,344
Corning, Inc. 49,100 2,320
Unocal Corp. 53,139 2,298
- - Boston Scientific Corp. 41,600 2,296
The Goodyear Tire & Rubber Co. 33,300 2,289
USX-Marathon Group 61,400 2,283
Textron, Inc. 34,400 2,236
- - AMR Corp. 20,100 2,225
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Fifth Third Bancorp 33,900 $ 2,212
- - Toys R Us, Inc. 61,600 2,187
The Hartford Financial Services Group Inc. 25,000 2,152
State Street Corp. 34,900 2,127
Bankers Trust New York Corp. 17,100 2,095
Mattel, Inc. 62,887 2,083
PG&E Corp. 88,900 2,061
Georgia-Pacific Corp. 19,500 2,035
CVS Corp. 35,600 2,025
Charles Schwab Corp. 56,250 2,011
FPL Group, Inc. 39,100 2,004
Ralston-Ralston Purina Group 22,600 2,000
Barrick Gold Corp. 80,400 1,990
- - HEALTHSOUTH Corp. 74,000 1,975
Air Products & Chemicals, Inc. 23,800 1,974
United Healthcare Corp. 39,300 1,965
- - Tellabs, Inc. 38,100 1,962
- - Federal Express Corp. 24,400 1,952
Marriott International 27,400 1,947
Comcast Corp. Class A Special 75,600 1,937
Comerica, Inc. 24,300 1,918
- - Federated Department Stores 44,400 1,915
- - Seagate Technology 53,000 1,915
Albertson's, Inc. 53,900 1,880
Conseco Inc. 38,400 1,874
Wrigley, (Wm.) Jr. Co. 24,800 1,868
Fort James Corp. 40,700 1,865
Hershey Foods Corp. 32,800 1,853
Texas Utilities Co. 51,341 1,848
- - Tenet Healthcare Corp. 63,400 1,847
Aon Corp. 34,650 1,832
Honeywell, Inc. 27,200 1,827
American Electric Power Co., Inc. 40,000 1,820
Occidental Petroleum Corp. 69,200 1,795
Guidant Corp. 31,800 1,781
Hilton Hotels Corp. 52,700 1,775
Avon Products, Inc. 28,400 1,761
Tenneco, Inc. 36,500 1,747
Browning-Ferris Industries, Inc. 45,500 1,732
- - Costco Cos., Inc. 45,556 1,711
Praxair, Inc. 33,400 1,710
Consolidated Edison Co. of New York, Inc. 50,200 1,707
Salomon, Inc. 22,600 1,699
- - ITT Corp. 25,000 1,694
Alcan Aluminium Ltd. 48,450 1,684
SunAmerica Inc. 42,300 1,658
Dover Corp. 24,400 1,656
- - Bay Networks, Inc. 42,800 1,653
Progressive Corp. of Ohio 15,400 1,650
Dresser Industries, Inc. 38,300 1,647
Cardinal Health, Inc. 23,000 1,633
The Clorox Co. 22,000 1,631
- - The Kroger Co. 53,800 1,624
Service Corp. International 50,400 1,622
Pioneer Hi-Bred International, Inc. 17,600 1,602
Masco Corp. 34,400 1,576
Delta Air Lines, Inc. 16,700 1,573
Williams Cos., Inc. 33,600 1,573
Lincoln National Corp. 22,300 1,553
- - Micron Technology, Inc. 44,500 1,544
Newmont Mining Corp. 33,946 1,525
Eaton Corp. 16,500 1,524
American Stores Co. 62,400 1,521
TRW, Inc. 27,500 1,509
Ingersoll-Rand Co. 34,950 1,505
Northrop Grumman Corp. 12,300 1,493
Cognizant Corp. 36,400 1,483
The Quaker Oats Co. 29,100 1,466
St. Paul Cos., Inc. 17,900 1,460
Rite Aid Corp. 26,300 1,458
- - Kmart Corp. 104,000 1,456
Dominion Resources, Inc. 38,150 1,445
MGIC Investment Corp. 25,200 1,444
- - Digital Equipment Corp. 33,300 1,442
The McGraw-Hill Cos. 21,300 1,442
Lowe's Cos., Inc. 36,900 1,434
Sysco Corp. 38,800 1,433
Coastal Corp. 23,350 1,430
UNUM Corp. 31,200 1,423
SAFECO Corp. 26,900 1,422
The Limited, Inc. 57,895 1,415
PacifiCorp 63,000 1,410
Transamerica Corp. 14,100 1,403
Union Pacific Resources Group, Inc. 53,422 1,399
ALLTEL Corp. 40,500 1,397
Tribune Co. 26,200 1,397
Interpublic Group of Cos., Inc. 27,150 1,393
