<PAGE> 1
VANGUARD
INSTITUTIONAL
MONEY MARKET PORTFOLIO
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change
plus income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major asset
classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed.
Nominal returns for stocks and bonds were close to their highest levels in
history and forged well into double- digit territory. To make a good investment
environment even better, inflation was tame (averaging 3.8% annually), and real
returns were solidly positive.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will
end in the year 2002. Some investors will fear a recurrence of the returns of
the first decade, while others will hope for a recurrence of the second; most
will likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
Income Yields (January 1)
--------------------------------------------------------
1973 1983 1993 (11/30)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
----------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
-----------------------------------------------------
1973 1981 1993 (11/30)
------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
-----------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
- ---------------------------------------------------------------------
VANGUARD INSTITUTIONAL MONEY MARKET PORTFOLIO IS DESIGNED PRIMARILY FOR
INSTITUTIONAL INVESTORS. THE PORTFOLIO'S OBJECTIVE IS TO PROVIDED THE MAXIMUM
CURRENT INCOME THAT IS CONSISTENT WITH THE PRESERVATION OF CAPITAL AND LIQUIDITY
BY INVESTING IN SPECIFIED MONEY MARKET INSTRUMENTS. THE PORTFOLIO INTENDS TO
MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO]
DEAR SHAREHOLDER:
Money market yields remained low--indeed at levels not seen since the early
1960s--throughout our 1993 fiscal year, which ended on November 30.
Accordingly, Vanguard Institutional Money Market Portfolio provided a modest
return, albeit one that was above the returns of most competitive institutional
money market funds.
The table below shows the total return (assuming reinvestment of
dividends) of the Portfolio, along with its annualized yield on November 30,
1993. The yield is shown on a "simple interest" basis as well as a "compound
interest" basis, reflecting the reinvestment of dividends.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Fiscal Year Ended
November 30, 1993
-------------------------------------------------------
Yield at Year-End
--------------------------------
Total Return Simple Compound
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
VIMMP +3.19% 3.16% 3.21%
- ----------------------------------------------------------------------------
</TABLE>
Although our Portfolio return was low in an absolute sense, it remained
comfortably ahead of the returns provided by competitive funds. On balance, the
average institutional money market fund returned +2.94%, or 0.25% (25 "basis
points") less than our Portfolio.
This performance differential is largely the result of our low expense
structure. The Vanguard Portfolio, operating with total costs of 0.15% of
average net assets compared to 0.44% for the average institutional fund,
provided an income premium of almost 10% over the average competitor.
* THE YEAR IN REVIEW
As shown in the chart on page 2, short-term interest rates fluctuated in a
narrow band during the past twelve months. The 90-day U.S. Treasury bill yielded
3.3% on November 30, 1992, moved to 2.9% by April 1993, and held steady in a
range of about 3.0% to 3.2% through the close of the fiscal year. At year end,
the rate on the Treasury bill was 3.2%.
A combination of relatively slow economic growth, restrained inflation,
and accommodative Federal Reserve monetary policy provided the economic backdrop
for this period of low and relatively stable money market rates. The economy, as
measured by Gross Domestic Product (GDP), has grown at an inflation-adjusted
rate of 2.8% over the past twelve months. The first half of the year was
particularly sluggish; more recently, economic growth has picked up.
Perhaps the best news on the economic front has been the continued low
level of inflation, with the consumer price index (CPI) rising only 2.7% during
the past year. In this environment, the Federal Reserve Board has felt
comfortable maintaining low short-term rates in hopes of stimulating the
economy.
