<PAGE> 1
VANGUARD
ASSET ALLOCATION
FUND
[PHOTO]
SEMIANNUAL REPORT
MARCH 31, 1999
[THE VANGUARD GROUP LOGO]
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AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
12
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
JOHN J. BRENNAN JOHN C. BOGLE
CHAIRMAN & CEO SENIOR CHAIRMAN
Vanguard Asset Allocation Fund provided an exceptional return of +15.5% during
the six months ended March 31, 1999, the first half of our fiscal year. Your
fund outperformed both the average asset allocation fund and our composite
index of stocks and bonds.
As you know, the fund allocates its assets among large-capitalization
common stocks, long-term U.S. Treasury bonds, and cash investments. The
adjacent table compares our six-month total return (capital change plus
reinvested dividends) with those of the average competing fund and our
composite index, which is based on a fixed allocation of 65% to stocks and 35%
to bonds. We also present six-month returns for indexes representing the three
asset classes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
MARCH 31, 1999
- ------------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund +15.5%
- ------------------------------------------------------------
Average Asset Allocation Fund +13.8%
- ------------------------------------------------------------
Asset Allocation Composite Index* +15.1%
- ------------------------------------------------------------
S&P 500 Index +27.3%
Lehman Brothers Long U.S. Treasury
Bond Index - 5.2
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index + 2.3
- ------------------------------------------------------------
</TABLE>
*65% S&P 500 INDEX AND 35% LEHMAN LONG U.S.
TREASURY INDEX.
The fund's return is based on an increase in net asset value from $22.90
per share on September 30, 1998, to $24.63 per share on March 31, 1999, with
the latter figure adjusted for a dividend of $0.56 per share paid from net
investment income and a distribution of $1.18 per share paid from net realized
capital gains.
THE PERIOD IN REVIEW
During the six months ended March 31, the U.S. stock market rebounded in a big
way from 1998's midyear slump, when most market benchmarks declined by -20% or
more. Conditions were excellent for stocks: Surprisingly strong economic growth
coincided with mild inflation. However, the powerful economic expansion was not
a plus for the fixed-income market, where interest rates rose and bond prices
fell.
The overall U.S. stock market, as measured by the Wilshire 5000 Equity
Index, rose +26.1% during the first half of our fiscal year, setting record
highs along the way. The Standard & Poor's 500 Composite Stock Price Index,
which is dominated by large-cap stocks and is the target for your fund's equity
portfolio, did even better, rising +27.3%. Small-cap stocks, represented by the
Russell 2000 Index, gained +10.0%, a superb half-year performance but subpar in
comparison with larger stocks. Growth stocks far outperformed value stocks
during the period. Within the S&P 500 Index, for example, growth stocks gained
an amazing +33.1%, compared with a +20.8% return for value stocks.
The stock market soared despite two factors that might have daunted
investors. First, corporate earnings declined slightly in 1998 and were forecast
to rise less than 3% during first-quarter 1999. Second, despite a pair of
short-term interest rate cuts by the Federal Reserve Board early in the period,
interest rates rose, which often hurts stocks. The yield of the benchmark
30-year U.S. Treasury bond rose 65 basis points (0.65 percentage point), from
4.98% when the fiscal year began to 5.63% as of March 31. Bond prices,
1
<PAGE> 4
which move in the opposite direction from interest rates, declined. The Lehman
Long U.S. Treasury Index, for example, declined -8.1% in price, more than
offsetting interest income and resulting in a -5.2% total return. Short-term
Treasury yields did not rise as far--the yield of the 3-month T-bill increased
by 12 basis points, from 4.36% to 4.48%.
Our investment adviser, Mellon Capital Management, changes the fund's
allocation from time to time in an effort to take advantage of perceived
imbalances in the relative prices and expected returns of stocks, bonds, and
cash investments. The expected returns and recommended allocations are
determined by the adviser's proprietary asset-allocation model. During the
first half of the fiscal year, two shifts were made. The fund began the period
with an allocation of 80% stocks/20% bonds. The allocation was shifted in late
October to 70% stocks/30% bonds, and in November to 60% stocks/40% bonds, where
it remained through March 31. These modest shifts enhanced the fund's return by
0.4 percentage point over the 15.1% return that would have been achieved
(before expenses) by maintaining a steady "neutral" mix of 65% stocks and 35%
bonds.
Our policy of investing the fund's equity segment in a portfolio tracking
the S&P 500 Index helped us to achieve a 1.7-percentage-point margin over the
return of the average asset allocation fund. As we noted, large-cap stocks
outperformed smaller stocks during the half-year, which worked to our benefit
because our average peer holds a larger stake in smaller stocks. We note that
large-cap stocks won't always be the market's leaders, so holding them will
sometimes work to our disadvantage. Similarly, our use of long-term Treasury
bonds for the fund's fixed-income segment helps us when interest rates are
falling and hurts when rates are rising (as during this period), since our
typical peer holds shorter-maturity bonds whose prices are less sensitive to
changes in interest rates.
We were aided versus our competitors by our low operating costs, which we
believe represent a durable advantage. The average asset allocation fund has
annual operating expenses amounting to 1.41% of net assets, nearly three times
the 0.48% expense ratio of Vanguard Asset Allocation Fund. This cost
differential represents a head start of about a full percentage point, year
after year, in our effort to provide superior returns.
IN SUMMARY
The first half of our fiscal year was richly rewarding to investors in Vanguard
Asset Allocation Fund, as the U.S. stock market packed more than two years'
worth of "normal" returns into a mere six-month period. We are, of course,
grateful for this bounty, even as we recognize that such extraordinary gains
can't continue indefinitely. As the bond market showed during the past
half-year, markets can fall as well as rise. Price fluctuations are a risk
investors must assume in pursuit of long-term rewards from the financial
markets.
We believe that a sensible approach for dealing with investment risks is
to construct a balanced portfolio of stocks, bonds, and cash investments
appropriate to your time horizon, goals, and tolerance for price fluctuations.
Indeed, Vanguard Asset Allocation Fund embodies a balanced approach to the
trade-off between investment risks and rewards. In any event, once your own
plan is in place, we recommend that you stick with it.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
April 15, 1999
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MARCH 31, 1999
[PHOTO]
Stock markets worldwide provided solid gains during the six months ended March
31, 1999, as they recovered from a sharp slide in midsummer 1998. Central banks
around the world helped by easing monetary policy and lowering short-term
interest rates.
A remarkably robust performance by the U.S. economy was a key factor in
the global recovery. Indeed, the United States was the only major economy in
which policymakers and bondholders had to ponder whether growth was too rapid.
Concern about a potential inflationary surge was one reason that longer-term
interest rates rose modestly and bond prices generally slipped in the United
States.
