<PAGE> 1
VANGUARD
VARIABLE
INSURANCE FUND
ANNUAL REPORT 1994
[FIGURE 1 -- SEE EDGAR APPENDIX]
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a
balance is often achieved by a combination of Vanguard money market, bond, and
stock funds.
"Conservatism," too, remains our standard. Over the years, we have tried
to maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD VARIABLE INSURANCE FUND IS INTENDED AS AN INVESTMENT VEHICLE FOR
VARIABLE ANNUITY CONTRACTS CURRENTLY OFFERED BY THE SEPARATE ACCOUNT OF
NATIONAL HOME LIFE ASSURANCE COMPANY. THE FUND CONSISTS OF SEVEN PORTFOLIOS:
MONEY MARKET, HIGH-GRADE BOND, BALANCED, EQUITY INDEX, EQUITY INCOME, GROWTH,
AND INTERNATIONAL.
<PAGE> 3
CHAIRMAN'S LETTER
DEAR PLANHOLDER:
The 1994 fiscal year for Vanguard Variable Insurance Fund, ended September 30,
was a year of mixed results for financial markets. The dominant development
during the period was a sharp rise in interest rates. As would be expected, the
rate increase helped money market investors and battered bond investors;
however, the major stock market indexes were largely unchanged for the full
twelve months, as buoyant corporate profits provided substantial compensatory
relief.
INVESTMENT PERFORMANCE
In this environment, the Fund's Portfolios provided returns consistent with
those of the market sectors in which they invest. The following table sets
forth the total return (capital change plus income) of each Portfolio compared
to the measure that we think is most appropriate as a benchmark:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Fund Total Return
------------------
Fiscal Year Ended
September 30, 1994
- ---------------------------------------------------------------------
<S> <C>
MONEY MARKET PORTFOLIO +3.6%
AVERAGE MONEY MARKET FUND +3.1
- ---------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO -3.3%
LEHMAN AGGREGATE BOND INDEX -3.2
- ---------------------------------------------------------------------
BALANCED PORTFOLIO +2.7%
COMPOSITE INDEX* -0.3
- ---------------------------------------------------------------------
EQUITY INDEX PORTFOLIO +3.5%
EQUITY INCOME PORTFOLIO -1.6
GROWTH PORTFOLIO +5.9
STANDARD & POOR'S 500 STOCK INDEX +3.7
- ---------------------------------------------------------------------
INTERNATIONAL PORTFOLIO +3.1%**
MSCI EUROPE, AUSTRALIA, FAR EAST INDEX +2.7**
- ---------------------------------------------------------------------
</TABLE>
* 65% Standard & Poor's 500 Index , 35% Salomon High-Grade Bond Index.
** Since inception of the International Portfolio on June 3, 1994.
These total return calculations reflect the change in net asset value of each
Portfolio plus the reinvestment of dividend income and any capital gains
distributions. They are the best measures of the Fund's investment results.
However, holders of the Vanguard Variable Annuity Plan earn a somewhat lower
return, since the Plan deducts insurance and administrative expenses totaling
some 0.55% annually. The following table lists the net results for the Plan:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Plan Total Return
------------------
Fiscal Year Ended
Portfolio September 30, 1994
- ---------------------------------------------------------------------
<S> <C>
MONEY MARKET +3.1%
HIGH-GRADE BOND -3.8
BALANCED +2.1
EQUITY INDEX +3.0
EQUITY INCOME -2.2
GROWTH +5.3
INTERNATIONAL +2.9*
- ---------------------------------------------------------------------
</TABLE>
* Since inception on June 3, 1994.
THE FISCAL YEAR IN REVIEW
The declining interest rate environment that had persisted with striking
consistency since October 1987 came to an end in October 1993. The yield on the
long-term U.S. Treasury bond, which had fallen from 7.5% as 1993 began to a low
of 5.9% in mid-October, then began to rise sharply, moving to the 7.8% level by
September 30, 1994. The earlier rate decline had engendered a +22% increase in
the price of the long Treasury bond, the rate rise a commensurate -22%
[FIGURE 2 -- SEE EDGAR APPENDIX]
1
<PAGE> 4
[FIGURE 3 -- SEE EDGAR APPENDIX]
drop in price. Over the same periods, the yield on the 90-day U.S. Treasury
bill fell from 3.2% to 3.1%, then rose to 4.7% by the fiscal year's end.
(Because of the bill's short maturity, its price remained virtually flat during
the entire period.)
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, there is little evidence of it. The
U.S. Consumer Price Index has risen just 3.0% over the past twelve months,
although more sensitive indicators-- such as commodity prices and producer
prices--have been rising at a higher rate.
In an effort to quell inflationary fears, the Federal Reserve has acted to
"tighten" the money supply and slow economic growth and potential future
inflation. Five rate increases--in February, March, April, May, and again in
August--combined to raise the Federal funds rate (at which banks borrow from
one another) from 3.00% to 4.75%. Theory suggests that increases in short-term
rates should be regarded by market participants as a restraint on potential
inflation, and thus cause long-term rates to fall. However, this theory seldom
holds true in practice, and, at least so far in 1994, theory has again been
rebutted by practice.
In this rising rate environment, our MONEY MARKET PORTFOLIO benefited from
increasing yields. One year ago, our yield was 3.0%; by the end of the 1994
fiscal year our yield had risen to 4.8%. As illustrated in the table at the
outset, our Portfolio's return was once again fully competitive with the return
of the average money market fund (+3.6% versus +3.1%). I would note, too, that
we have avoided the risks that a number of money funds have taken by including
risky derivatives in their portfolios. In our view, these instruments have no
role in a money market fund.
Our HIGH-GRADE BOND PORTFOLIO, of course, suffered from the decline in
bond prices. However, the negative effects were somewhat muted by the
medium-term maturity of the bond index we track. Our Portfolio's total return
of -3.3% was virtually identical to the - 3.2% return (the difference of -0.1%
is less than our expenses) of the Lehman Aggregate Bond Index, which is our
measurement standard. However, our return was much better than the returns of
standards based on longer-term bonds. For example, the long-term U.S. Treasury
bond posted a return of -10.7%.
While the bond market was roiled by the increase in short rates, the major
stock market indexes rolled on. There were a few bumps along the way-- notably
a -9% interim drop in the Standard & Poor's 500 Index from new highs reached in
February--but by the fiscal year's end the Index had recovered. On balance, the
price of the Standard & Poor's 500 Index moved from 459 to 463; thus, its +3.7%
total return consisted mainly of dividend income. The saving grace for U.S.
stocks was undoubtedly the salutary news on the corporate profits front.
Earnings of the 500 companies in the Index are estimated to have risen at a
remarkable, if most likely unsustainable, rate of 30% over the past twelve
months.
There were, of course, substantial cross-currents in the U.S. stock
market. For instance, larger capitalization stocks fared much better than
smaller
2
<PAGE> 5
stocks. Some more aggressive stock funds suffered negative returns of -10% or
worse, as speculative stocks came under fire after a very strong run over the
previous three years. Our EQUITY INDEX PORTFOLIO not only did a fine job of
tracking its benchmark, but also provided a competitive return compared to the
average actively managed equity fund. The Portfolio's return of +3.5% reflected
the positive relative results of larger companies; by contrast, the average
equity fund emphasizes smaller companies and returned +1.8%.
One noteworthy development in fiscal 1994 was that large growth stocks
provided better results than income-oriented stocks. This phenomenon is
revealed by examining the results of the "Growth" and "Value" components of the
Standard & Poor's 500 Index; the Growth Index returned +6.9% versus +0.5% for
the Value Index. Particularly hard hit were utility stocks, which suffered as
interest rates rose and the profit outlook for utility companies came into
question. The results of our two actively managed equity portfolios reflect
these trends. The GROWTH PORTFOLIO provided a return of +5.9%; the EQUITY
INCOME PORTFOLIO, with substantial weightings in utility stocks, returned
- -1.6%. I might note that swings in the relative strength of value and growth
stocks come and go, and should probably be ignored by most long-term investors.
Our BALANCED PORTFOLIO held up well in spite of the fact that bonds
represent roughly 35% of the Portfolio's net assets. Thanks to some good stock
selections, the Portfolio's stock holdings offset the bond declines and the
total Portfolio posted a return of +2.7%, a nice margin over the -0.3% return
of the 65% stock/35% bond benchmark that we use as our measurement stick.
Aided by weakness in the U.S. dollar, most major overseas markets
outperformed the U.S. stock market over the past twelve months. Our new
INTERNATIONAL PORTFOLIO, launched on June 3, 1994, got off to a good start with
a return of +3.1% in its first four months of operations. The Portfolio
benefited primarily from good country selection among the major markets. The
Portfolio also held a modest portion of its assets (11%) in emerging markets,
which rallied during the summer following a steep decline earlier in the year.
VANGUARD VARIABLE ANNUITY PLAN UPDATE
The Vanguard Variable Annuity Plan continues to attract attention from the
press and investors as the most competitively priced variable annuity available
to the general public. In spite of only the most modest marketing program, our
assets continue to grow-- by another 37% in fiscal 1994. While growth in assets
is not an end in itself, it is very helpful in improving the economics of the
program for the benefit of our investors.
On balance, we have been able to reduce the expense ratios charged by our
Portfolios by approximately 0.16% from our first year of operations. In
addition, our insurance charges are scaled so that the mortality and expense
charges of the Plan should decline with overall asset growth. (The chart on the
facing page compares the year-by-year costs in the Vanguard Plan with the
average variable annuity.) We believe minimizing costs is so important because
costs directly reduce the returns earned by investors. The improving economics
have also permitted us to expand the array of investment choices from our
initial four Portfolios to seven today.
LOOKING AHEAD
The modest returns of the past year, coming after the recent years of relative
financial calm and asset price appreciation, should not surprise us. Indeed, in
my letter to you last year in the Annual Report, I noted that "with interest
rates at lows not seen since 1973, and stocks again at valuation levels that
are high by most historical standards, one cannot help but conclude that long-
term financial assets may be vulnerable to a correction."
As we look forward now, with our crystal ball as hazy as ever, we feel
that investors should continue to have realistic (i.e., modest) expectations
about returns for the remainder of the 1990s. With long-term bond yields at
nearly 8%, it may be that bonds once again offer fair value relative to
inflation, which still seems under good control. Common stocks, on the other
hand, have not suffered a major comeuppance since the fall of 1990 and have
escaped the rise in bond yields relatively intact. Unless corporate profits
continue to grow at impressive rates, it may be that stock prices will come
under some
3
<PAGE> 6
pressure or--starting from historically low dividend yields--offer only modest
returns in the years ahead.
For markets that are by nature uncertain, balance and diversification are the
keys. Once again, we encourage you to select a diversified and balanced
Portfolio that meets your long-term needs and then stick with it through the
inevitable "thick and thin" that securities markets entail.
Sincerely,
/S/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
October 21, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
VANGUARD VARIABLE INSURANCE FUND VANGUARD VARIABLE ANNUITY PLAN
- --------------------------------------------------------------------------------------------------------------------------
SEC SEC
30-Day 30-Day
Total Return Annualized Accumulated Total Return Annualized
Portfolio (Inception) Fiscal Year Yield Unit Value Fiscal Year Yield
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market (5/2/91) + 3.6% 4.79%* $ 1.12 + 3.1% 4.27%*
High-Grade Bond (4/29/91) - 3.3 7.39 12.24 - 3.8 6.86
Balanced (5/23/91) + 2.7 4.66 13.00 + 2.1 4.14
Equity Index (4/29/91) + 3.5 2.78 13.25 + 3.0 2.26
Equity Income (6/7/93) - 1.6 4.83 10.43 - 2.2 4.30
Growth (6/7/93) + 5.9 1.73 10.79 + 5.3 1.20
International (6/3/94) + 3.1** N/A 10.29 + 2.9** N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Yield for Money Market Portfolio is a 7-day yield.
** Since inception, June 3, 1994.
4
<PAGE> 7
REPORT FROM VANGUARD FIXED INCOME GROUP
MARKET OVERVIEW
During the fiscal year ended September 30, 1994, interest rates rose
substantially. In response to the inflation threat posed by the growing
economy, the Federal Reserve (the "Fed") increased short-term rates. In turn,
market forces pushed long-term rates higher by demanding a greater yield
premium over current inflation rates to compensate for the risk that increased
inflation would erode the value of future principal and interest payments.
For money market investments, the Fed's rate hikes have resulted in solid
positive real yields (after deducting inflation) on a pre-tax basis for the
first time since 1992. Unfortunately, rising rates reduce the value of bonds,
and bond investments over the past year have suffered losses, with longer
maturity holdings experiencing the greatest declines in value.
MONEY MARKET PORTFOLIO
Much of the rise in rates during the past 12 months was engineered by the Fed
to remove the stimulative effects of low interest rate policies that had helped
to end the most recent recession. A key determinant of the need for further
monetary restraint will be the degree to which wages, the dominant factor in
costs of production and consumption patterns, are bid up as the economy's
limited remaining spare capacity is put to use.
Earlier this year, we reduced the average weighted maturity of the Money
Market Portfolio--in anticipation of higher short-term interest rates--from 60
days to approximately 40 days. This change causes the Portfolio to turn over
its assets more quickly, making its yield more responsive to changes in market
interest rates. The shorter average maturity also makes the market value of the
Portfolio's investments less sensitive to the negative effects of rising
interest rates.
In recent months, the financial press has documented several instances of
money market funds that have required capital infusions (and at least one that
was liquidated at a loss to shareholders) to make up for losses incurred on
risky, exotic derivative securities. The market risks of these investments were
well outside the parameters established by the U.S. Securities and Exchange
Commission for money market funds. We do not invest in such exotica. Indeed, at
Vanguard our investment policies are even more stringent than SEC rules
because, in our judgment, the incremental return gained by going to the legal
limits is not worth the added risk. By virtue of our low expenses, we can
manage the Money Market Portfolio within the spirit and the letter of the law
and still provide highly competitive returns.
HIGH-GRADE BOND PORTFOLIO
The performance of the various sectors of the Lehman Aggregate Bond Index for
the six-month and twelve-month periods ended September 30, 1994, is shown in
the table below. These results reflect an environment in which the yields on
long-term bonds have risen, pushing bond prices lower.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Total Return
------------------------------
Periods Ended
September 30, 1994
- -----------------------------------------------------------------------------------
Six Months Twelve Months
- -----------------------------------------------------------------------------------
<S> <C> <C>
LEHMAN AGGREGATE BOND INDEX -0.43% -3.22%
- -----------------------------------------------------------------------------------
GOVERNMENT SECTOR -0.72% -4.04%
CORPORATE SECTOR -0.85 -4.49
MORTGAGE-BACKED SECURITIES SECTOR +0.30 -1.14
- -----------------------------------------------------------------------------------
</TABLE>
The High-Grade Bond Portfolio is designed to closely replicate the performance
of the Lehman Aggregate Bond Index. For the fiscal year ended September 30,
1994, the Portfolio's return was -3.3%, virtually the same as that of the
Index. Adjusted for expenses and transaction costs (neither of which affect the
theoretical Index), the difference was +0.2%.
As of September 30, 1994, the High-Grade Bond Portfolio was composed of
32% government bonds, 30% corporate bonds, 35% mortgage-backed securities, and
3% foreign securities (dollar denominated).
Respectfully,
John W. Hollyer Kenneth E. Volpert
Assistant Vice President Vice President
Money Market Portfolio High-Grade Bond Portfolio
Vanguard Fixed Income Group October 17, 1994
5
<PAGE> 8
REPORT FROM WELLINGTON MANAGEMENT COMPANY
The Balanced Portfolio allocates approximately two-thirds of its assets to
equity investments and the remainder to long-term, investment-grade
fixed-income securities. Since the first half of the Portfolio's 1994 fiscal
year, the equity weighting has been raised from 62% of assets to 66%, which is
at approximately the middle of our policy range of 60% to 70%. During the 1994
fiscal year, the Portfolio earned a total return of +2.7%.
Within the Portfolio's equity component, we continue to follow a strategy
that emphasizes four major sectors of the marketplace. In our view, business
conditions remain quite favorable today; we expect solid economic growth in
both the U.S. and abroad, with well-behaved inflation and interest rates.
The basic industry sector is currently our primary area of emphasis. In
our view, earnings of basic materials and manufacturing companies have only
begun their cyclical expansion and have a long way to go in the next two years.
While expectations have undoubtedly risen with stock prices, the full extent of
the earnings gains that lie ahead remain significantly underappreciated.