While the money market was uneventful, the long-term bond market reacted
very favorably to the good news on the inflation front. As our fiscal year
began, the 30-year U.S. Treasury bond yielded 7.5%, or some 4.2 percentage
points (420 basis points) above the 90-day U.S. Treasury bill. Long-
1
<PAGE> 4
[MONTH END YIELDS CHART -- SEE EDGAR APPENDIX]
term bond rates subsequently declined, breaking through the 7.0% level in
February and, to the surprise of most bond market observers, the 6.0% level in
September. After hitting a low of 5.9% in October, yields reversed direction
late in the period to close our fiscal year at 6.3%, or some 300 basis points
above money market rates. As yields declined over the year, the long-term bond
gained +16% in price; so, it was a very good year indeed for bond investors.
Interestingly, money market yield spreads reflecting quality
differences were very narrow during the year. For example, top-rated commercial
paper issuers paid just 10 to 15 basis points more than the U.S. Treasury to
issue short-term debt. Our Portfolio, as you know, invests in a diversified
portfolio of private issuers (96% of assets) with the highest ratings (A1/P1),
with modest holdings in government securities (4%).
The fiscal year was also noteworthy for the substantial number of
financial restructurings that took place. Lower interest rates and accompanying
higher common stock prices allowed many companies to revitalize their balance
sheets by calling in their bonds. These purchases often were funded by
additional stock offerings in the marketplace. The stronger corporate balance
sheets that resulted led to a general improvement in the creditworthiness of
money market issuers. You should know that our policy in the Institutional
Money Market Portfolio has always been to invest only in the debt of top-rated
companies, and the general improvement in credit had little impact on us other
than to increase the number of top-rated issues available to us.
* A LONGER-TERM PERSPECTIVE
The past two years--and in particular 1993--came as something of a rude
awakening to investors who had become accustomed to the relatively high money
market yields and relatively low inflation which characterized the period from
1982 to 1991. The chart on page 3 shows how unusual that period was by
comparing Treasury bill total returns and the inflation rate since 1960. During
the 1960s, Treasury bill yields were relatively low until the last few years of
the decade, and generally Treasuries provided a modest "real" return (the
nominal return less the inflation rate), averaging about 1%. Inflation then
"took off" during the 1970s and Treasury bill rates moved sharply higher, but
not as high as the inflation rate. Thus, money market investors earned returns
that failed to compensate them for the increase in the level of consumer
prices, as U.S. Treasury bill returns lagged inflation by an average of 1%
annually. In contrast, during the 1980s, Treasury bill returns exceeded
inflation by a handsome margin, some 4% on average.
All of this is by way of saying that the current environment, in which
Treasury bills provide only the most modest of premiums (0.4%) over inflation,
is unusual by historical standards, but hardly unprecedented.
2
<PAGE> 5
[U.S. TREASURY BILL RETURNS AND INFLATION CHART
-- SEE EDGAR APPENDIX]
* LOOKING AHEAD
The pace of economic growth has picked up in the second half of 1993. Current
estimates for the fourth quarter call for a 4% rate of GDP growth. It is
possible that a strengthening economy will eventually bring about an increase
in the demand for loans and perhaps an accompanying rise in short-term interest
rates, as well as some renewed inflationary pressures. On the other hand, it
seems equally possible that, in this uncertain world, a period of sustained low
inflation and relatively low interest rates may be in store.
A period of low investment returns calls for close attention to
maximizing the value of your investments. Perhaps in a period of greater
abundance, it was possible to overlook the difference that mutual fund expense
ratios make to the bottom line. Today, however, when expenses of, for example,
0.4% of average net assets consume nearly 15% of the 3.0% yield available on
the average money market fund, it seems more obvious than ever what a positive
difference low expenses can make. In this environment, the sustainable cost
advantage of Vanguard Institutional Money Market Portfolio provides a
compelling built-in yield premium.
In closing, Vanguard remains committed to providing you with the
highest quality management and servicing of your funds, at virtually the lowest
expense ratio available in the industry. We are confident that we can continue
to meet your investment needs in the years ahead.
