<PAGE>
VANGUARD(R)
ASSET ALLOCATION FUND
[PHOTO]
SEMIANNUAL REPORT
March 31, 2000
[THE VANGUARD GROUP LOGO]
<PAGE>
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterproductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments.
Remember that, at any moment, some part of a diversified portfolio will lag
other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
o Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
- - - - - - - --------------------------------------------------------------------------------
CONTENTS
REPORT FROM THE CHAIRMAN 1 PERFORMANCE SUMMARY 7
THE MARKETS IN PERSPECTIVE 3 FUND PROFILE 8
REPORT FROM THE ADVISER 5 FINANCIAL STATEMENTS 12
- - - - - - - --------------------------------------------------------------------------------
All comparative mutual fund data arefrom Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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>
REPORT FROM THE CHAIRMAN
[PHOTO]
JOHN J. BRENNAN
Vanguard Asset Allocation Fund delivered an excellent absolute return of 10.8%
during the six months ended March 31, 2000, the first half of our fiscal year.
However, your fund's performance was less impressive on a relative basis as it
lagged the returns of its average competitor and its composite index of stocks
and bonds.
- - - - - - - ------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
MARCH 31, 2000
- - - - - - - ------------------------------------------------------------
Vanguard Asset Allocation Fund 10.8%
- - - - - - - ------------------------------------------------------------
Average Flexible Fund* 13.6%
- - - - - - - ------------------------------------------------------------
Asset Allocation Composite Index** 13.5%
- - - - - - - ------------------------------------------------------------
S&P 500 Index 17.5%
Lehman Long Treasury Index 5.8
Salomon Smith Barney 3-Month
Treasury Index 2.6
- - - - - - - ------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**65% S&P 500 Index and 35% Lehman Long
Treasury Index.
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 weighted 65% in large-capitalization stocks and 35% in long-term
U.S. Treasury bonds. We also present six-month returns for the index's two
components--the Standard & Poor's 500 Index and the Lehman Brothers Long U.S.
Treasury Bond Index--as well as for the Salomon Smith Barney 3-Month U.S.
Treasury Bill Index, a measure of short-term reserves. As you know, the fund may
invest in any combination of the three asset classes.
The fund's return is based on an increase in net asset value from $24.11
per share on September 30, 1999, to $25.14 per share on March 31, 2000, and is
adjusted for a dividend of $0.53 per share paid from net investment income and a
distribution of $0.96 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
In March, the remarkably vibrant U.S. economy completed its 108th month of
uninterrupted expansion--a record nine full years without a recession. In the
last quarter of 1999, the economy was growing at an astounding 7.3% rate. The
engine of the expansion--consumer demand--remained strong throughout our fiscal
half-year. Americans' ardor for spending combined with other factors to prompt
an uptick in inflation. But there was also remarkable growth in the production
of goods and services during the period, and corporate profits improved. Amid
these generally accommodating conditions, stock market averages turned in a
terrific, yet turbulent, performance. The bond market was generally weak.
Large-cap stocks--which had gained just 0.4% from April 1999 through
September 1999--resumed their climb. The S&P 500 Index, which is dominated by
large-cap stocks, gained 17.5%. The overall U.S. stock market, as measured by
the Wilshire 5000 Total Market Index, did even better, advancing 23.2%.
The bull market in stocks continued despite three quarter-point interest
rate hikes--raising the federal funds rate from 5.25% to 6.0%--by the Federal
Reserve Board. The yield on Treasury bills responded by climbing 102 basis
points (1.02 percentage point) to 5.87% as of March 31. But long-term interest
rates went the other way. The yield of the benchmark 30-year Treasury bond fell
22 basis points, on balance, ending the half-year--unusually--below the T-bill
rate, at 5.83%. Typically, long-term bonds carry
1
<PAGE>
higher yields than short-term bonds. This relationship, which is often depicted
in an upward sloping yield curve, compensates long-term bond investors for the
risks associated with cash flows that they will not receive for many years.
Analysts attributed the inversion of the yield curve during the period to
technical factors that are unlikely to persist for long.
The overall bond market, as measured by the Lehman Aggregate Bond Index,
returned 2.1%, as price declines for corporate, mortgage-backed, and
shorter-term Treasury bonds offset some of their interest income. Prices
declined because short-term interest rates rose, making the fixed yields on
outstanding bonds less attractive. One oasis in this difficult environment was
the market for long-term Treasury bonds, which posted a total return of 5.8%
thanks to the slight downward movement of yields on long-term Treasuries.
PERFORMANCE OVERVIEW
Vanguard Asset Allocation Fund is managed according to a proprietary
asset-allocation model developed by our investment adviser, Mellon Capital
Management. The model assesses various factors to project the long-term returns
on stocks, bonds, and short-term reserves. It then recommends asset allocation
changes designed to exploit temporary imbalances between the prices and values
of the different asset classes. During the first half of our fiscal year, our
adviser made just one shift. The fund moved from 50% stocks/50% bonds to 40%
stocks/60% bonds in November and remained in that position--which it last took
in 1992--for the remainder of the period. The fund has never had a smaller stake
in stocks. (For more information, see the Report from the Adviser on page 5.)
In a period of rising stock prices, of course, this relatively conservative
allocation had a cost. A "neutral" mix of 65% stocks and 35% bonds would have
provided a return of 13.5% for the six months. Likewise, our average competitor,
which provided a total return of 13.6%, held a bigger stake in stocks--and
therefore outperformed--Vanguard Asset Allocation Fund. Six months is far too
brief a period, however, to judge the effectiveness of an investment strategy.
We note that Asset Allocation Fund's long-term record, compiled exclusively by
Mellon Capital, is excellent. The fund has managed to provide much of the return
of stocks while taking significantly less risk.
IN SUMMARY
Stocks continued to provide impressive returns during the six months ended March
31. But volatility was extreme. In fact, as I write this letter, the U.S. stock
market has just completed an eye-opening week during which the S&P 500 Index and
the Nasdaq Composite Index declined -10.5% and -25.3%, respectively.
How should an investor respond to such volatility? By holding a balanced
investment portfolio that includes stocks, bonds, and short-term reserves in
proportions that are appropriate to his or her time horizon, goals, and risk
tolerance. Once such a program is in place, the best course is to stick with it.
Short-term fluctuations are unsettling, but they are a natural part of
investing.
/S/
John J. Brennan
Chairman and Chief Executive Officer
April 17, 2000
2
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MARCH 31, 2000
A strong economy and an extraordinary run-up in prices for technology stocks
carried broad market indexes higher during a volatile but generally rewarding
six months ended March 31, 2000.
The rise in stocks was surprising in light of higher inflation and rising
interest rates, both of which did some damage to bond prices. For stock
investors, however, worries about inflation and interest rates did little to
dampen enthusiasm for technology, telecommunications, and media companies.
The U.S. economy continued its rapid growth during the semiannual period.
Gross domestic product, an estimate of total economic output, increased at a
7.3% pace, even after inflation, during the final three months of 1999. The
economy expanded by more than 4% during 1999, which is a brisk clip for a large
economy, especially one that in March completed a record 108 consecutive months
without a recession.