U.S. STOCK MARKETS
The surge in U.S. stocks during the half-year reflected both the strength of
the domestic economy and the confidence of investors in future corporate and
economic prospects. The overall market, as measured by the Wilshire 5000 Equity
Index, gained 26.1%. The S&P 500 Index, which is dominated by
large-capitalization stocks, advanced 27.3%. Small-cap stocks, which have
consistently underperformed large-cap stocks in recent years, gained 10.0%, as
measured by the Russell 2000 Index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED MARCH 31, 1999
------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 27.3% 18.5% 26.2%
Russell 2000 Index 10.0 -16.3 11.2
Wilshire 5000 Index 26.1 13.1 23.6
MSCI EAFE Index 22.5 6.4 9.1
- ---------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -0.2% 6.5% 7.8%
Lehman 10-Year Municipal Bond Index 1.2 6.3 7.7
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.3 4.9 5.2
- ---------------------------------------------------------------------------------
OTHER
Consumer Price Index 0.9% 1.7% 2.3%
- ---------------------------------------------------------------------------------
</TABLE>
*Annualized.
There was also a striking disparity in returns from growth and value
stocks; the growth-stock segment of the S&P 500 Index gained 33.1%, while the
value-stock segment rose 20.8%.
Investors in U.S. stocks seemed to have forgotten the jitters that sent
market indexes plummeting by 20% or more during the summer of 1998. Nor did
they appear to care that corporate earnings were flat to slightly lower during
the half-year. Investors focused more on the potential for future earnings than
on near-term disappointments. Interest rate reductions by central banks,
including three separate quarter-percentage-point cuts during autumn 1998 by
the U.S. Federal Reserve Board, lessened fears that the major economies would
be dragged down by the economic and currency troubles still afflicting much of
Asia, Russia, and Latin America. There was certainly little fear among U.S.
consumers, who were encouraged by low unemployment, rising wages, and low
inflation to spend freely. Their spending propelled the economy to a 6%
annualized growth rate during the first quarter of our fiscal year.
3
<PAGE> 6
With consumer spending so strong, it is no surprise that retailers and
other companies in the consumer-discretionary sector were the stock market's
leaders during the fiscal half-year, rising 49% on average. Technology stocks
were a close second, gaining 48%. Optimism--some would say overoptimism--was
especially evident in Internet stocks.
The market's laggards were energy stocks (integrated-oil companies were
up a relatively paltry 6%; "other energy" rose about 14%) and the
consumer-staples and materials & processing groups (each up about 10%). Energy
stocks lagged because prices for oil and natural gas were weak, despite upticks
late in the period. Several large makers of consumer staples, such as beverages
and tobacco, reported disappointing overseas profits.
U.S. BOND MARKETS
Early in the fiscal year, long-term interest rates fell to 30-year lows as a
result of the favorable inflationary environment and heavy demand from
investors who sought the perceived safety of U.S. Treasury bonds amid overseas
economic turmoil. The yield of the 30-year Treasury began the period at 4.98%
and fell to a low of 4.72% on October 5. However, as prices of stocks and
riskier bonds rebounded from their summertime lows, Treasury bond prices began
to fall and their yields began to rise. By March 31, the yield on the 30-year
Treasury was at 5.63%, up 65 basis points (0.65 percentage point) for the
half-year. The Lehman Brothers Long U.S. Treasury Bond Index declined -5.2%
during the half-year. The overall U.S. taxable bond market, as measured by the
Lehman Aggregate Bond Index, which has an intermediate-term average maturity,
had a negative return of -0.2%. High-yield bonds, which had suffered along with
other risky assets during last summer's slump in financial markets, produced
positive returns during the half-year.
Short-term interest rates, which were most directly affected by the
Federal Reserve Board's reductions, rose only slightly. Yields on 3-month
Treasury bills began the half-year at 4.36% but fell as low as 3.62% in
mid-October. By March 31, the 3-month T-bill was yielding 4.48%, only 12 basis
points higher than the rate when the period began.
INTERNATIONAL STOCK MARKETS
International stock markets, heartened by Wall Street's strong rally and easier
monetary policy, rallied during the half-year. Overall, the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index gained 22.5%
in U.S. dollars. The gains were due, in part, to interest rate cuts by monetary
authorities in Japan, Europe, and Latin America. Investors also were heartened
by an increase in corporate restructuring and merger activity in Europe and
recession-wracked Japan.
The biggest gains overseas were for those bourses hit hardest during 1997
and 1998: emerging markets (the MSCI Select Emerging Markets Free Index rose
30.5% during the six months) and the Pacific region (up 40.1%). Further
boosting returns for U.S. investors was a weakening of the U.S. dollar against
the Japanese yen. In a turnabout, Europe's developed stock markets--which
account for some 70% of the EAFE Index--were the laggards, although they
performed well on balance, providing an aggregate return of 16.3% for U.S.
investors. While the U.S. dollar was weakening against the Japanese yen, and
thus boosting returns from the Pacific region for U.S. investors by more than
12 percentage points, it was gaining against most European currencies, cutting
U.S. investors' returns on European stocks by about 5 percentage points.
In some emerging markets where stocks had plummeted in 1997 and 1998, the
six-month gains were spectacular: about 130% in U.S.-dollar terms in South
Korea, 115% in Indonesia, 69% in Malaysia, 66% in the Philippines, and 43% in
Mexico.
4
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REPORT FROM THE ADVISER
[PHOTO]
Vanguard Asset Allocation Fund earned a total return of 15.5% for the six
months ended March 31, 1999, the first half of our fiscal year. This was
slightly ahead of the 15.1% return of our unmanaged stock/bond composite index.
By way of comparison, the S&P 500 Index rose 27.3% and the Lehman Long U.S.
Treasury Index returned -5.2% during the half-year.
The stock market's strong performance during the first fiscal quarter
occurred amid a high level of volatility, prompted in part by financial crises
in emerging markets. On October 15, the Federal Reserve Board, seeing little
risk of an overheating economy or an increase in inflation, acted to counter
the effects of growing caution by lenders and unsettled financial markets by
lowering its target for the federal funds rate by 0.25 percentage point to
5.00%. (The Fed had similarly cut the fed funds rate by a quarter point in late
September.)
Although the equity market reacted favorably to the Fed's action--the
S&P 500 Index rose 8.1% during October, its highest monthly return since
December 1991--bond prices declined and yields rose. Stocks rose sharply again
in November, while the bond market posted marginal gains. On November 17, the
Federal Reserve lowered the target federal funds rate by another quarter point
to 4.75%, the third decrease in seven weeks. The widely anticipated move was
intended to calm markets in general and to restore order in global credit
markets in particular. The Fed made no further changes in monetary policy
through the rest of our fiscal half-year.
With the exception of the manufacturing sector, the U.S. economy grew
steadily throughout the first fiscal quarter, benefiting from low inflation,
high consumer confidence, and solid consumer spending. Unemployment in March
fell to 4.2% of the workforce, the lowest rate in 29 years.
In contrast to the Federal Reserve's earlier preoccupation with external
shocks to domestic growth, economic releases during the second fiscal quarter
seemed to show that financial crises abroad had not significantly slowed growth
in the United States. In fact, economic reports during the quarter on gross
domestic product (GDP), manufacturing output, consumption, and employment were
uniformly strong, showing accelerating growth. GDP grew at an
inflation-adjusted 6.0% annual rate during the October-December quarter as the
economy completed its eighth year of expansion. The last time GDP grew faster
than 6.0% was in 1984, when the economy was emerging from a deep recession.
