<PAGE> 1
VANGUARD
INTERNATIONAL
EQUITY INDEX FUND
ANNUAL REPORT 1993
[COVER PHOTO -- SEE EDGAR APPENDIX]
<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 BAR GRAPH -- 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 1994
- --------------------------------------------------------------
<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
- --------------------------------------------------------------
<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 INTERNATIONAL EQUITY INDEX FUND SEEKS TO PROVIDE TWO "MARKET INDEX"
PORTFOLIOS. THE EUROPEAN PORTFOLIO IS DESIGNED TO MATCH THE PERFORMANCE OF THE
UNMANAGED MORGAN STANLEY CAPITAL INERNATIONAL EQUOPE (FREE) INDEX. THE PACIFIC
PORTFOLIO IS DESIGNED TO MATCH THE PERFORMANCE OF THE MORGAN STANLEY CAPITAL
INTERNATIONAL PACIFIC INDEX. TOGETHER, THESE TWO PORTFOLIOS ARE DESIGNED TO
"TRACK" THE ENTIRE INTERNATIONAL EQUITY MARKET.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
FELLOW SHAREHOLDER:
International markets were wonderful to investors during 1993. While the U.S.
market provided an overall return of about +10%, foreign markets generally
gained three times that amount. The two Portfolios of Vanguard International
Equity Index Fund were, of course, full participants in the upsurge. The return
on our European Portfolio was +29.1%; the return on our Pacific Portfolio was
+35.5%.
This table presents the total return (capital change plus income) of each
Portfolio for the year ended December 31, 1993, compared to the unmanaged
market indexes of European and Pacific stocks that we use as our tracking
standards:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Total Return
--------------------
Year Ended
December 31, 1993
- -----------------------------------------------------------------------------
<S> <C>
VANGUARD EUROPEAN INDEX PORTFOLIO +29.1%
MSCI* EUROPE (FREE) INDEX +29.3
- -----------------------------------------------------------------------------
VANGUARD PACIFIC INDEX PORTFOLIO +35.5%
MSCI* PACIFIC INDEX +35.6
- -----------------------------------------------------------------------------
</TABLE>
*Morgan Stanley Capital International.
The total return of the Vanguard European Index Portfolio is based on net asset
values of $9.33 per share on December 31, 1992, and $11.88 on December 31,
1993, with the latter figure adjusted to take into account the Portfolio's 1993
year-end dividend of $.17 per share from net investment income. For the
Vanguard Pacific Index Portfolio, the respective net asset values were $7.56
and $10.13, and the dividend from net investment income was $.06 per share. In
addition, the Pacific Index Portfolio made a year-end distribution of $.05 per
share from net realized capital gains.
* WORLD MARKETS IN 1993
In 1993, the offshore markets were far stronger than the U.S. stock market,
following four years in which the U.S. was the leader by a wide margin. As a
result, taking the five full years in total, the U.S. stock market was by far
the performance champion. As shown in the chart at the top of page 2, the
Standard & Poor's 500 Composite Stock Price Index rose by +97% during the
five-year period, compared to a gain of +80% for the European markets and a
decline of -17% for the Pacific basin markets. As I shall discuss later in this
letter, the rule seems to be "what goes around, comes around."
As is customary, the returns shown in this Annual Report are presented on
a "U.S. dollar" basis. That is to say, they reflect the investment returns to a
U.S. investor. On a "local currency" basis, the returns may be substantially
different. The simple--and unvarying--rule is that when the dollar strengthens
relative to the currency of a given nation, the return to U.S. investors in
that nation's financial markets is reduced (since it takes a higher number of,
say, British pounds to convert into one U.S. dollar). Conversely, a weakening
dollar increases the return to U.S. investors.
During 1993, the difference between U.S. dollar-based returns and local
currency-based returns favored Pacific basin stocks, but hampered
1
<PAGE> 4
[CUMULATIVE PERFORMANCE, 1989-1993 -- SEE EDGAR APPENDIX]
European stocks. This table shows the results for the year, both on a U.S.
dollar basis and a local currency basis:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Year Ended December 31, 1993
------------------------------------------
Local Currency Currency U.S. Dollar
Return Impact Return
- -----------------------------------------------------------------
<S> <C> <C> <C>
EUROPEAN INDEX +37.2% - 7.9% +29.3%
PACIFIC INDEX +23.2 +12.4 +35.6
- -----------------------------------------------------------------
TOTAL INDEX +29.8% + 3.3% +33.1%
- -----------------------------------------------------------------
</TABLE>
The strengthening of the U.S. dollar actually was far less negative a factor in
Europe during 1993 than it was in 1992. In the Pacific region, a relatively
neutral dollar impact in 1992 was followed by a nicely positive impact during
1993. Interestingly, when measured in local currency terms, the European Index
outpaced the Pacific Index by 14 percentage points during the past year;
however, when measured in dollar terms, the European Index lagged the Pacific
Index by more than six percentage points.
This difference emphasizes the fact that, while the risk assumed by U.S.
investors in U.S. stocks is based solely on the performance of the stock
market, there are two incremental risks assumed by U.S. investors in world
markets: (1) the risk in the stock market of each particular nation; and (2)
the risk of fluctuations in the value of the U.S. dollar. This analysis does
not take into account the potential impact (and cost) of completely "hedging"
the dollar, so as to, in effect, provide U.S. investors with identical returns
(i.e., not impacted by fluctuations in the dollar) to those earned by local
investors in offshore markets.
* THE FUND IN 1993
The returns of our European and Pacific Portfolios during the past year, in our
perhaps biased view, go into the record as another affirmation of the value of
indexing abroad. Despite our operating expenses (very low) and our portfolio
transaction costs (also very low--even considering the relatively high cost of
buying and selling securities abroad--because of our minimal portfolio
turnover), our "tracking" of our target indexes was extremely tight.
Part of the reason for our fine tracking record, I should note, is that
investors in the Fund incur a transaction fee of 1% when they purchase shares
of the Fund, which helps to cover our portfolio trading costs. As you know,
this fee is paid to the Fund itself, so that the cost of investing new money
tends to be borne not by the existing shareholders in the Fund, but by those
who invest the new money. In no way should this transaction charge be
considered a "sales load" payable to an outside agent or stockbroker.
Given the fact that operating and transaction costs--however low--exist in
the "real world" of investing but do not exist in the "paper world" of
calculating an index, we are most pleased with the ability of our Vanguard Core
Management Group to administer our two Portfolios with such effectiveness. The
table that follows presents our Portfolios' returns during 1993 and over the
Fund's three-and-one-half year history, compared to those of their respective
unmanaged Indexes. The chart at the bottom of the facing page illustrates the
comparison on a cumulative basis.
2
<PAGE> 5
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Annual Rate of Total Return
----------------------------------------------
Year Ended June 30, 1990, to
December 31, 1993 December 31, 1993
- ---------------------------------------------------------------------------------
<S> <C> <C>
EUROPEAN PORTFOLIO* +27.8% +6.5%
MSCI EUROPE (FREE) INDEX +29.3 +7.4
- ---------------------------------------------------------------------------------
PACIFIC PORTFOLIO* +34.1% +1.3%
MSCI PACIFIC INDEX +35.6 +1.5
- ---------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for a 1% portfolio transaction fee on
purchases and a $10 annual account maintenance fee.
The next question, of course, is how the returns generated by our indexing
strategy compare with those achieved by professional investment managers of
mutual funds. These funds charge higher expenses (averaging about 1.85% of
assets annually, or nearly six times our 0.32% expense ratio) and also engage
in higher portfolio turnover (averaging 59% of assets, compared to rates of 4%
in our European Portfolio and 7% in our Pacific Portfolio), in markets where
such costs are considerably higher than in U.S. markets. Our index strategy is
based on the conviction that it is only the rare traditional fund manager who
has sufficient skill to overcome this substantial cost handicap. (A further
challenge for investors, of course, is that such managers are difficult to
identify in advance.)
Certainly the results of our European Portfolio present solid, if
preliminary, evidence that indexing in international markets works well. The
following table shows our results during 1993 and since our inception compared
to those of the average European fund; the chart below presents the long-term
comparison on a cumulative basis.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Annual Rate of Total Return
--------------------------------------------
Year Ended June 30, 1990, to
December 31, 1993 December 31, 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
EUROPEAN PORTFOLIO* +27.8% +6.5%
- -------------------------------------------------------------------------------
AVERAGE EUROPEAN FUND +26.0% +1.5%
- -------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for a 1% portfolio transaction fee on
purchases and a $10 annual account maintenance fee.