- - - - - - - ----------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED MARCH 31, 2000
-------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- - - - - - - ----------------------------------------------------------------------
STOCKS
S&P 500 Index 17.5% 17.9% 26.8%
Russell 2000 Index 26.8 37.3 17.2
Wilshire 5000 Index 23.2 24.0 25.9
MSCI EAFE Index 17.0 25.4 12.7
- - - - - - - ----------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 2.1% 1.9% 7.1%
Lehman 10 Year Municipal Bond Index 2.2 0.5 6.2
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.6 5.0 5.2
- - - - - - - ----------------------------------------------------------------------
OTHER
Consumer Price Index 1.9% 3.7% 2.5%
- - - - - - - ----------------------------------------------------------------------
*Annualized.
Inflation measures sent mixed messages. Higher oil prices did cause the
Consumer Price Index to increase by 1.9% and 3.7% for the six- and twelve-month
periods ended March 31. But if energy and food prices were factored out,
inflation remained tame. Nonetheless, the Federal Reserve Board, concerned that
rapid growth and low unemployment (around 4% of the workforce) would cause
inflation to build momentum, continued the efforts it began in June 1999 to slow
the economy. The Fed raised its target for short-term interest rates by 0.25
percentage point on three occasions during the six months, bringing the federal
funds rate to 6.0%.
U.S. STOCK MARKETS
The technology sector continued to dominate the stock market during the
half-year, although it suffered some setbacks. Over a five-week period from
March 10 through April 14, technology stocks fell sharply and the Nasdaq
Composite Index, which is dominated by large tech issues, declined -34%.
However, for the six months ended March 31, the Nasdaq Composite registered an
incredible 67.3% return.
The overall stock market, as measured by the Wilshire 5000 Index, posted a
23.2% gain. Large-capitalization stocks didn't do quite as well--the S&P 500
Index returned 17.5%. The small-cap Russell 2000 Index gained 26.8%.
3
<PAGE>
Computer software and hardware companies, semiconductor makers, and an
array of Internet-related companies powered the advance on Wall Street. Indeed,
one-third of the 57 companies in the S&P 500's tech group gained more than 100%
during the six months. A number of tech-related companies within the
producer-durables and utility groups also posted impressive gains. For the
half-year, technology stocks, which accounted for one-quarter of the total
market capitalization of the S&P 500 Index, gained 53%. Producer-durables
companies returned 36%. The oil-drilling and services companies in the "other
energy" category benefited from higher oil prices and returned about 30% for the
six months.
Despite the impressive gains for the market averages, many individual
stocks declined. The market's worst-performing sectors were consumer staples
(-14%), including large food, beverage, supermarket, and tobacco stocks, and the
materials & processing group (-6%), which was hurt by higher energy prices,
competitive pressure from imports, and higher interest rates.
With demand for stocks high, Wall Street came up with new supply: During
the first three months of 2000, a record $75 billion in new stock was issued
through underwriters.
U.S. BOND MARKETS
The step-by-step increases in short-term interest rates by the Federal Reserve
did succeed in elevating other short-term rates. For example, yields of 3-month
U.S. Treasury bills rose by 102 basis points (about 1 percentage point) during
the half-year, from 4.85% on September 30 to 5.87% on March 31. Yields on 3-year
Treasury notes rose about 75 basis points, in line with the Fed's actions.
But for long-term Treasury bonds, interest rates fell during the period.
This was due primarily to the federal government's budget surplus, which
resulted in reduced issuance of new bonds and steps by the Treasury to buy back
some of its existing long-term securities. This reduced supply of long-term
bonds caused the yield on the 30-year Treasury to fall 22 basis points--from
6.05% to 5.83%--during the half-year. Yields of 10-year Treasury securities rose
only 12 basis points to 6.00% as of March 31.
Higher short-term rates and lower or relatively stable long-term rates
resulted in an inversion in the yield curve. Instead of the usual upward sloping
curve--with yields rising along with the maturity of Treasury securities--yields
were lower for long-term bonds.
Outside of the Treasury market, yields rose and prices fell for most
intermediate- to long-term corporate and municipal bonds. The overall bond
market, as measured by the Lehman Aggregate Bond Index, posted a 2.1% return, as
an average price decline of -1.3% offset much of the 3.4% income provided by the
market.
INTERNATIONAL STOCK MARKETS
Stock markets in Europe, Asia, and many emerging markets produced double-digit
gains during the half-year as investors responded to improving global economic
growth and a rise in corporate merger and acquisition activity. The overall
return from developed foreign markets was an excellent 17.0%, as measured by the
Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index.
In Europe, an average return of 27.7% in local-currency terms was reduced
to 17.6% for U.S. investors because of the U.S. dollar's gains against European
currencies. (Returns from abroad are diminished when the dollar rises in value
against other currencies, and increased when the dollar falls.) Stocks in the
Pacific region, which is dominated by Japan, returned 15.6% in dollars and 12.8%
in local-currency terms. The Select Emerging Markets Free Index soared 26.2% in
dollars, led by big gains in Turkey (111%) and Brazil (60%).
4
<PAGE>
REPORT FROM THE ADVISER
Vanguard Asset Allocation Fund had a total return of 10.8% for the six months
ended March 31, 2000. This was below the 13.5% return of the fund's index
benchmark, a composite that is weighted 65% in stocks and 35% in bonds. The S&P
500 Index, which constitutes the stock portion of the benchmark, returned 17.5%.
The other benchmark component, the Lehman Long Treasury Index, returned 5.8%
during the half-year.
Stocks outperformed bonds during the first fiscal quarter while the economy
continued on its path of solid growth with low inflation. Gross domestic product
(GDP) grew at a 5.7% annual rate in the quarter ended September 30. During that
quarter, the personal spending component of GDP, which accounts for two-thirds
of economic activity, grew at a 4.9% pace. The Conference Board's Consumer
Confidence Index rose to a 31-year high of 141.7 in December, when the jobless
rate was at a 30-year low of 4.1%. Yet there were few signs of a pickup in
broad-based inflation during the quarter. Core inflation--as measured by the
Consumer Price Index excluding energy and food--remained near the 33-year low
touched in August. Meanwhile, in most industries, companies found it difficult
to raise prices due to tough competition, a fact reflected in restrained
increases in producer prices. The core rate of inflation in producer prices grew
by just 0.8% in 1999, and the GDP price deflator--the broadest measure of
inflation--rose at a 1.1% rate.
However, by late 1999 it appeared that the strong demand for workers was
exerting modest upward pressure on wages--average hourly earnings rose 0.4%
during December and 3.7% for all of 1999. Even so, the rise in average hourly
earnings was lower than those seen in both 1998 and 1997. Nevertheless, in view
of the tight labor market, the Federal Reserve Board acted preemptively, raising
its target federal funds rate to 5.5% on November 16, the third increase since
June 1999.
Bonds significantly outperformed stocks during the January-March quarter,
during which the current economic expansion became the longest in U.S. history.
The Lehman Long Treasury Bond Index returned 8.1%, while the S&P 500 Index
gained 2.3%. In its continuing effort to slow the economy and keep inflation
from accelerating, the Federal Reserve raised the target for the federal funds
rate twice to a level of 6.0% by quarter-end. In all, the Fed has raised the fed
funds rate five times by a total of 1.25 percentage points since June 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.