Green Tree Financial Corp. 29,400 1,382
Cooper Industries, Inc. 25,457 1,376
Burlington Resources, Inc. 26,800 1,375
Newell Co. 34,000 1,360
Union Carbide Corp. 27,700 1,349
Baker Hughes, Inc. 30,800 1,347
Public Service Enterprise Group Inc. 52,100 1,342
Republic New York Corp. 11,800 1,341
Rohm & Haas Co. 13,800 1,324
- - National Semiconductor Corp. 31,600 1,296
H.F. Ahmanson & Co. 22,800 1,295
- - Thermo Electron Corp. 32,000 1,280
Houston Industries, Inc. 58,522 1,273
Entergy Corp. 48,800 1,272
Becton, Dickinson & Co. 26,500 1,269
Crown Cork & Seal Co., Inc. 27,400 1,264
Torchmark Corp. 32,000 1,256
VF Corp. 13,514 1,252
Champion International Corp. 20,500 1,249
- - Clear Channel Communications 19,200 1,246
Huntington Bancshares Inc. 34,300 1,235
Amerada Hess Corp. 20,000 1,234
Fortune Brands, Inc. 36,400 1,226
UST Inc. 40,100 1,226
- - KLA-Tencor Corp. 18,000 1,215
General Dynamics Corp. 13,900 1,211
Consolidated Natural Gas Co. 20,800 1,210
The Times Mirror Co. Class A 21,900 1,203
- - Parametric Technology Corp. 27,300 1,203
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Freeport-McMoRan Copper & Gold Inc. Class B 41,700 $ 1,201
Jefferson-Pilot Corp. 15,200 1,201
Genuine Parts Co. 38,850 1,197
R.R. Donnelley & Sons Co. 32,700 1,167
Carolina Power & Light Co. 32,400 1,164
Nordstrom, Inc. 18,300 1,164
International Flavors & Fragrances, Inc. 23,700 1,161
W.R. Grace & Co. 15,700 1,156
MBIA, Inc. 9,200 1,154
Winn-Dixie Stores, Inc. 32,400 1,148
- - Mirage Resorts, Inc. 38,100 1,148
Hercules, Inc. 22,800 1,134
- - Computer Sciences Corp. 16,000 1,132
CINergy Corp. 33,718 1,127
Sherwin-Williams Co. 38,000 1,119
Knight-Ridder, Inc. 20,400 1,114
PECO Energy Corp. 47,500 1,113
Reynolds Metals Co. 15,700 1,112
Dillard's Inc. 25,200 1,104
Golden West Financial Corp. 12,300 1,104
Parker Hannifin Corp. 24,525 1,104
Whirlpool Corp. 16,600 1,101
New York Times Co. Class A 20,800 1,092
Phelps Dodge Corp. 14,000 1,087
Morton International, Inc. 30,400 1,079
Unicom Corp. 46,000 1,075
Dana Corp. 21,700 1,071
Allegheny Teledyne Inc. 37,110 1,062
- - Cabletron Systems, Inc. 32,800 1,050
Eastman Chemical Co. 16,750 1,038
- - Western Atlas, Inc. 11,800 1,038
The Dun & Bradstreet Corp. 36,400 1,033
Case Corp. 15,500 1,033
Equifax, Inc. 32,400 1,019
Laidlaw, Inc. 68,100 1,017
- - Advanced Micro Devices, Inc. 31,200 1,016
- - Owens-Illinois, Inc. 29,700 1,008
W.W. Grainger, Inc. 11,300 1,006
TJX Cos., Inc. 32,800 1,002
- - Silicon Graphics, Inc. 38,146 1,001
Central & South West Corp. 44,900 996
Nucor Corp. 18,700 985
Southwest Airlines Co. 30,800 984
- - LSI Logic Corp. 30,500 980
Placer Dome, Inc. 51,100 977
Dow Jones & Co., Inc. 20,700 968
- - AutoZone Inc. 32,200 966
PACCAR, Inc. 17,340 962
Fluor Corp. 17,900 960
DTE Energy Co. 31,100 947
Sonat, Inc. 18,400 936
Anadarko Petroleum Corp. 12,900 926
GPU Inc. 25,700 922
Johnson Controls, Inc. 18,400 912
Baltimore Gas & Electric Co. 32,750 909
Union Camp Corp. 14,700 907
Willamette Industries, Inc. 23,600 903
Inco Ltd. 35,898 900
Avery Dennison Corp. 22,400 896
Beneficial Corp. 11,700 891
- - ITT Industries, Inc. 26,300 873
Circuit City Stores, Inc. 21,500 867
The Stanley Works 20,000 860
Liz Claiborne, Inc. 15,600 857