A second area of concentration, representing 19% of equities, is the
finance sector, which is comprised largely of banks. The surge from crisis lows
in late-1990 is now behind bank stocks, and the new phase is requiring much
greater selectivity. We have eliminated some banks, at substantial profits, and
have kept the focus on those which likely have strong earnings gains ahead or
which are clear players in the continuing consolidation of the industry.
Energy stocks, at 14% of equities, are a third area of focus. Oil and gas
prices have been disappointing so far, and if it were not for a sizable holding
in foreign companies, performance in the energy sector would have been humdrum.
Because we still believe energy prices will head higher, we will be looking for
opportunities to increase the Fund's stake in companies with large and growing
oil and gas production volumes.
Finally, the health care sector now comprises approximately 13% of the
Portfolio's equities. Our early view that investors in health care stocks would
breathe easier once the Administration's health plan began to decompose has
come to pass. Prices of the Fund's health care holdings have risen materially
but, in our view, have further to go as their earnings begin to reflect the
introduction of important new products.
The Portfolio's bond component remains focused on long-term securities
with high quality ratings. Typically, at least 80% of the bond portion of the
Portfolio is invested in securities rated "A" or better. The average current
maturity of the Portfolio's bond component was raised modestly over the past
six months, as gains derived from our earlier, more defensive, portfolio
posture have been realized.
This table provides a summary of the Portfolio's holdings on September 30,
1994.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Percent of Total
Asset Type Net Assets
- ---------------------------------------------------------------------
<S> <C>
EQUITIES
BASIC INDUSTRY 26%
FINANCE 12
ENERGY 9
HEALTH CARE 8
CONSUMER 8
UTILITIES 3
- ---------------------------------------------------------------------
TOTAL EQUITIES 66%
- ---------------------------------------------------------------------
FIXED-INCOME SECURITIES 33%
CASH 1
- ---------------------------------------------------------------------
TOTAL PORTFOLIO 100%
- ---------------------------------------------------------------------
</TABLE>
We believe that the Balanced Portfolio is well-positioned to take advantage of
an improving economic climate, as growth in the major industrialized nations of
the world will be on a synchronized upswing for the first time in many years,
and we expect bond values to hold as inflation remains within moderate bounds.
Respectfully,
Vincent Bajakian, Senior Vice President
Portfolio Manager
Wellington Management Company
October 17, 1994
6
<PAGE> 9
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
The U.S. stock market, as measured by the Standard & Poor's 500 Index, posted a
modest +3.7% total return during the fiscal year ended September 30, 1994.
Although this result does not measure up to the unusually high returns the
market has provided over the last 10 years, given the economic environment and
fundamental valuations of the market, the return from stocks was quite
remarkable, exceeding the returns of most other financial assets.
At the beginning of the 1994 fiscal year, the Standard & Poor's 500 Index
was expensively priced by most valuation measures. The price-to-earnings ratio
was 22.4 times and the dividend yield was 2.7%, both of which represent
historical extremes. These high levels of valuation were rationalized by a
stimulative Federal Reserve policy that had reduced long-term interest rates by
two percentage points over the previous two years, creating a growing economy
and the prospect of increasing corporate earnings. While the economy continued
to strengthen into the fourth calendar quarter of 1993, long-term bond yields
bottomed at 5.9%, as fears of inflation began to rise. The stock market ignored
the subsequent one-half percentage point increase in long-term rates and
advanced +2.3% during the fourth quarter.
Long-term rates continued to rise during the first calendar quarter in
1994 in response to heightened concerns over inflation. On February 4, the
Federal Reserve moved to raise the Fed Funds rate (the rate at which banks loan
reserves to each other) by 0.25%. The bond and stock markets immediately
reacted to the tightening, as long-term rates rose to 7.1% by the end of the
quarter and the stock market declined -3.8% for the quarter on a total return
basis.
The Federal Reserve continued to tighten as the strength of the economy
persisted. To head off potential inflation, the Fed pushed the Fed Funds rate
higher on five separate occasions, from a level of 3.00% on February 3 to 4.75%
by the end of the fiscal year. Separately, the dollar continued to decline
against the Japanese yen and the German deutsche mark, as the U.S. trade
deficit widened and trade negotiations with Japan became stalemated. This
produced a very bad environment for bonds in the second and third calendar
quarters, as long-term yields rose to almost 8%.
The stock market, however, was able to "decouple" from the bond market and
advanced--largely on the strength of a very large increase in corporate
earnings. This annual earnings increase of some 30% helped to relieve some of
the overvaluation of the market that existed at the beginning of the fiscal
year. The price-to-earnings ratio of the Standard & Poor's 500 Index declined
to 17.3 times, although the yield remained relatively low at 2.8%.
As mentioned in last year's letter, the Portfolio has sufficient critical
mass to effectively track the performance of the S&P 500 Index. The +3.53%
total return of the Portfolio lagged the +3.68% total return of the Index by
0.15%, which was less than the 0.24% expense ratio of the Portfolio. Based on
the Portfolio's total net assets of $186 million, the future returns of the
Portfolio should provide similar relative performance.
Respectfully,
George U. Sauter, Vice President
Vanguard Core Management Group
October 19, 1994
7
<PAGE> 10
REPORT FROM NEWELL ASSOCIATES
The Equity Income Portfolio moderately outperformed the average equity income
fund during the past six months; over the past twelve months, the Portfolio
underperformed the Index and the average equity income fund.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Total Return
------------------------------
Periods Ending
September 30, 1994
Six months Twelve months
- -------------------------------------------------------------------------------------
<S> <C> <C>
Equity Income Portfolio +6.5% -1.6%
- -------------------------------------------------------------------------------------
S&P 500 Index +5.3% +3.7%
- -------------------------------------------------------------------------------------
Average Equity Income Fund +3.9% +1.3%
- -------------------------------------------------------------------------------------
</TABLE>
SOME OLD FAVORITES STAGE A COMEBACK
A large part of the outperformance of the Equity Income Portfolio during the
past six months came from two old Wall Street favorite groups--drug stocks and
tobacco stocks--as they began to recover from health care reform and
competitive pricing scares. Chemicals also made a strong contribution,
continuing to revive from the effects of the recent recession.
DARK CLOUDS OF RISING INTEREST RATES AND DEREGULATION . . .
Twelve-month performance is a very different picture from that of the most
recent six months. Long-term bond rates have been rising this year, causing
interest-rate-sensitive stocks to decline. The Portfolio is more heavily
weighted in interest-rate-sensitive stocks than the S&P 500 Index or the
average equity income fund. The telephone and electric utility groups were also
hurt by threats of increased competition resulting from deregulation at both
the state and federal levels.
. . . BUT WITH A SILVER LINING
We think that the stock price reaction in the electric utilities and in many of
the telephone stocks has been overdone, and that at current price levels the
clouds over these stocks have a silver lining. Over the past twenty years, the
telephones and electrics have acquitted themselves well versus the S&P 500
Index, and at lower volatility and risk levels. Most of their success has been
due to the large dividends they pay. Currently, the electrics have an average
yield roughly three times that of the S&P 500 Index, and the telephones about
double. These large dividends compound rapidly, like interest payments on
fixed-income investments, but with an added virtue--they grow over time.
In the coming competitive environment, dividends (and also the stocks
paying them) are likely to grow in the range of 2% to 4% per year, which,
combined with current yields between 5% and 8%, would roughly equal the
long-term rate of return on the S&P 500 Index. And this is without benefit from
the rebound potential that depressed stocks typically have.
PORTFOLIO MANAGEMENT ACTIVITY
There are many electric utility companies that appear well situated to succeed
in the coming competitive environment. As a result of the recent sell-off, some
of them have become attractive for purchase for the first time in many months,
or even years. During the past six months, we have been making selective
purchases among these companies.
The drug stocks, long the darlings of Wall Street, experienced a major
decline starting in 1992, which was triggered essentially by competitive
pricing pressures. Some of the companies in this group experienced price
declines as large as those of the electric utilities. In a few cases, drug
stocks briefly reached yield levels similar to the electrics. We used this
opportunity to continue to increase the Portfolio's position in the drugs from
8% at the beginning of the year to over 12% at the close.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
October 17, 1994
8
<PAGE> 11
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
Your Growth Portfolio, and the stock market in general, generated strong
returns during the six months ended September 30, 1994. This growth came about
despite interest rates on bonds rising another 0.8%, normally a constraining
factor. Well, we are happy to accept positive returns even if we aren't always
sure of the source of investor motivation.
Returns for the 1994 fiscal year were about the same as the latest six
months; you may recall that the first half of the fiscal year had been notably
dull, essentially break-even. For the full year, longer-term interest rates, as
measured by the ten-year U.S. Treasury bond, rose over 2%, a historically
dramatic move.
The character of your seasoned growth company portfolio was consistent
over this period. Among the largest ten commitments listed below, there were
only two changes made during the past six months: Procter & Gamble and General
Motors 'E' (Electronic Data Systems) joined this select company; they had been
#11 and #12, respectively, on March 31. Our holdings in McDonald's and PepsiCo
were trimmed back, and they now rank #11 and #14, respectively. The top ten
holdings aggregate 40% of the portfolio compared with 42% six months ago and
40% a year ago.
The following table provides an overview of our ten largest holdings:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Company Business
- -----------------------------------------------------------------------------------
<C> <S> <C>
1. COCA-COLA #1 SOFT DRINK COMPANY
2. GENERAL ELECTRIC DIVERSIFIED MANUFACTURER
(#1 IN MOST SEGMENTS)
3. AUTOMATIC DATA #1 PAYROLL SERVICES
4. FANNIE MAE #1 MORTGAGE FINANCING COMPANY
5. WAL-MART STORES #1 RETAILER
6. PROCTER & GAMBLE #1 HOUSEHOLD PRODUCTS COMPANY
7. AMERICAN INT'L GROUP #1 U.S. OVERSEAS INSURER
8. GILLETTE #1 MANUFACTURER OF RAZORS
AND BLADES
9. FREDDIE MAC MORTGAGE INSURANCE AND
FINANCING AGENCY
10. GENERAL MOTORS 'E' A LEADING COMPUTER SERVICE COMPANY
- -----------------------------------------------------------------------------------
</TABLE>
This classy group of growth companies, indeed the entire portfolio, is
valued in the stock market at a slight discount to the 15 times estimated
earnings (18 months out) at which the overall market is selling. Given the
quality of the issues held and their almost undoubtedly superior long-term
earnings prospects, the portfolio seems to us to be attractively valued.
Long-term investors should find it to be a useful choice within their variable
annuity portfolio.
Sincerely,
Dave Fowler and Parker Hall, Co-Managers
Lincoln Capital Management Company
October 10, 1994
9
<PAGE> 12
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
The International Portfolio was launched on June 3, 1994, and rose by +3.1%
during the period ended September 30, 1994. This return compares to a +2.7%
rise over the same period in the MSCI-EAFE Index.
The background against which we have made these first investments for the
Portfolio is one which we believe is a period of consolidation. Falling
interest rates drove share prices upwards in most international markets in
1993. In contrast, during 1994 markets have been unsettled by signs that
interest rates may already have bottomed in many countries, as economic
recovery becomes evident. This development, in and of itself, is not bearish,
because recovery brings with it corporate profit increases, the foundation upon
which our long-term strategy is built. However, until it is evident that these
increases will not be accompanied by materially higher inflation, stock prices
will tend to reflect nervousness.
We do not believe that inflation outside the United States will pick up
sufficiently to upset international stock prices. What is more, the many
countries in which the Portfolio is invested have economies that are at
different stages in their economic cycles. For both of these reasons, we trust
that in time and with hindsight, the current period of uncertainty will prove
to have been a good time to start a new investment program.
Japan's economy is certainly showing signs of a modest but broad recovery:
consumers have seen their disposable income boosted by tax cuts in the past two
months and car sales have risen sharply; exports are strengthening; and even
machinery orders are picking up, which is a sign that industry is becoming
confident enough to start investing again. Over the past two years, the
Japanese market has risen by 49% in U.S. dollar terms. We have 26% of the
portfolio invested there because we believe it has further to go, and we shall
continue selectively to add to your holdings.
Another 14% of the portfolio is invested in the smaller Asian countries,
whose fast economic growth has been one of the most dramatic features of the
world economy during the past ten years. These countries have been
beneficiaries of the remorseless rise in the foreign value of the Japanese
currency, as Japanese companies have increasingly shifted manufacturing to
neighboring countries with lower labor costs. Inflationary pressures are an
ever-present risk in such countries but the underlying growth in corporate
profits is, in our opinion, sufficient to outweigh such risks over the medium
and long term.
Forty-six percent of the Portfolio is invested in Europe, with the largest
portion, 16%, in the United Kingdom. The UK stock market has been a notable
laggard over the past two years, up just 17% in dollar terms, and we have built
up substantial holdings in anticipation of higher stock prices. UK industry,
like U.S. industry, has benefited recently from a weak currency, which has
boosted exports and profit margins. Meantime, consumers are reticent about
spending, which is holding back inflationary fears.
With UK stocks cheaper than many of their European counterparts, we
continue to be highly selective in the rest of Europe, emphasizing a small
number of companies whose prospects look particularly strong. Two such
companies are ING, a Dutch banking and insurance company, and Heineken, the
internationally renowned brewer. Exceeding in size both of these investments is
our exposure to Telecom Italia, which is one of the cheapest telephone
companies in the world.
The investment outlook is riskier than it has been in recent years but the
probability is high that the uptrend in most international stock markets is
still intact. I look forward to reporting to you again during the coming year.
Respectfully,
Richard R. Foulkes
Schroder Capital Management International
October 17, 1994
10
<PAGE> 13
CUMULATIVE PERFORMANCE
MONEY MARKET PORTFOLIO MAY 31, 1991, TO SEPTEMBER 30, 1994
Average Annual Total Returns--Periods Ended September 30, 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 Year Since Inception*
- -----------------------------------------------------------------
<S> <C> <C>
MONEY MARKET PORTFOLIO +3.63% +3.81%
AVERAGE MONEY MARKET FUND +3.13 +3.41
SALOMON 90-DAY T-BILL +3.70 +3.81
</TABLE>
[FIGURE 4 -- SEE EDGAR APPENDIX]
* Inception, May 2, 1991. Performance begins on May 31, 1991, to show
comparative data.
Note: Past performance is not predictive of future performance.
HIGH-GRADE BOND PORTFOLIO APRIL 30, 1991, TO SEPTEMBER 30, 1994
Average Annual Total Returns--Periods Ended September 30, 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 Year Since Inception*
- -----------------------------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND PORTFOLIO -3.31% +6.65%
AVERAGE FIXED INCOME FUND -2.56 +7.36
LEHMAN AGGREGATE BOND INDEX -3.22 +7.30
</TABLE>
[FIGURE 5 -- SEE EDGAR APPENDIX]
* Inception, April 29, 1991. Performance begins on April 30, 1991, to show
comparative data.
Note: Past performance is not predictive of future performance.
11
<PAGE> 14
CUMULATIVE PERFORMANCE (continued)
BALANCED PORTFOLIO MAY 31, 1991, TO SEPTEMBER 30, 1994
Average Annual Total Returns--Periods Ended September 30, 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 Year Since Inception*
- -----------------------------------------------------------------
<S> <C> <C>
BALANCED PORTFOLIO +2.67% +8.79%
AVERAGE BALANCED FUND -0.28 +7.91
COMPOSITE INDEX** -0.26 +8.41
</TABLE>
[FIGURE 6 -- SEE EDGAR APPENDIX]
* Inception, May 23, 1991. Performance begins on May 31, 1991, to show
comparative data.
** 65% S&P 500 Index, 35% Salomon High-Grade Bond Index.
Note: Past performance is not predictive of future performance.
EQUITY INDEX PORTFOLIO APRIL 30, 1991, TO SEPTEMBER 30, 1994
Average Annual Total Returns--Periods Ended September 30, 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 Year Since Inception*
- -----------------------------------------------------------------
<S> <C> <C>
EQUITY INDEX PORTFOLIO +3.53% +9.18%
AVERAGE GROWTH & INCOME FUND +2.90 +9.52
STANDARD & POOR'S 500 INDEX +3.68 +9.49
</TABLE>
[FIGURE 7 -- SEE EDGAR APPENDIX]
* Inception, April 29, 1991. Performance begins on April 30, 1991, to show
comparative data.
Note: Past performance is not predictive of future performance.