- - - - - - - --------------------------------------------------------------------------------
However, through March 2000 there was little evidence that higher rates had
slowed the economy's growth. Labor markets remained tight and economic
indicators continued to signal stronger-than-expected growth. The economy added
817,000 jobs during the January-March quarter, pushing the unemployment rate as
low as 4.0% in January--near the record of 3.9% recorded in January 1970. The
Consumer Confidence Index reached an all-time high of 144.7 in January,
surpassing the record of 142.3 set in October 1968. GDP grew at an annual rate
of 7.3% in the fourth quarter of 1999, the fastest pace since a 9.0%
5
<PAGE>
annual rate in the first quarter of 1984. For all of 1999, the economy grew at a
4.6% "real" rate (after inflation), having grown 4.3% in 1998 and 4.5% in 1997.
The last time the economy expanded at 4% or more for three years in a row was
1976-1978. Again, inflation remained subdued, despite well-publicized increases
in the price of oil. For the 12 months through March 2000, core inflation, which
excludes energy and food prices, was 1.2% at the producer level and 2.4% at the
consumer level.
The fund began the semiannual period with an allocation of 50% stocks/50%
bonds. The sharp divergence in returns on stocks and bonds during the
October-December quarter presented an opportunity for us to shift the fund's
asset allocation. The rise in equity prices through early November lowered the
expected return on stocks, while higher bond yields raised the expected return
on bonds. The net effect of these changes was to narrow the spread between the
expected returns on stocks and bonds, prompting our tactical asset allocation
model to call for a shift of 10% of assets from stocks into bonds. On November
4, the fund's allocation was shifted to 40% stocks/60% bonds.
As stock prices continued to rise during December, the expected return on
stocks fell. Meanwhile, increasing bond yields raised the expected return on
bonds. Although these changes narrowed the spread between the expected returns
on stocks and bonds, the narrowing wasn't sufficient to prompt a change in the
fund's holdings.
A decline in stock prices in January and February raised the expected
return on stocks, while falling bond yields lowered expected returns on bonds.
But the changes weren't enough to trigger any shifts in asset allocation. Stocks
increased during early March, lowering their expected return. Meanwhile, bond
yields continued to fall, further lowering the expected return on bonds. On
balance, expected returns for stocks and bonds didn't change much, and the fund
held its allocation at approximately 40% stocks and 60% bonds.
During the past six months, forecasts of improved corporate earnings
boosted expected returns on stocks. Our long-run forecast for stock returns is
near 10%. However, with yields on long Treasury bonds near 6.0%, our tactical
asset allocation model finds bonds somewhat more attractive than stocks.
Therefore, the Asset Allocation Fund has a lighter weight in stocks and a
heavier weight in bonds than our index benchmark.
William L. Fouse, CFA
Mellon Capital Management Corporation
April 13, 2000
6
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: NOVEMBER 3, 1988-MARCH 31, 2000
- - - - - - - ----------------------------------------------------------
ASSET ALLOCATION FUND COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- - - - - - - ----------------------------------------------------------
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
- - - - - - - ----------------------------------------------------------
ASSET ALLOCATION FUND COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- - - - - - - ----------------------------------------------------------
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 10.5 4.2 14.7 14.4
2000** 8.5 2.3 10.8 13.5
- - - - - - - ----------------------------------------------------------
*65% S&P 500 Index, 35% Lehman Long Treasury Index.
**Six months ended March 31, 2000.
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000
- - - - - - - --------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- - - - - - - --------------------------------------------------------------------------------
Asset Allocation Fund 11/3/1988 10.01% 20.82% 11.40% 4.48% 15.88%
- - - - - - - --------------------------------------------------------------------------------
7
<PAGE>
FUND PROFILE
ASSET ALLOCATION FUND
This Profile provides a snapshot of the fund's characteristics as of March 31,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 10 and 11.
TOTAL FUND CHARACTERISTICS FUND ASSET ALLOCATION*
- - - - - - - --------------------------------- ----------------------------------
Turnover Rate 31%* STOCKS 41%
Expense Ratio 0.47%* BONDS 58%
Cash Reserves 1.2% CASH RESERVES 1%
*Annualized. *Actual allocation may vary
slightly from target allocation
because of day-to-day market
fluctuations.
TOTAL FUND VOLATILITY MEASURES
- - - - - - - -------------------------------------
ASSET ALLOCATION S&P 500
- - - - - - - -------------------------------------
R-Squared 0.90 1.00
Beta 0.61 1.00
TEN LARGEST STOCKS
(% OF EQUITIES)
- - - - - - - -------------------------------------------
Microsoft Corp. 4.3%
Cisco Systems, Inc. 4.2
General Electric Co. 4.0
Intel Corp. 3.5
Exxon Mobil Corp. 2.1
Wal-Mart Stores, Inc. 1.9
Oracle Corp. 1.7
International Business Machines Corp. 1.7
Citigroup, Inc. 1.6
Lucent Technologies, Inc. 1.5
- - - - - - - -------------------------------------------
Top Ten 26.5%
- - - - - - - -------------------------------------------
Top Ten as % of Total Net Assets 8.2%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- - - - - - - --------------------------------------------------------------------------------
MARCH 31, 1999 MARCH 31, 2000
-----------------------------------------------------------
ASSET ALLOCATION ASSET ALLOCATION S&P 500
-----------------------------------------------------------
Auto & Transportation 2.5% 1.9% 1.9%
Consumer Discretionary 13.2 12.5 12.5
Consumer Staples 8.4 5.0 5.0
Financial Services 16.7 13.5 13.5
Health Care 12.4 9.0 9.0
Integrated Oils 5.1 4.6 4.6
Other Energy 1.0 1.7 1.7
Materials & Processing 3.3 2.6 2.5
Producer Durables 3.2 4.0 4.0
Technology 17.3 29.4 29.4
Utilities 11.1 9.7 9.7
Other 5.8 6.1 6.2
- - - - - - - --------------------------------------------------------------------------------
8
<PAGE>
EQUITY CHARACTERISTICS
- - - - - - - --------------------------------------------------------------------------------
ASSET ALLOCATION S&P 500
- - - - - - - ------------------------------------------------
Number of Stocks 505 500
Median Market Cap $94.4B $94.4B
Price/Earnings Ratio 28.7x 28.7x
Price/Book Ratio 5.7x 5.7x
Dividend Yield 1.1% 1.1%
Return on Equity 24.2% 24.2%
Earnings Growth Rate 16.4% 16.4%
Foreign Holdings 1.2% 1.2%
EQUITY INVESTMENT FOCUS
- - - - - - - ----------------------------
[GRID]
STYLE BLEND
MARKET CAP LARGE
FIXED-INCOME CHARACTERISTICS
- - - - - - - ----------------------------------------------------------
LEHMAN
ASSET ALLOCATION INDEX*
- - - - - - - ----------------------------------------------------------
Number of Bonds 31 5,566
Average Coupon 8.0% 6.8%
Average Duration 10.5 years 4.9 years
Average Maturity 21.0 years 8.9 years
Average Quality Treasury Aaa
*Lehman Aggregate Bond Index.