Sincerely,
/S/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board December 27, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
3
<PAGE> 6
CUMULATIVE PERFORMANCE
[CUMULATIVE PERFORMANCE CHART -- SEE EDGAR APPENDIX]
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------------------------
Average Annual Total Returns--The current yields provided in the Chairman's
letter are calculated in accordance with the SEC guidelines. The average annual
total returns for the Portfolio (periods ended September 30, 1993) are as
follows:
1 Year: +3.21% Since Inception (10/3/89): +5.78%
These data represent past performance; future returns will fluctuate.
Please note that an investment in a money market fund is neither insured nor
guaranteed by the U.S. Government, and there is no assurance that the fund will
be able to maintain a stable net asset value of $1.00.
- --------------------------------------------------------------------------------
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
During the fiscal year ended November 30, 1993, short-term interest rates
were relatively stable. The Federal Reserve, a powerful arbiter of short-term
rates through its control of the Federal Funds Rate (the rate at which member
banks borrow and lend among themselves), did not change its reserve policy
throughout the year. In prior years, the Fed lowered short-term rates
dramatically (from nearly 10% in 1989 to 3% in 1992) to offset the effects of
economic recession.
Lower interest rates, of course, stimulate economic activity by
encouraging businesses to borrow. Unfortunately, among the lenders to
businesses are the shareholders of money market funds, who have seen their
annual returns dwindle to +3% (or even less in funds with high expense
charges). These returns do little better than offset the effects of inflation.
Indeed, current after-tax money market fund returns are probably below the rate
of inflation, depending on the individual shareholder's tax bracket. At best,
prevailing after-tax money market returns are at "break-even" relative to
inflation.
In 1993, the Fed has deemphasized its role as stimulator of economic
activity, and has been content to watch the economic statistics for signs of
whether its previous interest rate reductions are in fact fostering economic
growth. A qualified "yes" is the answer at this point. The housing sector, in
particular, has benefited from low mortgage rates and high affordability. The
job market has been slower to respond, but has finally developed a distinct
uptrend in hiring. Of special importance is recent marginal growth in higher
paying manufacturing jobs.
Consumer confidence, sapped by the "anemia" of the recent recovery, has
been slower to respond, and will be crucial to sustaining economic expansion.
If such expansion is sustained, the Fed will shift into its role of inflation
fighter. Typically, in a fast-growing economy, the Fed raises short- term
interest rates to increase the cost of borrowing for businesses and consumers,
thereby slowing the growth of the economy and controlling the threat of
inflation. Under this scenario, money market investors could expect somewhat
higher returns.
In contrast to the emerging recovery in the United States, the major
European economies have spent the year mired in recession. High interest rates,
currency instability, and high labor costs have substantially reduced economic
activity. Our capital markets do not operate in a vacuum. High- quality
European banks that typically raise large sums of money in the U.S. money
market have cut back on their funding needs. This has reduced the available
supply of short-term non-government securities.
In addition, the U.S. Treasury has begun to issue more short-term debt
in order to lower the average maturity of the national debt. The Treasury's
goal is to lower the government's cost of borrowing by taking advantage of the
same low short-term interest rates that have reduced money market fund yields.
It remains to be seen whether this strategy will work in the long run. These
two phenomena--less supply of non-government securities and greater supply of
Treasury securities--have caused the present situation, in which there is a
very small reward (in the form of higher yields) for taking greater credit
risk. That is to say, prime commercial paper provides only a marginally higher
yield than U.S. Treasury bills.
In an environment where additional credit risk offers little or no
additional yield, the creditworthiness of the Vanguard Institutional Money
Market Portfolio remains high. Our Portfolio's low expenses (0.15% annually)
allow us to pursue high-quality investments, and distribute
6
<PAGE> 9
as net income approximately 95% of the Portfolio's gross earnings at current
yield levels. In the coming year, we will remain vigilant over the credit
quality of issuers. Our low costs should ensure that our shareholders will
continue to benefit from a fair exchange of risk, return, and cost.