12
<PAGE> 15
EQUITY INCOME PORTFOLIO JUNE 30, 1993, TO SEPTEMBER 30, 1994
Average Annual Total Returns--Periods Ended September 30, 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 Year Since Inception*
- -----------------------------------------------------------------
<S> <C> <C>
EQUITY INCOME PORTFOLIO -1.64% +3.28%
AVERAGE EQUITY INCOME FUND +1.33 +4.54
STANDARD & POOR'S 500 INDEX +3.68 +5.04
</TABLE>
[FIGURE 8 -- SEE EDGAR APPENDIX]
* Inception, June 7, 1993. Performance begins on June 30, 1993, to show
comparative data.
Note: Past performance is not predictive of future performance.
GROWTH PORTFOLIO JUNE 30, 1993, TO SEPTEMBER 30, 1994
Average Annual Total Returns--Periods Ended September 30, 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 Year Since Inception*
- -----------------------------------------------------------------
<S> <C> <C>
GROWTH PORTFOLIO +5.87% +5.49%
AVERAGE GROWTH FUND +1.42 +5.09
STANDARD & POOR'S 500 INDEX +3.68 +5.04
</TABLE>
[FIGURE 9 -- SEE EDGAR APPENDIX]
* Inception June 7, 1993. Performance begins on June 30, 1993, to show
comparative data.
Note: Past performance is not predictive of future performance.
13
<PAGE> 16
FINANCIAL STATEMENTS
September 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (3.8%)
- -------------------------------------------------------------------------------------------
Federal National Mortgage Assn.
3.658%-4.86%,
11/1/94-11/30/94
(Cost $6,453) $ 6,500 $ 6,453
- -------------------------------------------------------------------------------------------
COMMERCIAL PAPER (74.4%)
- -------------------------------------------------------------------------------------------
BANK HOLDING COMPANY (8.0%)
Bankers Trust New York Corp.
4.826%, 10/3/94 1,750 1,750
CoreStates Capital Corp.
4.667%-4.899%,
10/11/94-11/18/94 3,000 2,986
J.P. Morgan & Co., Inc.
4.536%-4.772%,
10/5/94-10/12/94 4,000 3,996
NationsBank Corp.
4.678%, 10/12/94 2,000 1,997
Norwest Corp.
4.571%, 10/31/94 2,000 1,992
PNC Funding Corp.
4.645%, 11/8/94 1,000 995
----------
GROUP TOTAL 13,716
----------
- -------------------------------------------------------------------------------------------
FINANCE--AUTO (2.3%)
Ford Credit Receivables Funding
4.322%, 10/21/94 3,000 2,992
Toyota Motor Credit
4.621%, 10/27/94 1,000 996
----------
GROUP TOTAL 3,988
----------
- -------------------------------------------------------------------------------------------
FINANCE--SECURITIES DEALERS (2.9%)
Goldman Sachs & Co.
4.839%, 11/8/94 3,000 2,985
Merrill Lynch & Co.
4.271%, 10/20/94 2,000 1,995
GROUP TOTAL 4,980
FINANCE--OTHER (19.1%)
American Express Credit Corp.
2.39%-4.779%, 10/7/94-10/13/94 3,000 2,996
Asset Securitization Cooperative Corp.
4.586%-4.803%, 10/4/94-10/18/94 3,000 2,998
Associates Corp.
4.838%, 10/21/94 1,000 997
Banc One Diversified Services Corp.
4.535%-4.681%, 10/5/94-10/6/94 4,900 4,897
Barclays U.S. Funding Corp.
4.582%, 10/26/94 1,000 997
CIT Group Holdings Inc.
4.809%-4.84%, 10/11/94-11/7/94 2,300 2,293
Ciesco L.P.
4.859%, 10/11/94 1,000 999
Corporate Asset Funding Corp.
4.554%-4.68%, 10/3/94-10/14/94 3,700 3,697
Eiger Capital Corp.
4.79%, 10/11/94 2,000 1,997
General Electric Capital Corp.
4.835%-5.255%, 10/11/94-2/13/95 4,500 4,443
MCA Funding Corp.
4.81%, 10/24/94 1,000 997
Motorola Credit Corp.
3.18%, 10/14/94 2,000 1,996
Panasonic Finance Corp.
4.109%, 10/18/94 2,000 1,996
Pitney Bowes Credit Corp.
4.604%, 10/25/94 1,420 1,415
----------
GROUP TOTAL 32,718
----------
- -------------------------------------------------------------------------------------------
INDUSTRIAL (9.7%)
Abbott Laboratories
4.621%-4.857%, 10/28/94-11/14/94 3,500 3,483
Chevron Oil Finance
4.446%-4.618%, 10/25/94-11/7/94 4,800 4,781
Dun & Bradstreet Corp.
5.312%, 1/10/95 2,000 1,970
H.J. Heinz Co.
4.679%-4.805%, 10/17/94-11/14/94 4,000 3,984
Nestle Capital Corp.
4.548%, 10/25/94 2,330 2,323
----------
GROUP TOTAL 16,541
----------
- -------------------------------------------------------------------------------------------
INSURANCE (10.7%)
AIG Funding Inc.
5.177%, 2/28/95 2,000 1,958
MetLife Funding Corp.
4.177%-4.692%, 10/19/94-11/17/94 6,000 5,974
Prudential Funding
4.808%, 10/17/94 3,000 2,994
Safeco Credit Corp.
4.703%-4.807%, 10/4/94-10/14/94 3,000 2,997
USAA Capital Corp.
4.621%-4.808%, 10/17/94-10/27/94 4,300 4,288
----------
GROUP TOTAL 18,211
----------
- -------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITY (6.8%)
Ameritech Corp.
4.557%, 10/5/94 $ 3,000 $ 2,998
AT&T Corp.
4.876%, 11/23/94 2,700 2,681
BellSouth
4.69%, 11/2/94 2,000 1,991
Citizens Utilities
4.95%, 12/27/94 2,000 1,977
US West Communications Inc.
4.788%, 10/24/94 2,000 1,994
----------
GROUP TOTAL 11,641
----------
- -------------------------------------------------------------------------------------------
OTHER (2.1%)
Harvard Univ. 4.316%, 10/21/94 2,000 1,995
Stanford Univ. Board of Trustees
4.537%, 10/27/94 1,654 1,648
----------
GROUP TOTAL 3,643
----------
- -------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT (5.0%)
Province of British Columbia
4.886%, 11/15/94 1,615 1,605
Canada Bills 4.865%, 11/15/94 3,000 2,982
Canadian Wheat Board
4.935%-5.247%, 11/22/94-2/28/95 3,000 2,964
New South Wales Treasury Corp.
4.659%, 10/4/94 1,000 1,000
----------
GROUP TOTAL 8,551
----------
- -------------------------------------------------------------------------------------------
FOREIGN--OTHER (7.8%)
British Telecommunications Inc.
4.875%, 11/30/94 825 818
Caisse des Depots et Consignations
4.253%-4.572%, 10/20/94-10/26/94 3,000 2,992
Canadian Imperial Holdings
4.638%, 10/31/94 2,000 1,992
KFW International Finance
3.167%-4.827%, 10/14/94-10/28/94 5,500 5,484
Ontario Hydro 4.643%, 10/17/94 2,000 1,996
----------
GROUP TOTAL 13,282
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost $127,271) 127,271
- -------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (12.3%)
YANKEE CERTIFICATES OF DEPOSIT--
U.S. BRANCHES (11.1%)
Bank of Nova Scotia 4.76%, 10/6/94 2,000 2,000
Bayerische Hypo Bank
4.82%-4.875%, 10/4/94-11/18/94 2,000 2,000
Commerzbank 4.90%, 10/28/94 2,000 2,000
Credit Suisse 5.21%, 3/3/95 2,000 1,999
Deutsche Bank 4.81%, 11/30/94 1,000 1,000
Rabobank Nederlanden
5.18%-5.19%, 1/27/95-3/7/95 3,000 2,998
Societe Generale 4.75%, 12/5/94 2,000 1,999
Union Bank of Switzerland 4.73%, 10/4/94 3,000 3,000
Westdeutsche Landesbank
5.06%-5.15%, 1/12/95-1/17/95 2,000 2,000
----------
GROUP TOTAL 18,996
----------
- -------------------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
CANADIAN BRANCHES (1.2%)
Barclays Bank 4.708%, 11/16/94 2,000 1,988
----------
- -------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $20,984) 20,984
- -------------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (5.8%)
- -------------------------------------------------------------------------------------------
National Westminster Bank
5.09%-5.29%, 1/13/95-3/15/95 5,000 5,000
Toronto Dominion Bank 4.80%, 11/9/94 5,000 4,999
- -------------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT (Cost $9,999) 9,999
- -------------------------------------------------------------------------------------------
BANKERS ACCEPTANCE (.9%)
- -------------------------------------------------------------------------------------------
Wachovia Bank of Georgia
4.807%, 10/17/94 (Cost $1,597) 1,600 1,597
- -------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
BANK NOTES (2.3%)
- -------------------------------------------------------------------------------------------
National Bank of Detroit
5.07%, 1/19/95 $ 2,000 $ 1,999
State Street Bank & Trust
4.82%, 10/20/94 2,000 2,000
- -------------------------------------------------------------------------------------------
TOTAL BANK NOTES
(Cost $3,999) 3,999
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $170,303) 170,303
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- -------------------------------------------------------------------------------------------
Other Assets--Note C 1,287
Liabilities (424)
----------
863
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 171,167,178 outstanding shares
of beneficial interest (unlimited
authorization--no par value) 171,166
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE 1.00
===========================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 171,167 $ 1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (1) --
Unrealized Appreciation of Investments -- --
- -------------------------------------------------------------------------------------------
NET ASSETS 171,166 1.00
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
HIGH-GRADE BOND PORTFOLIO (000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (31.2%)
- -------------------------------------------------------------------------------------------
U.S. Treasury Bonds
7.875%, 2/15/21 $ 2,065 $ 2,035
8.125%, 8/15/19 1,415 1,430
8.50%, 2/15/20 1,870 1,966
8.875%, 8/15/17-2/15/19 2,495 2,716
10.375%, 11/15/12 250 300
10.75%, 8/15/05 400 489
11.625%, 11/15/02 1,000 1,245
14.00%, 11/15/11 1,565 2,317
U.S. Treasury Notes 5.75%, 8/15/03 645 569
6.25%, 2/15/03 145 133
6.375%, 1/15/00-8/15/02 275 262
6.75%, 5/31/99 400 392
6.875%, 7/31/99 325 320
7.00%, 4/15/99 2,635 2,611
7.25%,11/15/96-5/15/04 295 293
7.50%, 1/31/96 375 381
7.75%, 2/15/01 400 407
7.875%, 2/15/96-8/15/01 3,310 3,389
8.00%, 8/15/99-5/15/01 440 454
8.25%, 7/15/98 210 218
8.50%, 7/15/97 225 234
8.625%, 8/15/97 700 731
8.75%, 8/15/00 525 560
8.875%, 11/15/98-2/15/99 1,350 1,433
9.25%, 1/15/96 200 207
- -------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $26,775) 25,092
- -------------------------------------------------------------------------------------------
FEDERAL AGENCY OBLIGATIONS (3.3%)
- -------------------------------------------------------------------------------------------
Federal National Mortgage Assn.
4.95%, 9/30/98 700 639
5.30%, 3/11/98 525 491
5.35%, 8/12/98 700 649
7.00%, 8/12/02 900 858
- -------------------------------------------------------------------------------------------
TOTAL FEDERAL AGENCY OBLIGATIONS
(Cost $2,675) 2,637
- -------------------------------------------------------------------------------------------
MORTGAGE PASS-THROUGH SECURITIES (31.7%)
- -------------------------------------------------------------------------------------------
U.S. GOVERNMENT (30.9%)
Federal Home Loan Mortgage Corp.
5.50%, 12/1/98-11/1/08 188 174
6.00%, 7/1/98-1/1/24 931 853
6.50%, 4/1/98-5/1/24 1,857 1,711
7.00%, 1/1/98-6/1/24 1,898 1,787
7.50%, 4/1/98-4/1/24 1,288 1,247
8.00%, 6/1/96-6/1/23 1,008 995
8.50%, 3/1/96-8/1/23 470 472
9.00%, 11/1/05-6/1/22 832 855
9.50%, 12/1/05 80 83
10.00%, 3/1/17-11/1/19 208 220
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Federal National Mortgage Assn.
5.50%, 3/1/01 $ 97 $ 91
6.00%, 8/1/00-1/1/09 464 426
6.50%, 3/1/00-7/1/24 1,871 1,708
7.00%, 5/1/00-5/1/24 2,268 2,128
7.50%, 4/1/99-5/1/24 1,534 1,475
8.00%, 2/1/00-7/1/23 1,212 1,195
8.50%, 11/1/06-3/1/23 628 631
9.00%, 3/1/20-7/1/22 409 419
9.50%, 6/1/01-9/1/19 353 369
10.00%, 8/1/20-8/1/21 268 286
10.50%, 8/1/20 75 81
Government National Mortgage Assn.
6.00%, 3/15/09-1/15/24 200 175
6.50%, 10/15/08-5/15/24 739 658
7.00%, 11/15/08-3/15/24 1,475 1,346
7.50%, 5/15/08-1/15/24 1,337 1,265
8.00%, 3/15/08-5/15/23 1,147 1,124
8.50%, 12/15/16-2/15/22 611 611
9.00%, 4/15/16-8/15/21 1,458 1,495
9.50%, 4/15/17-3/15/20 479 502
10.00%, 5/15/20-8/15/20 230 245
10.50%, 5/15/19 59 64
11.00%, 10/15/15 56 61
11.50%, 2/15/13 110 122
----------
GROUP TOTAL 24,874
----------
- -------------------------------------------------------------------------------------------
PRIVATE (.8%)
Resolution Trust Corp.
7.75%-10.40%, 12/25/18-8/25/21 652 658
- -------------------------------------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH SECURITIES
(Cost $27,019) 25,532
- -------------------------------------------------------------------------------------------
CORPORATE BONDS (29.8%)
- -------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (5.1%)
Chase Manhattan Credit Card Trust
7.40%, 5/15/00 300 301
8.75%, 8/15/99 300 308
First Chicago Master Trust
6.25%, 8/15/97 450 437
8.40%, 6/15/98 450 459
MBNA Credit Card Trust
6.20%, 8/31/97 450 437
7.75%, 10/15/98 300 304
Sears Credit Card Account Trust
5.90%, 11/15/98 300 298
7.75%, 9/15/98 300 304
Standard Credit Card Trust
8.00%, 10/7/97 450 458
8.50%, 8/7/97 450 461
9.375%, 8/10/96 300 306
----------
GROUP TOTAL 4,073
----------
- -------------------------------------------------------------------------------------------
FINANCE (12.3%)
Associates Corp.
8.75%, 9/4/96 600 618
AVCO Financial Services
7.50%, 11/15/96 200 202
8.85%, 2/1/96 420 431
BankAmerica Corp.
10.00%, 2/1/03 200 220
Bankers Trust New York Corp.
8.25%, 7/2/96 400 408
Bear Stearns
6.625%, 1/15/04 200 175
CIT Group Holdings
5.65%, 11/15/95 450 446
8.60%, 12/1/94 300 301
Chase Manhattan Corp.
8.50%, 3/1/96 500 511
Chemical Banking Corp.
6.625%, 1/15/98 250 243
7.375%, 6/15/97 300 301
Commercial Credit Corp.
6.75%, 1/15/97 450 446
Countrywide Funding Corp.
7.31%, 8/28/00 600 575
Dean Witter Discover & Co.
6.00%, 3/1/98 510 487
Ford Motor Credit Corp.
7.875%, 1/15/97 450 456
8.25%, 7/15/96 300 307
Household Finance Corp.
9.25%, 2/15/95 450 455
International Lease Finance
7.90%, 10/1/96 600 609
Mellon Finance Corp.
6.125%, 11/15/95 400 399
7.625%, 11/15/99 200 198
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 400 399
Morgan Stanley Group Inc.
9.25%, 3/1/98 200 209
NationsBank Inc.
5.375%, 12/1/95 425 420
NCNB Corp.
9.50%, 6/1/04 150 161
Norwest Financial
7.10%, 11/15/96 450 451
Paine Webber Inc.
7.00%, 3/1/00 150 141
Transamerica Financial Corp.
8.375%, 2/15/98 325 333
----------
GROUP TOTAL 9,902
----------
- -------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL (7.5%)
American Brands Inc.
7.875%, 1/15/23 $ 100 $ 90
Anheuser-Busch Co., Inc.
7.375%, 7/1/23 75 65
8.625%, 12/1/16 150 148
Applied Materials
8.00%, 9/1/04 100 97
Archer-Daniels-Midland Co.
8.875%, 4/15/11 180 187
Auburn Hills
12.375%, 5/1/20 115 152
Boeing Co.