[CUMULATIVE PERFORMANCE LINE GRAPHS, JUNE 30, 1990 TO DECEMBER 31, 1993 -- SEE
EDGAR APPENDIX]
3
<PAGE> 6
[ALLOCATION OF GLOBAL MARKETS PIE CHARTS -- SEE EDGAR APPENDIX]
Our margin of +1.8% over the competitive funds for 1993 and +5% annually since
our inception (more than four times the return earned by the average U.S. fund
investing in European stocks) is most satisfying. What is more, this
satisfaction seems particularly justified by the fact that our country
diversification is, as it happens, remarkably similar to that of the average
managed fund. The net assets of our European Portfolio, for example, include
38% in the United Kingdom, 14% in Germany, 13% in France, and 10% in
Switzerland. (These weights, of course, are also those of our target index.)
Comparable figures for other European mutual funds are, respectively, 32%, 11%,
14%, and 7%.
The relative country weightings are "another story" in our Pacific
Portfolio, which renders making a fair comparison quite challenging. Again
paralleling the diversification of our target index, we have 75% of our assets
in the huge Japanese market, 10% in Hong Kong, 6% in Australia, and 4% in
Singapore. Our competitors, on average, are much more widely diversified, with
respective country weightings of 40%, 19%, 4%, and 7%. In any event, the
following table shows the comparative returns for the past year and since our
inception; the chart at the bottom of page 3 presents the long-term comparison
on a cumulative basis.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Annual Rate of Total Return
--------------------------------------------
Year Ended June 30, 1990, to
December 31, 1993 December 31, 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
PACIFIC PORTFOLIO* +34.1% + 1.3%
- -------------------------------------------------------------------------------
AVERAGE PACIFIC FUND +55.9% + 12.0%
- -------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for a 1% portfolio transaction fee on
purchases and a $10 annual account maintenance fee.
In short, the heavy weight of the Japanese market in our Pacific Portfolio (and
in the Pacific Index) held back our returns in 1993, as the "emerging markets"
of the Pacific region--largely excluded from the Index--soared to lofty, if not
stratospheric, levels. This handicap largely accounts for our dramatic
shortfall over the full three and one-half year period.
The point of all of this analysis is that we do not intend to "brag" about
our returns whenever the Japanese market does particularly well; nor shall we
"apologize" for our returns when the Japanese market lags the other Pacific
markets.
4
<PAGE> 7
That said, we believe that investors should have the opportunity to use an
index-oriented strategy for the emerging markets not now included in the Morgan
Stanley Capital International EAFE Index. These markets lie largely in Asia,
but also in Latin America. To give our shareholders an opportunity to own a
complete international portfolio, we expect to inaugurate an "Emerging Markets
Index Portfolio" during 1994.
* THE WORLD PORTFOLIO
The emerging markets are just one more manifestation of how the world's
financial markets shift over time. As recently as 1988, the major markets in
the Pacific basin accounted for 43% of the total value of the world's stock
markets (Japan was the largest of any nation, representing 40%), while European
markets comprised 20% and the U.S. stock market comprised 29%. The emerging
markets, which are not included in the MSCI EAFE Index, accounted for but 4% of
the world's capitalization in 1988; today, thanks especially to huge gains in
market value during the past few years, the emerging markets represent 10% of
the global total. The chart at the top of page 4 illustrates the shift in
market value among the four major world market categories.
The strength in the U.S. markets, the European markets, and the emerging
markets accounted for the increase since 1988 in the total market value of all
of the nations of the world. The Japanese stock market, as noted earlier,
actually lost value during the period. These fluctuations, to be sure, simply
reflect the obvious fact that the world's markets do not operate in "lock
step." To a major degree, they operate independently, with their own local
market risks and returns. For U.S. investors in these markets, there will be
some addition to or subtraction from these returns engendered by changes in the
value of each local currency relative to the U.S. dollar.
To make this point, the chart below shows the annual returns achieved in
the three major global markets in each year during the past decade.
[ANNUAL RETURNS IN GLOBAL MARKETS: 1984-1993 BAR GRAPH -- SEE EDGAR APPENDIX]
5
<PAGE> 8
Note how the pattern of leadership changes from one year to the next. The U.S.
market, for example, was up +30% in 1991, compared to +14% in Europe and +11%
in the Pacific basin. In 1992, the respective returns were +8%, -4%, and -18%.
By way of contrast, as noted at the outset, in 1993 the U.S. market was up but
+10%, compared with +29% in Europe and +36% in the Pacific basin. For the full
decade, the returns were comparable, as shown in this table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Total Return
---------------------------------------
Ten Years Ended December 31, 1993
-----------------------------------------
Global Markets Cumulative Annual Rate
- ------------------------------------------------------------------
<S> <C> <C>
UNITED STATES +300% +14.9%
- ------------------------------------------------------------------
EUROPE +492% +19.5%
- ------------------------------------------------------------------
PACIFIC +386% +17.1%
- ------------------------------------------------------------------
</TABLE>
It should go without saying that these returns are merely history. Future
returns that may be achieved in these markets may be better or worse than those
shown in the table.
Clearly, variations in annual returns from one region of the world to
another indicate that international markets have a role to play in widening the
diversification of investors' portfolios--at least for those who understand
both the substantial volatility risk in foreign markets and the additional risk
of currency changes from one nation to another. We believe, however, that
because of the extra risks involved, few investors should undertake to build
the truly global stock portfolio that would be implied by the market
capitalization weights of each region. Today, such a strategy would place 36%
of the investor's assets in the U.S. and 64% in offshore markets. Such a
balance would be, for most U.S. investors, excessively tilted toward
international markets. While a precise limit cannot be set, we believe that a
limit of 20% of equities invested outside the U.S. is a realistic maximum.
* IN SUMMARY
The past year was a banner period for foreign markets both in an absolute
sense--whether measured in local currencies or in dollar terms--and relative to
U.S. markets. To simply extrapolate those trends into the future, however,
would invite excessive expectations, and ultimately disappointment. In too many
cases, this disappointment would be followed by the liquidation of
international holdings at just the wrong time. I recommend that you accept the
proposition that "the financial markets giveth and the financial markets taketh
away"--to express a biblical-like but blunt statement of what we all know to be
a fact--and invest accordingly.
Once the decision to invest internationally is made, the question of "how"
remains. We would answer that, for the long-term investor, the "market index"
approach of Vanguard International Equity Index Fund is worth serious
consideration. The concept has proven itself over a decade or more; the
implementation through our Portfolios, while still relatively young, suggests
that the concept and the reality are one. This fact helps to explain our
acceptance in the marketplace, as our combined assets have grown to more than
$1 billion in but three-and-one-half years.
We expect that our existing European and Pacific Portfolios will meet a
real need for the investor who understands and accepts the risks involved. And
we are optimistic about the success of our proposed new "Emerging Markets
Portfolio," which, we should note, will carry even higher risks. In each case,
the Portfolios are designed for investors with the strength and wisdom to "stay
the course."
Sincerely,
/s/ JOHN C. BOGLE
- ------------------
John C. Bogle
Chairman of the Board
January 25, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURNS*--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1993) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
PORTFOLIO (INCEPTION DATE) 1 YEAR SINCE INCEPTION
-------------------------- ------ ---------------
<S> <C> <C>
EUROPEAN PORTFOLIO (6/18/90) +27.77% +7.35%
PACIFIC PORTFOLIO (6/18/90) +34.05 +1.15
</TABLE>
THE RETURN FOR THE EUROPEAN PORTFOLIO SINCE INCEPTION INCLUDES A CAPITAL RETURN
OF +4.93% AND AN INCOME RETURN OF +2.42%. THE RETURN FOR THE PACIFIC PORTFOLIO
SINCE INCEPTION INCLUDES A CAPITAL RETURN OF +0.62% AND AN INCOME RETURN OF
+0.53%. ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
*RETURNS ARE ADJUSTED FOR THE 1% PORTFOLIO TRANSACTION FEE ON PURCHASES AND THE
ANNUAL ACCOUNT MAINTENANCE FEE OF $10.00.