FIXED-INCOME INVESTMENT FOCUS
- - - - - - - --------------------------------------
[GRID]
AVERAGE MATURITY LONG
CREDIT QUALITY TREASURY/AGENCY
9
<PAGE>
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 investment.
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>
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>
FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.), with the
fund's S&P 500 Index common stocks listed in descending market value order.
Other assets are added to, and liabilities are subtracted from, the value of
Total Investments to calculate the fund's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the fund to arrive at its share price, or
Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. 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.
- - - - - - - --------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- - - - - - - --------------------------------------------------------------------------------
COMMON STOCKS (31.0%)(1)
- - - - - - - --------------------------------------------------------------------------------
o Microsoft Corp. 1,082,700 $ 115,037
o Cisco Systems, Inc. 1,425,600 110,217
General Electric Co. 684,200 106,179
Intel Corp. 695,600 91,776
Exxon Mobil Corp. 720,120 56,034
Wal-Mart Stores, Inc. 928,000 51,504
o Oracle Corp. 588,800 45,963
International Business
Machines Corp. 375,300 44,285
Citigroup, Inc. 700,891 41,571
Lucent Technologies, Inc. 663,371 40,300
Nortel Networks Corp. 300,520 37,865
AT&T Corp. 664,221 37,362
American International
Group, Inc. 322,868 35,354
o America Online, Inc. 465,400 31,298
Home Depot, Inc. 476,900 30,760
o Sun Microsystems, Inc. 325,200 30,472
Merck & Co., Inc. 487,500 30,286
SBC Communications Inc. 711,414 29,879
Pfizer, Inc. 805,700 29,458
o Dell Computer Corp. 529,400 28,554
Hewlett-Packard Co. 212,500 28,169
Time Warner, Inc. 268,300 26,830
o MCI WorldCom, Inc. 590,966 26,778
Texas Instruments, Inc. 167,000 26,720
o EMC Corp. 213,412 26,676
Royal Dutch Petroleum Co. ADR 444,700 25,598
The Coca-Cola Co. 515,100 24,177
Bristol-Myers Squibb Co. 412,760 23,837
o QUALCOMM, Inc. 153,500 22,919
Motorola, Inc. 148,140 21,091
Johnson & Johnson 288,100 20,185
Bell Atlantic Corp. 322,230 19,696
Morgan Stanley Dean
Witter & Co. 232,200 18,939
o Yahoo!, Inc. 109,000 18,680
Bank of America Corp. 355,988 18,667
BellSouth Corp. 391,700 18,410
The Walt Disney Co. 430,100 17,795
Tyco International Ltd. 352,170 17,564
Warner-Lambert Co. 179,100 17,462
Procter & Gamble Co. 274,944 15,466
The Chase Manhattan Corp. 171,322 14,937
o Applied Materials, Inc. 158,400 14,929
American Home Products Corp. 272,900 14,634
GTE Corp. 204,100 14,491
Eli Lilly & Co. 228,300 14,383
Wells Fargo Co. 343,610 14,066
American Express Co. 93,745 13,962
o Amgen, Inc. 213,000 13,073
Medtronic, Inc. 249,300 12,823
Chevron Corp. 135,200 12,497
Fannie Mae 214,700 12,117
o Sprint PCS 178,900 11,684
E.I. du Pont de Nemours & Co. 220,867 11,678
Ford Motor Co. 251,300 11,544
Sprint Corp. 180,200 11,353
Abbott Laboratories 320,600 11,281
Schering-Plough Corp. 304,300 11,183
Enron Corp. 149,200 11,171
12
<PAGE>
- - - - - - - --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- - - - - - - --------------------------------------------------------------------------------
Corning, Inc. 57,500 $ 11,155
o NEXTEL Communications, Inc. 74,900 11,104
General Motors Corp. 133,531 11,058
McDonald's Corp. 283,100 10,634
PepsiCo, Inc. 307,500 10,628
Philip Morris Cos., Inc. 493,400 10,423
o MediaOne Group, Inc. 126,030 10,208
Charles Schwab Corp. 169,250 9,615
Compaq Computer Corp. 353,848 9,421
o CBS Corp. 161,667 9,154
Honeywell International Inc. 171,150 9,017
The Gap, Inc. 176,737 8,804
Schlumberger Ltd. 112,700 8,621
o Veritas Software Corp. 64,564 8,458
Gillette Co. 223,700 8,431
o Comcast Corp.-Special Class A 193,000 8,371
Bank One Corp. 243,435 8,368
Merrill Lynch & Co., Inc. 76,000 7,980
First Union Corp. 205,932 7,671
o Viacom Inc. Class B 143,800 7,585
U S WEST, Inc. 103,782 7,537
Minnesota Mining &
Manufacturing Co. 84,700 7,501
o Micron Technology, Inc. 56,200 7,081
FleetBoston Financial Corp. 189,037 6,900
Colgate-Palmolive Co. 121,900 6,872
The Boeing Co. 180,086 6,832
Target Corp. 89,818 6,714
Monsanto Co. 130,000 6,695
Computer Associates
International, Inc. 111,400 6,593
o Global Crossing Ltd. 160,715 6,579
The Bank of New York Co., Inc. 155,600 6,467
Kimberly-Clark Corp. 113,992 6,383
Freddie Mac 144,200 6,372
United Technologies Corp. 100,000 6,319
Electronic Data Systems Corp. 97,500 6,258
Pharmacia & Upjohn, Inc. 105,090 6,227
Automatic Data Processing, Inc. 128,200 6,186
Texaco Inc. 115,300 6,183
Marsh & McLennan Cos., Inc. 54,650 6,029
Anheuser-Busch Cos., Inc. 96,414 6,002
o Analog Devices, Inc. 73,400 5,913
Unilever NV ADR 118,442 5,700
Atlantic Richfield Co. 66,400 5,644
o Xilinx, Inc. 67,200 5,565
Alcoa Inc. 77,600 5,451
Walgreen Co. 209,300 5,389
o Tellabs, Inc. 83,700 5,272
The Seagram Co. Ltd. 88,500 5,266