Even the manufacturing sector, which has recently been the economy's one weak
link, began to show credible signs of strength. Notably, the National
Association of Purchasing Management index rose strongly during our second
fiscal quarter, rising 9.0 points to 54.3 from its December level of 45.3. (A
reading above 50 is generally associated with an expansion in manufacturing.)
Labor markets remained tight, as indicated by the low
5
<PAGE> 8
unemployment rate. Moreover, inflation continued to show no sign of
accelerating, and the Consumer Price Index rose only 1.7% for the 12 months
ended March 31, 1999.
Concerning our tactical asset allocation model, the volatility in the
markets during the first fiscal quarter presented two opportunities to change
the fund's asset allocation. The steep rise in stock prices through October 22
lowered the prospective future return on equities, while bond yields rose
substantially. This narrowed the spread between our model's expected returns on
stocks and bonds and prompted the model to call for a shift of 10% of assets
out of stocks into bonds. This shift was implemented on October 23, changing
the fund's allocation to 70% stocks/30% bonds from an 80%/20% mix. As stock
prices continued to rise sharply, the expected return on stocks fell further.
Meanwhile, a sharp increase in bond yields during early November narrowed the
spread between the expected returns on stocks and bonds. This prompted our
model to call for another 10% shift from stocks to bonds. This move was
implemented on November 9, changing the fund's asset mix to 60% stocks/40%
bonds.
The fund's asset mix remained at 60% stocks/40% bonds through the end of
the half-year. During January, a sharp rise in equities lowered the expected
return on stocks, while a decrease in bond yields lowered the expected return
on bonds. The net effect was to leave the spread between expected returns on
stocks and bonds little changed. During February, the decline in equity prices
raised the expected return on stocks, while substantially higher bond yields
raised the expected return on bonds. Again, the net effect was little change in
the spread between expected returns on stocks and those on bonds. The rise in
equity prices during March lowered the expected return on stocks, while yields,
and thus expected returns, on bonds were unchanged. Although the net effect was
a narrowing in the spread between the expected returns on stocks and bonds, it
was not large enough to prompt our model to recommend any shift in our asset
allocation.
During the six months ended March 31, changes in earnings forecasts had a
positive effect on our forecast for the expected return on stocks. Our long-run
expected return for stocks is now near 9.5% annually, and the Vanguard Asset
Allocation Fund continues to hold a neutral allocation of about 60% stocks/40%
bonds.
William L. Fouse, CFA
Mellon Capital Management Corporation
April 13, 1999
INVESTMENT PHILOSOPHY
The adviser believes that, although the financial markets are very efficient,
imbalances can be identified in the relative pricing of stocks, bonds, and
money market instruments. Implicit in this approach is a belief that such
imbalances occur only periodically and do not persist for long periods. The
adviser attempts to identify these windows of opportunity and to structure the
portfolio to take advantage of them.
6
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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 an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: NOVEMBER 3, 1988-MARCH 31, 1999
- ----------------------------------------------------------
ASSET ALLOCATION FUND COMPOSITE
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
1998 11.5 3.7 15.2 14.2
1999** 12.9 2.6 15.5 15.1
- ----------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long U.S. Treasury Index.
**Six months ended March 31, 1999.
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999
- -----------------------------------------------------------------------------------------------------
INCEPTION 10 YEARS
--------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund 11/3/1988 14.99% 20.95% 11.76% 4.59% 16.35%
- -----------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
FUND PROFILE
ASSET ALLOCATION FUND
This Profile provides a snapshot of the fund's characteristics as of March 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 10 and 11.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- -----------------------------------------------------------
<S> <C>
Turnover Rate 3%*
Expense Ratio 0.48%*
Cash Reserves 0.9%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- -----------------------------------------------------------
ASSET ALLOCATION S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 0.68 1.00
</TABLE>
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION*
- -----------------------------------------------------------
<S> <C> <C>
[PIE CHART]
Stocks Bonds Cash Reserves
60% 39% 1%
</TABLE>
*Actual allocation may vary slightly from target allocation because of
day-to-day market fluctuations.
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- -----------------------------------------------------------
<S> <C>
Microsoft Corp. 4.3%
General Electric Co. 3.4
Wal-Mart Stores, Inc. 1.9
Intel Corp. 1.9
Merck & Co., Inc. 1.8
Pfizer, Inc. 1.7
Cisco Systems, Inc. 1.6
Exxon Corp. 1.6
AT&T Corp. 1.6
International Business Machines Corp. 1.6
- -----------------------------------------------------------
Top Ten 21.4%
- -----------------------------------------------------------
Top Ten as % of Total Net Assets 9.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------------------------------
MARCH 31, 1998 MARCH 31, 1999
------------------------------------------------------------
ASSET ALLOCATION ASSET ALLOCATION S&P 500
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.6% 2.5% 2.5%
Consumer Discretionary 10.0 13.2 13.2
Consumer Staples 10.9 8.4 8.4
Financial Services 17.9 16.7 16.7
Health Care 11.7 12.4 12.4
Integrated Oils 6.7 5.1 5.1
Other Energy 1.2 1.0 1.1
Materials & Processing 5.6 3.3 3.3
Producer Durables 4.1 3.2 3.1
Technology 11.9 17.3 17.3
Utilities 10.6 11.1 11.1
Other 5.8 5.8 5.8
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- -----------------------------------------------------------
ASSET ALLOCATION S&P 500
- -----------------------------------------------------------
<S> <C> <C>
Number of Stocks 502 500
Median Market Cap $64.6B $64.6B
Price/Earnings Ratio 29.1x 29.1x
Price/Book Ratio 5.1x 5.1x
Dividend Yield 1.3% 1.3%
Return on Equity 22.5% 22.5%
Earnings Growth Rate 16.8% 16.8%
Foreign Holdings 1.5% 1.5%
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -----------------------------------------------------------
LEHMAN
ASSET ALLOCATION INDEX*
- -----------------------------------------------------------
<S> <C> <C>
Number of Bonds 26 7,422
Average Coupon 8.2% 6.8%
Average Duration 10.9 years 4.7 years
Average Maturity 21.5 years 8.9 years
Average Quality Treasury Aaa
</TABLE>
*Lehman Aggregate Bond Index.
[EQUITY INVESTMENT FOCUS GRAPH]
- -----------------------------------------------------------
[FIXED-INCOME INVESTMENT FOCUS GRAPH]
- -----------------------------------------------------------
9
<PAGE> 12
AVERAGE COUPON. The average interest rate paid on the securities held by a
fund. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the fund's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity (or are called) and are repaid. In general, the longer the average
maturity, the more a fund'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 fund'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. U.S. Treasury securities are considered to
have the highest credit quality.
BETA. A measure of the magnitude of a fund'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 fund 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 fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. This
figure does not include cash invested in futures contracts to simulate stock or
bond investments.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a fund, 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 fund.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund's equity
holdings 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 fund'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 fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's
assets invested in each stock. Stocks representing half of the fund's assets
have market capitalizations above the median, and the rest are below it.