Sincerely,
Ian A. MacKinnon,
Senior Vice President
Robert F. Auwaerter,
Vice President
John Hollyer,
Assistant Vice President
Vanguard Fixed Income Group
December 7, 1993
7
<PAGE> 10
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
November 30, 1993
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
-----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (3.7%)
-----------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
3.19%, 3/11/94 $ 500 $ 496
Federal National Mortgage
Association
3.31%-3.43%, 2/14/94-7/6/94 11,000 10,883
-----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST $11,379) 11,379
-----------------------------------------------------------------------------------------
COMMERCIAL PAPER (70.1%)
-----------------------------------------------------------------------------------------
BANK HOLDING COMPANIES (2.3%)
Bankers Trust New York Corp.
3.37%, 1/13/94 4,000 3,984
J.P. Morgan & Co., Inc.
3.23%, 3/21/94 1,000 990
PNC Funding Corp.
3.11%, 12/3/93 2,000 2,000
-------
GROUP TOTAL 6,974
-------
----------------------------------------------------------------------------------------
FINANCE--AUTO (1.9%)
Ford Credit Receivables Funding Corp.
3.10%-3.25%, 12/8/93-1/31/94 6,000 5,984
-------
----------------------------------------------------------------------------------------
FINANCE--SECURITIES DEALERS (7.8%)
Bear Stearns Co.
3.39%, 1/26/94 3,000 2,984
Credit Suisse First Boston
3.12%-3.13%, 12/2/93-12/7/93 6,000 5,998
Goldman Sachs & Co.
3.37%-3.39%, 3/1/94-3/4/94 6,000 5,948
Merrill Lynch & Co.
3.37%-3.40%, 1/6/94-2/2/94 7,000 6,972
Morgan Stanley Co.
3.39%, 2/25/94 2,000 1,984
-------
GROUP TOTAL 23,886
-------
----------------------------------------------------------------------------------------
FINANCE--OTHER (18.4%)
Asset Securitization Cooperative Corp.
3.12%-3.26%, 12/10/93-1/28/94 6,000 5,979
Associates Corp. of N.A.
3.09%, 12/16/93 1,000 999
Banc One Diversified Services Corp.
3.09%-3.11%, 12/16/93-12/17/93 6,016 6,008
Barclays U.S. Funding Corp.
3.24%-3.37%, 1/27/94-2/11/94 6,000 5,967
CIT Group Holdings
3.09%-3.12%, 12/13/93-12/15/93 5,000 4,995
Corporate Asset Funding Corp. Inc.
3.35%-3.38%, 2/1/94-2/22/94 7,000 6,954
Eiger Capital Corp.
3.10%, 12/1/93 4,000 4,000
General Electric Capital Corp.
3.25%-3.37%, 2/1/94-3/3/94 $12,000 $11,919
Household Finance Corp.
3.09%, 12/17/93 2,000 1,997
Matterhorn Capital Corp.
3.12%-3.36%, 12/17/93-1/24/94 5,338 5,322
MCA Funding Corp.
3.26%, 3/10/94 2,000 1,982
-------
GROUP TOTAL 56,122
-------
----------------------------------------------------------------------------------------
INDUSTRIAL (4.5%)
Chevron Oil Finance Co.
3.11%, 12/28/93 3,000 2,993
Norfolk Southern Corp.
3.11%, 12/6/93-12/7/93 6,000 5,997
PepsiCo Inc.
3.11%, 12/22/93-12/27/93 3,529 3,522
Schering Corp.
3.13%, 12/15/93 1,220 1,219
-------
GROUP TOTAL 13,731
-------
----------------------------------------------------------------------------------------
INSURANCE (5.4%)
AIG Funding Inc.
3.25%, 3/1/94 1,000 992
Prudential Funding Corp.
3.21%, 2/2/94 1,000 994
Safeco Credit Co.
3.10%-3.37%, 12/10/93-2/17/94 10,500 10,442
USAA Capital Corp.