Dow Chemical Co. 45,850 5,227
o Network Appliance, Inc. 62,800 5,197
o Solectron Corp. 122,000 4,888
o Clear Channel
Communications, Inc. 70,200 4,848
Emerson Electric Co. 90,800 4,801
o Safeway, Inc. 106,100 4,801
J.P. Morgan & Co., Inc. 36,242 4,775
Firstar Corp. 208,149 4,774
o Costco Wholesale Corp. 89,512 4,705
Lowe's Cos., Inc. 79,700 4,652
o Apple Computer, Inc. 34,000 4,618
o LSI Logic Corp. 62,000 4,503
MBNA Corp. 166,650 4,250
PE Corp.-PE Biosystems Group 43,500 4,198
Gannett Co., Inc. 58,700 4,131
ALLTEL Corp. 65,500 4,131
o 3Com Corp. 73,500 4,088
Fifth Third Bancorp 64,350 4,054
Allstate Corp. 170,054 4,049
First Data Corp. 91,200 4,036
Duke Energy Corp. 74,081 3,889
Williams Cos., Inc. 87,700 3,853
SunTrust Banks, Inc. 65,600 3,788
Baxter International, Inc. 59,000 3,699
International Paper Co. 86,389 3,693
Halliburton Co. 90,000 3,690
Eastman Kodak Co. 67,900 3,688
o Guidant Corp. 62,300 3,664
o Best Buy Co., Inc. 42,300 3,638
Household International, Inc. 97,088 3,623
o Gateway, Inc. 66,900 3,546
Xerox Corp. 135,996 3,536
Omnicom Group Inc. 37,000 3,457
Illinois Tool Works, Inc. 62,300 3,442
U.S. Bancorp 155,703 3,406
Sara Lee Corp. 188,700 3,397
o AES Corp. 43,000 3,386
Conoco Inc. Class B 131,939 3,381
o ADC Telecommunications, Inc. 62,400 3,362
o Kohl's Corp. 32,200 3,301
Washington Mutual, Inc. 123,941 3,284
Associates First Capital Corp. 149,912 3,214
State Street Corp. 33,000 3,197
Mellon Financial Corp. 108,300 3,195
o KLA-Tencor Corp. 37,600 3,168
Southern Co. 145,200 3,158
Carnival Corp. 127,100 3,154
Northern Trust Corp. 45,900 3,101
Columbia/HCA Healthcare Corp. 120,145 3,041
CVS Corp. 80,600 3,028
o Comverse Technology, Inc. 15,900 3,005
o The Kroger Co. 169,100 2,970
American General Corp. 52,295 2,935
o Teradyne, Inc. 35,600 2,928
Caterpillar, Inc. 74,200 2,926
o Conexant Systems, Inc. 40,900 2,904
Campbell Soup Co. 94,200 2,897
Linear Technology Corp. 51,852 2,852
Wachovia Corp. 42,200 2,851
PNC Financial Services Group 62,800 2,830
Adobe Systems, Inc. 25,300 2,816
o Lexmark International
Group, Inc. Class A 26,600 2,813
National City Corp. 136,082 2,807
Bestfoods 58,800 2,753
o Computer Sciences Corp. 34,700 2,746
o Cendant Corp. 148,234 2,742
13
<PAGE>
- - - - - - - --------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- - - - - - - --------------------------------------------------------------------------------
Albertson's, Inc. 87,736 $ 2,720
Weyerhaeuser Co. 47,700 2,719
Interpublic Group of Cos., Inc. 56,100 2,651
CIGNA Corp. 34,700 2,629
o Seagate Technology Inc. 43,400 2,615
Paychex, Inc. 49,900 2,614
Sysco Corp. 73,100 2,609
H.J. Heinz Co. 74,700 2,605
The Hartford Financial Services
Group Inc. 49,100 2,590
Cardinal Health, Inc. 56,050 2,571
o BMC Software, Inc. 51,700 2,553
Pitney Bowes, Inc. 56,500 2,525
o Citrix Systems, Inc. 37,900 2,511
Sears, Roebuck & Co. 81,100 2,504
Harley-Davidson, Inc. 31,400 2,492
AFLAC, Inc. 54,700 2,492
Providian Financial Corp. 28,600 2,477
Circuit City Stores, Inc. 40,600 2,472
Phillips Petroleum Co. 53,300 2,465
NIKE, Inc. Class B 59,800 2,370
Molex, Inc. 40,250 2,365
The Chubb Corp. 34,900 2,358
Lehman Brothers Holdings, Inc. 24,300 2,357
General Mills, Inc. 64,300 2,327
o FedEx Corp. 59,220 2,310
Transocean Sedco Forex Inc. 43,207 2,217
o National Semiconductor Corp. 36,500 2,213
Kellogg Co. 85,300 2,186
Burlington Northern
Santa Fe Corp. 98,696 2,184
o Biogen, Inc. 31,200 2,180
Southwest Airlines Co. 104,300 2,171
General Dynamics Corp. 43,400 2,159
Tandy Corp. 41,128 2,087
United Healthcare Corp. 34,900 2,081
o Novell, Inc. 72,300 2,070
Scientific-Atlanta, Inc. 32,400 2,055
Coastal Corp. 44,000 2,024
Rohm & Haas Co. 45,239 2,019
Dover Corp. 41,800 2,001
Deere & Co. 52,300 1,987
Kansas City Southern
Industries, Inc. 23,100 1,985
Union Pacific Corp. 50,600 1,980
PPG Industries, Inc. 37,600 1,967
Dominion Resources, Inc. 50,778 1,952
o Staples, Inc. 97,400 1,948
May Department Stores Co. 68,300 1,947
Baker Hughes, Inc. 64,160 1,941
Capital One Financial Corp. 40,200 1,927
El Paso Energy Corp. 47,400 1,914
Coca-Cola Enterprises, Inc. 88,700 1,913
Masco Corp. 91,800 1,882
Delphi Automotive Systems Corp. 116,718 1,867
Textron, Inc. 30,500 1,857
o Boston Scientific Corp. 86,500 1,844
The McGraw-Hill Cos., Inc. 40,400 1,838
ConAgra, Inc. 101,000 1,831
Tribune Co. 49,900 1,824
o Advanced Micro Devices, Inc. 31,700 1,809
Wrigley, (Wm.) Jr. Co. 23,500 1,805
BB&T Corp. 64,300 1,804
The Limited, Inc. 42,688 1,798
o Federated Department
Stores, Inc. 42,100 1,758
KeyCorp 91,800 1,744
Ralston-Ralston Purina Group 63,400 1,736
Franklin Resources Corp. 51,900 1,735
Texas Utilities Co. 57,641 1,711
FPL Group, Inc. 36,900 1,700
Waste Management, Inc. 123,910 1,696
Aetna Inc. 30,406 1,693
The Quaker Oats Co. 27,700 1,679
USX-Marathon Group 64,000 1,668
Aon Corp. 51,625 1,665
PG&E Corp. 78,600 1,651
Lockheed Martin Corp. 80,482 1,645
o Unisys Corp. 64,500 1,645
Marriott International, Inc.