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular bond issuer.
10
<PAGE> 13
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, 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 fund, 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 fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund'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 fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of equity assets that a fund has invested in
its ten largest stocks. As this percentage rises, a fund's returns are likely
to be more volatile because they are more dependent on the fortunes of a few
companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
11
<PAGE> 14
FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
[PHOTO]
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. 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)
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (42.0%)(1)
- ----------------------------------------------------------
- - Microsoft Corp. 1,566,800 $140,424
General Electric Co. 1,018,000 112,616
Wal-Mart Stores, Inc. 690,100 63,618
Intel Corp. 520,600 61,886
Merck & Co., Inc. 738,400 59,210
Pfizer, Inc. 404,900 56,180
- - Cisco Systems, Inc. 488,700 53,543
Exxon Corp. 757,300 53,437
AT&T Corp. 651,081 51,964
International Business
Machines Corp. 289,500 51,314
- - MCI WorldCom, Inc. 567,411 50,251
The Coca-Cola Co. 764,500 46,921
- - America Online, Inc. 319,100 46,589
American International
Group, Inc. 383,835 46,300
Citigroup, Inc. 710,261 45,368
Lucent Technologies, Inc. 407,548 43,913
Procter & Gamble Co. 415,744 40,717
Bristol-Myers Squibb Co. 616,760 39,665
Johnson & Johnson 416,900 39,058
BankAmerica Corp. 539,089 38,073
Royal Dutch Petroleum Co. ADR 664,700 34,564
- - Dell Computer Corp. 790,800 32,324
Eli Lilly & Co. 341,000 28,942
SBC Communications Inc. 605,946 28,555
Home Depot, Inc. 458,200 28,523
Time Warner, Inc. 381,200 27,089
American Home Products Corp. 407,800 26,609
Philip Morris Cos., Inc. 753,800 26,524
Schering-Plough Corp. 455,000 25,167
Bell Atlantic Corp. 481,630 24,894
BellSouth Corp. 608,000 24,358
Fannie Mae 324,800 22,492
Abbott Laboratories 477,300 22,344
Hewlett-Packard Co. 322,200 21,849
The Chase Manhattan Corp. 265,322 21,574
Ford Motor Co. 375,500 21,310
Mobil Corp. 241,700 21,270
Gillette Co. 348,100 20,690
E.I. du Pont de Nemours & Co. 350,800 20,368
Bank One Corp. 363,235 20,001
Ameritech Corp. 341,700 19,776
- - EMC Corp. 154,800 19,776
The Walt Disney Co. 634,900 19,761
McDonald's Corp. 422,600 19,149
Morgan Stanley Dean
Witter & Co. 181,900 18,179
GTE Corp. 298,800 18,077
PepsiCo, Inc. 458,300 17,960
Chevron Corp. 202,200 17,882
Wells Fargo Co. 507,110 17,781
General Motors Corp. 204,531 17,769
- - AirTouch Communications, Inc. 177,700 17,170
Warner-Lambert Co. 254,400 16,838
American Express Co. 142,645 16,761
Compaq Computer Corp. 528,148 16,736
First Union Corp. 307,832 16,450
- - Sun Microsystems, Inc. 119,700 14,955
Tyco International Ltd. 198,631 14,252
Sprint Corp. 138,900 13,630
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
Motorola, Inc. 185,400 $13,581
Unilever NV ADR 198,400 13,181
Medtronic, Inc. 181,300 13,008
Northern Telecom Ltd. 206,160 12,808
The Gap, Inc. 182,325 12,273
Freddie Mac 214,100 12,230
- - MediaOne Group, Inc. 188,530 11,972
Texas Instruments, Inc. 120,200 11,930
Charles Schwab Corp. 123,975 11,917
- - Amgen, Inc. 159,000 11,905
- - Oracle Corp. 448,800 11,837
Anheuser-Busch Cos., Inc. 149,614 11,399
Xerox Corp. 203,496 10,862
The Boeing Co. 313,186 10,687
Schlumberger Ltd. 168,600 10,148
Associates First Capital Corp. 224,512 10,103
United Technologies Corp. 72,700 9,846
Allstate Corp. 265,554 9,842
Pharmacia & Upjohn, Inc. 157,490 9,823
Texaco Inc. 167,800 9,523
Merrill Lynch & Co., Inc. 106,600 9,427
- - Viacom Inc. Class B 110,900 9,309
- - CBS Corp. 221,900 9,084
Dayton Hudson Corp. 134,618 8,969
Carnival Corp. 184,200 8,945
Monsanto Co. 194,600 8,939
Minnesota Mining &
Manufacturing Co. 126,200 8,929
Walgreen Co. 305,600 8,633
U S WEST, Inc. 155,382 8,556
AlliedSignal Inc. 173,700 8,544
Colgate-Palmolive Co. 91,000 8,372
The Bank of New York Co., Inc. 232,600 8,359
Waste Management, Inc. 185,910 8,250
Kimberly-Clark Corp. 169,992 8,149
U.S. Bancorp 231,403 7,882
- - Safeway, Inc. 150,700 7,733
Automatic Data Processing, Inc. 184,600 7,638
Electronic Data Systems Corp. 151,200 7,362
Atlantic Richfield Co. 99,500 7,264
Washington Mutual, Inc. 177,541 7,257
Sara Lee Corp. 292,200 7,232
Emerson Electric Co. 135,600 7,178
Comcast Corp. Class A Special 113,500 7,143
Household International, Inc. 152,688 6,966
- - Applied Materials, Inc. 112,200 6,921
J.P. Morgan & Co., Inc. 55,742 6,877
National City Corp. 101,191 6,717
Lowe's Cos., Inc. 109,000 6,594
Dow Chemical Co. 70,650 6,584
Fleet Financial Group, Inc. 174,754 6,575
Enron Corp. 101,200 6,502
Eastman Kodak Co. 101,100 6,458
Firstar Corp. 71,000 6,355
Computer Associates
International, Inc. 173,900 6,184
- - Costco Cos., Inc. 67,056 6,140
The Seagram Co. Ltd. 122,500 6,125
SunTrust Banks, Inc. 98,300 6,119
Raytheon Co. Class B 104,200 6,109
Duke Energy Corp. 111,181 6,073