7
<PAGE> 10
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
December 31, 1993
<TABLE>
<CAPTION>
Market
Value
EUROPEAN PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.5%)
- -----------------------------------------------------------------------
AUSTRIA (.9%)
* Austrian Airlines 2,378 $ 344
Creditanstalt Bank 12,540 832
Creditanstalt Bank Pfd. 9,738 639
Ea-Generali AG 1,661 567
OEMV AG ATS 11,307 834
Oesterreicherische Wirtsc. Class A 8,013 488
Weinerberger Baustoffindustrie AG 862 293
* Z-Laenderbank Austria 14,642 1,507
--------
GROUP TOTAL 5,504
--------
- -----------------------------------------------------------------------
BELGIUM (2.6%)
* Acec Union Miniere NPV 8,168 553
AG Financiere 9,197 738
Bekaert Class B 1,537 889
Cimenteries Cbr 1,050 344
Cimenteries Cbr Belgium NPV 1,060 349
Delhaize Freres 20,028 742
* Electrabel NPV 34,832 6,494
Generale de Banque NPV 2,560 646
Gevaert Photo Products NPV 2,650 660
Glaverbel 2,790 327
Group Bruxelles Lambert SA 3,250 360
Kredietbank NPV 2,038 452
Petrofina SA 6,660 1,813
Solvay et Cie. SA 2,100 851
Tractebel 2,050 615
-------
GROUP TOTAL 15,833
-------
- -----------------------------------------------------------------------
DENMARK (1.4%)
Carlsberg Series A 8,875 385
Carlsberg Series B Pfd. 8,449 368
Danisco 3,027 437
Den Danske Bank AF 23,200 1,311
* East Asiatic Co. 22,600 585
FLS Industries Class B 3,548 204
* ISS (International Service Systems) 21,619 722
J Lauritzen Holding 2,965 570
NKT(Nordisk Kabel) 14,200 562
Novo-Nordisk Class B 7,166 701
Radiometer Class B 4,339 437
Sophus Berendsen Class A 3,483 276
Sophus Berendsen Class B 6,200 491
Superfos 6,942 401
* Unidanmark AS Class B 25,677 820
-------
GROUP TOTAL 8,270
-------
- -----------------------------------------------------------------------
FINLAND (.9%)
Kone Corp. B 3,478 342
Kymmene Corp. 52,354 1,031
Metra Oy B 17,128 562
Nokia AB 13,900 $ 691
Outokumpu A 55,500 655
Pohjola A 22,688 329
Repola Oy 86,808 1,351
Sampo A 7,601 386
-------
GROUP TOTAL 5,347
-------
- -----------------------------------------------------------------------
FRANCE (13.3%)
Accor 5,800 582
Air Liquide 10,423 1,543
Alcatel Alsthom 44,771 6,384
AXA 12,015 3,256
Bic 1,425 319
Bouygues 6,822 794
BSN-Gervais Danone 27,881 4,415
Carrefour 3,040 2,216
Casino (Etabl. Economique) 11,000 367
Chargeurs SA 1,665 385
Club Mediterranee 4,260 254
CMB Packaging 17,805 597
Compagnie Bancaire 6,796 673
Compagnie Financiere de Suez 43,491 2,629
* Compagnie Generale des Eaux 9,472 4,689
Comptoirs Modernes 1,175 352
Credit Foncier France 4,522 898
Credit National 4,222 500
Docks de France 3,630 446
Dollfus-Mieg & Cie. 5,900 376
Ecco 3,517 404
Elf Sanofi 3,122 539
Eridania Beghin Say 7,785 1,197
Essilor International 6,285 757
Eurafrance 2,040 795
* Europe 1 1,577 455
Finextel 21,600 585
Geophysique (Cie. Generale) 2,500 241
GTM Entrepose 3,800 322
Havas 9,006 679
Imetal 6,932 648
Lafarge-Coppee 20,438 1,615
Legrande 510 494
L'Oreal 22,085 4,881
LVMH Moet - Hennessy 4,813 3,045
Lyonnaise des Eaux 10,034 987
Matra Hachette SA 26,809 726
Michelin Class B 22,260 791
Moulinex 17,112 296
Nord Est SA 20,200 571
Paribas Compagnie Financiere 28,991 2,435
Parisienne de Reescompte 7,275 655
Pernod-Ricard 11,761 860
Peugeot Citroen SA 12,973 1,731
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Pinault-Printemps SA 2,539 $ 432
Promodes 5,165 974
Sagem 2,040 1,002
Saint Gobain 16,411 1,634
Saint-Louis 1,824 482
Salomon 970 324
Schneider SA 14,415 1,077
Simco Rfd. 203 21
Simco-Union Pout 4,125 425
Societe Generale de France 21,229 2,754
Societe National Elf Aquitaine 85,601 6,041
Societe Unibail 2,180 223
Sodexho 1,550 287
Sommer Allibert 2,825 971
Sovac-Credit Mobilier 2,520 838
S.E.F.I.M.E.G. 3,350 309
Thomson-C.S.F. 36,475 1,124
Total SA 65,546 3,582
-------
GROUP TOTAL 79,884
-------
- -----------------------------------------------------------------------
GERMANY (14.0%)
Aachener & Muenchener (Bearer) 444 346
Aachener & Muenchener Beteiligungs
(Registered) 1,200 947
AGIV AG Industrie & Verkehr 820 272
AGIV AG Industrie & Verkehr Rfd. 117 36
Allianz AG Holdings 7,081 12,021
* Asko Deutsche Kaufhaus AG 700 464
BASF AG 22,150 3,903
Bayer AG 21,050 4,485
Bayer Hypotheken & Wechsel Bank 3,939 1,193
Bayer Vereins Bank 3,653 1,226
Beiersdorf AG 1,500 726
Bilfinger & Berger 912 494
Brau & Brunnen AG 1,350 358
* Bremer Vulk Schiff 6,033 350
Colonia Konzern AG 650 599
Colonia Konzern VZA 700 407
* Continental AG 2,200 339
* Daimler Benz 16,875 8,221
Degussa AG 1,692 487
Deutsche Bank AG 17,100 8,730
Douglas Holding 962 307
Dresdner Bank AG 12,550 3,346
Dresdner Bank AG Rfd. 726 161
Dyckerhoff AG 650 247
Dyckerhoff VZA 990 308
Heidelberger Zement 650 438
Herlitz VZA 1,815 359
Hochtief 1,680 1,103
Karstadt AG 1,550 531
Kaufhof AG 2,090 654
Kaufhof AG Pfd. 1,250 $ 292
* Klockner-Humbolt-Deutz 4,500 302
Linde AG 1,170 637
Linotype AG 950 202
* Lufthansa 6,450 659
Man AG 1,875 451
* Man Vorzug AG 2,050 401
Mannesmann AG 8,915 2,169
Mannesmann AG Rfd. 1,114 266
Preussag AG 3,230 805
* PWA Papierwerke Waldhof 3,300 408
Rheinisch-West Elektrizitaetswerke AG 7,875 2,426
Rheinisch-West Elektrizitaetswerke AG
Pfd. 5,618 1,349
Rheinmetall Berlin 1,900 359
Sap AG 327 335
Sap AG VZA 444 416
Schering AG 1,210 801
Siemens AG 18,680 8,579
Strabag Bau AG 1,293 454
Strabag Bau AG Pfd. 143 38
Thyssen AG 7,710 1,223
Veba AG 15,033 4,519
Viag AG 5,551 1,630
Viag AG Rfd. 555 160
Volkswagen AG 6,750 1,710
Volkswagenwerke AG 1,850 388
-------
GROUP TOTAL 84,037
-------
- -----------------------------------------------------------------------
IRELAND (.5%)
Allied Irish Bank 179,900 781
CRH PLC 79,200 419
Independent News 116,842 675
Irish Life 93,700 294
Jefferson Smurfit Group 122,200 530
* Waterford Wedgewood 400,180 245
Woodchester Invest 9,100 19
-------
GROUP TOTAL 2,963
-------
- -----------------------------------------------------------------------
ITALY (4.1%)
* Alitalia 683,496 233
Assicurazioni Generali 250,980 5,760
Assur Con Stad Rotte 9,180 225
Banca Commerciale Italiana 128,500 367
Banca Commerciale Italiana Risp. 207,500 629
Banca Nazionale dell' Agricoltura 117,950 258
Banca Nazionale dell' Agricoltura Pfd. 363,758 297
Banco Ambrosiano Veneto 131,255 339
* Burgo (Cartiere) SPA 240,100 1,360
Credito Italiano 389,000 524
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Credito Italiano Risp. 303,380 $ 370
Edison SPA 119,000 513
Fiat SPA 663,500 1,694
Fiat SPA Pfd. 206,000 275
Fidis 132,500 300
* Fin Cirio Bertolli 92,945 53
* Finanziaria Italgel 92,945 82
Franco Tosi SPA 24,100 302
Gilardini 263,500 456
Italcable 92,543 510
Italcementi 46,057 295
Italcementi Svg N/CVT 170,635 614
Italgas 119,750 347
Montedison SPA 574,274 316
Olivetti & Cie. 272,250 331
Pirelli SPA 307,000 383
RAS 54,550 891
RAS Risp. 36,000 327
Rinascente 127,062 666
SAI 53,730 621
* Saipem 121,500 242
SIP 1,575,072 3,293
SIP di Risp. 292,072 530
Sirti SPA 58,000 330
SME Meridonale Finanziaria 92,945 202
* SNIA 629,000 549
-------
GROUP TOTAL 24,484
-------
- -----------------------------------------------------------------------
NETHERLANDS (6.5%)
ABN AMRO Holding NV 81,884 3,014
Akzo NV 11,570 1,120
Ahold NV 31,530 761
Elsevier NV 11,470 1,076
Getronics NV 13,579 306
Heineken NV 6,703 743
* Hoogovens & Staalf 16,984 421
International Nederlanden Groep 70,831 3,388
* KLM Royal Dutch Airlines 19,057 397
Koninklijke Knp BT NV 15,554 379
Nedlloyd Groep NV 15,351 466
Oce Van Der Grinten 10,607 374
Philips Gloeilampenfabrieken