H & R Block, Inc. 22,100 854
Tandy Corp. 25,064 843
Union Electric Co. 21,800 838
Apache Corp. 19,500 836
Columbia Gas Systems, Inc. 11,800 826
- - Humana, Inc. 34,600 824
Countrywide Credit Industries, Inc. 22,400 816
Rubbermaid, Inc. 31,900 815
Pennzoil Co. 10,200 813
Westvaco Corp. 22,500 811
Frontier Corp. 35,100 807
Harris Corp. 17,600 805
Raychem Corp. 9,500 803
The Mead Corp. 11,100 802
Maytag Corp. 23,500 802
Ashland, Inc. 14,700 799
Ohio Edison Co. 33,900 795
Providian Financial Corp. 20,000 794
Temple-Inland Inc. 12,400 794
PP&L Resources Inc. 36,200 792
Black & Decker Corp. 20,900 779
Hasbro, Inc. 27,600 776
Harcourt General, Inc. 15,563 771
Adobe Systems, Inc. 15,300 769
Brunswick Corp. 21,500 758
Brown-Forman Corp. Class B 15,200 755
Sigma-Aldrich Corp. 22,200 730
Northern States Power Co. 14,600 726
- - FMC Corp. 8,100 719
Kerr-McGee Corp. 10,400 716
IKON Office Solutions 27,900 713
Perkin-Elmer Corp. 9,700 709
Cummins Engine Co., Inc. 9,000 703
- - US Airways Group Inc. 16,900 699
Engelhard Corp. 32,250 695
- - St. Jude Medical, Inc. 19,700 691
Ecolab, Inc. 14,200 690
Sun Co., Inc. 15,667 686
- - Novell, Inc. 75,300 675
- - DSC Communications Corp. 25,000 672
- - Rowan Cos., Inc. 18,700 666
Great Lakes Chemical Corp. 13,500 666
USX-U.S. Steel Group 18,940 658
- - Woolworth Corp. 29,500 653
Snap-On Inc. 14,050 647
- - Ceridian Corp. 17,300 640
Whitman Corp. 23,300 635
Thomas & Betts Corp. 11,600 634
Ryder System, Inc. 17,500 629
Pacific Enterprises 18,500 627
Nalco Chemical Co. 15,300 613
Biomet, Inc. 25,600 613
SuperValu Inc. 15,600 612
Deluxe Corp. 18,200 611
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Wendy's International, Inc. 28,600 $ 608
American Greetings Corp. Class A 16,500 606
- - Reebok International Ltd. 12,300 599
- - Apple Computer, Inc. 27,600 599
USF&G Corp. 25,800 592
- - Unisys Corp. 38,200 585
Louisiana-Pacific Corp. 23,200 580
Louisiana Land & Exploration Co. 7,400 580
Armstrong World Industries Inc. 8,600 577
Mallinckrodt, Inc. 15,900 572
- - Oryx Energy Co. 22,000 560
The Timken Co. 13,800 553
Pall Corp. 25,566 551
- - ALZA Corp. 18,400 534
Polaroid Corp. 10,362 530
Bausch & Lomb, Inc. 13,000 526
The BFGoodrich Co. 11,600 525
Tektronix, Inc. 7,700 519
Bemis Co., Inc. 11,600 519
Mercantile Stores Co., Inc. 8,200 516
Allergan, Inc. 14,200 514
- - Harrah's Entertainment, Inc. 22,700 509
- - Andrew Corp. 19,275 504
Cyprus Amax Minerals Co. 20,711 497
Cooper Tire & Rubber Co. 18,500 491
National Service Industries, Inc. 11,000 483
- - Fruit of the Loom, Inc. 17,100 481
- - NextLevel Systems, Inc. 28,700 481
Homestake Mining Co. 31,200 478
Caliber System Inc. 8,700 472
Autodesk, Inc. 10,400 472
Harnischfeger Industries Inc. 11,000 470
Echlin, Inc. 13,300 466
General Signal Corp. 10,700 463
Manor Care Inc. 13,900 462
U.S. Surgical Corp. 15,700 458
- - Navistar International Corp. 16,580 458
Millipore Corp. 9,200 452
Boise Cascade Corp. 10,700 450
Helmerich & Payne, Inc. 5,500 440
NICOR, Inc. 11,600 435
C.R. Bard, Inc. 12,800 434
McDermott International, Inc. 11,900 434
Giant Food, Inc. Class A 13,300 433
Crane Co. 10,225 421
Moore Corp. Ltd. 22,100 420
Darden Restaurants Inc. 35,600 412
Meredith Corp. 12,400 411