MBNA Corp. 249,050 5,946
- - Tellabs, Inc. 59,900 5,855
Marsh & McLennan Cos., Inc. 78,650 5,835
Baxter International, Inc. 88,400 5,834
- - Sprint PCS 131,200 5,814
First Data Corp. 135,900 5,810
CVS Corp. 120,700 5,733
CIGNA Corp. 68,100 5,708
Campbell Soup Co. 139,800 5,688
Mellon Bank Corp. 80,800 5,686
Guidant Corp. 93,400 5,651
- - Ascend Communications, Inc. 67,400 5,641
Pitney Bowes, Inc. 88,100 5,616
McKesson HBOC, Inc. 84,265 5,561
Cardinal Health, Inc. 84,150 5,554
Gannett Co., Inc. 87,500 5,512
American General Corp. 78,095 5,506
- - Clear Channel
Communications, Inc. 81,900 5,492
Fifth Third Bancorp 82,950 5,470
Sears, Roebuck & Co. 120,600 5,450
Caterpillar, Inc. 115,200 5,292
H.J. Heinz Co. 111,600 5,287
ALLTEL Corp. 84,400 5,264
PNC Bank Corp. 93,600 5,201
Williams Cos., Inc. 131,600 5,198
Halliburton Co. 135,000 5,198
NIKE, Inc. Class B 88,900 5,128
Wachovia Corp. 63,100 5,123
Southern Co. 216,200 5,040
Burlington Northern
Santa Fe Corp. 146,796 4,826
- - Boston Scientific Corp. 118,600 4,811
- - Staples, Inc. 145,200 4,773
Alcoa Inc. 115,600 4,761
- - The Kroger Co. 79,500 4,760
Illinois Tool Works, Inc. 76,600 4,740
Providian Financial Corp. 42,900 4,719
Lockheed Martin Corp. 120,682 4,548
May Department Stores Co. 111,300 4,355
Kellogg Co. 127,100 4,297
The Clorox Co. 36,400 4,266
Omnicom Group Inc. 52,600 4,205
Corning, Inc. 69,900 4,194
KeyCorp 137,800 4,177
- - FDX Corp. 44,660 4,145
The Hartford Financial Services
Group Inc. 72,900 4,142
- - Cendant Corp. 262,434 4,133
Albertson's, Inc. 76,100 4,133
Bestfoods 87,800 4,127
State Street Corp. 49,400 4,060
Union Pacific Corp. 75,800 4,050
Newell Rubbermaid, Inc. 84,310 4,005
BankBoston Corp. 91,502 3,963
International Paper Co. 93,600 3,949
Textron, Inc. 50,600 3,915
ConAgra, Inc. 151,200 3,865
Columbia/HCA Healthcare Corp. 201,645 3,819
Avon Products, Inc. 80,500 3,788
Aetna Inc. 45,406 3,769
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
Coca-Cola Enterprises, Inc. 124,400 $ 3,763
Phillips Petroleum Co. 79,600 3,761
- - Micron Technology, Inc. 76,900 3,710
PG&E Corp. 117,700 3,656
AMP, Inc. 67,743 3,637
General Mills, Inc. 48,000 3,627
Texas Utilities Co. 86,341 3,599
- - Solectron Corp. 72,600 3,526
BB&T Corp. 96,600 3,496
- - Kohl's Corp. 48,500 3,437
IMS Health, Inc. 102,400 3,392
TJX Cos., Inc. 99,400 3,380
Weyerhaeuser Co. 60,300 3,347
- - Tricon Global Restaurants, Inc. 47,300 3,323
- - AMR Corp. 56,600 3,315
The McGraw-Hill Cos., Inc. 60,600 3,303
Interpublic Group of Cos., Inc. 42,250 3,290
- - Gateway 2000, Inc. 47,800 3,277
Aon Corp. 51,750 3,273
Delta Air Lines, Inc. 47,000 3,266
Consolidated Edison Inc. 71,200 3,226
Wrigley, (Wm.) Jr. Co. 35,300 3,192
Progressive Corp. of Ohio 22,000 3,157
Comerica, Inc. 50,450 3,150
Southwest Airlines Co. 104,000 3,146
J.C. Penney Co., Inc. 77,200 3,127
PECO Energy Corp. 67,600 3,127
- - NEXTEL Communications, Inc. 85,100 3,117
The Limited, Inc. 78,395 3,106
Lincoln National Corp. 31,400 3,105
Norfolk Southern Corp. 117,600 3,102
United Healthcare Corp. 58,500 3,079
The Chubb Corp. 52,200 3,057
Northern Trust Corp. 34,300 3,046
Capital One Financial Corp. 20,100 3,035
Deere & Co. 77,300 2,986
Conseco Inc. 95,945 2,962
FPL Group, Inc. 55,400 2,950
Honeywell, Inc. 38,600 2,926
Masco Corp. 102,500 2,896
Becton, Dickinson & Co. 75,200 2,881
American Stores Co. 87,200 2,878
PPG Industries, Inc. 55,800 2,860
Sysco Corp. 108,000 2,842
Pioneer Hi-Bred
International, Inc. 75,040 2,823
Transamerica Corp. 39,600 2,812
Public Service Enterprise
Group, Inc. 73,000 2,788
- - Fred Meyer Inc. 47,200 2,779
Unocal Corp. 74,839 2,755
- - Compuware Corp. 113,800 2,717
Rockwell International Corp. 64,000 2,716
- - Novell, Inc. 107,300 2,703
Archer-Daniels-Midland Co. 182,676 2,683
Computer Sciences Corp. 47,900 2,643
Frontier Corp. 50,500 2,620
Marriott International, Inc.
Class A 77,400 2,602
Loews Corp. 34,800 2,597
The Quaker Oats Co. 41,500 2,596
CSX Corp. 66,600 2,593
Ralston-Ralston Purina Group 96,100 2,565
- - 3Com Corp. 109,800 2,560
Bankers Trust Corp. 29,000 2,559
Hershey Foods Corp. 45,700 2,559
- - Federated Department
Stores, Inc. 63,400 2,544
General Dynamics Corp. 39,200 2,519
- - Kmart Corp. 148,400 2,495
Ingersoll-Rand Co. 49,850 2,474
Edison International 111,100 2,472
Air Products & Chemicals, Inc. 71,700 2,456
RJR Nabisco Holdings Corp. 97,800 2,445
Tribune Co. 37,200 2,434
USX-Marathon Group 87,600 2,409
Unicom Corp. 65,600 2,399
Reliant Energy, Inc. 91,722 2,391
Paychex, Inc. 49,900 2,367
The Goodyear Tire & Rubber Co. 47,500 2,366
Browning-Ferris Industries, Inc. 61,200 2,360
Baker Hughes, Inc. 97,060 2,360
American Electric Power Co., Inc. 59,100 2,346
Circuit City Stores, Inc. 30,600 2,345
- - BMC Software, Inc. 63,000 2,335
Regions Financial Corp. 65,900 2,282
Dover Corp. 68,800 2,262
Dominion Resources, Inc. 60,750 2,244
Mercantile Bancorp, Inc. 46,900 2,228
St. Paul Cos., Inc. 71,656 2,226
Mattel, Inc. 89,187 2,218
- - Seagate Technology 75,000 2,217
Jefferson-Pilot Corp. 32,400 2,195
Franklin Resources Corp. 77,700 2,185
Tandy Corp. 34,164 2,180
Coastal Corp. 65,900 2,175
SLM Holding Corp. 52,000 2,171
Lehman Brothers Holdings, Inc. 36,300 2,169