NV (non-voting) 74,485 1,534
Royal Dutch Petroleum 162,805 17,108
* Royal Pakhoed Holdings 13,180 362
Stork VMF 14,121 315
Unilever NV 57,277 6,635
Wolters Kluwer 10,719 677
-------
GROUP TOTAL 39,076
-------
- -----------------------------------------------------------------------
NORWAY (.6%)
Aker Free 15,723 195
Bergesen Series A 24,616 $ 480
Bergesen Series B 16,236 316
Dyno Industrier AS 21,896 352
Hafslund Nycomed Series A Free 16,258 277
Hafslund Nycomed Series B Free 16,018 268
Norsk Hydro 57,494 1,632
-------
GROUP TOTAL 3,520
-------
- -----------------------------------------------------------------------
SPAIN (3.8%)
Acerinox SA 7,516 583
* Aguila (El) SA 33,558 285
Alba 7,265 286
Autopista Aces 46,727 510
Banco Bilbao Vizcaya 46,621 1,032
Banco Central Hispano Americano 45,402 1,096
Banco de Santander 26,327 1,223
Banco Espanol Credito 5,642 75
* Banesto Banco Espanol de Credito 35,109 490
Carburos Metalic 9,732 247
Catalana de Gas 6,252 372
Dragados y Construciones SA 32,696 527
Ebro Agricolas 24,944 305
Empresa Nacional de Electricidad SA 65,209 3,102
* Ercros 366,732 369
Fabric Auto Renault de Espana 9,013 322
Fomento Construciones y Contra 6,908 828
Hidroelectrica Iberica Iberduero SA 140,963 1,011
Inmobiliaria 9,108 330
Inmobiliaria Metropolitana Vasco 1,401 51
Mapfre 16,521 867
Metal Duro Felguera 60,308 238
Portland Valderrivas 3,848 279
Repsol SA 68,933 2,146
Tabacalera SA 20,206 566
Telefonica de Espana 259,268 3,383
Union Electrica Fenosa 47,737 201
* Uralita 142,462 1,226
Vallehermoso SA 25,198 489
Zardoya Otis SA 2,006 191
-------
GROUP TOTAL 22,630
-------
- -----------------------------------------------------------------------
SWEDEN (2.9%)
Aga AB 17,830 888
Asea AB Series A Free 10,668 755
Asea AB Series B Free 9,500 671
Astra AB Series A 160,900 3,668
Astra AB Series B 33,830 755
Atlas Copco Series A Free 13,400 667
Electrolux Series B Free 29,900 1,019
Hennes & Mauritz Series B 11,888 364
S E Banken Series A 157,853 1,070
* Skandia Free 33,072 671
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Skanska Series B 26,558 $ 567
Stora Kopparberg Series A 12,741 604
* Svenska Cell Series B Free (SCA) 61,646 998
Svenska Handelsbank Series A 88,330 1,197
Telefon AB L.M. Ericsson Series B 79,200 3,240
Volvo Series B 9,675 626
-------
GROUP TOTAL 17,760
-------
- -----------------------------------------------------------------------
SWITZERLAND (10.2%)
* Adia SA (Bearer) 3,017 382
* Alusuisse-Lonza Holding (Bearer) 891 388
Alusuisse-Lonza Holding (Registered) 825 359
BBC Brown Boveri (Bearer) 1,475 1,079
Ciba Geigy AG 7,858 4,762
Ciba Geigy AG (Bearer) 925 586
Ciba Geigy AG (Ptg. Ctf.) 658 394
CS Holdings (Bearer) 5,675 2,817
CS Holdings (Registered) 11,630 1,151
Grands Magasins Jelmoli (Bearer) 280 180
Grands Magasins Jelmoli (Registered) 610 65
Holderbank Financiere Glarus AG (Bearer) 850 532
Merkur Holding AG 1,471 368
Nestle SA (Registered) 12,789 11,049
Nissan Motor IB 95,691 171
Roche Holdings AG (Bearer) 583 4,515
Roche Holdings Ltd. 2,244 9,535
SMH (Bearer) 962 674
SMH (Registered) 2,880 440
Sandoz AG (Ptg. Ctf.) 300 881
Sandoz AG (Registered) 1,740 4,892
Societe Generale de Surveillance
Holdings SA (Bearer) 522 657
Swiss Bank Corp. (Bearer) 6,394 2,050
Swiss Bank Corp. (Registered) 10,800 1,687
* Swiss Reinsurance (Bearer) 575 302
* Swiss Reinsurance (Registered) 2,673 1,323
Union Bank of Switzland (Bearer) 7,821 7,131
Zurich Insurance (Bearer) 1,643 1,676
Zurich Insurance (Registered) 1,202 1,218
-------
GROUP TOTAL 61,264
-------
- -----------------------------------------------------------------------
UNITED KINGDOM (37.8%)
Abbey National 640,616 4,853
Amec PLC 202,931 372
Amstrad Consumer Electric 574,427 340
Anglian Water 63,190 553
Argos PLC 58,573 332
Argyll Group PLC 277,272 1,132
Arjo Wiggins Appleton PLC 147,598 520
Associated British Foods PLC 255,634 2,129
Barclays 625,408 5,885
Barratt Development 119,111 $ 377
Bass PLC 300,266 2,381
BBA Group 163,532 473
BICC PLC 112,480 669
Blue Circle Industries 175,523 875
BOC Group 220,683 2,152
Boots Co. PLC 185,086 1,638
Bowater PLC 102,620 689
Bowthorpe PLC 57,063 299
BPB Industries Ltd. 79,908 417
British Aerospace 136,195 832
British Airways PLC 312,967 2,081
B.A.T. (British American
Tobacco) Industries 978,956 8,017
British Gas 1,545,982 7,811
British Land Co. PLC 60,055 386
British Petroleum Co. 1,680,177 8,961
British Steel 630,469 1,175
British Telcommunications PLC 1,972,901 13,792
BTR PLC 1,158,804 6,395
Burmah Castrol PLC 32,303 399
B.E.T. PLC 261,132 522
Cable & Wireless PLC 652,723 5,041
Cadbury Schweppes PLC 158,774 1,196
Calor Group 74,993 353
Carlton Communications PLC 49,675 697
Chubb Security PLC 101,311 550
Coats Viyella PLC 99,043 377
Commercial Union 137,645 1,318
* Costain Group 259,978 110
Courtalds Textiles 32,193 219
Courtaulds PLC 225,285 1,627
Dawson International PLC 85,165 173
De La Rue Co. PLC 36,899 468
Delta Group British 33,049 237
East Midlands Electric PLC 45,439 437
Eastern Electricity PLC 49,902 498
ECC Group 46,508 317
Electrocomponents PLC 43,988 342
FKI 124,756 357
Forte PLC 234,082 904
General Accident PLC 114,389 1,212
General Electric PLC 1,012,578 5,116
GKN 38,727 303
Glaxo Holdings 916,811 9,834
Grand Metropolitan PLC 618,682 4,353
Great Portland Estates 101,123 338
Great Universal Stores PLC 181,817 1,746
Guardian Royal Exchange PLC 198,749 679
Guinness PLC 740,742 5,233
Hammerson Property Investment 63,516 388
Hanson 1,480,715 5,882
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Harrison and Crosfield 225,273 $ 630
Hepworth Ceramic Holdings Ltd. 50,375 321
HSBC Holdings PLC 365,665 5,345
HSBC Holdings (Foreign) 220,000 3,274
IMI PLC 69,098 334
Imperial Chemical Industries 188,032 2,226
Johnson Matthey PLC 44,148 351
Kingfisher PLC 182,963 2,095
Kleinwort Benson Group 45,559 393
Ladbroke Group 461,917 1,111
Laing, John 64,357 292
Laird Group 59,150 302
Land Securities PLC 158,670 1,857
Lasmo PLC 251,271 431
Legal & General Group PLC 91,518 681
Lex Services 52,726 350
Lloyds Bank Group PLC 518,109 5,052
London Electricity PLC 42,499 415
Lonrho 242,458 463
Lucas Industries 148,940 423
Manweb PLC 32,418 363
Marks and Spencer PLC 909,198 6,100
MB Group 132,241 810
Meyer International PLC 51,941 396
National Power 322,963 2,313
Next PLC 111,882 383
North West Water Group 109,672 951
Northern Electricity PLC 52,343 559
Ocean Transportation & Trading 71,755 352
Pearson, S. & Son PLC 87,209 785
Penninsular & Orient Steam
Navigation Co. 143,201 1,369
Pilkington 282,121 743
Prudential Corp. 539,375 2,881
Racal Electronics PLC 81,626 233
Rank Organization 65,863 960
Redland PLC 134,287 1,162
Reed International PLC 150,267 1,992
Reuters Holdings PLC 137,416 3,625
RMC Group PLC 34,423 475
Rolls Royce PLC 314,564 756
Royal Bank of Scotland 373,296 2,518
* Royal Doulton PLC 8,720 29
Royal Insurance Holdings 150,291 756
RTZ Corp. 157,850 1,896
* RTZ Corp. (Bearer) 164,800 2,048
Rugby Group 133,512 666
Sainsbury, J. PLC 642,724 4,222
Schroders PLC 23,826 482
Scottish Power 174,958 1,178
Scottish & Newcastle Breweries 118,531 938
Sears PLC 255,742 482
Sedgwick Group PLC 106,450 $ 286
Seeboard PLC 36,296 398
Slough Estates PLC 82,589 336
Smithkline Beecham Equity Unit 306,031 1,653
Smithkline Beecham PLC Class A 462,549 2,765
Smiths Industries PLC 161,923 1,098
Southern Electric PLC 51,786 542
Southern Water 36,461 366
T & N PLC 162,499 490
Tarmac PLC 190,737 487
Tate & Lyle 63,404 375
Taylor Woodrow PLC 172,537 370
Tesco PLC 541,764 1,711