8.375%, 3/1/96 450 460
British Petroleum
7.875%, 5/15/02 200 199
CSX Corp.
8.25%, 11/1/96 350 358
8.40%, 8/1/96 150 153
8.625%, 5/15/22 50 50
Conrail Corp.
9.75%, 6/15/20 100 111
Deere & Co.
8.50%, 1/9/22 100 99
Ford Capital B.V.
9.00%, 6/1/96 225 232
Ford Motor Corp.
9.95%, 2/15/32 65 73
Grand Metropolitan Corp.
9.00%, 8/15/11 150 156
ITT Corp.
7.25%, 11/15/96 450 451
International Paper Co.
7.625%, 1/15/07 100 95
May Department Stores Co.
9.75%, 5/16/06 100 108
McDonald's Corp.
6.75%, 2/15/03 230 211
Mobil Corp.
7.625%, 2/23/33 200 178
PepsiCo Inc.
5.00%, 2/24/97 500 477
6.125%, 1/15/98 200 193
Philip Morris Co., Inc.
8.25%, 10/15/03 150 148
Texaco Capital Corp.
8.875%, 9/1/21 150 155
Union Carbide
7.875%, 4/1/23 125 110
Union Oil of California
9.125%, 2/15/06 115 121
9.25%, 2/1/03 80 85
Union Pacific
8.625%, 5/15/22 175 172
Waste Management, Inc.
7.875%, 8/15/96 275 279
Whirlpool Corp.
9.00%, 3/1/03 150 156
Xerox Corp.
9.625%, 10/15/00 400 412
----------
GROUP TOTAL 5,981
----------
- -------------------------------------------------------------------------------------------
UTILITY (4.9%)
Alabama Power Co.
8.75%, 12/1/21 129 125
Arizona Public Service
8.00%, 2/1/25 150 133
Carolina Power & Light
6.875%, 8/15/23 175 142
Enron Corp.
9.65%, 5/15/01 450 487
Georgia Power Co.
9.23%, 12/1/19 45 44
Houston Lighting & Power Co.
8.75%, 3/1/22 100 98
MCI Communications
7.50%, 8/20/04 250 238
Michigan Bell Telephone
7.50%, 2/15/23 175 155
New York Telephone
7.00%, 8/15/25 175 142
Pacific Bell Corp.
7.25%, 7/1/02 225 216
Southern Bell Telephone Co.
7.625%, 3/15/13 450 412
Southwestern Bell Corp.
7.625%, 10/1/13 125 113
7.625%, 3/1/23 300 270
Texas Utilities Corp.
7.125%, 6/1/97 600 596
7.875%, 3/1/23 110 98
U.S. West Financial Corp.
8.85%, 9/20/99 500 519
Virginia Electric Power
6.625%, 4/1/03 200 183
----------
GROUP TOTAL 3,971
----------
- -------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $25,243) 23,927
- -------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN BONDS (2.4%)
- -------------------------------------------------------------------------------------------
CANADA (1.4%)
Province of Alberta
9.25%, 4/1/00 $ 365 $ 390
Province of British Columbia
7.00%, 1/15/03 170 161
Province of Manitoba
9.25%, 4/1/20 120 125
9.50%, 10/1/00 130 139
Province of Ontario
7.375%, 1/27/03 110 105
7.75%, 6/4/02 200 197
----------
GROUP TOTAL 1,117
----------
- -------------------------------------------------------------------------------------------
WORLD BANKS (.7%)
European Investment Bank
8.875%, 3/1/01 225 237
InterAmerican Development Bank
8.50%, 3/15/11 130 135
International Bank for Reconstruction
and Development
12.375%, 10/15/02 175 221
----------
GROUP TOTAL 593
----------
- -------------------------------------------------------------------------------------------
OTHER (.3%)
New Zealand Government
9.875%, 1/15/11 175 196
- -------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $2,096) 1,906
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.6%)
- -------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 4.85%, 10/3/94 (Cost $446) 446 446
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(Cost $84,254) 79,540
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- -------------------------------------------------------------------------------------------
Other Assets--Note C 1,251
Liabilities (432)
----------
819
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 8,179,933 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $80,359
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.82
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 85,710 $ 10.48
Undistributed Net Investment
Income -- --
Accumulated Net Realized
Losses--Note D (637) (.08)
Unrealized Depreciation of
Investments--Note E (4,714) (.58)
- -------------------------------------------------------------------------------------------
NET ASSETS $ 80,359 $ 9.82
- -------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
BALANCED PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (63.7%)
- -------------------------------------------------------------------------------------------
APPLIED SCIENCE & RESEARCH (11.3%)
- -------------------------------------------------------------------------------------------
DEFENSE ELECTRONICS & AEROSPACE (1.7%)
Northrop Grumman Corp. 68,500 $ 3,100
United Technologies Corp. 11,800 739
MEDICAL PRODUCTS & SERVICES (8.2%)
Abbott Laboratories, Inc. 68,600 2,152
American Home Products Corp. 43,000 2,580
Baxter International, Inc. 100,100 2,815
Bristol-Myers Squibb Co. 38,200 2,192
Johnson & Johnson 59,000 3,046
Pfizer, Inc. 77,500 5,357
Zeneca Group ADR 18,399 704
OFFICE EQUIPMENT (1.4%)
Xerox Corp. 29,000 3,096
----------
GROUP TOTAL 25,781
----------
- -------------------------------------------------------------------------------------------
BASIC INDUSTRY (29.2%)
- -------------------------------------------------------------------------------------------
CHEMICALS (4.0%)
Cabot Corp. 23,600 643
Dow Chemical Co. 38,000 2,974
E.I. du Pont de Nemours & Co. 52,300 3,033
Eastman Chemical 6,025 328
PPG Industries, Inc. 42,200 1,672
Witco Chemical Corp. 23,000 661
ENERGY (9.1%)
Amerada Hess Corp. 39,000 1,814
Amoco Corp. 10,400 616
Ashland Oil, Inc. 15,400 545
Atlantic Richfield Co. 18,000 1,816
Chevron Corp. 20,600 857
Exxon Corp. 52,300 3,014
Kerr-McGee Corp. 21,200 1,031
Mobil Corp. 33,900 2,682
Norsk Hydro AS ADR 20,900 771
Pennzoil Co. 11,700 548
Phillips Petroleum Co. 32,800 1,123
Repsol SA ADR 42,400 1,299
Royal Dutch Petroleum Co. 13,700 1,471
Texaco, Inc. 27,000 1,620
USX-Marathon Group 23,200 412
Unocal Corp. 52,500 1,483
MANUFACTURING (5.4%)
General Electric Co. 94,600 4,553
Hanson PLC ADR 118,000 2,139
Honeywell, Inc. 76,800 2,650
Minnesota Mining &
Manufacturing Co. 31,400 1,735
Thomas & Betts Corp. 18,200 1,233
METAL (3.3%)
Aluminum Co. of America 32,500 2,754
British Steel PLC ADR 60,400 1,638
J & L Specialty Steel Inc. 40,000 760
Reynolds Metals Co. 22,700 1,285
USX-U.S. Steel Group 25,900 1,085
PAPER (3.9%)
Georgia-Pacific Corp. 26,200 2,004
International Paper Co. 26,500 2,080
Temple-Inland Inc. 37,000 2,044
Westvaco Corp. 39,300 1,498
Willamette Industries, Inc. 25,400 1,302
TRANSPORTATION & OTHER SERVICES (3.5%)
British Airways PLC 33,250 1,916
Canadian Pacific Ltd. 130,500 2,189
Norfolk Southern Corp. 16,400 1,021
Union Pacific Corp. 28,800 1,544
WMX Technologies Inc. 45,000 1,299
----------
GROUP TOTAL 67,142
----------
- -------------------------------------------------------------------------------------------
CONSUMER & SERVICES (8.0%)
- -------------------------------------------------------------------------------------------
CONSUMER PRODUCTS & SERVICES (4.6%)
Brunswick Corp. 66,000 1,328
The Dun & Bradstreet Corp. 18,000 1,035
Eastman Kodak Co. 21,100 1,092
Ford Motor Co. 42,000 1,166
General Motors Corp. 63,000 2,953
Kimberly-Clark Corp. 49,600 2,914
RETAIL (3.4%)
May Department Stores Co. 36,800 1,449
J.C. Penney Co., Inc. 39,000 2,013
Sears, Roebuck & Co. 32,600 1,565
SuperValu, Inc. 52,900 1,375
Woolworth Corp. 84,500 1,468
----------
GROUP TOTAL 18,358
----------
- -------------------------------------------------------------------------------------------
FINANCE (12.4%)
- -------------------------------------------------------------------------------------------
BANKS & FINANCE (9.8%)
Banc One Corp. 110,247 3,294
The Bank of New York Co., Inc. 121,400 3,596
Citicorp 70,000 2,975
CoreStates Financial Corp. 71,540 1,905
First Bank System, Inc. 87,000 3,176
First Union Corp. 26,955 1,166
Keycorp 53,136 1,621
Norwest Corp. 107,600 2,663
Wachovia Corp. 62,800 2,025
INSURANCE & SERVICES (2.6%)
Allstate Corp. 106,000 2,531
CIGNA Corp. 3,000 185
General Re Corp. 31,700 3,356
----------
GROUP TOTAL 28,493
----------
- -------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES (2.8%)
- -------------------------------------------------------------------------------------------
ELECTRIC (.4%)
Entergy Corp. 12,000 $ 279
PECO Energy Co. 26,100 662
TELEPHONE (2.4%)
AT&T Corp. 26,000 1,404
Bell Atlantic Corp. 11,000 583
NYNEX Corp. 18,600 716
Pacific Telesis Group 14,300 440
Southwestern Bell Corp. 30,200 1,284
U.S. West Corp. 25,100 973
----------
GROUP TOTAL 6,341
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $134,676) 146,115
- -------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (2.2%)
- -------------------------------------------------------------------------------------------
Alumax Inc. $4.00 6,334 868
Bethlehem Steel Corp. $3.50 10,000 575
Cyprus Amax $4.00 12,666 883
Ford Motor Co. $4.20 6,900 628
Norwest Corp. $3.50 12,500 870
Reynolds Metals $3.31 17,100 919
Sears Roebuck & Co. Inc.
PERCS $3.75 5,200 290
- -------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $4,064) 5,033
- -------------------------------------------------------------------------------------------
CORPORATE BONDS (19.9%)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
---------- ----------
<S> <C> <C>
ASSET-BACKED (.8%)
American Express Credit
5.375%, 7/15/01 $ 1,000 $ 881
Sears Roebuck & Co.
8.60%, 5/15/98 822 843
BANKS & FINANCE (5.7%)
Associates Corp.
5.25%, 9/1/98 1,000 920
BankAmerica Corp.
7.20%, 4/15/06 1,000 908
Chase Manhattan Corp.
7.75%, 11/1/99 1,000 988
Chemical Bank
8.625%, 5/1/02 1,000 1,021
Countrywide Funding MTN
5.14%, 3/29/96 1,000 978
Dean Witter Discover & Co.
5.00%, 4/1/96 1,000 975
6.75%, 10/15/13 1,000 813
Exxon Capital Corp.
6.00%, 7/1/05 1,000 857
Ford Motor Credit Co. MTN
6.15%, 12/15/95 1,000 997
General Motors Acceptance
Corp. MTN
7.50%, 5/25/00 1,000 973
8.50%, 1/1/03 1,000 1,010
International Lease Finance
5.75%, 1/15/96 1,000 989
Salomon Inc. MTN
6.55%, 12/26/95 1,000 998
Wells Fargo & Co.
6.125%, 11/1/03 1,000 860
DRUGS & PHARMACEUTICALS (.4%)
American Home Products
7.25%, 3/1/23 1,000 851
INDUSTRIAL (6.9%)
British Petroleum
7.875%, 5/15/02 1,000 995
Baxter International
9.25%, 9/15/96 1,000 1,037
Coca-Cola Enterprises
8.50%, 2/1/22 1,000 984
Georgia Pacific
9.625%, 3/15/22 1,000 1,018
Harsco Corp.
8.75%, 5/15/96 1,000 1,025
International Business Machines Corp.
6.375%, 11/1/97 1,000 974
International Paper Co.
6.125%, 11/1/03 1,000 866
Philips Electronics
7.75%, 4/15/04 1,000 955
Procter & Gamble
9.36%, 1/1/21 1,000 1,086
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,067
TRW Inc.
9.375%, 4/15/21 1,000 1,065
Temple Inland
9.00%, 5/1/01 1,000 1,042
United Parcel Service
8.375%, 4/1/20 2,000 1,996
WMX Technologies
6.375%, 12/1/03 1,000 889
Wal-Mart Stores, Inc.
7.25%, 6/1/13 1,000 891
RAILROAD (.4%)
Consolidated Rail Corp.
7.875%, 5/15/43 1,000 903
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE (1.4%)
BellSouth Telecommunications
7.50%, 6/15/33 $ 1,000 $ 868
Illinois Bell Telephone Co.
6.625%, 2/1/25 1,000 800
New York Telephone
7.25%, 2/15/24 1,000 832
US West Communications
6.875%, 9/15/33 1,000 799
UTILITIES (4.3%)
Baltimore Gas & Electric
5.50%, 4/15/04 1,000 831
Carolina Power & Light
6.75%, 10/1/02 1,000 924
Duke Power Co.
7.00%, 7/1/33 1,000 819
Hydro-Quebec
8.40%, 1/15/22 1,000 943
Korea Electric Power
6.375%, 12/1/03 1,000 849
Pacific Gas & Electric
6.25%, 8/1/03 1,000 874
Southern California Gas
5.75%, 11/15/03 1,000 845
Texas Utilities Co.
7.875%, 4/1/24 1,000 885
Union Electric Co.
7.375%, 12/15/04 1,000 943
Virginia Electric & Power
8.00%, 3/1/04 1,000 990
Wisconsin Electric Power
7.70%, 12/15/27 1,000 899
- -------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $49,420) 45,756
- -------------------------------------------------------------------------------------------
FOREIGN BONDS (1.1%)
- -------------------------------------------------------------------------------------------
Italy Global Bond
6.875%, 9/27/23 1,000 791
Province of Ontario
7.375%, 1/27/03 1,000 953
Toronto Dominion Bank
6.45%, 1/15/09 1,000 834
- -------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $2,905) 2,578
- -------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (12.2%)
- -------------------------------------------------------------------------------------------
Federal Home Loan Bank
7.66%, 7/20/04 1,000 978
Government National Mortgage Assn.