Fort James Corp. 68,300 2,164
Burlington Resources, Inc. 54,185 2,164
Danaher Corp. 41,400 2,163
- - Unisys Corp. 77,300 2,140
Summit Bancorp 54,000 2,106
UNUM Corp. 43,700 2,078
Entergy Corp. 75,500 2,076
Georgia Pacific Group 27,900 2,072
Avery Dennison Corp. 35,900 2,064
Nordstrom, Inc. 50,100 2,048
Fortune Brands, Inc. 52,100 2,016
Huntington Bancshares Inc. 65,070 2,013
Occidental Petroleum Corp. 111,700 2,011
Century Telephone
Enterprises, Inc. 28,500 2,002
FirstEnergy Corp. 71,600 2,000
Rite Aid Corp. 79,500 1,987
- - AES Corp. 52,700 1,963
Barrick Gold Corp. 114,200 1,949
Rohm & Haas Co. 57,500 1,930
Maytag Corp. 31,800 1,920
SouthTrust Corp. 51,300 1,914
Dollar General Corp. 55,625 1,891
Dana Corp. 48,959 1,860
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
Cincinnati Financial Corp. 50,800 $ 1,851
Dun & Bradstreet Corp. 51,900 1,849
Union Carbide Corp. 39,800 1,798
VF Corp. 37,928 1,790
- - Tenet Healthcare Corp. 94,200 1,784
Alcan Aluminium Ltd. 69,050 1,782
Allergan, Inc. 20,100 1,766
SAFECO Corp. 43,500 1,759
TRW, Inc. 38,500 1,752
MBIA, Inc. 30,200 1,752
- - Ceridian Corp. 47,800 1,748
Carolina Power & Light Co. 46,100 1,743
Praxair, Inc. 47,700 1,720
Winn-Dixie Stores, Inc. 45,900 1,716
Hasbro, Inc. 59,250 1,714
Union Planters Corp. 38,800 1,705
DTE Energy Co. 44,200 1,699
AmSouth Bancorp 36,900 1,679
New York Times Co. Class A 58,800 1,676
Golden West Financial Corp. 17,500 1,671
Synovus Financial Corp. 80,650 1,648
Eaton Corp. 23,000 1,644
Bear Stearns Co., Inc. 36,750 1,642
- - Toys R Us, Inc. 86,500 1,627
Johnson Controls, Inc. 26,000 1,622
Black & Decker Corp. 29,200 1,619
The Times Mirror Co. Class A 29,700 1,606
Genuine Parts Co. 54,850 1,580
Equifax, Inc. 45,800 1,574
- - Parametric Technology Corp. 79,000 1,560
Morton International, Inc. 42,200 1,551
PacifiCorp 89,900 1,551
Republic New York Corp. 33,400 1,541
Cooper Industries, Inc. 36,057 1,537
Ameren Corp. 42,200 1,527
Sherwin-Williams Co. 53,700 1,510
Central & South West Corp. 64,100 1,502
H & R Block, Inc. 31,700 1,502
Biomet, Inc. 35,700 1,497
UST, Inc. 56,900 1,487
- - US Airways Group, Inc. 30,400 1,484
GPU, Inc. 39,700 1,481
R.R. Donnelley & Sons Co. 45,300 1,458
Tenneco, Inc. 51,900 1,450
Provident Cos., Inc. 41,600 1,438
Consolidated Natural Gas Co. 29,400 1,431
- - Apple Computer, Inc. 39,800 1,430
Amerada Hess Corp. 28,300 1,424
- - General Instrument Corp. 46,900 1,422
Ecolab, Inc. 40,000 1,420
Sempra Energy 73,720 1,415
Torchmark Corp. 44,700 1,414
Union Camp Corp. 21,000 1,410
- - AutoZone Inc. 46,000 1,397
Anadarko Petroleum Corp. 36,700 1,385
Dow Jones & Co., Inc. 29,300 1,383
Knight Ridder 27,600 1,380
Perkin-Elmer Corp. 14,100 1,369
W.W. Grainger, Inc. 31,500 1,356
- - HEALTHSOUTH Corp. 130,700 1,356
- - LSI Logic Corp. 43,200 1,347
Cinergy Corp. 48,118 1,323
Columbia Energy Group 25,200 1,317
ITT Industries, Inc. 36,900 1,305
Countrywide Credit
Industries, Inc. 34,700 1,301
Whirlpool Corp. 23,400 1,272
Willamette Industries, Inc. 33,700 1,272
International Flavors &
Fragrances, Inc. 33,400 1,254
- - KLA-Tencor Corp. 25,800 1,253
- - Sealed Air Corp. 25,315 1,245
MGIC Investment Corp. 35,400 1,241
Northrop Grumman Corp. 20,700 1,239
Brown-Forman Corp. Class B 21,500 1,239
PP&L Resources Inc. 50,000 1,238
Adobe Systems, Inc. 21,400 1,214
Champion International Corp. 29,200 1,199
- - Owens-Illinois, Inc. 47,600 1,190
Parker Hannifin Corp. 34,525 1,182
Nucor Corp. 26,700 1,176
New Century Energies, Inc. 34,500 1,175
Baltimore Gas & Electric Co. 46,250 1,174
Bausch & Lomb, Inc. 18,000 1,170
- - Mirage Resorts, Inc. 54,400 1,156
Allegheny Teledyne Inc. 61,010 1,155
Wendy's International, Inc. 40,100 1,140
Service Corp. International 77,700 1,107
Crown Cork & Seal Co., Inc. 38,700 1,105
Temple-Inland Inc. 17,500 1,098
Reynolds Metals Co. 22,200 1,073
Northern States Power Co. 46,100 1,069
Hilton Hotels Corp. 75,000 1,055
Sunoco, Inc. 28,967 1,045
Sonat, Inc. 33,900 1,017
- - PeopleSoft, Inc. 69,100 1,011
- - Consolidated Stores, Inc. 33,300 1,009
Eastman Chemical Co. 23,950 1,007
PACCAR, Inc. 24,440 1,007
- - ALZA Corp. 26,200 1,002
Darden Restaurants Inc. 48,200 994
Harcourt General, Inc. 21,963 973
The Mead Corp. 31,600 972
Phelps Dodge Corp. 19,400 955
Ashland, Inc. 23,000 942
- - Silicon Graphics, Inc. 55,346 924
Sigma-Aldrich Corp. 31,300 916
- - Navistar International Corp. 22,680 911
Union Pacific Resources
Group, Inc. 76,122 904
C.R. Bard, Inc. 17,800 898
Dillard's Inc. 35,200 893
SuperValu Inc. 42,100 868
Kerr-McGee Corp. 26,397 866
- - Humana, Inc. 49,700 857
Newmont Mining Corp. 48,146 843
Placer Dome, Inc. 73,600 823
Hercules, Inc. 31,400 793
- - HCR Manor Care, Inc. 34,400 785
- - Niagara Mohawk Holdings Inc. 57,700 775
Engelhard Corp. 45,350 768
The BFGoodrich Co. 22,200 762
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
Deluxe Corp. 25,500 $ 743
Apache Corp. 28,300 738
The Stanley Works 28,000 717
- - King World Productions, Inc. 23,300 712
Harris Corp. 24,800 710
Liz Claiborne, Inc. 21,600 705
Great Lakes Chemical Corp. 18,900 695
- - Advanced Micro Devices, Inc. 44,100 684
Fluor Corp. 25,100 678
Inco Ltd. 50,898 678