Worthington Industries, Inc. 20,150 407
Owens Corning 11,100 405
Centex Corp. 6,900 403
- - Beverly Enterprises, Inc. 22,600 393
Alberto-Culver Co. Class B 12,600 383
Foster Wheeler Corp. 8,700 382
Scientific-Atlanta, Inc. 16,800 380
Tupperware Corp. 13,300 374
Pep Boys (Manny, Moe & Jack) 13,700 373
Battle Mountain Gold Co. Class A 51,400 369
King World Productions, Inc. 8,300 359
Potlatch Corp. 6,500 327
Stone Container Corp. 20,810 324
Adolph Coors Co. Class B 8,400 318
Aeroquip-Vickers Inc. 6,400 314
Briggs & Stratton Corp. 6,300 311
Safety-Kleen Corp. 12,800 306
- - Niagara Mohawk Power Corp. 31,900 305
ASARCO, Inc. 9,400 301
Peoples Energy Corp. 7,700 290
Great Atlantic & Pacific Tea Co., Inc. 8,500 270
Shared Medical Systems Corp. 5,100 270
Russell Corp. 8,900 262
Fleetwood Enterprises, Inc. 7,775 261
Jostens Inc. 9,600 260
- - Data General Corp. 9,500 253
- - Bethlehem Steel Corp. 24,500 253
Longs Drug Stores, Inc. 9,200 246
Ball Corp. 6,600 230
Pulte Corp. 5,900 226
Inland Steel Industries, Inc. 10,100 221
Springs Industries Inc. Class A 4,100 215
Cincinnati Milacron, Inc. 7,800 210
EG&G, Inc. 10,100 209
ONEOK, Inc. 6,000 196
Echo Bay Mines Ltd. 30,800 175
Eastern Enterprises 4,500 168
Kaufman & Broad Home Corp. 7,500 163
John H. Harland Co. 6,800 157
Fleming Cos., Inc. 8,300 152
Stride Rite Corp. 10,900 148
- - Charming Shoppes, Inc. 23,000 142
- - Armco, Inc. 23,300 140
NACCO Industries, Inc. Class A 860 101
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $893,795) 1,587,886
- -------------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (48.1%)
- -------------------------------------------------------------------------------------
U.S. Treasury Bonds
6.00%, 2/15/26 $90,500 85,047
6.25%, 8/15/23 53,725 52,198
6.50%, 11/15/26 43,500 43,788
6.875%, 8/15/25 99,165 104,278
7.125%, 2/15/23 48,405 52,220
7.25%, 5/15/16 87,050 94,610
7.25%, 8/15/22 21,500 23,506
7.50%, 11/15/16 36,170 40,263
7.50%, 11/15/24 29,190 32,977
7.625%, 11/15/22 63,120 71,965
7.625%, 2/15/25 56,550 64,815
8.00%, 11/15/21 68,080 80,521
8.125%, 8/15/19 58,610 69,786
8.125%, 5/15/21 96,645 115,624
8.125%, 8/15/21 44,860 53,706
8.50%, 2/15/20 17,300 21,392
8.75%, 5/15/17 23,500 29,436
8.75%, 5/15/20 85,890 108,836
8.75%, 8/15/20 65,330 82,867
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
8.875%, 8/15/17 35,340 $ 44,809
8.875%, 2/15/19 39,995 51,017
9.125%, 5/15/18 78,590 102,206
9.25%, 2/15/16 17,575 22,843
10.375%, 11/15/09 13,500 16,666
10.375%, 11/15/12 54,100 70,344
10.625%, 8/15/15 29,860 43,072
11.25%, 2/15/15 21,770 32,776
11.75%, 11/15/14 49,265 71,520
12.00%, 8/15/13 39,070 56,304
12.50%, 8/15/14 6,000 9,043
12.75%, 11/15/10 15,140 21,337
13.875%, 5/15/11 14,000 21,030
14.00%, 11/15/11 5,400 8,274
- -------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $1,727,246) 1,799,076
- -------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (8.7%)
- -------------------------------------------------------------------------------------
U.S. TREASURY BILL
5.08%, 12/11/97 (1) 12,260 12,142
COMMERCIAL PAPER
CIT Group Holdings
5.48%, 12/15/97 39,000 38,545
Ciesco LP
5.52%, 12/2/97 25,000 24,748
Ford Credit Europe PLC
5.51%, 12/24/97 40,000 39,478
General Electric Capital Corp.