Class A 52,100 1,641
Rockwell International Corp. 39,200 1,639
St. Paul Cos., Inc. 47,856 1,633
Burlington Resources, Inc. 43,585 1,613
o Compuware Corp. 76,300 1,607
Unicom Corp. 43,500 1,588
The Clorox Co. 48,600 1,580
Avon Products, Inc. 54,200 1,575
Alcan Aluminium Ltd. 46,050 1,560
Occidental Petroleum Corp. 75,000 1,556
Union Carbide Corp. 26,400 1,539
TRW, Inc. 25,900 1,515
Hershey Foods Corp. 30,900 1,506
New York Times Co. Class A 35,000 1,503
Dollar General Corp. 55,431 1,490
Unocal Corp. 50,039 1,489
Georgia Pacific Group 37,600 1,488
TJX Cos., Inc. 66,700 1,480
Avery Dennison Corp. 24,100 1,472
Public Service Enterprise
Group, Inc. 49,600 1,469
Ingersoll-Rand Co. 33,150 1,467
Reliant Energy, Inc. 61,822 1,449
Tenet Healthcare Corp. 62,700 1,442
Jefferson-Pilot Corp. 21,600 1,438
PECO Energy Corp. 38,900 1,434
Comerica, Inc. 34,050 1,426
Dow Jones & Co., Inc. 19,700 1,415
Lincoln National Corp. 42,100 1,410
Delta Air Lines, Inc. 26,400 1,406
Danaher Corp. 27,500 1,403
Newell Rubbermaid, Inc. 55,909 1,387
Consolidated Edison Inc. 47,700 1,383
Air Products & Chemicals, Inc. 48,100 1,368
Allergan, Inc. 26,700 1,335
Archer-Daniels-Midland Co. 128,434 1,333
Praxair, Inc. 31,700 1,320
Becton, Dickinson & Co. 49,900 1,313
14
<PAGE>
- - - - - - - --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- - - - - - - --------------------------------------------------------------------------------
PaineWebber Group, Inc. 9,600 $ 1,302
Cincinnati Financial Corp. 33,800 1,272
Edison International 74,700 1,237
Raytheon Co. Class B 69,700 1,237
Amerada Hess Corp. 19,000 1,228
o Parametric Technology Corp. 58,000 1,222
AmSouth Bancorp 81,000 1,210
Eaton Corp. 15,500 1,209
Bear Stearns Co., Inc. 26,187 1,195
Barrick Gold Corp. 75,600 1,186
McKesson HBOC, Inc. 55,965 1,175
American Electric Power Co., Inc. 39,400 1,175
IMS Health, Inc. 69,300 1,174
Loews Corp. 23,400 1,170
SLM Holding Corp. 35,000 1,166
W.W. Grainger, Inc. 21,400 1,161
Apache Corp. 23,100 1,149
o Bed Bath & Beyond, Inc. 29,000 1,142
The Times Mirror Co. Class A 12,200 1,134
Norfolk Southern Corp. 78,600 1,130
o PeopleSoft, Inc. 56,000 1,120
Progressive Corp. of Ohio 14,600 1,111
o Cabletron Systems, Inc. 37,700 1,105
Golden West Financial Corp. 35,200 1,098
Huntington Bancshares Inc. 47,807 1,070
CenturyTel, Inc. 28,550 1,060
MGIC Investment Corp. 24,000 1,047
MBIA, Inc. 20,100 1,046
CSX Corp. 44,400 1,043
Champion International Corp. 19,400 1,033
Reynolds Metals Co. 15,300 1,023
Kerr-McGee Corp. 17,597 1,016
Entergy Corp. 50,300 1,015
Fort James Corp. 45,800 1,008
Synovus Financial Corp. 53,350 1,007
Dun & Bradstreet Corp. 34,900 999
o AMR Corp. 31,300 998
Regions Financial Corp. 43,700 997
Columbia Energy Group 16,800 995
T. Rowe Price 25,200 995
Carolina Power & Light Co. 30,500 989
Constellation Energy Group 30,950 987
o Tricon Global Restaurants, Inc. 31,700 985
FirstEnergy Corp. 47,700 984
Ecolab, Inc. 26,700 980
o Wellpoint Health
Networks Inc. Class A 14,000 978
Tosco Corp. 31,800 968
Knight Ridder 18,900 963
H & R Block, Inc. 21,500 962
Parker Hannifin Corp. 23,125 955
o Kmart Corp. 98,500 954
Vulcan Materials Co. 20,800 953
Summit Bancorp 36,100 948
Johnson Controls, Inc. 17,300 935
Anadarko Petroleum Corp. 24,100 932
Florida Progress Corp. 20,100 922
o Sealed Air Corp. 16,915 919
Whirlpool Corp. 15,600 915
Dana Corp. 32,359 912
Union Planters Corp. 29,600 912
Mattel, Inc. 86,687 905
o Office Depot, Inc. 78,200 904
Willamette Industries, Inc. 22,500 903
Nucor Corp. 17,800 890
o Toys R Us, Inc. 59,500 881
Leggett & Platt, Inc. 40,900 879
Genuine Parts Co. 36,650 875
Biomet, Inc. 24,000 873
SouthTrust Corp. 34,300 873
Ameren Corp. 28,200 872
Fortune Brands, Inc. 34,800 870
o AutoZone Inc. 30,800 855
DTE Energy Co. 29,400 853
Phelps Dodge Corp. 17,803 846
UnumProvident Corp. 49,591 843
Sabre Holdings Corp. 22,619 835
o Adaptec, Inc. 21,500 830
PACCAR, Inc. 16,440 822
o NCR Corp. 20,000 803
Nordstrom, Inc. 27,100 799
Old Kent Financial Corp. 24,700 798
Sherwin-Williams Co. 36,200 794
Brown-Forman Corp. Class B 14,500 789
o Watson Pharmaceuticals, Inc. 19,800 786
International Flavors &
Fragrances, Inc. 22,400 785
o ALZA Corp. 20,900 785
SAFECO Corp. 29,400 781
Nabisco Group Holdings Corp. 64,900 779
Equifax, Inc. 30,800 778
J.C. Penney Co., Inc. 51,000 759
Black & Decker Corp. 19,900 747
The Mead Corp. 21,100 737
The Goodyear Tire & Rubber Co. 31,600 737
Union Pacific Resources
Group, Inc. 50,622 734
o Inco Ltd. 39,998 732
GPU, Inc. 26,700 731
Central & South West Corp. 42,600 727
Conseco Inc. 63,545 727
Eastman Chemical Co. 15,950 726
Northrop Grumman Corp. 13,700 725
PPL Corp. 34,100 714
Sempra Energy 42,592 713
Westvaco Corp. 21,300 711
Newmont Mining Corp. 31,546 708
Torchmark Corp. 30,300 701
New Century Energies, Inc. 22,900 688
Cinergy Corp. 31,918 686
o Mirage Resorts, Inc. 35,400 686
Cooper Industries, Inc. 19,557 685
Liz Claiborne, Inc. 14,900 683
Young & Rubicam Inc. 14,500 682
The BFGoodrich Co. 22,800 654
R.R. Donnelley & Sons Co. 31,100 651
Hasbro, Inc. 39,450 651
ITT Industries, Inc. 20,600 640
15
<PAGE>
- - - - - - - --------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- - - - - - - --------------------------------------------------------------------------------
Autodesk, Inc. 13,900 $ 632
Bausch & Lomb, Inc. 12,100 631
o Thermo Electron Corp. 30,900 630
Countrywide Credit
Industries, Inc. 23,100 629
o Navistar International Corp. 15,580 625