Ryder System, Inc. 24,200 669
Westvaco Corp. 31,700 666
- - St. Jude Medical, Inc. 27,300 665
Scientific-Atlanta, Inc. 24,100 657
Centex Corp. 19,200 641
- - Thermo Electron Corp. 46,800 635
USX-U.S. Steel Group 26,940 633
Freeport-McMoRan Copper &
Gold Inc. Class B 58,100 632
Adolph Coors Co. Class B 11,700 632
Thomas & Betts Corp. 16,700 627
Louisiana-Pacific Corp. 33,100 616
Pall Corp. 36,766 609
- - Harrah's Entertainment, Inc. 31,900 608
Mallinckrodt, Inc. 22,500 599
Raychem Corp. 26,500 598
Autodesk, Inc. 14,700 594
American Greetings Corp. Class A 22,900 581
Brunswick Corp. 30,400 580
Laidlaw, Inc. 97,900 569
NICOR, Inc. 15,800 568
Nalco Chemical Co. 21,300 566
Snap-On Inc. 19,450 564
Homestake Mining Co. 65,100 561
Case Corp. 22,100 561
- - FMC Corp. 11,300 558
Armstrong World Industries Inc. 12,300 556
Meredith Corp. 17,200 541
Crane Co. 21,637 523
Aeroquip-Vickers Inc. 9,000 516
IKON Office Solutions, Inc. 40,100 514
Boise Cascade Corp. 15,800 510
Bemis Co., Inc. 16,400 509
Owens Corning 15,900 506
National Service Industries, Inc. 14,700 501
Cooper Tire & Rubber Co. 25,400 467
- - National Semiconductor Corp. 49,800 464
Cummins Engine Co., Inc. 12,500 445
Ball Corp. 9,400 441
McDermott International, Inc. 17,200 435
Briggs & Stratton Corp. 8,500 419
Shared Medical Systems Corp. 7,500 418
Alberto-Culver Co. Class B 17,600 411
Tektronix, Inc. 16,150 408
- - Cabletron Systems, Inc. 47,500 389
Longs Drug Stores, Inc. 12,600 383
EG&G, Inc. 14,100 372
Great Atlantic & Pacific Tea
Co., Inc. 12,000 360
Cyprus Amax Minerals Co. 29,311 355
Helmerich & Payne, Inc. 15,600 354
Peoples Energy Corp. 10,900 352
Worthington Industries, Inc. 29,050 341
- - Rowan Cos., Inc. 26,500 336
Tupperware Corp. 18,500 333
- - Andrew Corp. 26,975 332
Pulte Corp. 15,700 327
The Timken Co. 19,500 317
Millipore Corp. 13,100 316
Fleetwood Enterprises, Inc. 10,975 314
Potlatch Corp. 9,100 309
Moore Corp. Ltd. 30,200 298
- - Bethlehem Steel Corp. 36,100 298
The Pep Boys
(Manny, Moe & Jack) 19,500 297
Polaroid Corp. 14,362 288
Jostens Inc. 13,000 276
- - Reebok International Ltd. 17,400 276
- - W.R. Grace & Co. 22,600 274
Kaufman & Broad Home Corp. 11,200 253
Russell Corp. 12,200 246
- - Fruit of the Loom Inc. Class A 23,600 245
Eastern Enterprises 6,400 233
ONEOK, Inc. 8,800 218
Battle Mountain Gold Co. Class A 72,300 199
NACCO Industries, Inc. Class A 2,560 190
ASARCO, Inc. 13,000 179
Milacron Inc. 11,300 178
Springs Industries Inc. Class A 5,800 157
Foster Wheeler Corp. 12,500 152
- - Data General Corp. 14,000 142
Harnischfeger Industries Inc. 15,200 86
- - Siebel Systems, Inc. 102 5
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,777,430) 3,268,114
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (38.8%)
- ----------------------------------------------------------
U.S. TREASURY BONDS
5.50%, 8/15/2028 $ 50,000 47,861
6.125%, 11/15/2027 163,410 169,621
6.375%, 8/15/2027 117,270 125,465
6.50%, 11/15/2026 212,160 229,877
6.875%, 8/15/2025 81,315 91,931
7.125%, 2/15/2023 45,585 52,618
7.25%, 5/15/2016 66,525 76,454
7.50%, 11/15/2016 98,770 116,309
7.50%, 11/15/2024 109,240 132,139
7.625%, 11/15/2022 79,220 96,307
7.625%, 2/15/2025 79,585 97,831
(2)8.00%, 11/15/2021 138,360 173,948
8.125%, 8/15/2019 103,820 130,737
(2)8.125%, 5/15/2021 155,115 196,999
8.75%, 5/15/2017 79,830 105,271
8.75%, 5/15/2020 84,400 112,987
8.75%, 8/15/2020 115,600 154,973
8.875%, 8/15/2017 127,540 169,790
8.875%, 2/15/2019 118,335 158,939
10.375%, 11/15/2012 83,958 110,776
10.625%, 8/15/2015 66,610 100,026
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- ----------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (38.8%)
- ----------------------------------------------------------
11.25%, 2/15/2015 $70,890 $ 110,707
11.75%, 11/15/2014 55,775 82,553
12.00%, 8/15/2013 94,650 137,903
12.75%, 11/15/2010 7,220 10,072
14.00%, 11/15/2011 17,300 26,252
- ----------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $3,049,362) 3,018,346
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENTS (19.6%)(1)
- ----------------------------------------------------------
COMMERCIAL PAPER (10.9%)
A.I. Credit Corp.
4.80%, 6/16/1999 40,000 39,596
Abbey National North America Corp.
4.82%, 6/9/1999 55,000 54,495
Associates First Capital Corp.
4.82%, 6/11/1999 50,000 49,525
BP Capital Corp.
4.78%, 6/18/1999 25,000 24,741
Commercial Credit Corp.
4.83%, 5/10/1999 50,000 49,738
Daimler-Benz of North America, Inc.
4.81%, 5/7/1999 59,000 58,716
E.I. du Pont de Nemours & Co.
4.80%, 6/2/1999 25,000 24,870
4.80%, 6/7/1999 24,000 23,786
Ford Credit Puerto Rico Corp.
4.86%, 4/12/1999 25,000 24,963
Ford Motor Credit Co.
4.81%, 6/18/1999 30,000 29,687
General Electric Capital Corp.
4.83%, 6/10/1999 50,000 49,534
General Motors Acceptance Corp.
4.80%, 5/7/1999 20,000 19,904
4.83%, 4/14/1999 30,000 29,948
Halifax PLC
4.80%, 6/16/1999 50,000 49,494
Household Finance Corp.
4.82%, 6/10/1999 50,000 49,531
International Lease Finance Corp.
4.79%, 6/14/1999 25,000 24,754
4.79%, 6/21/1999 25,000 24,731
KFW International Finance Inc.
4.79%, 6/17/1999 50,000 49,488
MetLife Funding Inc.
4.83%, 4/15/1999 20,000 19,962
Toyota Motor Credit Corp.