6.50%, 6/15/23-4/15/24 5,030 4,408
9.50%, 12/15/19 208 218
U.S. Treasury Bonds
6.25%, 8/15/23 5,000 4,058
7.125%, 2/15/23 11,000 9,996
7.50%, 11/15/16 4,000 3,789
U.S. Treasury Note
6.25%, 2/15/03 5,000 4,594
- -------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $31,038) 28,041
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.8%)
- -------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 4.85%, 10/3/94
(Cost $1,911) 1,911 1,911
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $224,014) 229,434
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.1%)
- -------------------------------------------------------------------------------------------
Other Assets--Notes C and F 5,607
Liabilities--Note F (5,433)
----------
174
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 20,271,571 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $ 229,608
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.33
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994, NET ASSETS
CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 220,209 $ 10.86
Undistributed Net
Investment Income 2,468 .12
Accumulated Net
Realized Gains 1,511 .08
Unrealized Appreciation
of Investments--Note E 5,420 .27
- -------------------------------------------------------------------------------------------
NET ASSETS $ 229,608 $ 11.33
- -------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
EQUITY INDEX FUND Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.8%)(1)
- -------------------------------------------------------------------------------------------
AT&T Corp. 83,087 $ 4,487
General Electric Co. 90,712 4,365
Exxon Corp. 65,894 3,797
The Coca-Cola Co. 68,674 3,339
Royal Dutch Petroleum Co. 28,373 3,046
Wal-Mart Stores, Inc. 121,534 2,841
Philip Morris Cos., Inc. 46,352 2,833
Merck & Co., Inc. 66,925 2,376
Procter & Gamble Co. 36,086 2,152
International Business Machines Corp. 30,843 2,144
E.I. du Pont de Nemours & Co. 36,142 2,096
General Motors Corp. 39,801 1,866
Johnson & Johnson 34,134 1,762
* Microsoft Corp. 30,600 1,717
Mobil Corp. 21,104 1,670
Motorola, Inc. 29,956 1,580
Amoco Corp. 26,310 1,559
Bristol-Myers Squibb Co. 27,152 1,558
GTE Corp. 50,739 1,541
American International Group, Inc. 16,787 1,492
Ford Motor Co. 53,468 1,484
BellSouth Corp. 26,265 1,464
Chevron Corp. 34,414 1,432
PepsiCo, Inc. 42,176 1,397
Intel Corp. 22,100 1,359
Abbott Laboratories, Inc. 43,316 1,359
Southwestern Bell Corp. 31,700 1,347
Minnesota Mining & Manufacturing Co. 22,782 1,259
Bell Atlantic Corp. 23,086 1,224
Hewlett-Packard Co. 13,395 1,170
Ameritech Corp. 28,856 1,161
Dow Chemical Co. 14,640 1,146
Federal National Mortgage Assn. 14,447 1,138
Pfizer, Inc. 16,161 1,117
The Walt Disney Co. 28,340 1,102
Home Depot, Inc. 23,712 996
American Home Products Corp. 16,428 986
McDonald's Corp. 37,236 977
Unilever NV 8,420 955
U.S. West Corp. 24,030 931
Eastman Kodak Co. 17,449 903
Eli Lilly & Co. 15,487 896
Sears, Roebuck & Co. 18,487 887
Citicorp 20,465 870
BankAmerica Corp. 19,641 867
NYNEX Corp. 22,298 858
Atlantic Richfield Co. 8,423 850
Chrysler Corp. 18,650 837
Gillette Co. 11,636 823
Texaco, Inc. 13,717 823
Columbia/HCA Healthcare Corp. 18,900 822
American Express Co. 26,282 798
The Boeing Co. 17,987 776
MCI Communications Corp. 30,512 774
* Airtouch Communications 25,998 744
WMX Technologies Inc. 25,575 738
Schering-Plough Corp. 10,154 721
Anheuser-Busch Co., Inc. 14,164 721
Emerson Electric Co. 11,847 706
NationsBank, Inc. 14,406 706
Time Warner, Inc. 19,960 701
Schlumberger Ltd. 12,877 700
Kellogg Co. 12,082 693
Sprint Corp. 18,129 691
Pacific Telesis Group 22,298 686
* Telecommunications, Inc. Class A 30,385 672
Capital Cities/ABC, Inc. 8,140 667
* Oracle Systems Corp. 15,336 659
Banc One Corp. 21,628 646
J.C. Penney Co., Inc. 12,466 644
Southern Co. 33,964 633
J.P. Morgan & Co., Inc. 10,206 620
Xerox Corp. 5,585 596
The Seagram Co. Ltd. 19,652 594
Caterpillar, Inc. 10,804 585
Union Pacific Corp. 10,800 579
Sara Lee Corp. 25,224 568
Warner-Lambert Co. 7,069 567
Travelers Inc. 16,913 556
* Toys R Us, Inc. 15,376 548
The Dun & Bradstreet Corp. 9,358 538
Campbell Soup Co. 13,306 526
Pacific Gas & Electric Co. 22,943 522
* Viacom International Class B 13,004 521
ITT Corp. 6,229 519
May Department Stores Co. 13,092 515
International Paper Co. 6,519 512
Allied-Signal, Inc. 14,940 510
Federal Home Loan Mortgage Corp. 9,500 507
Monsanto Co. 6,253 503
Kimberly-Clark Corp. 8,520 501
American Barrick Resources 18,500 493
H.J. Heinz Co. 13,314 488
General Mills, Inc. 8,430 487
United Healthcare Corp. 9,100 482
Weyerhaeuser Co. 10,803 482
General Re Corp. 4,475 474
Phillips Petroleum Co. 13,819 473
Archer-Daniels-Midland Co. 18,175 473
Chemical Banking Corp. 13,324 466
Colgate-Palmolive Co. 7,966 462
</TABLE>
23
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Northern Telecom Ltd. 13,287 $ 462
Raytheon Co. 7,162 459
Norfolk Southern Corp. 7,315 455
* Compaq Computer Corp. 13,713 447
PPG Industries, Inc. 11,224 445
Kmart Corp. 24,100 431
AMP, Inc. 5,512 426
Duke Power Co. 10,805 421
Wells Fargo & Co. 2,903 421
Norwest Corp. 16,934 419
United Technologies Corp. 6,643 416
Automatic Data Processing, Inc. 7,378 414
Conagra, Inc. 13,117 413
Baxter International, Inc. 14,572 410
Aluminum Co. of America 4,770 404
Enron Corp. 13,304 402
CPC International, Inc. 7,902 400
Rockwell International Corp. 11,673 400
U.S. Healthcare, Inc. 8,500 395
Tenneco, Inc. 8,947 395
Keycorp 12,801 390
Computer Associates International, Inc. 8,765 390
Albertson's, Inc. 13,336 388
American Brands, Inc. 10,697 388
First Union Corp. 8,918 386
Texas Utilities Co. 11,799 385
Merrill Lynch & Co., Inc. 11,102 384
* Amgen, Inc. 7,200 383
Corning, Inc. 11,670 378
The Limited, Inc. 19,221 377
CSX Corp. 5,497 377
Gannett Co., Inc. 7,720 371
* Cisco Systems, Inc. 13,400 367
Georgia-Pacific Corp. 4,774 365
Unocal Corp. 12,669 358
First Interstate Bancorp. 4,324 351
The Chase Manhattan Corp. 9,896 343
Dean Witter Discover & Co. 9,008 339
Occidental Petroleum Corp. 16,091 338
Public Service Enterprise Group Inc. 12,736 334
FPL Group, Inc. 10,216 332
The Chubb Corp. 4,664 332
Dominion Resources, Inc. 8,809 328
Texas Instruments, Inc. 4,764 326
Lowes Cos., Inc. 8,392 324
Browning-Ferris Industries, Inc. 10,206 324
PNC Bank Corp. 12,380 320
Medtronic, Inc. 6,040 319
Nucor Corp. 4,572 318
Alcan Aluminium Ltd. 12,048 318
American General Corp. 11,676 317
Placer Dome Group, Inc. 12,573 316
Suntrust Banks, Inc. 6,454 315
UST, Inc. 10,928 313
Deere & Co. 4,552 312
Upjohn Co. 9,154 312
Marsh & McLennan, Inc. 3,947 308
SCE Corp. 23,674 308
Consolidated Edison Co. of New York, Inc. 12,357 307
American Electric Power Co., Inc. 9,769 307
Wachovia Corp. 9,300 300
PECO Energy Co. 11,731 298
Pitney Bowes, Inc. 8,314 295
Bankers Trust New York Corp. 4,362 291
* Novell, Inc. 19,500 288
Dayton-Hudson Corp. 3,742 286
Mellon Bank Corp. 5,088 286
Entergy Corp. 12,176 283
Air Products & Chemicals, Inc. 6,024 282
Union Carbide Corp. 8,152 277
Aetna Life & Casualty Co. 5,922 275
Quaker Oats Co. 3,552 272
Fleet Financial Group, Inc. 7,219 272
The Goodyear Tire & Rubber Co. 8,134 271
USX-Marathon Group 15,109 268
Burlington Resources, Inc. 6,900 259
H & R Block, Inc. 5,612 257
Mattel, Inc. 9,478 257
Illinois Tool Works, Inc. 5,920 253
R.R. Donnelley & Sons Co. 8,410 252
Unicom Corp. 11,325 252
Wm. Wrigley, Jr. Co. 6,134 250
Pacificorp 14,806 250
The Gap, Inc. 7,584 249
TRW, Inc. 3,422 248
Scott Paper Co. 4,047 247
International Flavors & Fragrances, Inc. 5,928 247
Walgreen Co. 6,546 246
Sysco Corp. 9,670 245
Houston Industries, Inc. 6,956 245
NBD Bancorp, Inc. 8,519 244
Westinghouse Electric Corp. 18,683 243
Cooper Industries, Inc. 6,019 242
Honeywell, Inc. 6,984 241
Eastman Chemical 4,412 240
McDonnell Douglas Corp. 2,077 240
Textron, Inc. 4,671 238
CIGNA Corp. 3,844 237
Burlington Northern, Inc. 4,652 234
Genuine Parts Co. 6,629 233
Nike, Inc. Class B 3,950 233
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Phelps Dodge Corp. 3,738 $ 232
Lockheed Corp. 3,326 232
Amerada Hess Corp. 4,962 231
Salomon, Inc. 5,822 230
Avon Products, Inc. 3,814 228
Barnett Banks of Florida, Inc. 5,127 227
Rubbermaid, Inc. 8,520 227
Martin Marietta Corp. 5,096 227
First Chicago Corp. 4,932 226
Hercules, Inc. 2,194 226
Carolina Power & Light Co. 8,522 225
CBS, Inc. 699 224
Great Lakes Chemical Corp. 3,800 223
Central & South West Corp. 9,976 222
Fluor Corp. 4,461 222
Santa Fe Pacific Corp. 9,745 220
Ralston-Purina Group 5,323 220
Morton International, Inc. 7,788 214
The Times Mirror Co. Class A 6,957 214
Conrail, Inc. 4,262 211
Hershey Foods Corp. 4,681 211
* AMR Corp. 4,035 208
Rohm & Haas Co. 3,633 208
W.R. Grace & Co. 4,972 206
Apple Computer, Inc. 6,134 206
Newmont Mining Corp. 4,536 204
Transamerica Corp. 4,053 204
CoreStates Financial Corp. 7,618 203
Whirlpool Corp. 3,939 202
Ingersoll-Rand Co. 5,708 202
Melville Corp. 5,606 200
Detroit Edison Co. 7,794 199
Winn Dixie Stores, Inc. 3,955 198
McGraw-Hill, Inc. 2,698 198
First Data Corp. 3,900 196
Louisiana-Pacific Corp. 5,916 196
Masco Corp. 8,096 195
Consolidated Natural Gas Co. 4,972 193
UNUM Corp. 4,200 193
Union Electric Corp. 5,500 193
Newell Co. 8,638 192
Becton, Dickinson & Co. 3,952 191
The Tribune Co. 3,528 191
* Price/Costco Inc. 11,856 190
Halliburton Co. 6,014 189
Champion International Corp. 4,886 189
* Digital Equipment Corp. 7,144 189
American Stores Co. 7,476 189
Reynolds Metals Co. 3,319 188
Dresser Industries, Inc. 9,268 188
MBNA Corp. 8,100 187
Inco Ltd. 6,209 187
Lincoln National Corp. 4,966 186
St. Paul Cos., Inc. 4,568 186
* Promus Co. Inc. 5,509 185
* Crown Cork & Seal Co., Inc. 4,774 184
Union Camp Corp. 3,737 184
Micron Technology Inc. 5,300 183
Eaton Corp. 3,836 182
Marriott International 6,287 182
First Fidelity Bancorp. 4,319 181
Baltimore Gas & Electric Co. 7,850 181
Household International, Inc. 5,042 180
* Federal Express Corp. 2,907 180
Dover Corp. 3,122 178
Praxair, Inc. 7,252 177
Boatmen's Bancshares, Inc. 5,650 175
Nordstrom, Inc. 4,364 175
VF Corp. 3,514 174
Torchmark Corp. 3,954 173
Alco Standard Corp. 2,782 173
Safeco Corp. 3,326 171
* DSC Communications Corp. 5,962 170
Providian Corp. 5,380 169
Loral Corp. 4,302 169
Southwest Airlines Co. 7,500 169
Reebok International Ltd. 4,681 167
Sun Co., Inc. 5,713 164
USX-U.S. Steel Group 3,901 163
The Mead Corp. 3,117 162
Dillard Department Stores Class A 6,022 161
Williams Cos., Inc. 5,366 161
Temple-Inland Inc. 2,910 161
W.W. Grainger, Inc. 2,708 160
* The Kroger Co. 5,972 159
Ohio Edison Co. 8,305 158
Cyprus Amax 5,015 157
Coastal Corp. 5,607 156
* National Medical Enterprises, Inc. 9,118 156
Dow Jones & Co., Inc. 5,202 156
Hilton Hotels Corp. 2,595 155
Homestake Mining Co. 7,298 155
Northern States Power Co. of Minnesota 3,625 153
Sherwin-Williams Co. 4,873 152
Clorox Co. 2,908 152
Dana Corp. 5,364 150
Pioneer Hi Bred International 4,800 150
Sonat, Inc. 4,772 150
Tandy Corp. 3,475 149
Panhandle Eastern Corp. 6,380 148
Jefferson-Pilot Corp. 2,805 148
* Advanced Micro Devices, Inc. 4,965 148
Mallinckrodt Group, Inc. 4,550 147
</TABLE>
25
<PAGE> 28
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
General Dynamics Corp. 3,366 $ 147
Bank of Boston Corp. 5,448 145
Baker Hughes, Inc. 7,775 145
Knight-Ridder, Inc. 2,899 144
* Sun Microsystems, Inc. 4,900 144
National City Corp. 5,100 143
Harcourt General, Inc. 4,139 142
Westvaco Corp. 3,731 142
Hasbro, Inc. 4,769 141
Premark International, Inc. 3,322 140
Great Western Financial Corp. 7,257 140
Kerr-McGee Corp. 2,798 136
U.S. Bancorp 5,331 136
Golden West Financial Corp. 3,427 136
Engelhard Corp. 4,999 134
H.F. Ahmanson & Co. 6,433 134
Interpublic Group of Cos., Inc. 4,000 132
Deluxe Corp. 4,469 131
Shawmut National Corp. 6,253 130
Circuit City Stores, Inc. 4,984 129
Northrop Grumman Corp. 2,794 126
Nalco Chemical, Inc. 3,838 126
Woolworth Corp. 7,259 126
Roadway Services, Inc. 2,177 125
New York Times Co. Class A 5,652 124
* Bethlehem Steel Corp. 5,852 123
* Computer Sciences Corp. 2,796 122
Bausch & Lomb, Inc. 3,118 122
Delta Air Lines, Inc. 2,699 121
Tyco International Ltd. 2,494 118
Ashland Oil, Inc. 3,315 117
* FMC Corp. 1,870 116
American Greetings Corp. Class A 4,026 116
Pennzoil Co. 2,480 116
Service Corp. International 4,436 114
Comcast Corp. Class A 7,531 113
Pet, Inc. 5,706 113
Pep Boys (Manny, Moe & Jack) 3,211 112
Avery Dennison Corp. 3,224 111
James River Corp. 4,563 111
Beneficial Corp. 2,704 110
Johnson Controls, Inc. 2,179 108
The Dial Corp. 5,158 108
Harris Corp. 2,178 106
Worthington Industries, Inc. 4,877 105
Cooper Tire & Rubber Co. 4,464 104
* Western Atlas Inc. 2,384 104
* Tandem Computers, Inc. 6,413 104
Borden, Inc. 7,495 103
Pall Corp. 5,962 103
SuperValu, Inc. 3,951 103
Brown-Forman Corp. Class B 3,765 102
Niagara Mohawk Power Corp. 7,672 102
Ryder System, Inc. 3,947 101
Black & Decker Corp. 4,623 101
Brunswick Corp. 4,977 100
* National Semiconductor Corp. 6,407 100
Parker Hannifin Corp. 2,496 100
Moore Corp. Ltd. 5,392 99
Pacific Enterprises 4,641 99
Paccar, Inc. 2,148 98
Whitman Corp. 5,806 97
Rite Aid Corp. 4,666 97
* Stone Container Corp. 4,954 97
Maytag Corp. 5,912 95
Liz Claiborne, Inc. 4,170 95
Echlin, Inc. 3,112 95
General Signal Corp. 2,678 94
Allergan, Inc. 3,700 94
* Unisys Corp. 8,724 94
Manor Care Inc. 3,514 94
The Stanley Works 2,284 93
St. Jude Medical, Inc. 2,594 93
Sigma Aldrich Corp. 2,600 91
Raychem Corp. 2,175 89
Polaroid Corp. 2,500 88
* Varity Corp. 2,349 88
Armstrong World Industries Inc. 1,974 86
* Inland Steel Industries, Inc. 2,162 85
Scientific-Atlanta, Inc. 2,067 84
Autodesk, Inc. 1,349 84
Echo Bay Mines Ltd. 6,098 84
Millipore Corp. 1,556 84
* Lotus Development Corp. 2,285 83
United States Surgical Corp. 3,100 83
* ALZA Corp. 4,030 83
Wendys International, Inc. 5,694 83
Louisiana Land & Exploration Co. 1,856 81
Cummins Engine Co., Inc. 2,060 81
TJX Cos., Inc. 3,840 81
Mercantile Stores Co., Inc. 1,874 78
Perkin-Elmer Corp. 2,466 77
* Biomet, Inc. 6,224 77
Snap-On Inc. 2,183 77
* Owens-Corning Fiberglas Corp. 2,281 76
Oryx Energy Co. 5,459 76
McDermott International, Inc. 2,888 74
E-Systems, Inc. 1,762 73
Russell Corp. 2,381 73
* King World Productions, Inc. 1,876 72
Ecolab, Inc. 3,294 72
Foster Wheeler Corp. 2,071 71
NICOR, Inc. 2,916 71
* Columbia Gas Systems, Inc. 2,601 70
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
PSI Resources, Inc. 3,109 $ 70
Asarco, Inc. 2,082 68
Comcast Corp. Class A Special 4,514 68
C.R. Bard, Inc. 2,706 68
Giant Food, Inc. Class A 3,118 67
Bemis Co., Inc. 2,702 67
National Service Industries, Inc. 2,499 66
Federal Paper Board Co., Inc. 2,080 66
* Beverly Enterprises Inc. 4,246 65
* Clark Equipment Co. 935 65
Potlatch Corp. 1,558 64
Boise Cascade Corp. 2,176 64
Thomas & Betts Corp. 934 63
* Andrew Corp. 1,257 63