3.23%-3.27%, 2/10/94-2/22/94 4,000 3,972
-------
GROUP TOTAL 16,400
-------
----------------------------------------------------------------------------------------
UTILITIES (7.5%)
American Telephone &
Telegraph Co.
3.09%-3.34%, 12/6/93-2/10/94 10,000 9,967
Ameritech Corp.
3.10%, 12/10/93 3,000 2,998
Consolidated Natural Gas Co.
3.34%, 2/9/94 2,000 1,987
GTE California
3.39%, 2/9/94 2,300 2,285
Pacific Energy Fuels Co.
3.35%, 1/28/94 4,000 3,979
Pennsylvania Power & Light Co.
3.11%, 12/1/93 1,563 1,563
-------
GROUP TOTAL 22,779
-------
-----------------------------------------------------------------------------------------
FOREIGN BANKS (1.6%)
Abbey National N.A.
3.36%, 1/5/94 2,000 1,994
Canadian Imperial Holdings Inc.
3.22%, 1/21/94 2,000 1,991
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
-----------------------------------------------------------------------------------------
<S> <C> <C>
Hypo U.S. Finance Inc.
3.10%, 12/23/93 $ 1,000 $ 998
--------
GROUP TOTAL 4,983
--------
----------------------------------------------------------------------------------------
CANADIAN GOVERNMENT (6.1%)
Canada Bills
3.22%, 2/15/94 3,000 2,980
Canadian Wheat Board
3.37%, 3/10/94 3,000 2,973
Province of Alberta
3.34%, 12/20/93 3,000 2,995
Province of British Columbia
3.31%-3.40%, 2/8/94-4/11/94 8,800 8,717
Province of Ontario
3.30%, 12/20/93 1,000 998
--------
GROUP TOTAL 18,663
--------
----------------------------------------------------------------------------------------
OTHER FOREIGN GOVERNMENT (14.3%)
Australian Wool Realisation Corp.
3.22%-3.23%, 2/11/94-2/16/94 4,000 3,973
Caisse des Depots et Consignations
3.37%, 1/27/94 3,000 2,984
KFW International Finance
3.24%-3.35%, 2/7/94-3/28/94 10,000 9,908
Mobil Australia Finance
3.41%, 1/18/94 2,450 2,439
New South Wales Treasury Corp.
3.24%-3.37%, 12/8/93-2/22/94 5,000 4,979
Oesterreichische Kontrollbank
3.47%, 5/18/94 425 418
Queensland Treasury Corp.
3.30%, 2/3/94 4,000 3,977
Kingdom of Sweden
3.25%-3.30%, 2/18/94-3/1/94 6,000 5,955
Western Australia Treasury Corp.
3.25%-3.44%, 3/2/94-4/26/94 9,000 8,904
--------
GROUP TOTAL 43,537
--------
----------------------------------------------------------------------------------------
FOREIGN INDUSTRIAL (.3%)
Siemens Corp.