Thames Water PLC 121,699 1,039
Thorn EMI PLC 232,872 3,411
Trafalgar House PLC 263,953 365
Transport Development 211,521 883
Tube Investment Group 76,076 451
Unigate PLC 52,393 284
Unilever PLC 289,498 5,153
United Biscuits Holdings PLC 106,104 567
Vickers PLC 129,129 336
Vodafone Group PLC 287,149 2,524
Warburg, S.G. Group PLC 52,191 719
Welsh Water 30,176 313
Williams Holdings PLC 89,847 497
Willis Corroon PLC 89,536 299
Wilson, C. Holdings 106,443 362
Wimpey, George PLC 112,698 315
Wolseley PLC 42,318 529
Zeneca Group PLC 230,938 2,872
-------
GROUP TOTAL 227,327
-------
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $519,094) 597,899
- -----------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (.7%)
- -----------------------------------------------------------------------
U.S. TREASURY BILL--Note D
3.06%, 3/24/94 $ 300 $ 298
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.26%, 1/3/94 3,683 3,683
- -----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $3,981) 3,981
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(Cost $523,075) 601,880
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.2%)
- -----------------------------------------------------------------------
Other Assets--Notes B and E 102,297
Liabilities--Note E (103,332)
--------
(1,035)
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 50,574,942, outstanding
$.001 par value shares
(authorized 500,000,000 shares) $600,845
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.88
=======================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT DECEMBER 31, 1993, NET ASSETS
CONSISTED OF:
- -----------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital--Note F $522,177 $10.32
Overdistributed Net
Investment Income--Note F (392) (.01)
Accumulated Net
Realized Gains--Note F 229 .01
Unrealized Appreciation
of Investments 78,831 1.56
- -----------------------------------------------------------------------
NET ASSETS $600,845 $11.88
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
PACIFIC PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.8%)
- -----------------------------------------------------------------------
AUSTRALIA (5.5%)
Australia National Industries 464,774 $ 653
Boral Ltd. 361,210 1,049
Brambles Industries, Ltd. 92,611 828
Broken Hill Proprietary Co. Ltd. 338,100 4,034
Coca-Cola Amatil Ltd. 112,375 877
Coles Myer Ltd. 343,750 1,304
CRA Ltd. 117,400 1,466
CSR Ltd. 158,900 524
Dominion Mining 986,575 335
Email Ltd. 187,883 627
Emperor Mines 52,510 101
Fosters Brewing Corp. 739,100 732
General Property Trust 393,700 722
Gold Mines Kalgoorlie 115,673 104
Goodman Fielder Ltd. 464,800 521
Lend Lease Corp. 50,200 605
MIM Holdings Ltd. 389,400 703
National Australia Bank Ltd. 286,800 2,402
Newcrest Mining Ltd. 63,945 288
News Corp. Ltd. 431,164 2,903
North Broken Hill Peko Ltd. 325,613 802
Pacific Dunlop Ltd. 167,640 616
Rothmans Australian 103,900 464
Santos Ltd. 290,389 761
Sons of Gwalia 56,472 349
Western Mining Corp. 196,100 936
Westfield Trust (Units) 654,739 1,240
Westpac Banking Ltd. 407,404 1,280
-------
GROUP TOTAL 27,226
-------
- -----------------------------------------------------------------------
HONG KONG (9.6%)
Cathay Pacific Air 1,034,000 2,007
Cheung Kong Holdings Ltd. 622,000 3,803
China Light & Power 435,000 3,181
Dairy Farm International Holding Ltd. 534,000 1,064
Hang Seng Bank 442,800 4,326
Harbour Centre 289,000 426
Hong Kong & China Gas 340,661 987
Hong Kong Electric Holdings 453,000 1,891
Hong Kong Land Holdings 802,000 2,844
Hong Kong Telecommunication Ltd. 2,646,400 5,582
Hopewell Holdings 1,509,000 1,972
Hutchinson Whampoa Ltd. 858,000 4,275
Jardine Matheson Holdings 183,600 1,913
New World Development 20,000 106
South China Morning Post 1,282,000 780
Sun Hung Kai Properties Ltd. 544,400 5,002
Swire Pacific Ltd. 401,500 3,611
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Wharf Holdings Ltd. 706,000 $ 3,358
Winsor Industrial Corp. 29,000 55
-------
GROUP TOTAL 47,183
-------
- -----------------------------------------------------------------------
Japan (75.1%)
Ajinomoto Co., Inc. 142,000 1,476
Alps Electric Co., Ltd. 40,000 355
Amada Co., Ltd. 62,000 499
Amano Corp. 33,000 399
Aoki Construction Co. 4,000 15
Arabian Oil Co. Ltd. 12,000 444
Asahi Bank Ltd. 552,000 5,441
Asahi Breweries, Ltd. 154,000 1,628
Asahi Chemical Industries 283,000 1,521
Asahi Glass Co. Ltd. 264,000 2,507
Ashikaga Bank 160,000 1,077
Bank of Tokyo 450,000 5,927
Bank of Yokohama 327,000 2,868
Banyu Pharmaceutical 52,000 405
Bridgestone Corp. 202,000 2,317
Brother Industries Ltd. 92,000 342
Canon Inc. 193,000 2,663
Chiba Bank 184,000 1,484
Chiyoda Corp. 40,000 373
Chugai Pharmaceutical Ltd. 46,000 499
Citizen Watch Co. 63,000 463
Cosmo Oil Co., Ltd. 49,000 351
CSK 16,200 353
Daido Steel Co. 96,000 349
Daiei Inc. 133,000 1,716
Daifuku 32,000 298
Dai-ichi Kangyo Bank 688,000 10,911
Daiichi Pharmaceutical Co. Ltd. 87,000 1,107
Daikin Industries Ltd. 57,000 337
Daimaru Inc. 74,000 365
Dai-Nippon Ink & Chemicals 144,000 546
Dai-Nippon Printing Co. Ltd. 157,000 2,237
Dai-Nippon Screen Manufacturing 62,000 291
Daishowa Seoshi Paper 47,000 375
Daiwa House Industries 99,000 1,331
Daiwa Securities Ltd. 275,000 3,080
Denki Kagaku Kogyo 155,000 367
Ebara Corp. 67,000 762
Eisai Co., Ltd. 48,000 770
Fanuc Co. Ltd. 53,500 1,764
Fuji Bank 662,000 11,745
Fuji Photo Film Co. Ltd. 113,000 2,501
Fujita Corp. 98,000 477
Fujita Tourist Enterprises 25,000 461
Fujitsu Ltd. 427,000 3,229
Furukawa Electric Co. 105,000 489
Gunma Bank Ltd. 116,000 1,174
Hankyu Corp. 171,700 $ 922
Hankyu Department Stores 41,000 426
Haseko 135,000 823
Hattori Seiko 38,000 272
Hazama-Gumi Ltd. 13,000 46
Higo Bank 67,000 444
Hirose Electric Co. Ltd. 10,000 542
Hitachi Ltd. 688,000 5,067
Hokkaido Bank 93,000 330
Hokuriku Bank 114,000 765
Honda Motor Co. Ltd. 224,000 3,051
Honshu Paper Co., Ltd. 81,000 383
House Foods Industrial Co., Ltd. 23,000 493
Hoya Corp. 27,000 433
INAX 46,000 416
Industrial Bank of Japan Ltd. 518,000 13,135
C Itoh & Co. 423,000 2,035
Itoham Food Co., Ltd. 60,000 469
Ito-Yokado Co. 98,000 4,478
Iwatani & Co. 75,000 348
Japan Air Lines Co. Ltd. 264,000 1,419
Japan Energy Corp. 242,000 878
Japan Steel Works Ltd. 99,000 264
Joyo Bank 196,800 1,479
Jusco Co., Ltd. 60,000 1,118
Kajima Corp. 182,000 1,349
Kamigumi 42,000 444
Kanebo Ltd. 115,000 374
Kanegafuchi Chemical Industry Co. Ltd. 72,000 341
Kansai Electric Power Inc. 235,400 5,906
Kansai Paint Co., Ltd. 86,000 331
Kao Corp. 149,000 1,562
* Kawasaki Kisen Kaisha Ltd. 97,000 243
Kawasaki Steel Corp. 697,000 1,955
Keihin Electric Express Railway Co. Ltd. 77,000 438
Kikkoman 50,000 379
Kinden Corp. 42,000 659
Kinki Nippon Railway 458,000 3,488
Kirin Brewery Co. Ltd. 235,000 2,379
Kobe Steel Ltd. 697,000 1,580
Kokuyo Co., Ltd. 34,000 670
Komatsu 223,000 1,497
Konica 72,000 406
Koyo Seiko Co. 70,000 407
Kubota Ltd. 329,000 1,722
Kumagai Gumi Co., Ltd. 177,000 682
Kurabo Industries Ltd. 76,000 221
Kureha Chemical Industries 88,000 330
Kyocera Corp. 40,000 2,115
Kyowa Hakko Kogyo 88,000 749
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S><C> <C> <C>
Lion Corp. 75,000 $ 437
Maeda Road Construction Co. Ltd. 20,000 378
Makita Electric Works 30,000 524
Marubeni Corp. 324,000 1,286
Marui 79,000 1,012
Matsushita Electric Industries Co. Ltd. 489,000 6,528
Meiji Milk Products Co. 53,000 331
Meiji Seika Kaisha Ltd. 84,000 428
* Minebea Co., Ltd. 89,000 387
Misawa Homes Co., Ltd. 41,000 336
Mitsubishi Chemical Industries Ltd. 234,000 925