5.52%, 12/9/97 40,000 39,572
International Business Machines Corp.
5.49%, 12/15/97 25,000 24,708
Procter & Gamble Co.
5.47%, 12/22/97 20,000 19,746
USAA Capital Corp.
5.51%, 12/19/97 30,000 29,633
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.05%, 10/1/97 95,077 95,077
- -------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $323,684) 323,649
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(COST $2,944,725) 3,710,611
- -------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.7%)
- -------------------------------------------------------------------------------------
Other Assets--Notes C and F 40,793
Liabilities--Note F (13,011)
----------
27,782
- -------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------
Applicable to 173,602,641 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $3,738,393
=====================================================================================
NET ASSET VALUE PER SHARE $21.53
=====================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
** The combined market value of common stocks and S&P 500 Index futures
contracts represents 50.5% of net assets. See Note E in Notes to Financial
Statements.
- Non-Income Producing Security.
(1)Security segregated as initial margin for open futures contracts.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $2,758,849 $15.89
Undistributed Net
Investment Income 56,803 .33
Accumulated Net
Realized Gains 154,824 .89
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 765,886 4.41
Futures Contracts 2,031 .01
- -------------------------------------------------------------------------------------
NET ASSETS $3,738,393 $21.53
=====================================================================================
</TABLE>
17
<PAGE> 20
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30, 1997
(000)
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 23,860
Interest 109,124
---------
Total Income 132,984
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 3,723
Performance Adjustment (921)
The Vanguard Group--Note C
Management and Administrative 10,632
Marketing and Distribution 683
Taxes (other than income taxes) 217
Custodian Fees 104
Auditing Fees 20
Shareholders' Reports 77
Annual Meeting and Proxy Costs 9
Directors' Fees and Expenses 7
---------
Total Expenses 14,551
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 118,433
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 9,657
Futures Contracts 171,257
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN 180,914
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 482,050
Futures Contracts (7,745)
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 474,305
- ------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $773,652
==========================================================================================
</TABLE>
18
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996
(000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 118,433 $ 82,386
Realized Net Gain 180,914 130,567
Change in Unrealized Appreciation (Depreciation) 474,305 57,983
-------------------------------
Net Increase in Net Assets Resulting from Operations 773,652 270,936
-------------------------------
DISTRIBUTIONS
Net Investment Income (101,081) (68,953)
Realized Capital Gain (137,804) (59,350)
-------------------------------
Total Distributions (238,885) (128,303)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,014,872 814,326
Issued in Lieu of Cash Distributions 229,554 121,514
Redeemed (381,985) (330,667)
-------------------------------
Net Increase from Capital Share Transactions 862,441 605,173
- --------------------------------------------------------------------------------------------------------
Total Increase 1,397,208 747,806
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,341,185 1,593,379
-------------------------------
End of Year $3,738,393 $2,341,185
========================================================================================================
(1) Shares Issued (Redeemed)
Issued 52,552 46,473
Issued in Lieu of Cash Distributions 12,599 7,051
Redeemed (19,710) (18,936)
-------------------------------
Net Increase in Shares Outstanding 45,441 34,588
========================================================================================================
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $18.27 $17.03 $13.78 $15.08 $13.79
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .74 .69 .64 .52 .54
Net Realized and Unrealized Gain (Loss) on Investments 4.29 1.82 3.18 (.81) 1.51
-------------------------------------------------------
Total from Investment Operations 5.03 2.51 3.82 (.29) 2.05
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.72) (.66) (.57) (.48) (.59)
Distributions from Realized Capital Gains (1.05) (.61) -- (.53) (.17)
-------------------------------------------------------
Total Distributions (1.77) (1.27) (.57) (1.01) (.76)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $21.53 $18.27 $17.03 $13.78 $15.08
=========================================================================================================================
TOTAL RETURN 29.42% 15.27% 28.57% -2.05% 15.41%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,738 $2,341 $1,593 $1,120 $1,003
Ratio of Total Expenses to Average Net Assets 0.49% 0.47% 0.49% 0.50% 0.49%
Ratio of Net Investment Income to Average Net Assets 3.96% 4.17% 4.41% 3.68% 4.07%
Portfolio Turnover Rate 10% 47% 34% 51% 31%
Average Commission Rate Paid $.0099 $.0160 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard Asset Allocation Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Bonds, and temporary cash investments
acquired over 60 days to maturity, are valued using the latest bid prices or
using valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund uses S&P 500 Index futures contracts, with the
objectives of maintaining full exposure to the stock market, enhancing returns,
maintaining liquidity, and minimizing transaction costs. The Fund may purchase
futures contracts to immediately invest incoming cash in the market, or sell
futures in response to cash outflows, thereby simulating a fully invested
position in the underlying index while maintaining a cash balance for
liquidity. The Fund may seek to enhance returns by using futures contracts
instead of the underlying securities when futures are believed to be priced
more attractively than the underlying securities. The primary risks associated
with the use of futures contracts are imperfect correlation between changes in
market values of stocks held by the Fund and the prices of futures contracts,
and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices.