3.34%, 1/21/94 1,000 995
--------
----------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $214,054) 214,054
----------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (15.7%)
----------------------------------------------------------------------------------------
YANKEE CERTIFICATE OF DEPOSIT--
CANADIAN BRANCH (.3%)
ABN--AMRO
3.39%, 2/7/94 1,000 994
----------------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
U.S. BRANCHES (15.4%)
ABN--AMRO
3.23%, 1/25/94 5,000 5,000
Bayerische Landesbank
3.48%, 2/9/94 $2,000 $ 2,000
Canadian Imperial Bank of Commerce
3.31%, 1/6/94 3,000 3,000
Commerzbank
3.25%, 1/12/94 5,000 4,999
Credit Suisse
3.54%-3.56%, 3/11/94-3/18/94 6,000 6,001
Dresdner Bank
3.30%-3.44%, 2/22/94-3/7/94 3,000 3,000
Lloyds Bank
3.25%, 4/4/94 3,000 2,999
Rabobank Nederlanden
3.24%-3.34%, 3/21/94-4/15/94 6,000 5,999
Societe Generale
3.25%-3.30%, 1/11/94-2/1/94 5,000 4,999
Union Bank of Switzerland
3.23%-4.10%, 12/2/93-3/15/94 5,000 4,999
Westdeutsche Landesbank
3.25%, 1/20/94 4,000 4,000
--------
GROUP TOTAL 46,996
--------
----------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $47,990) 47,990
----------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (4.2%)
----------------------------------------------------------------------------------------
Bayerische Landesbank
3.22%-3.53%, 1/24/94-2/18/94 6,000 6,001
Deutsche Bank
3.34%-3.98%, 12/9/93-12/21/93 7,000 7,000
----------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES OF
DEPOSIT (Cost $13,001) 13,001
----------------------------------------------------------------------------------------
BANK NOTE (1.0%)
----------------------------------------------------------------------------------------
State Street Bank & Trust
3.12%,12/13/93 (Cost $3,000) 3,000 3,000
----------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (4.6%)
----------------------------------------------------------------------------------------
Eastbridge Capital
3.28%, 12/1/93
(Collateralized by U.S. Treasury Bill
3.28%, 5/26/94) 4,109 4,109
Goldman Sachs & Co., Inc.
3.125%, 12/3/93*
Collateralized by Federal National
Mortgage Association
7.00%, 3/1/08-7/1/08) 5,000 5,000
Kidder Peabody & Co.
3.10%, 12/14/93*
(Collateralized by Federal National
Mortgage Association
5.40%, 5/28/98) 5,000 5,000
----------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(COST $14,109) 14,109
----------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
----------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (99.3%)
(COST $303,533) $303,533
---------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
---------------------------------------------------------------------------------------
Other Assets--Note B 2,156
Liabilities (138)
-----------
2,018
----------------------------------------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------------------------------------
Applicable to 305,552,060 outstanding
$.001 par value shares
(authorized 20,000,000,000 shares) $305,551
----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
========================================================================================
+See Note A to Financial Statements.
*Put Option Obligation.
----------------------------------------------------------------------------------------
AT NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
----------------------------------------------------------------------------------------
Amount Per
(000) Share
------- -----
Paid in Capital $305,552 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (1) --
Unrealized Appreciation
of Investments -- --
----------------------------------------------------------------------------------------
NET ASSETS $305,551 $1.00
----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1993
(000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,492
- ----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . 9,492
- ----------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . $ 28
Management and Administrative . . . . . . . . . . . . . . . . . . . . 227
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . 99 354
----
Custodian's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Taxes (other than income taxes)--Note A 22
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 20
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 1
- ----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 432
- ----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . 9,060
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD--Note A . . . . . . . . . . . . . . . . . . . . . . . . . --
- ----------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . --
- ----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . $9,060
====================================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
NOVEMBER 30, 1993 November 30, 1992
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 9,060 $ 9,423
Realized Net Loss . . . . . . . . . . . . . . . . . . . . . . -- (2)
Unrealized Appreciation (Depreciation) . . . . . . . . . . . -- --
- -----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 9,060 9,421
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . (9,060) (9,423)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (at $1.00 per share)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . 177,159 146,745
-- In Lieu of Cash Distributions . . . . . . . . . . . 8,876 9,081
-- Exchange . . . . . . . . . . . . . . . . . . . . . 19,911 13,900
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . (157,034) (94,907)
-- Exchange . . . . . . . . . . . . . . . . . . . . . (12,327) (24,133)
- -----------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . 36,585 50,686
- -----------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 36,585 50,684
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . 268,966 218,282
- -----------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . . . . . . . . $305,551 $268,966
=====================================================================================================
(1) Income Dividends Per Share . . . . . . . . . . . . . . . $.031 $.040