Mitsubishi Corp. 329,000 3,154
Mitsubishi Electric Co. 434,000 2,100
Mitsubishi Estate Co. Ltd. 279,000 2,302
Mitsubishi Gas & Chemical 98,000 290
Mitsubishi Heavy Industries Ltd. 656,000 3,615
Mitsubishi Oil 93,000 716
Mitsubishi Paper Mills 75,000 331
Mitsubishi Petrochemical 133,000 685
Mitsubishi Steel Manufacturing 67,000 242
Mitsubishi Trust & Banking Co. 266,000 2,074
Mitsubishi Trust & Banking Corp. 271,000 2,914
Mitsubishi Warehouse & Transportation 32,000 424
Mitsui & Co. Ltd. 329,000 2,043
Mitsui Engineering & Ship Building 172,000 476
Mitsui Marine & Fire Insurance 153,000 1,069
Mitsui Mining & Smelting Co. Ltd. 95,000 339
Mitsui Osk Lines Ltd. 347,000 1,070
Mitsui Real Estate Development 128,000 1,296
Mitsui Toatsu Chemicals Inc. 117,000 331
Mitsukoshi Ltd. 116,000 852
Mochida Pharmaceutical 19,000 358
Mori Seiki Co. 24,000 409
Nagoya Railroad Co. 139,000 636
NEC Corp. 350,000 2,681
NGK Insulators 68,000 593
NGK Spark Plug Co. 50,000 466
Nicherei 67,000 426
Nichii Co., Ltd. 53,000 679
Nihon Cement Co. 56,000 325
Niigata Engineering Co. 93,000 350
Nippon Denso Co. Ltd. 192,000 2,821
Nippon Express Co., Ltd. 254,000 2,185
Nippon Fire & Marine 88,000 567
Nippon Kokan (NKK) 848,000 1,816
Nippon Light Metal Co. 103,000 456
Nippon Meat Packers Inc. 80,000 1,133
Nippon Oil Co. Ltd. 298,000 1,746
Nippon Paper Industries Co. 260,000 1,230
Nippon Seiko Kabushiki 107,000 520
Nippon Sharyo Seizo Kaisha 39,000 $ 384
Nippon Sheet Glass Co. 83,000 331
Nippon Shinpan Co. 54,000 447
Nippon Shokubai 66,000 464
Nippon Steel Corp. 1,501,000 4,129
Nippon Suisan Kaisha 100,000 319
Nippon Yusen Kabushiki Kaisha 339,000 1,625
Nissan Motor Co., Ltd. 573,000 3,881
Nisshinbo Industries 53,000 389
Nissin Food 34,000 874
Nitto Denko Corp. 40,000 437
Nomura Secutities Co. Ltd. 436,000 6,993
Noritake Co., Ltd. 53,000 321
NTN Toyo-Bearing Co. 86,000 398
Odakyu Electric Railway 125,000 828
Ohbayashi-Gumi Ltd. 155,000 811
OJI Paper Co., Ltd. 110,000 872
Okuma Machinery Works 51,000 270
Okumura Corp. 59,000 456
Olympus Optical Ltd. 42,000 391
Omron Tateisi Electronics Co. 52,000 685
Onoda Cement 107,000 475
Onward Kashiyama Co. 41,000 389
Orient Corp. 61,000 370
Orix Corp. 15,000 410
Osaka Gas Co., Ltd. 543,000 2,311
Penta Ocean Construction 33,000 183
Pioneer Electronic Corp. 49,000 1,234
Renown Inc. 81,000 320
Ricoh Co. 113,000 728
Sagami Railway 84,000 376
Sakura Bank 760,000 9,874
Sankyo Co., Ltd. 91,000 1,802
Sanrio Co., Ltd. 6,000 58
Sanyo Electric Co., Ltd. 502,000 1,912
Sapporo Breweries 63,000 525
Secom Co., Ltd. 24,000 1,454
Seino Transportation Co. Ltd. 33,000 473
Seiyu 37,000 481
Sekisui Chemical Co. 157,000 1,407
Sekisui House Ltd. 123,000 1,422
Settsu 97,000 321
Seven Eleven Japan Co. Ltd. 76,000 5,645
Seventy-Seven Bank 59,000 463
Sharp Corp. 236,000 3,214
Shimizu Construction Corp. 220,000 1,530
Shin-Etsu Chemical Co. Ltd. 57,000 843
Shionogi & Co., Ltd. 89,000 686
Shiseido Co., Ltd. 86,000 948
Shizuoka Bank 162,000 1,902
Showa Denko Kabushiki 251,000 596
Skylark Co., Ltd. 31,000 625
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Snow Brand Milk Products 60,000 $ 387
Sony Corp. 80,500 3,974
Sumitomo Corp. 251,000 1,952
Sumitomo Bank 718,000 12,545
Sumitomo Cement Co. 81,000 319
Sumitomo Chemical Co. 526,000 2,003
Sumitomo Electric Co. 194,000 2,260
Sumitomo Heavy Industries Ltd. 144,000 475
Sumitomo Marine & Fire Insurance Co. 139,000 1,098
Sumitomo Metal Industries 747,000 1,767
Sumitomo Metal Mining 122,000 951
Taisei Construction Corp. 252,000 1,432
Taisho Pharmaceuticals 83,000 1,599
Takara Shuzo Co. 69,000 427
Takashimaya Co. 38,000 378
Takeda Chemical Industries 224,000 2,208
Tanabe Seiyaku Co., Ltd. 51,000 418
Teijin Ltd. 122,000 443
Teikoku Oil Co., Ltd. 57,000 321
Toa Harbor Works 72,000 384
Tobu Railway Co., Ltd. 186,000 1,050
Toho Co., Ltd. 5,200 811
Tohoku Electric Power 110,800 2,929
Tokai Bank 463,000 4,646
Tokio Marine & Fire Insurance Ltd. 355,000 3,881
Tokyo Broadcasting System 37,000 434
Tokyo Dome 29,000 413
Tokyo Electric Power 313,700 8,657
Tokyo Electron Inc. 33,000 822
Tokyo Gas Co., Ltd. 463,000 2,054
Tokyo Style Co. 20,000 289
Tokyotokeiba 54,000 285
Tokyu Corp. 274,000 1,667
Toppan Printing Co. 140,000 1,518
Toray Industries Inc. 273,000 1,399
Tostem Corp. 48,000 1,591
Toto Ltd. 103,000 1,689
Toyo Kanetsu Kabushiki 44,000 211
Toyo Seikan Kaisha Ltd. 57,000 1,430
Toyobo 93,000 282
Toyoda Automatic Loom Works 66,000 875
Toyota Motor Corp. 818,000 13,046
Tsubakimoto Chain Co. 104,000 403
Ube Industries Ltd. 188,000 495
Unitika 141,000 359
Yamaha Corp. 46,000 391
Yamaichi Securities Co. 288,000 1,535
Yamanouchi Pharmaceuticals Ltd. 72,000 1,297
Yamato Transport Co. 88,000 891
Yamazaki Baking Co., Ltd. 39,000 751
The Yasuda Trust & Banking Co., Ltd. 228,000 $ 1,491
-------
GROUP TOTAL 369,859
-------
- -----------------------------------------------------------------------
MALAYSIA (4.3%)
Amalgamated Steel Mills 339,000 627
Edaran Otomobil 92,000 581
Golden Plus Holdings 167,000 1,010
Johan Holdings 721,000 800
Landmarks Bhd. 355,000 1,054
Magnum Corp. Bhd. 275,000 817
Malayan Banking Bhd. 220,000 1,552
Malaysian Pacific 226,000 587
Malaysian Resources Co. 125,000 322
Nestle Malaysia Bhd. 89,000 562
Oriental Holdings Bhd. 130,000 651
Perusahaan Otomobil NA 140,000 629
Petaling Garden Bhd. 557,000 761
Pilecon Engineering 414,000 953
Promet Bhd. 567,000 812
Rashid Hussain Bhd. 230,000 828
RJ Reynolds 309,000 746
Tan Chong Motor Holdings Bhd. 404,000 630
* Technology Resources Industries 214,000 1,120
Telekom Malaysian Bhd. 389,000 3,191
Tenaga Nasional 340,000 2,436
United Engineers 75,000 398
-------
GROUP TOTAL 21,067
-------
- -----------------------------------------------------------------------
NEW ZEALAND (.7%)
Carter Holt Harvey 545,259 1,101
Fletcher Challenge Ltd. 448,269 837
Telecom Corp. of New Zealand 654,875 1,634
-------
GROUP TOTAL 3,572
-------
- -----------------------------------------------------------------------
SINGAPORE (3.6%)
Development Bank of Singapore (Foreign) 189,625 2,145
Haw Par Brothers International 374,000 907
Keppel Corp. 185,000 1,322
Malayan Banking 240,000 1,596
Overseas Chinese Banking Corp. (Foreign) 232,166 2,511
Overseas Chinese Banking Corp. (Local) 18,000 165
Prima 176,000 766
Sime Darby Bhd. 538,000 1,451
Singapore Airlines Ltd. (Foreign) 325,000 2,727
Singapore Press Holdings Ltd. (Foreign) 133,800 2,245
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Singapore Press Holdings Ltd. (Local) 5,000 $ 48
United Overseas Bank (Foreign) 181,125 1,767
-------
GROUP TOTAL 17,650
-------
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $447,514) 486,557
- -----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (.8%)
- -----------------------------------------------------------------------
Face
Amount
(000)
-------
U.S. TREASURY BILL--Note D
3.06%, 3/24/94 $2,000 1,986
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.26%, 1/4/94 1,958 1,958
- -----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $3,944) 3,944
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $451,458) 490,501
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.4%)
Other Assets--Notes B and E 110,007
Liabilities--Note E (107,893)
--------
2,114
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 48,638,825 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $492,615
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.13
- -----------------------------------------------------------------------
</TABLE>