PerkinElmer, Inc. 9,400 625
o Ceridian Corp. 32,500 624
Maytag Corp. 18,700 619
Tektronix, Inc. 11,050 619
VF Corp. 25,528 614
Northern States Power Co. 30,600 608
UST, Inc. 38,200 597
Winn-Dixie Stores, Inc. 30,700 597
Hilton Hotels Corp. 76,800 595
Darden Restaurants Inc. 33,300 593
o US Airways Group, Inc. 21,200 590
Temple-Inland Inc. 11,800 588
Sigma-Aldrich Corp. 20,900 562
Placer Dome, Inc. 67,600 549
Wendy's International, Inc. 27,200 549
Harcourt General, Inc. 14,663 546
Pall Corp. 24,266 544
SuperValu Inc. 28,500 540
o Owens-Illinois, Inc. 31,900 538
Sunoco, Inc. 19,467 533
Fluor Corp. 17,100 530
o Rowan Cos., Inc. 17,900 527
o Niagara Mohawk Holdings Inc. 38,500 520
Ashland, Inc. 15,500 518
o Harrah's Entertainment, Inc. 26,800 497
The Stanley Works 18,800 496
Pinnacle West Capital Corp. 17,500 493
o HEALTHSOUTH Corp. 88,100 490
Millipore Corp. 8,600 485
o Freeport-McMoRan Copper &
Gold Inc. Class B 40,000 483
o St. Jude Medical, Inc. 18,500 478
C.R. Bard, Inc. 12,200 472
Engelhard Corp. 30,850 467
Deluxe Corp. 17,300 458
USX-U.S. Steel Group 17,940 449
o FMC Corp. 7,800 441
Great Lakes Chemical Corp. 12,800 435
Mallinckrodt, Inc. 15,100 434
o Andrew Corp. 18,275 418
Crown Cork & Seal Co., Inc. 26,100 418
Allegheny Technologies Inc. 20,555 412
Bemis Co., Inc. 11,000 406
o Quintiles Transnational Corp. 23,300 398
Dillard's Inc. 23,900 393
Brunswick Corp. 20,700 392
o Silicon Graphics, Inc. 36,646 387
Ryder System, Inc. 16,700 379
Adolph Coors Co. Class B 7,900 378
CMS Energy Corp. 20,800 377
Boise Cascade Corp. 10,300 358
NICOR, Inc. 10,800 356
Crane Co. 14,537 343
Snap-On Inc. 12,950 339
Hercules, Inc. 20,900 337
Meredith Corp. 11,700 324
o Manor Care, Inc. 23,200 313
Cummins Engine Co., Inc. 8,300 312
Centex Corp. 13,000 310
Thomas & Betts Corp. 10,900 308
Louisiana-Pacific Corp. 22,100 307
o Pactiv Corp. 34,500 302
Rite Aid Corp. 53,100 292
American Greetings
Corp. Class A 15,700 287
Alberto-Culver Co. Class B 11,800 281
Potlatch Corp. 6,100 262
o Allied Waste Industries, Inc. 38,900 255
o Consolidated Stores, Inc. 22,100 251
Shared Medical Systems Corp. 4,800 249
Eastern Enterprises 4,100 245
Homestake Mining Co. 40,900 245
Worthington Industries, Inc. 19,550 242
o Humana, Inc. 32,800 240
Briggs & Stratton Corp. 5,800 239
Polaroid Corp. 9,762 232
Pulte Corp. 10,900 228
Jostens Inc. 9,000 219
Ball Corp. 6,300 218
Cooper Tire & Rubber Co. 17,300 217
National Service Industries, Inc. 10,200 215
The Timken Co. 13,000 211
Owens Corning 10,400 202
Peoples Energy Corp. 7,300 200
Tupperware Corp. 12,500 198
Longs Drug Stores, Inc. 8,500 193
o W.R. Grace & Co. 15,100 192
IKON Office Solutions, Inc. 25,800 160
Great Atlantic & Pacific
Tea Co., Inc. 8,000 156
Kaufman & Broad Home Corp. 6,900 148
Armstrong World Industries Inc. 8,200 147
ONEOK, Inc. 5,800 145
Springs Industries Inc. Class A 3,800 144
o Bethlehem Steel Corp. 23,500 141
Russell Corp. 8,400 120
Milacron Inc. 7,500 108
o Reebok International Ltd. 11,600 107
McDermott International, Inc. 11,400 105
NACCO Industries, Inc. Class A 1,760 84
Arch Coal, Inc. 3,815 27
o Siebel Systems, Inc. 204 24
- - - - - - - --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,012,717) 2,651,581
- - - - - - - --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- - - - - - - --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (58.3%)
- - - - - - - --------------------------------------------------------------------------------
U.S. TREASURY BONDS
5.25%, 11/15/2028 $154,760 138,564
5.25%, 2/15/2029 65,000 58,292
5.50%, 8/15/2028 266,030 246,844
6.125%, 11/15/2027 163,410 165,023
16
<PAGE>
- - - - - - - --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- - - - - - - --------------------------------------------------------------------------------
6.125%, 8/15/2029 $ 37,500 $ 38,269
6.375%, 8/15/2027 214,210 223,115
6.50%, 11/15/2026 206,160 217,528
6.875%, 8/15/2025 110,715 121,649
7.125%, 2/15/2023 393,345 439,964
7.25%, 5/15/2016 140,550 155,295
7.50%, 11/15/2016 73,440 83,166
7.50%, 11/15/2024 96,490 113,294
7.625%, 11/15/2022 87,370 102,939
7.625%, 2/15/2025 72,585 86,528
(2)8.00%, 11/15/2021 162,520 197,886
8.125%, 8/15/2019 86,720 105,424
(2)8.125%, 5/15/2021 202,095 248,138
8.125%, 8/15/2021 151,830 186,669
8.50%, 2/15/2020 172,034 216,930
8.75%, 5/15/2017 189,830 239,822
8.75%, 5/15/2020 84,400 108,968
8.75%, 8/15/2020 132,500 171,379
8.875%, 8/15/2017 207,560 265,430
8.875%, 2/15/2019 173,460 224,414
10.375%, 11/15/2012 129,608 159,525
10.625%, 8/15/2015 82,260 117,472
11.25%, 2/15/2015 87,300 129,037
11.75%, 11/15/2014 104,775 144,300
12.00%, 8/15/2013 186,435 252,053
12.75%, 11/15/2010 7,220 9,288
14.00%, 11/15/2011 17,300 24,178
- - - - - - - --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $5,070,475) 4,991,383
- - - - - - - --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (14.6%)(1)
- - - - - - - --------------------------------------------------------------------------------
COMMERCIAL PAPER (5.2%)
AIG Funding Inc.
5.86%, 5/18/2000 24,000 23,820
Coca-Cola Co.
5.72%, 4/28/2000 30,000 29,874
6.03%, 6/5/2000 50,000 49,456
E.I. du Pont de Nemours & Co.
5.904%, 4/27/2000 50,000 49,800
6.04%, 6/5/2000 30,000 29,673
Ford Motor Credit Co.
5.99%, 6/14/2000 80,000 79,015
General Electric Capital Corp.
5.91%, 6/2/2000 25,000 24,749
General Motors Acceptance Corp.
6.05%, 6/6/2000 80,000 79,113
International Lease Finance Corp.