The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded
in the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Mellon Capital Management Corporation provides investment advisory
services to the Fund for a fee calculated at an annual percentage rate of
average net assets. Prior to April 1, 1997, the basic fee was subject to
quarterly adjustments based on performance relative to the S&P 500 Index.
Effective April 1, 1997, the basic fee is subject to quarterly adjustments
based on performance relative to a combined index comprising the S&P 500 Index
and the Lehman Long U.S. Treasury
21
<PAGE> 24
Index. For the year ended September 30, 1997, the advisory fee represented an
effective annual basic rate of 0.12% of the Fund's average net assets before a
decrease of $921,000 (0.03%) based on performance.
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At September 30, 1997, the Fund had contributed capital of $251,000
to Vanguard (included in Other Assets), representing 1.3% of Vanguard's
capitalization. The Fund's Directors and officers are also Directors and
officers of Vanguard.
D. During the year ended September 30, 1997, the Fund purchased
$378,838,000 of investment securities and sold $14,276,000 of investment
securities, other than U.S. government securities and temporary cash
investments. Purchases and sales of U.S. government securities were
$1,029,546,000 and $226,233,000, respectively.
E. At September 30, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$765,886,000, consisting of unrealized gains of $771,056,000 on securities that
had risen in value since their purchase and $5,170,000 in unrealized losses on
securities that had fallen in value since their purchase.
At September 30, 1997, the aggregate settlement value of open futures
contracts expiring in December 1997 and the related unrealized appreciation
were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(000)
--------------------------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 629 $300,190 $2,031
- ---------------------------------------------------------------------------
</TABLE>
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for federal income tax purposes.
F. The market value of securities on loan to broker/dealers at September
30, 1997, was $136,714,000, for which the Fund had received as collateral cash
of $1,554,000 and U.S. Treasury securities with a market value of $138,881,000.
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.
22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Asset Allocation Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Asset Allocation Fund (the "Fund") at September 30, 1997, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 31, 1997
23
<PAGE> 26
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD ASSET ALLOCATION FUND
This information for the fiscal year ended September 30, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $101,732,000 as capital gain dividends (from net
long-term capital gains), of which $9,736,000 was distributed to shareholders
in December 1996. The balance of $91,996,000 , along with any additional gains
realized through October 31, 1997, will be distributed in December 1997.
For corporate shareholders, 12.1% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
24
<PAGE> 27
- ----------------------------------------------------------------------
DIRECTORS AND OFFICERS
- ----------------------------------------------------------------------
JOHN C. BOGLE
Chairman of the Board and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group.
JOHN J. BRENNAN
President, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel
Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co., and The Mead Corp.; Trustee of Vanderbilt University.
- -------------------------------------------------------------------
OTHER FUND OFFICERS
- -------------------------------------------------------------------
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group,
Inc.; Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of
each of the investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ------------------------------------------------------------------
OTHER VANGUARD OFFICERS
- ------------------------------------------------------------------
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 28
THE VANGUARD
FAMILY OF FUNDS
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All Vanguard funds are offered by prospectus only. Prospectuses contain more
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Q780-9/97 - (C) 1997 Vanguard Marketing Corporation, Distributor