Fleetwood Enterprises, Inc. 2,488 63
The BF Goodrich Co. 1,451 61
Tektronix, Inc. 1,558 60
Pittston Services Group 2,075 59
* Amdahl Corp. 6,720 59
The Timkin Co. 1,559 59
USF&G Corp. 4,368 58
Trinova Corp. 1,656 58
* Navistar International Corp. 4,080 57
* Ceridian Corp. 2,285 56
Great Atlantic & Pacific Tea Co., Inc. 2,176 55
Briggs & Stratton Corp. 729 51
EG & G, Inc. 3,212 49
Ogden Corp. 2,285 48
ENSERCH Corp. 3,430 48
Alexander & Alexander Services, Inc. 2,381 46
Peoples Energy Corp. 1,766 46
NorAm Energy Corp. 7,130 46
Teledyne Inc. 2,911 46
Jostens Inc. 2,581 46
Safety-Kleen Corp. 2,812 46
Cincinnati Milacron, Inc. 1,755 45
Crane Co. 1,763 45
USLIFE Corp. 1,346 45
* Viacom International Class A 1,056 45
Charming Shoppes, Inc. 5,600 44
Ball Corp. 1,544 44
Fleming Cos., Inc. 1,861 44
* Consolidated Freightways, Inc. 1,970 43
Longs Drug Stores, Inc. 1,240 43
Santa Fe Energy Resources Inc. 4,428 41
Stride Rite Corp. 2,802 39
Meredith Corp. 834 39
Alberto-Culver Co. Class B 1,657 39
Harnischfeger Industries Inc. 1,463 39
Centex Corp. 1,660 38
Adolph Coors Co. Class B 2,075 38
Helmerich & Payne, Inc. 1,349 38
Continental Corp. 2,809 38
* Rowan Cos., Inc. 5,045 37
Community Psychiatric Centers 2,594 35
John H. Harland Co. 1,675 35
Bruno's Inc. 3,750 35
Shared Medical Systems Corp. 1,245 34
Luby's Cafeterias, Inc. 1,455 33
Eastern Enterprises 1,245 33
Giddings & Lewis, Inc. 1,800 32
Pulte Corp. 1,447 31
Morrison-Knudsen Co., Inc. 1,846 31
* Maxus Energy Corp. 6,800 31
Springs Industries Inc. Class A 835 30
* Cray Research, Inc. 1,453 30
* Armco, Inc. 4,877 29
Outboard Marine Corp. 1,239 28
Brown Group, Inc. 835 28
Transco Energy Co. 1,861 28
* Shoney's Inc. 1,977 27
Yellow Corp. 1,456 27
* Zenith Electronics Corp. 2,358 27
Kaufman & Broad Home Corp. 1,855 25
* Intergraph Corp. 2,796 25
NACCO Industries, Inc. Class A 418 25
* Data General Corp. 2,361 24
* Bally Entertainment Corp. 2,861 21
Oneok, Inc. 1,253 21
First Mississippi Corp. 1,039 21
* Ryan's Family Steak Houses, Inc. 3,205 19
Bassett Furniture Industries, Inc. 652 17
* Rollins Environmental Services, Inc. 2,720 17
Handleman Co. 1,466 16
* USAir Group, Inc. 2,890 13
Skyline Corp. 622 13
* M/A-Com, Inc. 1,648 13
Zurn Industries, Inc. 625 12
* Viacom Variable Rights Exp. 9/29/95 9,004 12
Oshkosh B Gosh, Inc. Class A 729 10
* Hartmarx Corp. 1,740 9
SPX Corp. 528 9
* Santa Fe Pacific Gold Corp. 400 7
* National Education Corp. 959 5
American Cyanamid Co. 20 2
* Genesco, Inc. 545 1
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $163,751) 178,106
- -------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (4.2%)
- -------------------------------------------------------------------------------------------
U.S. TREASURY BILL--Note E
4.66%, 12/22/94 $ 400 $ 396
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account,
4.85%, 10/3/94 7,395 7,395
- -------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $7,791) 7,791
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100%)
(Cost $171,542) 185,897
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------
Other Assets--Notes C and F 1,412
Liabilities--Note F (1,363)
----------
49
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 14,912,445 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $185,946
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.47
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1) The combined market value of common stocks and Standard & Poor's 500 Index
Futures Contracts represents 100.0% of net assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 168,399 $ 11.30
Undistributed Net
Investment Income 2,113 .14
Accumulated Net Realized Gains 1,224 .08
Unrealized Appreciation of
Investments--Note E 14,210 .95
- -------------------------------------------------------------------------------------------
NET ASSETS $ 185,946 $ 12.47
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
EQUITY INCOME PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.6%)
- -------------------------------------------------------------------------------------------
BANKS--NEW YORK (1.9%)
Bankers Trust New York Corp. 10,000 $ 668
J.P. Morgan & Co., Inc. 10,300 626
----------
GROUP TOTAL 1,294
----------
- -------------------------------------------------------------------------------------------
BANKS--REGIONAL (3.5%)
Bank One Corp. 4,400 131
Barnett Banks of Florida, Inc. 3,000 133
Boatmen's Bancshares, Inc. 10,500 325
CoreStates Financial Corp. 12,500 333
First Union Corp. 6,200 268
Mellon Bank Corp. 1,200 67
NBD Bancorp Inc. 6,800 195
NationsBank Inc. 1,300 64
PNC Bank Corp. 24,100 624
U.S. Bancorp 1,500 38
Wachovia Corp. 5,100 164
----------
GROUP TOTAL 2,342
----------
- -------------------------------------------------------------------------------------------
CHEMICAL--BASIC (5.4%)
ARCO Chemical Co. 23,600 1,168
Dow Chemical Co. 20,500 1,604
E.I. du Pont de Nemours & Co. 6,100 354
Monsanto Co. 6,900 555
----------
GROUP TOTAL 3,681
----------
- -------------------------------------------------------------------------------------------
CHEMICAL--DIVERSIFIED (.3%)
Minnesota Mining &
Manufacturing Co. 3,400 188
----------
- -------------------------------------------------------------------------------------------
COMPUTERS & OFFICE EQUIPMENT (1.5%)
International Business
Machines Corp. 14,300 994
----------
- -------------------------------------------------------------------------------------------
CONGLOMERATE (2.8%)
Hanson PLC ADR 48,500 879
Ogden Corp. 48,400 1,016
----------
GROUP TOTAL 1,895
----------
- -------------------------------------------------------------------------------------------
DRUGS (12.2%)
American Home Products Corp. 28,400 1,704
Bristol-Myers Squibb Co. 36,800 2,111
Eli Lilly & Co. 32,700 1,893
Merck & Co., Inc. 20,000 710
Upjohn Co. 41,200 1,406
Warner-Lambert Co. 5,700 457
----------
GROUP TOTAL 8,281
----------
- -------------------------------------------------------------------------------------------
ELECTRIC--UTILITY (14.1%)
Allegheny Power System, Inc. 24,700 497
Baltimore Gas & Electric Co. 23,700 545
Central & Southwest Corp. 9,500 211
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated Edison Co. of
New York, Inc. $ 15,500 $ 386
Dominion Resources, Inc. 6,600 246
Duke Power Co. 6,500 254
FPL Group, Inc. 36,600 1,190
Northern States Power Co. of Minnesota 9,100 384
Oklahoma Gas & Electric Co. 15,900 537
Pacificorp 63,400 1,070
Pennsylvania Power and Light Co. 15,700 314
Potomac Electric Power Co. 26,300 506
Public Service Enterprise Group Inc. 25,500 669
SCE Corp. 46,100 599
Scana Corp. 10,000 444
Teco Energy, Inc. 14,100 271
Texas Utilities Co. 26,200 855
Union Electric Corp. 9,700 340
Wisconsin Energy Corp. 11,400 289
----------
GROUP TOTAL 9,607
----------
- -------------------------------------------------------------------------------------------
ELECTRIC EQUIPMENT (.1%)
Westinghouse Electric Corp. 5,100 66
----------
- -------------------------------------------------------------------------------------------
ELECTRIC INSTRUMENTS (.7%)
Thomas & Betts Corp. 6,500 440
----------
- -------------------------------------------------------------------------------------------
FINANCIAL SERVICES (4.0%)
H.F. Ahmanson & Co. 39,000 814
American Express Co. 27,200 826
Great Western Financial Corp. 54,700 1,053
----------
GROUP TOTAL 2,693
----------
- -------------------------------------------------------------------------------------------
FOOD--PACKAGED (.5%)
H.J. Heinz Co. 9,100 333
----------
- -------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (.6%)
Clorox Co. 8,000 417
----------
- -------------------------------------------------------------------------------------------
INSURANCE--DIVERSIFIED (4.1%)
Aetna Life & Casualty Co. 16,400 761
American General Corp. 18,800 510
CIGNA Corp. 21,700 1,337
Lincoln National Corp. 5,500 206
----------
GROUP TOTAL 2,814
----------
- -------------------------------------------------------------------------------------------
INSURANCE--PROPERTY & CASUALTY (.5%)
Continental Corp. 25,600 346
----------
- -------------------------------------------------------------------------------------------
MEDICAL SUPPLIES (.3%)
Baxter International, Inc. 7,800 219
----------
- -------------------------------------------------------------------------------------------
MISCELLANEOUS (.2%)
National Service Industries, Inc. 3,900 103
----------
- -------------------------------------------------------------------------------------------
NATURAL GAS--DIVERSIFIED (2.7%)
Consolidated Natural Gas Co. 25,800 1,003
NICOR, Inc. 11,300 274
NorAm Energy Corp. 34,400 224
Pacific Enterprises 15,800 336
----------
GROUP TOTAL 1,837
----------
- -------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (.7%)
Union Camp Corp. 8,100 398
Weyerhaeuser Co. 1,600 71
----------
GROUP TOTAL 469
----------
- -------------------------------------------------------------------------------------------
PETROLEUM--DOMESTIC (5.0%)
Amoco Corp. 11,800 699
Atlantic Richfield Co. 16,300 1,644
Sun Co., Inc. 17,700 509
USX-Marathon Group 31,000 550
----------
GROUP TOTAL 3,402
----------
- -------------------------------------------------------------------------------------------
PETROLEUM--INTERNATIONAL (10.3%)
Chevron Corp. 35,600 1,482
Exxon Corp. 27,000 1,556
Mobil Corp. 22,100 1,749
Royal Dutch Petroleum Co. 4,500 483
Texaco, Inc. 29,000 1,740
----------
GROUP TOTAL 7,010
----------
- -------------------------------------------------------------------------------------------
PHOTOGRAPHY (2.0%)
Eastman Kodak Co. 26,700 1,382
----------
- -------------------------------------------------------------------------------------------
PUBLISHING (2.7%)
Deluxe Corp. 2,600 76
The Dun & Bradstreet Corp. 19,900 1,144
John H. Harland Co. 16,200 340
McGraw-Hill, Inc. 4,000 293
----------
GROUP TOTAL 1,853
----------
- -------------------------------------------------------------------------------------------
RETAIL--GENERAL MERCHANDISE (3.4%)
Kmart Corp. 74,700 1,335
J.C. Penney Co., Inc. 4,200 217
Sears, Roebuck & Co. 2,700 130
Woolworth Corp. 37,300 648
----------
GROUP TOTAL 2,330
----------
- -------------------------------------------------------------------------------------------
RETAIL--SPECIAL LINES (.3%)
Melville Corp. 5,900 210
----------
- -------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (13.1%)
Ameritech Corp. 38,400 1,546
Bell Atlantic Corp. 26,000 1,378
BellSouth Corp. 18,900 1,054
GTE Corp. 53,300 1,619
NYNEX Corp. 41,600 1,602
</TABLE>
29
<PAGE> 32
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Pacific Telesis Group 13,700 $ 421
Southern New England Telecom Corp. 1,000 34
U.S. West Corp. 32,700 1,267
----------
GROUP TOTAL 8,921
----------
- -------------------------------------------------------------------------------------------
TOBACCO (5.0%)
American Brands, Inc. 42,500 1,541
Philip Morris Cos., Inc. 30,700 1,877
----------
GROUP TOTAL 3,418
----------
- -------------------------------------------------------------------------------------------
TOILETRY & COSMETICS (.7%)
Tambrands, Inc. 12,600 469
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $69,720) 67,014
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.4%)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
---------- ---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 4.85%, 10/3/94
(Cost $963) $ 963 963
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $70,683) 67,977
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------
Other Assets--Note C 664
Liabilities (670)
----------
(6)
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 6,765,185 outstanding
shares of beneficial interest
(unlimited authorization--no par
value) $ 67,971
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.05
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994, NET ASSETS
CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 69,301 $ 10.25
Undistributed Net Investment
Income 1,037 .15
Accumulated Net Realized Gains 339 .05
Unrealized Depreciation of
Investments--Note E (2,706) (.40)
- -------------------------------------------------------------------------------------------
NET ASSETS $ 67,971 $ 10.05
- -------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.0%)
- -------------------------------------------------------------------------------------------
CONSUMER (23.5%)
Carnival Corp. Class A 17,800 $ 781
The Coca-Cola Co. 82,500 4,011
Colgate-Palmolive Co. 9,900 574
The Walt Disney Co. 28,700 1,116
Duracell International, Inc. 26,700 1,218
Gillette Co. 41,200 2,915
Kellogg Co. 7,000 402
McDonald's Corp. 93,100 2,444
PepsiCo, Inc. 63,500 2,103
Procter & Gamble Co. 54,600 3,255
Unilever NV 3,600 408
----------
GROUP TOTAL 19,227
----------
- -------------------------------------------------------------------------------------------
FINANCE & INSURANCE (14.4%)
AMBAC, Inc. 5,300 196
American International Group, Inc. 35,400 3,146
Chemical Banking Corp. 44,000 1,540
Federal Home Loan Mortgage Corp. 54,400 2,904
Federal National Mortgage Assn. 43,900 3,457
Norwest Corp. 20,900 517
----------
GROUP TOTAL 11,760
----------
- -------------------------------------------------------------------------------------------
HEALTH CARE (8.8%)
Abbott Laboratories, Inc. 43,200 1,355
Columbia/HCA Healthcare Corp. 9,600 418
Johnson & Johnson 16,400 847
Eli Lilly & Co. 3,500 202
Medtronic, Inc. 14,800 783
Merck & Co., Inc. 31,700 1,125
Pfizer, Inc. 32,700 2,260
Warner-Lambert Co. 2,900 233
----------
GROUP TOTAL 7,223
----------
- -------------------------------------------------------------------------------------------
MEDIA (1.2%)
Reuters Holdings PLC 22,100 989
----------
- -------------------------------------------------------------------------------------------
RETAIL & DISTRIBUTION (9.7%)
Home Depot, Inc. 31,000 1,302
Lowes Cos., Inc. 24,800 958
May Department Stores Co. 15,800 622
* Toys R Us, Inc. 41,200 1,468
Wal-Mart Stores, Inc. 147,000 3,436
Walgreen Co. 4,300 162
----------
GROUP TOTAL 7,948
----------
- -------------------------------------------------------------------------------------------
TECHNOLOGY (15.3%)
AT&T Corp. 38,700 2,090
* Airtouch Communications 18,900 541
AMP, Inc. 23,400 1,811
* Cisco Systems, Inc. 51,900 1,421
Hewlett-Packard Co. 21,500 1,879
Honeywell, Inc. 11,400 393
Intel Corp. 37,300 2,294
MCI Communications Corp. 51,800 1,314
Molex, Inc. Class A 5,300 208
* Oracle Systems Corp. 14,000 602
----------
GROUP TOTAL 12,553
----------
- -------------------------------------------------------------------------------------------
OTHER (19.1%)
ALCO Standard Corp. 6,600 410
Automatic Data Processing, Inc. 61,900 3,474
First Financial Management 7,400 426
General Electric Co. 82,800 3,985