5.90%, 5/15/2000 80,000 79,439
--------
444,939
--------
- - - - - - - --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- - - - - - - --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (9.4%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.12%, 4/3/2000 $395,161 $ 395,161
6.14%, 4/3/2000--Note F 405,520 405,520
-------
800,681
-------
- - - - - - - --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,245,586) 1,245,620
- - - - - - - --------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.9%)
(COST $7,328,778) 8,888,584
- - - - - - - --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.9%)
- - - - - - - --------------------------------------------------------------------------------
Other Assets--Note C 100,465
Security Lending Collateral Payable
to Brokers--Note F (405,520)
---------
Other Liabilities (31,220)
---------
(336,275)
---------
- - - - - - - --------------------------------------------------------------------------------
NET ASSETS (100%)
- - - - - - - --------------------------------------------------------------------------------
Applicable to 340,158,990 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization) $8,552,309
================================================================================
NET ASSET VALUE PER SHARE $25.14
================================================================================
*See Note A in Notes to Financial Statements.
oNon-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
40.5% and 5.1%, respectively, of net assets. See Note E in Notes to Financial
Statements.
(2)Securities with an aggregate value of $97,920,000 have been segregated as
initial margin for open futures contracts. ADR--American Depositary Receipt.
- - - - - - - --------------------------------------------------------------------------------
AT MARCH 31, 2000, NET ASSETS CONSISTED OF:
- - - - - - - --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- - - - - - - --------------------------------------------------------------------------------
Paid in Capital $6,690,600 $19.67
Undistributed Net
Investment Income 82,986 .24
Accumulated Net
Realized Gains 155,036 .46
Unrealized Appreciation--Note E
Investment Securities 1,559,806 4.58
Futures Contracts 63,881 .19
- - - - - - - --------------------------------------------------------------------------------
NET ASSETS $8,552,309 $25.14
================================================================================
17
<PAGE>
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.
- - - - - - - --------------------------------------------------------------------------------
ASSET ALLOCATION FUND
SIX MONTHS ENDED MARCH 31, 2000
(000)
- - - - - - - --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 16,714
Interest 175,479
Security Lending 428
---------
Total Income 192,621
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 4,563
Performance Adjustment (709)
The Vanguard Group--Note C
Management and Administrative 14,929
Marketing and Distribution 660
Custodian Fees 44
Auditing Fees 16
Shareholders' Reports 111
Trustees' Fees and Expenses 5
---------
Total Expenses 19,619
- - - - - - - --------------------------------------------------------------------------------
NET INVESTMENT INCOME 173,002
- - - - - - - --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 180,960
Futures Contracts (1,805)
- - - - - - - --------------------------------------------------------------------------------
REALIZED NET GAIN 179,155
- - - - - - - --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 394,768
Futures Contracts 115,289
- - - - - - - --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 510,057
- - - - - - - --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $862,214
================================================================================
18
<PAGE>
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, 2000 SEP. 30, 1999
(000) (000)
- - - - - - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 173,002 $ 261,315
Realized Net Gain 179,155 477,764
Change in Unrealized Appreciation (Depreciation) 510,057 102,998
--------------------------------
Net Increase in Net Assets Resulting from Operations 862,214 842,077
--------------------------------
DISTRIBUTIONS
Net Investment Income (182,342) (263,532)
Realized Capital Gain (330,279) (308,685)
--------------------------------
Total Distributions (512,621) (572,217)
--------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 953,909 3,038,828
Issued in Lieu of Cash Distributions 493,894 550,958
Redeemed (1,427,208) (1,314,040)
--------------------------------
Net Increase from Capital Share Transactions 20,595 2,275,746
- - - - - - - -----------------------------------------------------------------------------------------------------------
Total Increase 370,188 2,545,606
- - - - - - - -----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 8,182,121 5,636,515
--------------------------------
End of Period $8,552,309 $8,182,121
===========================================================================================================
1Shares Issued (Redeemed)
Issued 39,569 123,320
Issued in Lieu of Cash Distributions 20,682 23,236
Redeemed (59,477) (53,361)
--------------------------------
Net Increase in Shares Outstanding 774 93,195
===========================================================================================================
</TABLE>
19
<PAGE>
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, 2000 1999 1998 1997 1996 1995
- - - - - - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $24.11 $22.90 $21.53 $18.27 $17.03 $13.78
- - - - - - - ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .80 .79 .74 .69 .64
Net Realized and Unrealized Gain
(Loss) on Investments 2.02 2.50 2.33 4.29 1.82 3.18
-----------------------------------------------------------------
Total from Investment Operations 2.52 3.30 3.12 5.03 2.51 3.82
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.53) (.91) (.74) (.72) (.66) (.57)
Distributions from Realized Capital Gains (.96) (1.18) (1.01) (1.05) (.61)
-----------------------------------------------------------------
Total Distributions (1.49) (2.09) (1.75) (1.77) (1.27) (.57)
- - - - - - - ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $25.14 $24.11 $22.90 $21.53 $18.27 $17.03
===============================================================================================================
TOTAL RETURN 10.78% 14.68% 15.24% 29.42% 15.27% 28.57%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $8,552 $8,182 $5,637 $3,738 $2,341 $1,593
Ratio of Total Expenses to
Average Net Assets 0.47%* 0.49% 0.49% 0.49% 0.47% 0.49%
Ratio of Net Investment Income to
Average Net Assets 4.11%* 3.49% 3.80% 3.96% 4.17% 4.41%
Portfolio Turnover Rate 31%* 11% 60% 10% 47% 34%
===============================================================================================================
</TABLE>
*Annualized.
20
<PAGE>
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 CONTRACTS: 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.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. Mellon Capital Management Corporation provides investment advisory services
to the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
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, 2000, the advisory fee represented an effective annual
basic rate of 0.11% of the fund's average net assets before a decrease of
$709,000 (0.02%) 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, 2000, the fund had contributed capital of $1,647,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.6% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
D. During the six months ended March 31, 2000, the fund purchased $119,491,000
of investment securities and sold $832,151,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases and
sales of U.S. government securities were $1,157,666,000 and $345,449,000,
respectively.
E. At March 31, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,559,806,000,
consisting of unrealized gains of $1,709,290,000 on securities that had risen in
value since their purchase and $149,484,000 in unrealized losses on securities
that had fallen in value since their purchase.
At March 31, 2000, the aggregate settlement value of open futures contracts
expiring in June 2000 and the related unrealized appreciation were:
- - - - - - - --------------------------------------------------------------------------------
(000)
-----------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- - - - - - - --------------------------------------------------------------------------------
S&P 500 Index 2,139 $810,307 $63,881
- - - - - - - --------------------------------------------------------------------------------
F. The market value of securities on loan to broker/dealers at March 31, 2000,
was $542,625,000, for which the fund had received as collateral cash of
$405,520,000 and U.S. Treasury securities with a market value of $145,938,000.
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>
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
- - - - - - - ----------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital
Appreciation Fund*
Tax-Managed Growth and
Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock
Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
- - - - - - - ----------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
- - - - - - - ----------------------------------------
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term Treasury
Fund
Admiral(TM) Short-Term Treasury
Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt
Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt
Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- - - - - - - ----------------------------------------
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market
Funds (California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
- - - - - - - ----------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses,
obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge,
PA 19482-2600.
Read it carefully before you invest or send money.
23
<PAGE>
- - - - - - - --------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN J. BRENNAN (1987) 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 (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnsono Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton,
and Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL (1991) 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. (1971) 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 (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Quantitative Equity Group.
<PAGE>
[SHIP LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q782-042000
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