4.78%, 4/16/1999 25,000 24,950
4.78%, 6/16/1999 45,000 44,545
USAA Capital Corp.
4.80%, 6/4/1999 25,000 24,787
4.84%, 4/9/1999 25,000 24,973
Xerox Capital Corp. LLC
4.80%, 6/7/1999 30,000 29,730
- ----------------------------------------------------------
846,448
-----------
- ----------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS (8.7%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.94%, 4/1/1999 $ 617,466 $ 617,466
4.97%, 4/1/1999--Note G 59,119 59,119
- ----------------------------------------------------------
676,585
-----------
<CAPTION>
- ----------------------------------------------------------
<S> <C>
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,522,950) 1,523,033
- ----------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $6,349,742) 7,809,493
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- ----------------------------------------------------------
Other Assets--Note C 81,470
Liabilities--Note G (113,246)
-----------
(31,776)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 315,719,709 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $7,777,717
==========================================================
NET ASSET VALUE PER SHARE $24.63
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
(1) The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts. After giving effect to futures
investments, the fund's effective common stock and temporary cash
investment positions represent 60.3% and 1.3%, respectively, of net assets.
See Note F in Notes to Financial Statements.
(2) Securities with an aggregate value of $101,217,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
AT MARCH 31, 1999, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------
<S> <C> <C>
Paid in Capital $6,080,194 $19.26
Undistributed Net
Investment Income 56,997 .18
Accumulated Net Realized Gains 177,691 .56
Unrealized Appreciation--Note F
Investment Securities 1,459,751 4.62
Futures Contracts 3,084 .01
- -----------------------------------------------------------
NET ASSETS $7,777,717 $24.63
- -----------------------------------------------------------
</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
SIX MONTHS ENDED MARCH 31, 1999
(000)
- --------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 20,053
Interest 105,296
Security Lending 140
---------
Total Income 125,489
EXPENSES ---------
Investment Advisory Fees--Note B
Basic Fee 3,865
Performance Adjustment (980)
The Vanguard Group--Note C
Management and Administrative 12,883
Marketing and Distribution 663
Custodian Fees 33
Auditing Fees 18
Shareholders' Reports 61
Trustees' Fees and Expenses 5
---------
Total Expenses 16,548
Expenses Paid Indirectly--Note D (7)
---------
Net Expenses 16,541
- --------------------------------------------------------------------------
NET INVESTMENT INCOME 108,948
- --------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 12,414
Futures Contracts 336,884
- --------------------------------------------------------------------------
REALIZED NET GAIN 349,298
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 509,932
Futures Contracts (57,729)
- --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 452,203
- --------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $910,449
==========================================================================
</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
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined
on a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in
the fund, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and
Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
-------------------------------------
SIX MONTHS YEAR
ENDED ENDED
MAR. 31, 1999 SEP. 30, 1998
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 108,948 $ 179,056
Realized Net Gain 349,298 163,880
Change in Unrealized Appreciation (Depreciation) 452,203 242,715
--------------------------------
Net Increase in Net Assets Resulting from Operations 910,449 585,651
--------------------------------
DISTRIBUTIONS
Net Investment Income (146,494) (141,316)
Realized Capital Gain (308,688) (181,623)
--------------------------------
Total Distributions (455,182) (322,939)
--------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued 1,738,638 1,956,353
Issued in Lieu of Cash Distributions 439,047 310,969
Redeemed (491,750) (631,912)
--------------------------------
Net Increase from Capital Share Transactions 1,685,935 1,635,410
- -----------------------------------------------------------------------------------------------------
Total Increase 2,141,202 1,898,122
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 5,636,515 3,738,393
--------------------------------
End of Period $7,777,717 $5,636,515
=====================================================================================================
(1)Shares Issued (Redeemed)
Issued 71,184 85,659
Issued in Lieu of Cash Distributions 18,604 14,684
Redeemed (20,258) (27,756)
--------------------------------
Net Increase in Shares Outstanding 69,530 72,587
=====================================================================================================
</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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.90 $21.53 $18.27 $17.03 $13.78 $15.08
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .36 .79 .74 .69 .64 .52
Net Realized and Unrealized Gain
(Loss) on Investments 3.11 2.33 4.29 1.82 3.18 (.81)
------------------------------------------------------------------------
Total from Investment Operations 3.47 3.12 5.03 2.51 3.82 (.29)
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.56) (.74) (.72) (.66) (.57) (.48)
Distributions from Realized Capital Gains (1.18) (1.01) (1.05) (.61) -- (.53)
------------------------------------------------------------------------
Total Distributions (1.74) (1.75) (1.77) (1.27) (.57) (1.01)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $24.63 $22.90 $21.53 $18.27 $17.03 $13.78
=========================================================================================================================
TOTAL RETURN 15.48% 15.24% 29.42% 15.27% 28.57% -2.05%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $7,778 $5,637 $3,738 $2,341 $1,593 $1,120
Ratio of Total Expenses to
Average Net Assets 0.48%* 0.49% 0.49% 0.47% 0.49% 0.50%
Ratio of Net Investment Income to
Average Net Assets 3.18%* 3.80% 3.96% 4.17% 4.41% 3.68%
Portfolio Turnover Rate 3%* 60% 10% 47% 34% 51%
=========================================================================================================================
</TABLE>
*Annualized.
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: Equity securities 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. Prices are taken from the primary market in which each
security trades. 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. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair 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. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Mellon Capital Management Corporation provides investment advisory services
to the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
adjustments based on performance for the preceding three years relative to a
combined index comprising the S&P 500 Index and the Lehman Brothers Long U.S.
Treasury Bond Index. For the six months ended March 31, 1999, the advisory fee
represented an effective annual basic rate of 0.11% of the fund's average net
assets before a decrease of $980,000 (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 Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At March 31, 1999, the fund had contributed capital of $1,246,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 1.8% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. The fund's custodian bank has agreed to reduce its fees when the fund
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended March 31, 1999, custodian fee offset arrangements reduced
expenses by $7,000.
E. During the six months ended March 31, 1999, the fund purchased $746,076,000
of investment securities and sold $40,879,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases and
sales of U.S. government securities were $2,116,722,000 and $45,428,000,
respectively.
F. At March 31, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,459,751,000,
consisting of unrealized gains of $1,548,960,000 on securities that had risen
in value since their purchase and $89,209,000 in unrealized losses on
securities that had fallen in value since their purchase.
At March 31, 1999, the aggregate settlement value of open futures
contracts expiring in December 1999 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 4,397 $1,421,660 $3,084
--------------------------------------------------------------------------------------
</TABLE>
G. The market value of securities on loan to broker/dealers at March 31, 1999,
was $74,364,000, for which the fund had received as collateral cash of
$59,119,000 and U.S. Treasury securities with a market value of $18,843,000.
Cash collateral received is invested in repurchase agreements. 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
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, 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.,
NACCO Industries, and Newfield Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer 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(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," 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> 26
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q782-05/13/1999
(C) 1999 The Vanguard Marketing Corporation, Distributor. All rights reserved.