- -----------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------------- October 3, 1989-
For a Share Outstanding Throughout Each Period 1993 1992 1991 1990 November 30, 1989
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .031 .040 .063 .082 .014
Net Realized and Unrealized Gain
on Investments. . . . . . . . . . . . . . -- -- -- -- --
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . .031 .040 .063 .082 .014
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . (.031) (.040) (.063) (.082) (.014)
Distributions from Realized Capital Gains . -- -- -- -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . (.031) (.040) (.063) (.082) (.014)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
=====================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . +3.19% +4.02% +6.52% +8.49% +1.40%
- -----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . $306 $269 $218 $91 $69
Ratio of Expenses to Average Net Assets . . . .15% .15% .15% .15% .15%*
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . 3.14% 3.93% 6.14% 8.24% 8.90%*
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard Institutional Money Market Portfolio is a Portfolio of Vanguard
Institutional Portfolios, which is registered under the Investment Company Act
of 1940 as a diversified open-end investment company. The Fund invests in
short-term debt instruments of companies primarily operating in specific
industries; the issuers' abilities to meet these obligations may be affected by
economic developments in such industries.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities are stated at amortized cost which
approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Discounts and premiums are accreted and amortized, respectively, to interest
income over the lives of the respective securities. Distributions from net
investment income are declared on a daily basis payable on the first
business day of the following month.
4. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of the
repurchase agreement. Provisions of the agreement ensure that the market
value of the collateral is sufficient in the event of default: however, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
*B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, marketing and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. At November 30, 1993, the Fund had contributed capital of $50,000
to Vanguard (included in Other Assets), representing .3% of Vanguard's
capitalization. The directors and officers of the Fund are also directors and
officers of Vanguard.
14
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Institutional Money Market Portfolio
In our opinion, the accompanying statement of net assets and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of Vanguard Institutional Money Market
Portfolio (a portfolio of Vanguard Institutional Portfolios,
hereafter referred to as the "Fund") at November 30, 1993, the
results of its operations, the changes in its net assets and the
financial highlights for each of the respective periods presented,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at
November 30, 1993, by correspondence with the custodian and brokers
and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 27, 1993
15
<PAGE> 18
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc
Rorer Inc.; Director of Sun Company, Inc. and Immune Response Corporation;
Trustee of the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of
Dayton Hudson Corporation, American Express Bank Ltd., The St. Paul Companies,
Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
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 Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company;
Director of Cummins Engine Company; Trustee of Vanderbilt University and the
Culver Educational Foundation.
- -------------------------------------------------------------------------------
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
16
<PAGE> 19
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation
suggests that future real returns may prove to be satisfactory. Looking
forward, the main risks to the investor are two: (1) that yields on financial
assets will rise sharply, reducing the prices of stocks and bonds alike; and
(2) that inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing so, you buy
more shares of a mutual fund when its price falls, and fewer shares when its
price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any changes
should be limited to, say, 15 percentage points. That is, if your normal
portfolio allocation is 60% in stock funds, it might be reduced to 45%; if
85%, to 70%.
* For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income stream, but
their prices are highly volatile. Short-term and intermediate-term bond funds
offer a "middle way" of increasing income with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad- based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20% of
your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in the
past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money
market funds. Each asset class has its own risk and reward characteristics.
By allocating your resources among the three asset classes according to
your own requirements, you can build a portfolio providing appropriate
elements of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put another
way, high-cost funds must select investments with higher prospective gross
returns--which entail higher risks--to match the net returns earned by low-
cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q660-11/93
<PAGE> 21
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 16.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Month-End Yields (30-Year U.S. Treasury Bond
and 90-Day U.S. Treasury Bill) of the Institutional Money Market Portfolio
for the Fiscal Years 1989 through 1993 appears at the upper-left of page two.
Bar Charts illustrating performance of the Vanguard Institutional
Money Market Portfolio compared to Inflation for the Fiscal Years 1960 through
1990 appear on page three.