General Motors Corp. Class E 66,800 2,538
Minnesota Mining & Manufacturing Co. 34,800 1,923
Morton International, Inc. 45,600 1,254
* Renaissance Energy Ltd. 31,700 682
* Talisman Energy, Inc. 36,500 796
* Tarragon Oil & Gas Ltd. 14,900 192
----------
GROUP TOTAL 15,680
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $71,853) 75,380
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (9.7%)
- -------------------------------------------------------------------------------------------
Face Market
Amount Value
(000) (000)+
---------- ---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 4.85%, 10/3/94
(Cost $7,943) $ 7,943 7,943
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.7%)
(Cost $79,796) 83,323
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.7%)
- -------------------------------------------------------------------------------------------
Other Assets--Note C 542
Liabilities (1,937)
----------
(1,395)
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 7,596,224 outstanding
shares of beneficial interest (unlimited
authorization--no par value) $ 81,928
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.79
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
31
<PAGE> 34
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994, NET ASSETS
CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 78,495 $ 10.33
Undistributed Net Investment
Income 795 .11
Accumulated Net Realized
Losses--Note D (889) (.12)
Unrealized Appreciation of
Investments--Note E 3,527 .47
- -------------------------------------------------------------------------------------------
NET ASSETS $ 81,928 $ 10.79
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL PORTFOLIO Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.2%)
- -------------------------------------------------------------------------------------------
AUSTRALIA (2.7%)
Australia National Industries 68,000 $ 78
Broken Hill Proprietary Co. Ltd. 30,000 435
CRA Ltd. 11,000 155
Fairfax (John) 50,000 97
Mayne Nickless Ltd. 22,000 117
News Corp. Ltd. 38,000 241
Normandy Poseidon Ltd. 32,000 62
Western Mining Corp. 25,000 146
Western Mining Corp. (Rfd) 3,125 18
Westpac Banking Ltd. 72,000 224
Woodside Petroleum Ltd. 24,000 89
----------
GROUP TOTAL 1,662
----------
- -------------------------------------------------------------------------------------------
BELGIUM (1.0%)
Cimenteries Cbr Belgium NPV 1,600 604
----------
- -------------------------------------------------------------------------------------------
BRAZIL (1.5%)
* Telebras 15,341 949
----------
- -------------------------------------------------------------------------------------------
CHILE (.1%)
Compania de Telefonos de Chile ADR 1,000 88
----------
- -------------------------------------------------------------------------------------------
FINLAND (1.0%)
Kymmene Corp. 6,000 165
Metsa Serla Oy B 3,000 145
Repola Oy 15,000 315
----------
GROUP TOTAL 625
----------
- -------------------------------------------------------------------------------------------
FRANCE (3.9%)
Air Liquide 2,500 339
* Air Liquide Rights Exp. 11/5/94 2,500 34
Cardif 780 118
Carrefour 1,100 436
Eaux (Cie Generale) 1,430 124
* Michelin Class B (Registered) 8,000 326
Paribas Compagnie Financiere 1,900 115
Primagaz 900 147
Societe Centrale des
Assurances Generales de France 6,000 239
Societe National Elf Aquitaine 4,700 339
Total SA 4,101 242
----------
GROUP TOTAL 2,459
----------
- -------------------------------------------------------------------------------------------
GERMANY (4.1%)
BUDERUS 520 222
Frederick Grohe AG Pfd. 430 125
Muenchener Ruckversich 130 235
Sap AG VZA 1,250 641
Veba AG 2,000 664
Wella AG Pfd. 1,000 661
----------
GROUP TOTAL 2,548
----------
- -------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG (5.9%)
Cheung Kong Holdings Ltd. 96,000 $ 467
Hong Kong Electric Holdings 111,000 366
HSBC Holding PLC 44,000 491
Hutchison Whampoa Ltd. 113,000 534
Mandarin Oriental International Ltd. 204,000 272
Sun Hung Kai Properties Ltd. 75,000 558
Swire Pacific Ltd. A 84,000 658
Wharf Holdings Ltd. 86,000 347
----------
GROUP TOTAL 3,693
----------
- -------------------------------------------------------------------------------------------
INDONESIA (.7%)
* Indocement (Foreign) 30,000 124
Kalbe Farma (Foreign) 13,000 51
* Perusahaan Gudang Garam 8,000 44
* Wicaksana Overseas International (Foreign) 80,000 193
----------
GROUP TOTAL 412
----------
- -------------------------------------------------------------------------------------------
ITALY (3.8%)
Edison SPA 45,000 206
Parmalat SPA 186,000 216
Telecom Italia 702,000 1,980
----------
GROUP TOTAL 2,402
----------
- -------------------------------------------------------------------------------------------
JAPAN (25.8%)
* Alps Electric Co., Ltd. 22,000 287
Anritsu Corp. 20,000 287
Bridgestone Corp. 50,000 783
Casio Computer Co. 35,000 442
Daini Den Den Corp. 300 262
Dai-Nippon Printing Co. Ltd. 27,000 488
East Japan Railway 11,000 539
Eisai Co., Ltd. 20,000 355
Heiwa Real Estate 30,000 246
Hitachi Ltd. 82,000 792
Hoya Corp. 10,000 230
Ito-Yokado Co. 27,000 1,442
Keyence Inc. 3,000 333
Kuraray 27,000 316
Kyocera Corp. 4,000 286
Mabuchi Motors 4,000 303
Matsushita Electric Industrial Co. Ltd. 40,000 638
Mitsubishi Corp. 30,000 373
Mitsui & Co., Ltd. 66,000 562
Murata Manufacturing Co. Ltd. 6,600 255
Nippon Shinpan Co. 35,000 297
Nishimatsu Construction 33,000 377
Nissei Sangyo 5,000 346
Nomura Securities Co. Ltd. 36,000 745
Orix Corp. 5,000 199
Sankyo Co., Ltd. 9,000 225
Seino Transportation Co. Ltd. 30,000 573
Sekisui House Ltd. 50,000 591
Sharp Corp. 11,000 195
Shin-Etsu Chemical Co. Ltd. 18,000 369
Showa Shell Sekiyu 40,000 533
Skylark Co., Ltd. 18,000 385
Tokio Marine & Fire Insurance Ltd. 9,000 107
Tokyo Electron Inc. 7,000 223
Tokyo Style Co. 15,000 268
Toshiba Corp. 116,000 873
Toyota Motor Corp. 30,000 615
----------
GROUP TOTAL 16,140
----------
- -------------------------------------------------------------------------------------------
MALAYSIA (2.9%)
* Edaran Otomobil 64,000 432
Genting Bhd. 56,500 507
Malayan Banking Bhd. 60,000 400
Malaysian Helicopter Services 24,000 74
* Technology Resources Industries 60,000 246
Telekom Malaysian Bhd. 20,000 157
----------
GROUP TOTAL 1,816
----------
- -------------------------------------------------------------------------------------------
MEXICO (1.0%)
Cifra 'C' SA de CV C 65,000 182
Grupo Financiero Banamex L 30,000 207
Tolmex SA de CV B2 15,000 228
----------
GROUP TOTAL 617
----------
- -------------------------------------------------------------------------------------------
NETHERLANDS (7.0%)
ABN AMRO Holding NV 14,280 478
Getronics NV 20,000 610
Heineken NV 9,000 1,229
International Nederlanden Groep 36,125 1,560
Oce Van Der Grinten 11,000 465
----------
GROUP TOTAL 4,342
----------
- -------------------------------------------------------------------------------------------
NORWAY (.8%)
Norsk Hydro 14,000 513
----------
- -------------------------------------------------------------------------------------------
PHILIPPINES (1.5%)
Ayala Land Inc. 'B' 225,000 294
Philippine National Bank Class B 14,929 233
* SM Prime Holdings 942,000 268
Philippine Long Distance Telephone 2,000 116
----------
GROUP TOTAL 911
----------
- -------------------------------------------------------------------------------------------
SINGAPORE (1.8%)
Development Bank of
Singapore (Foreign) 20,000 210
DBS Land 15,000 47
Jurong Shipyard 26,000 242
Keppel Corp. 41,000 331
</TABLE>
33
<PAGE> 36
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Oversea-Chinese Banking
Corp. (Foreign) 12,000 $ 115
Singapore Press Holdings
Ltd. (Foreign) 11,000 193
----------
GROUP TOTAL 1,138
----------
- -------------------------------------------------------------------------------------------
SWEDEN (2.6%)
Astra AB Series B 14,300 337
Electrolux Series B Free 6,000 284
* SKF AB Series B Free 16,400 286
Stora Kopparberg Class A 7,600 435
Volvo AB Series B 16,500 301
----------
GROUP TOTAL 1,643
----------
- -------------------------------------------------------------------------------------------
SWITZERLAND (5.5%)
BBC Brown Boveri (Bearer) 750 647
Ciba Geigy AG (Bearer) 1,000 563
CS Holding (Bearer) 900 368
Nestle SA (Registered) 1,080 981
Sandoz AG (Registered) 990 498
Societe Generale de
Surveillance Holdings
SA (Bearer) 250 389
----------
GROUP TOTAL 3,446
----------
- -------------------------------------------------------------------------------------------
THAILAND (1.2%)
Land & House Co. Ltd. (Foreign) 12,000 238
Siam Cement Co., Ltd. (Foreign) 4,000 208
Thai Farmers Bank Ltd. (Foreign) 37,000 292
----------
GROUP TOTAL 738
----------
- -------------------------------------------------------------------------------------------
UNITED KINGDOM (16.4%)
Allied Domecq PLC 60,000 537
Asda Group PLC 600,000 619
Barclays PLC 60,000 539
BOC Group 50,000 545
Bowater PLC 40,000 297
British Airways PLC 115,000 654
British Land Co., PLC 60,000 368
British Petroleum Co. 80,000 503
British Steel 200,000 544
Cable and Wireless PLC 110,000 692
Courtaulds PLC 12,000 83
Daily Mail & General Trust 20,000 292
English China Clays 45,000 252
Fisons 60,000 111
Glaxo Holdings PLC 40,000 369
Grand Metropolitan PLC 60,000 386
Guinness PLC 15,000 108
Legal & General Group PLC 70,000 485
Peninsular & Orient Steam Navigation Co. 52,000 511
Rank Organisation Ltd. 106,000 672
Reuters Holdings PLC 80,000 599
Rolls Royce PLC 80,000 227
Vodafone Group PLC 200,000 621
Zeneca Group PLC 20,000 254
----------
GROUP TOTAL 10,268
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $56,289) 57,014
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (10.4%)
- -------------------------------------------------------------------------------------------
Face Market
Amount Value
(000) (000)+
---------- ---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 4.85%, 10/3/94
(Cost $6,495) $ 6,495 $ 6,495
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.6%)
(Cost $62,784) 63,509
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.6%)
- -------------------------------------------------------------------------------------------
Other Assets--Note C 308
Liabilities (1,313)
----------
(1,005)
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 6,060,199 outstanding
shares of beneficial interest
(unlimited authorization--no par
value) $ 62,504
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.31
===========================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994, NET ASSETS
CONSISTED OF:
- -------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $ 61,474 $ 10.14
Undistributed Net Investment
Income 325 .05
Accumulated Net Realized Gains 5 --
Unrealized Appreciation of
Investments--Note E 700 .12
- -------------------------------------------------------------------------------------------
NET ASSETS $ 62,504 $ 10.31
- -------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MONEY HIGH-GRADE
MARKET BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
Sept. 30, 1994 Sept. 30, 1994 Sept. 30, 1994
(000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . -- -- $ 4,728
Interest . . . . . . . . . . . . . . . . . . . . . $5,557 $ 5,247 5,182
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 5,557 5,247 9,910
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . 14 9 226
Performance Adjustments . . . . . . . . . . . . . -- -- --
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . 241 129 444
Marketing and Distribution . . . . . . . . . . . 38 15 35
Custodians' Fees . . . . . . . . . . . . . . . . . 16 26 4
Auditing Fees . . . . . . . . . . . . . . . . . . . 9 8 10
Shareholders' Reports . . . . . . . . . . . . . . . 6 11 23
Annual Meeting and Proxy Costs . . . . . . . . . . 1 2 4
Trustees' Fees and Expenses . . . . . . . . . . . . 1 -- 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . 326 200 747
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 5,231 5,047 9,163
- ----------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . (1) (534) 2,529
Futures Contracts . . . . . . . . . . . . . . . . . -- -- --
Forward Currency Contracts . . . . . . . . . . . . -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . (1) (534) 2,529
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . -- (7,468) (6,551)
Futures Contracts . . . . . . . . . . . . . . . . . -- -- --
Forward Currency Contracts . . . . . . . . . . . . -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . -- (7,468) (6,551)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . $5,230 $(2,955) $ 5,141
==================================================================================================================================
</TABLE>
35
<PAGE> 38
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
EQUITY EQUITY
INDEX INCOME GROWTH INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended June 3 to
Sept. 30, 1994 Sept. 30, 1994 Sept. 30, 1994 Sept. 30, 1994
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . . $4,894 $ 3,211 $ 944 $ 246
Interest . . . . . . . . . . . . . . . . . . . . . . 154 76 294 117
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 5,048 3,287 1,238 363
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . 42 68 99 21
Performance Adjustments . . . . . . . . . . . . . -- -- -- --
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . 307 114 113 8
Marketing and Distribution . . . . . . . . . . . 30 7 7 --
Custodians' Fees . . . . . . . . . . . . . . . . . . 4 11 10 --
Auditing Fees . . . . . . . . . . . . . . . . . . . 9 8 8 7
Shareholders' Reports . . . . . . . . . . . . . . . 23 17 7 2
Annual Meeting and Proxy Costs . . . . . . . . . . . 3 1 1 --
Trustees' Fees and Expenses . . . . . . . . . . . . 1 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . 419 226 245 38
- ----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . 4,629 3,061 993 325
- ----------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . 1,029 332 (768) 5
Futures Contracts . . . . . . . . . . . . . . . . . 218 -- -- --
Forward Currency Contracts . . . . . . . . . . . . . -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . 1,247 332 (768) 5
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . 194 (4,564) 2,947 725
Futures Contracts . . . . . . . . . . . . . . . . . (142) -- -- --
Forward Currency Contracts . . . . . . . . . . . . . -- -- -- (25)
- ----------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . 52 (4,564) 2,947 700
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . $5,928 $(1,171) $3,172 $1,030
==================================================================================================================================
</TABLE>
(1) Dividends for the International Portfolio are net of foreign withholding
taxes of $87,000.