+See Note A to Financial Statements.
*Non-income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT DECEMBER 31, 1993, NET ASSETS
CONSISTED OF:
- -----------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital--Note F $453,822 $ 9.33
Overdistributed Net
Investment Income--Note F (33) --
Overdistributed Net
Realized Gains--Note F (115) --
Unrealized Appreciation
of Investments 38,941 .80
- -----------------------------------------------------------------------
NET ASSETS $492,615 $10.13
- -----------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
EUROPEAN PORTFOLIO PACIFIC PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1993 December 31, 1993
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends (1) . . . . . . . . . . . . . . . $ 9,234 $ 3,864
Interest . . . . . . . . . . . . . . . . . 259 192
- -----------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . 9,493 4,056
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B . . . . . . . .
Management and Administrative . . . . . $537 $676
Marketing and Distribution . . . . . . . 94 631 90 766
---- ----
Taxes (other than income taxes)--Note A . . 30 32
Custodian's Fees . . . . . . . . . . . . . 543 381
Auditing Fees . . . . . . . . . . . . . . . 9 9
Shareholders' Reports . . . . . . . . . . . 32 28
Annual Meeting and Proxy Costs . . . . . . 7 6
Directors' Fees and Expenses . . . . . . . 1 1
- -----------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . 1,253 1,223
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 8,240 2,833
- -----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)--Note C
Investment Securities Sold . . . . . . . . 406 2,424
Futures Contracts . . . . . . . . . . . . . 419 (133)
Forward Currency Contracts . . . . . . . . (49) 217
- -----------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . 776 2,508
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes C and D
Investment Securities Sold . . . . . . . . 97,142 58,620
Futures Contracts . . . . . . . . . . . . . 16 51
Forward Currency Contracts . . . . . . . . 25 (141)
- -----------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . 97,183 58,530
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . $106,199 $63,871
=======================================================================================================================
</TABLE>
(1) Dividends are net of foreign withholding taxes of $1,468,000 and $579,000,
respectively.
18
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
EUROPEAN PORTFOLIO PACIFIC PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
DECEMBER 31, 1993 December 31, 1992 DECEMBER 31, 1993 December 31, 1992
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . $ 8,240 $ 6,706 $ 2,833 $ 1,365
Realized Net Gain (Loss)--Note C . . . . . . 776 (298) 2,508 2,557
Change in Unrealized Appreciation
(Depreciation)--Notes C and D . . . . . . 97,183 (18,410) 58,530 (18,535)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . 106,199 (12,002) 63,871 (14,613)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . (8,362) (6,980) (2,867) (1,344)
Realized Net Gain . . . . . . . . . . . . . -- -- (2,387) (2,689)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (8,362) (6,980) (5,254) (4,033)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . 190,298 105,385 205,281 116,972
-- In Lieu of Cash Distributions . 7,046 6,001 4,530 3,399
-- Exchange . . . . . . . . . . . . 124,502 44,111 174,449 57,229
Redeemed -- Regular . . . . . . . . . . . . (40,561) (20,004) (72,255) (14,969)
-- Exchange . . . . . . . . . . . . (34,640) (20,965) (84,944) (21,491)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . 246,645 114,528 227,061 141,140
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . 344,482 95,546 285,678 122,494
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . 256,363 160,817 206,937 84,443
- -----------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . $600,845 $256,363 $492,615 $206,937
=============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . $ .17 $ .26 $ .06 $ .05
Realized Net Gain . . . . . . . . . . -- -- $ .05 $ .10
- -----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 29,683 14,792 36,353 22,638
Issued in Lieu of Cash Distributions . 584 645 452 444
Redeemed . . . . . . . . . . . . . . . (7,181) (4,152) (15,525) (4,687)
- -----------------------------------------------------------------------------------------------------------------------------
23,086 11,285 21,280 18,395
- -----------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F . . . $ (392) $ (248) $ (33) $ 26
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EUROPEAN PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------ May 1-
For a Share Outstanding Throughout Each Period 1993 1992 1991 December 31, 1990
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . $9.33 $9.92 $9.06 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .17 .25 .26 .16
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . 2.55 (.58) .86 (.94)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . 2.72 (.33) 1.12 (.78)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . (.17) (.26) (.26) (.16)
Distributions from Realized Capital Gains -- -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . (.17) (.26) (.26) (.16)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . $11.88 $9.33 $9.92 $9.06
=============================================================================================================================
TOTAL RETURN** . . . . . . . . . . . . . . . . +29.13% -3.32% +12.40% -7.23%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . $601 $256 $161 $96
Ratio of Expenses to Average Net Assets . . . . .32% .32% .33% .40%*
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . . 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate . . . . . . . . . . . . 4% 1% 15%+ 3%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PACIFIC PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------ May 1-
For a Share Outstanding Throughout Each Period 1993 1992 1991 December 31, 1990
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . $7.56 $9.42 $8.56 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .06 .05 .05 .05
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . 2.62 (1.76) .86 (1.44)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . 2.68 (1.71) .91 (1.39)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.06) (.05) (.05) (.05)
Distributions from Realized Capital Gains . (.05) (.10) -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (.11) (.15) (.05) (.05)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . $10.13 $7.56 $9.42 $8.56
=============================================================================================================================
TOTAL RETURN** . . . . . . . . . . . . . . . . +35.46% -18.17% +10.65% -14.01%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . $493 $207 $84 $31
Ratio of Expenses to Average Net Assets . . . . .32% .32% .32% .35%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 75% .92% .70% 1.02%*
Portfolio Turnover Rate . . . . . . . . . . . . 7% 3% 21%+ 2%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total return figures do not reflect the 1% transaction fee on
purchases or the annual account maintenance fee of $10. Subscription
period for Portfolio was May 1, 1990, to June 17, 1990, during which
time all assets were held in money market instruments. Performance
measurement begins on June 18, 1990.