36
<PAGE> 39
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET HIGH-GRADE BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR Year YEAR Year YEAR Year
ENDED Ended ENDED Ended ENDED Ended
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
1994 1993 1994 1993 1994 1993
(000) (000) (000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . $ 5,231 $ 2,738 $ 5,047 $ 3,799 $ 9,163 $ 5,966
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . (1) -- (534) 1,224 2,529 1,727
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . -- -- (7,468) 1,046 (6,551) 9,903
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . 5,230 2,738 (2,955) 6,069 5,141 17,596
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS(1)
Net Investment Income . . . . . . . . . . . . . . . . . (5,231) (2,738) (5,047) (3,799) (7,649) (7,655)
Realized Net Gain . . . . . . . . . . . . . . . . . . . -- -- (1,239) (231) (2,895) (263)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (5,231) (2,738) ( 6,286) (4,030) (10,544) (7,918)
- ----------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A . . . . . . . . . . . . . -- -- -- -- 182 793
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . 348,060 335,904 41,578 58,665 97,152 129,863
--In Lieu of Cash Distributions . . . . . . . . 5,231 2,738 6,286 4,030 10,542 7,895
Redeemed . . . . . . . . . . . . . . . . . . . . . . . (295,746) (295,669) (43,481) (31,160) (64,162) (33,283)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . . . 57,545 42,973 4,383 31,535 43,532 104,475
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . 57,544 42,973 (4,858) 33,574 38,311 114,946
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . 113,622 70,649 85,217 51,643 191,297 76,351
- ----------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . $ 171,166 $ 113,622 $ 80,359 $ 85,217 $ 229,608 $ 191,297
==================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . $ .035 $ .030 $ .619 $ .636 $ .39 $.69
Realized Net Gain . . . . . . . . . . . . . . . . . -- -- $ .154 $ .049 $ .16 $.03
- ----------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . 348,060 335,904 3,978 5,483 8,513 11,742
Issued in Lieu of Cash Distributions . . . . . . . 5,231 2,738 608 378 934 717
Redeemed . . . . . . . . . . . . . . . . . . . . . (295,746) (295,669) (4,192) (2,928) (5,695) (2,988)
- ----------------------------------------------------------------------------------------------------------------------------------
57,545 42,973 394 2,933 3,752 9,471
- ----------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income . . . . . . . . . . . . . . . -- -- -- -- $ 2,468 $ 772
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 40
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
EQUITY INDEX EQUITY INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO GROWTH PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR Year YEAR YEAR
ENDED Ended ENDED June 7 to ENDED June 7 to JUNE 3 to
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, SEPT. 30,
1994 1993 1994 1993 1994 1993 1994
(000) (000) (000) (000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 4,629 $ 3,578 $ 3,061 $ 429 $ 993 $ 144 $ 325
Realized Net Gain (Loss) . . . . . . . . 1,247 1,361 332 73 (768) (121) 5
Change in Unrealized
Appreciation (Depreciation) . . . . . 52 10,457 (4,564) 1,858 2,947 580 700
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 5,928 15,396 (1,171) 2,360 3,172 603 1,030
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . (3,274) (3,537) (2,251) (477) (342) -- --
Realized Net Gain . . . . . . . . . . . (1,383) (189) (66) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . (4,657) (3,726) (2,317) (477) (342) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A . . . . . -- -- 99 176 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . 66,892 117,081 60,416 49,746 66,763 38,418 64,245
--In Lieu of
Cash Distributions . . . . . . 4,657 3,726 2,312 476 342 -- --
Redeemed . . . . . . . . . . . . . . . (51,790) (52,710) (40,943) (2,706) (23,735) (3,293) (2,771)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . 19,759 68,097 21,785 47,516 43,370 35,125 61,474
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . 21,030 79,767 18,396 49,575 46,200 35,728 62,504
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . 164,916 85,149 49,575 -- 35,728 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . $185,946 $164,916 $67,971 $49,575 $81,928 $35,728 $62,504
==================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . $ .23 $ .34 $ .33 $ .11 $ .07 -- --
Realized Net Gain . . . . . . . . . $ .10 $ .02 $ .01 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 5,400 9,884 5,951 4,908 6,333 3,806 6,328
Issued in Lieu of Cash
Distributions . . . . . . . . . 379 317 232 46 33 -- --
Redeemed . . . . . . . . . . . . . (4,195) (4,393) (4,109) (262) (2,253) (323) (268)
- ----------------------------------------------------------------------------------------------------------------------------------
1,584 5,808 2,074 4,692 4,113 3,483 6,060
- ----------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income . . . . . . . $ 2,113 $ 758 $ 1,037 $ 128 $ 795 $ 144 $ 325
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 41
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, May 2+ to
--------------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .035 .030 .040 .023
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . -- -- -- --
----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . .035 .030 .040 .023
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.035) (.030) (.040) (.023)
Distributions from Realized Capital Gains . . . . . . . -- -- -- --
----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.035) (.030) (.040) (.023)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +3.63% +3.05% +4.11% +2.35%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $171 $114 $71 $27
Ratio of Expenses to Average Net Assets . . . . . . . . . .23% .29% .33% .34%*
Ratio of Net Investment Income to Average Net Assets . . 3.66% 3.00% 3.90% 5.50%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
* Annualized.
39
<PAGE> 42
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
HIGH-GRADE BOND PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, April 29+ to
--------------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $10.94 $10.64 $10.24 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .619 .636 .705 .299
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . (.966) .349 .427 .240
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . (.347) .985 1.132 .539
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.619) (.636) (.705) (.299)
Distributions from Realized Capital Gains . . . . . . . (.154) (.049) (.027) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.773) (.685) (.732) (.299)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $ 9.82 $10.94 $10.64 $10.24
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . -3.31% +9.64% +11.47% +5.48%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $80 $85 $52 $16
Ratio of Expenses to Average Net Assets . . . . . . . . . .24% .29% .32% .40%*
Ratio of Net Investment Income to Average Net Assets . . 5.98% 5.92% 6.66% 6.89%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 46% 73% 31% 9%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
* Annualized.
40
<PAGE> 43
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, May 23+ to
--------------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $11.58 $10.83 $10.25 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .46 .50 .51 .19
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . (.16) .97 .52 .06
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . .30 1.47 1.03 .25
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.39) (.69) (.45) --
Distributions from Realized Capital Gains . . . . . . . (.16) (.03) -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.55) (.72) (.45) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $11.33 $11.58 $10.83 $10.25
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +2.67% +14.10% +10.29% +2.50%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $230 $191 $76 $13
Ratio of Expenses to Average Net Assets . . . . . . . . . .34% .39% .42% .51%*
Ratio of Net Investment Income to Average Net Assets . . 4.11% 4.45% 4.77% 5.24%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 42% 41% 15% 3%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
* Annualized.
41
<PAGE> 44
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
EQUITY INDEX PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, April 29+ to
--------------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $12.37 $11.32 $10.45 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .31 .34 .26 .08
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . .12 1.07 .85 .37
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . .43 1.41 1.11 .45
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.23) (.34) (.24) --
Distributions from Realized Capital Gains . . . . . . . (.10) (.02) -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.33) (.36) (.24) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $12.47 $12.37 $11.32 $10.45
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +3.53% +12.68% +10.74% +4.50%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $186 $165 $85 $24
Ratio of Expenses to Average Net Assets . . . . . . . . . .24% .29% .32% .45%*
Ratio of Net Investment Income to Average Net Assets . . 2.60% 2.63% 2.84% 3.22%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 7% 16% 1% 5%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
* Annualized.
42
<PAGE> 45
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO GROWTH PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED June 7+ to YEAR ENDED June 7+ to
SEPT. 30, Sept. 30, SEPT. 30 Sept. 30
For a Share Outstanding Throughout Each Period 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $10.57 $10.00 $10.26 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .45 .14 .14 .04
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . (.63) .54 .46 .22
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . (.18) .68 .60 .26
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.33) (.11) (.07) --
Distributions from Realized Capital Gains . . . . . . . (.01) -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.34) (.11) (.07) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $10.05 $10.57 $10.79 $10.26
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . -1.64% +6.81% +5.87% +2.60%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $68 $50 $82 $36
Ratio of Expenses to Average Net Assets . . . . . . . . . .34% .39%* .38% .43%*
Ratio of Net Investment Income to Average Net Assets . . 4.57% 4.30%* 1.55% 1.63%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 18% 2% 34% 10%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 3+ TO
SEPT. 30,
For a Share Outstanding Throughout the Period 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . $10.00
------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .05
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . . . . . . . . .31
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . --
Distributions from Realized Capital Gains . . . . . . . . . . . . . . . . . . . . . . . --
------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.31
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +3.10%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . .30%*
Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . . . . . 1.91%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
* Annualized.
43
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the Money
Market, High-Grade Bond, Balanced, Equity Index, Equity Income, Growth, and
International Portfolios. Certain investments of the Money Market, High-Grade
Bond and Balanced Portfolios are in corporate debt instruments; the issuers'
abilities to meet their obligations may be affected by economic developments in
their respective industries. Shares of the Fund are currently offered only to
National Home Life Assurance Company Separate Account IV and Separate Account B
for the Vanguard Variable Annuity Plan Contract.
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: Money Market Portfolio: securities are stated at
amortized cost which approximates market value. Other Portfolios: common
stocks listed on the New York Stock Exchange or other U.S. exchanges are
valued at the latest quoted sales prices as of 4:00 PM on the valuation
date; such securities not traded are valued at the mean of the latest
quoted bid and asked prices; those securities not listed are valued at the
latest quoted bid prices. Securities listed on foreign exchanges are
valued at the latest quoted sales prices. Securities not listed are valued
at the latest quoted bid prices. Foreign currency amounts are translated
into U.S. dollars at the bid prices of such currencies against U.S.
dollars quoted by major banks as of 4:00 PM London Time. Bonds are valued
utilizing the latest bid prices and on the basis of a matrix system (which
considers such factors as security prices, yields, maturities and
ratings), both as furnished by independent pricing services. Temporary
cash investments are valued at amortized cost, which approximates market
value.
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. EQUALIZATION: The Balanced and Equity Income Portfolios follow the
accounting practice known as "equalization," under which a portion of the
price of capital shares issued and redeemed, equivalent to undistributed
net investment income per share on the date of the transaction, is
credited or charged to undistributed income. As a result, undistributed
income per share is unaffected by Portfolio share sales or redemptions.
4. 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 banks until maturity of each 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.
5. FUTURES AND FORWARD CURRENCY CONTRACTS: The Equity Index Portfolio
utilizes futures contracts to a limited extent, and the International
Portfolio 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 Portfolio and the prices of futures
contracts, and the possibility of an illiquid market. Risks
44
<PAGE> 47
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 contracts
and certain forward currency contracts is required to be treated as
realized gain (loss) for tax purposes. See Note E.
6. 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 on securities purchased are amortized to
interest income over the lives of the respective securities. Distributions
of net investment income to shareholders of the Money Market and
High-Grade Bond Portfolios are declared on a daily basis payable on the
first business day of the following month. Dividend income and
distributions to shareholders of the Balanced, Equity Index, Equity
Income, Growth and International Portfolios are recorded on the
ex-dividend date.
B. Under the terms of advisory contracts, investment advisory fee payments
are calculated at an annual percentage rate of average net assets of the
following Portfolios:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Contract
Investment Expiration
Portfolio Adviser Date
- --------------------------------------------------------------------------------
<S> <C> <C>
BALANCED WELLINGTON MANAGEMENT APRIL 30, 1995
COMPANY
EQUITY INCOME NEWELL ASSOCIATES MAY 31, 1995
GROWTH LINCOLN CAPITAL MAY 31, 1995
MANAGEMENT COMPANY
INTERNATIONAL SCHRODER CAPITAL MARCH 31, 1996
MANAGEMENT INTERNATIONAL
- --------------------------------------------------------------------------------
</TABLE>
The basic fee thus computed for the Balanced Portfolio is subject to quarterly
adjustments based on performance relative to a combined index comprised of the
Standard & Poor's 500 Stock Index and the Salomon Brothers High Grade Corporate
Bond Index. For the year ended September 30, 1994, the investment advisory fee
of the Balanced Portfolio represented an effective annual rate of .10 of 1% of
average net assets. No performance adjustment was required during the period.
The advisory fees of the Equity Income, Growth and International Portfolios
represented effective annual rates of .10 of 1%, .15 of 1% and .13 of 1%,
respectively, of average net assets.
The Vanguard Group, Inc. furnishes investment advisory services to the Money
Market, High-Grade Bond and Equity Index Portfolios on an at-cost basis.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to each Portfolio of the Fund under methods approved by the Board
of Trustees. At September 30, 1994, the Fund had contributed capital of
$136,000 to Vanguard (included in Other Assets), representing .7% of Vanguard's
capitalization. The Fund's trustees and officers are also directors and
officers of Vanguard.
D. During the year ended September 30, 1994, 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>
HIGH-GRADE BOND $ 6,912 $ 2,116
BALANCED 96,699 45,574
EQUITY INDEX 26,258 12,378
EQUITY INCOME 35,560 11,864
GROWTH 64,042 19,363
INTERNATIONAL 56,379 95
- ---------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (continued)
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(000)
-----------------------------
Portfolio Purchases Sales
- ---------------------------------------------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND $42,846 $36,202
BALANCED 41,360 45,452
- ---------------------------------------------------------------------------------
</TABLE>
At September 30, 1994, the Fund had available realized capital losses to offset
future net capital gains through the following fiscal year ends:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Expiration
Fiscal Year(s) Ending Amount
Portfolio September 30, (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND 2003 $637
GROWTH 2002-2003 889
- ---------------------------------------------------------------------------------
</TABLE>
E. At September 30, 1994, unrealized appreciation (depreciation) of
investment securities for financial reporting and federal income tax purposes
was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(000)
------------------------------------------------------
Net
Unrealized
Appreciated Depreciated Appreciation
Portfolio Securities Securities (Depreciation)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
HIGH-GRADE BOND $ 27 $ (4,741) $(4,714)
BALANCED 16,427 (11,007) 5,420
EQUITY INDEX 22,982 (8,627) 14,355
EQUITY INCOME 3,356 (6,062) (2,706)
GROWTH 5,082 (1,555) 3,527
INTERNATIONAL 2,182 (1,457) 725
- ------------------------------------------------------------------------------------
</TABLE>
At September 30, 1994, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in December, 1994, held by the Equity
Index Portfolio, the related unrealized depreciation, and the market value of
securities deposited as initial margin for such contracts were $7,875,000,
$145,000, and $396,000, respectively.
Under the terms of open forward currency exchange contracts at September 30,
1994, the International Growth Portfolio was obligated to deliver foreign
currencies in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(000)
---------------------------
Foreign U.S.
Currency Dollars
- ---------------------------------------------------------------------------------
<S> <C> <C>
12/8/94 NETHERLAND GUILDERS 5,000 $2,884
12/8/94 GERMAN MARKS 2,000 1,292
- ---------------------------------------------------------------------------------
</TABLE>
Unrealized depreciation related to open forward currency exchange contracts of
the International Portfolio at September 30, 1994 was $25,000, of which $5,000
is required to be treated as realized loss for Federal income tax purposes.
F. The market value of securities on loan to broker/dealers at September 30,
1994, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000)
-------------------------------------------------
Collateral Received
--------------------------
Market Value Market Value of
of Loaned U.S. Treasury
Securities Cash Securities
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCED $10,063 $2,614 $8,005
EQUITY INDEX 83 102 --
- --------------------------------------------------------------------------------
</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.
46
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Variable Insurance 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 Money Market, High-Grade Bond, Balanced, Equity Index, Equity Income,
Growth, and International Portfolios of Vanguard Variable Insurance Fund (the
"Fund") at September 30, 1994, 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 custodians 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 1, 1994
47
<PAGE> 50
TRUSTEES 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.
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 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., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric 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 Chief Executive Officer 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 VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
48
<PAGE> 51
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the
same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no- load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets
(not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at
the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
[FIGURE 10 -- SEE APPENDIX]
<PAGE> 52
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
VARIABLE ANNUITY
Vanguard Variable Annuity Plan
(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.
Q640-9/94
<PAGE> 53
EDGAR APPENDIX
This appendix describes the 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 Vanguard ship
in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through the
sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through four.
A photograph of John C. Bogle appears at the lower-right of page one.
A bar chart comparing Variable Annuity Plan Expenses (Vanguard Variable
Annuity Plan vs. Average Variable Annuity Plan) for the years 1991 through 1994
appears at the upper-left of page two.
A running head featuring a map and telescope appears on pages five through
ten.
A running head featuring a lantern appears on pages eleven through
thirteen.
Cumulative performance line charts, including average annual total
returns, for the six portfolios of Vanguard Variable Insurance Fund ("VVIF")
appear on pages eleven through thirteen. At the top of page eleven, a
comparison is made between VVIF-Money Market Portfolio, the Salomon 90-Day
T-Bill and the Average Money Market Fund for the period May 31, 1991, to
September 30, 1994. At the bottom of page eleven, a comparison is made between
VVIF-High-Grade Bond Portfolio, the Lehman Aggregate Bond Index and the Average
Fixed Income Fund for the period April 30, 1991, to September 30, 1994.
Appearing at the top of page twelve is a comparison of VVIF-Balanced Portfolio,
the Average Balanced Fund and a Composite Index (65% S&P 500 Index, 35% Salomon
High-Grade Bond Index) for the period May 31, 1991, to September 30, 1994. At
the bottom of page twelve is the comparison of VVIF-Equity Index Portfolio, the
Average Growth and Income Fund and the Standard & Poor's 500 Index for the
period April 30, 1991, to September 30, 1994. At the top of page thirteen, a
comparison is made between VVIF-Equity Income Portfolio, the Average Equity
Income Fund, and the Standard & Poor's 500 Index for the period June 30, 1993,
to September 30, 1994. At the bottom of page thirteen, a comparison is made
between VVIF-Growth Portfolio, the Average Growth Fund and the Standard &
Poor's 500 Index for the period June 30, 1993, to September 30, 1994.
A running head featuring a log book and pen appears on pages fourteen
through forty-seven.
<PAGE> 54
A running head featuring a compass appears on page forty-eight.
At the bottom of the back cover there appears a triangle with the sides
labeled "risk," "cost," and "return."
A running head featuring a seagull in flight appears on the back cover of
the report.