+ Portfolio turnover rates for 1991, excluding in-kind redemptions, were
3% and 1% for the European and Pacific Portfolios, respectively.
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard International Equity Index Fund is registered under the Investment
Company Act of 1940 as a diversified open-end investment company and consists
of the European and Pacific Portfolios. The Portfolios invest in foreign
securities which involve investment risks not normally associated with
investing in securities of United States corporations.
* 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 listed on foreign exchanges are valued at
the latest quoted sales prices on the valuation date; securities not
listed are valued at the latest quoted bid prices. Temporary cash
investments are valued at cost which approximates market value. Foreign
currency amounts are converted into U.S. dollars at the bid prices of such
currencies against U.S. dollars last quoted by major banks as of 4:00 PM
Central Europe time.
2. FEDERAL INCOME TAXES: Each Portfolio of 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 of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by the Fund's
custodian bank until maturity of each repurchase agreement. Provisions of
the agreement ensure that the market value of this 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.
4. FUTURES AND FORWARD CURRENCY CONTRACTS: The Fund may utilize futures
contracts to a limited extent, and may enter into forward foreign currency
contracts to protect the securities and related receivables and payables
against changes in future foreign exchange rates. The primary risks
associated with the use of futures contracts are imperfect correlation
between the change in market value of the securities held by the Fund and
the prices of futures contracts, and the possibility of an illiquid
market. Risks associated with forward currency contracts include movement
in the value of the foreign currency relative to the U.S. dollar and the
ability of the counterparty to perform. Futures and forward currency
contracts are valued based upon their quoted daily settlement prices.
Fluctuations in the value of such contracts are recorded as unrealized
appreciation (depreciation) until terminated, at which time realized gains
(losses) are recognized. Unrealized appreciation (depreciation) related to
open futures and forward currency contracts is required to be treated as
realized gain (loss) for tax purposes.
5. 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. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
* B. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
December 31, 1993, the Fund had contributed capital of $165,000 to Vanguard
(included in Other Assets), representing .8% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
* C. During the year ended December 31, 1993, purchases and sales of investment
securities other than U.S. Government securities and temporary cash investments
were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(000)
-----------------------------------
Portfolio Purchases Sales
- ----------------------------------------------------------------------
<S> <C> <C>
EUROPEAN $259,029 $16,033
- ----------------------------------------------------------------------
PACIFIC 245,218 26,343
- ----------------------------------------------------------------------
</TABLE>
The European Portfolio utilized a capital loss carryforward of
approximately $563,000 to offset net capital gains realized during the year
ended December 31, 1993.
At December 31, 1993, unrealized appreciation of investment securities for
Federal income tax purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(000)
--------------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Appreciation
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
EUROPEAN $91,541 $(12,736) $78,805
- -----------------------------------------------------------------------------
PACIFIC 60,204 (21,299) 38,905
- -----------------------------------------------------------------------------
</TABLE>
* D. At December 31, 1993, the aggregate settlement value of open Eurotop
futures contracts (European Portfolio) and Japan-Topix futures contracts
(Pacific Portfolio) expiring in March 1994, the related unrealized
appreciation, and the market value of securities deposited as initial margin
for those contracts were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(000)
-------------------------------------------------
Market Value
Aggregate of Securities
Settlement Unrealized Deposited as
Portfolio Value Appreciation Initial Margin
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
EUROPEAN $ 753 $33 $ 298
- -----------------------------------------------------------------------------
PACIFIC 3,083 43 1,986
- -----------------------------------------------------------------------------
</TABLE>
Under terms of open forward currency exchange contracts at December 31, 1993,
the Portfolios were obligated to receive and deliver foreign currencies in
exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(000)
-----------------------------------------------
Unrealized
Portfolio/ Foreign U.S. Appreciation
Contract Date Currency Dollars (Depreciation)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EUROPEAN
RECEIVE 3/22/94 ECU* 645 $ 719 $ (7)
- -----------------------------------------------------------------------------
PACIFIC
RECEIVE 3/16/94 Yen 453,440 4,221 (146)
DELIVER 3/16/94 Yen 113,680 1,022 1
- -----------------------------------------------------------------------------
</TABLE>
*ECU--European Currency Units.
* E. The market values of securities on loan to broker/dealers at December 31,
1993, and the cash collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(000)
---------------------------
Market Value Cash
of Loaned Collateral
Portfolio Securities Received
- ---------------------------------------------------------
<S> <C> <C>
EUROPEAN $85,978 $ 92,119
- ---------------------------------------------------------
PACIFIC 93,842 100,169
- ---------------------------------------------------------
</TABLE>
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, realization and/or
retention of the collateral may be subject to legal proceedings.
* F. Effective in 1993, generally accepted accounting principles require that
differences between undistributed net investment income or accumulated net
realized capital gains for financial reporting and tax purposes, if permanent,
be reclassified to/from paid in capital. In connection
22
<PAGE> 25
with the adoption of this accounting method, the following permanent book/tax
differences have been reclassified:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Increase (Decrease)
Paid in Capital
Portfolio (000)
- -------------------------------------------------------------------
<S> <C>
EUROPEAN
UNDISTRIBUTED NET INVESTMENT INCOME $ 22
ACCUMULATED NET REALIZED GAINS 161
- -------------------------------------------------------------------
PACIFIC
UNDISTRIBUTED NET INVESTMENT INCOME 25
ACCUMULATED NET REALIZED GAINS 911
- -------------------------------------------------------------------
</TABLE>
The reclassifications of capital gains primarily represent realized net gains
resulting from prior years' in-kind redemptions. These reclassifications have
no effect on net assets or net asset values per share.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard International Equity Index Fund
In our opinion, the accompanying statements 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
the European Portfolio and the Pacific Portfolio of Vanguard International
Equity Index Fund (the "Fund") at December 31, 1993, the results of each of
their operations, the changes in each of their 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 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
January 31, 1994
23
<PAGE> 26
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
24
<PAGE> 27
(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> 28
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
[THE VANGUARD GROUP 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.
Q720-12/93
<PAGE> 29
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 32 and one through 40.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index,
Standard & Poor's 500 Index and Standard & Poor's Value Index) of the
Index Trust for the fiscal years 1989 through 1993 appears at the upper-left
of page two.
Line charts illustrating cumulative performance between Europe and
Pacific (MSCI Europe Index, Average European Fund, and European Portfolio) for
the Fiscal Years 1990 through 1993 appear on page 3.
Pie charts illustrating the allocation of global markets for the Fiscal
Years 1988 and 1993 appear on page 4.
A bar graph illustrating the Annual Returns in global markets (United
States, Europe and Pacific) for the Fiscal Years 1984 through 1993 appear on
page 5.
