<PAGE> 1
[VANGUARD VARIABLE INSURANCE FUND LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to
John J. Brennan, who, on January 31, 1996, will assume my responsibilities as
Chief Executive Officer of Vanguard Variable Insurance Fund and the other Funds
in The Vanguard Group. Mr. Brennan will continue to serve as President of the
Funds, and I will continue to serve as Chairman of the Board.
As Chairman of all the Vanguard Funds, I want to tell you that I am
enthusiastic and confident that Jack Brennan is exactly the right person to
succeed me as Chief Executive Officer. To use yet another Vanguard nautical
metaphor, he will be the new captain. He has the qualities of leadership,
integrity, intelligence, and vision that must continue to be Vanguard's hallmark
as we move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have been
working closely together since he joined Vanguard in 1982. He is a graduate of
Dartmouth College and Harvard Business School. He started as Assistant to
the Chairman and, rising like a rocket, became President in 1989. While, at age
41, he may seem young, he is in fact older than I was when I became Chief
Executive Officer of Vanguard's predecessor organization in 1967, at the age of
38. Most important of all, Jack is completely dedicated to the Vanguard
character, and believes in our basic mission: serving solely the shareholder,
free of any conflict of interest. He believes in holding our costs of operation
to a minimum, and in retaining our position as the lowest-cost provider of
financial services in the world. He is a true competitor, who shares Vanguard's
dedication to providing highly competitive returns to our investors relative to
the returns provided by other mutual funds with comparable objectives. He also
believes in reporting our results to shareholders with complete candor. He has
the full support of the Board of Directors and our crew, and is committed to
staying the course we have set for Vanguard. You need have no doubt that the
essential elements that drew you to Vanguard in the first place will remain
intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack Brennan
with whatever wisdom I may have acquired during my lifetime of experience in
this wonderful industry and in my service as captain of Vanguard since I founded
this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me
in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD VARIABLE INSURANCE FUND IS INTENDED AS AN INVESTMENT VEHICLE FOR
VARIABLE ANNUITY CONTRACTS CURRENTLY OFFERED BY THE SEPARATE ACCOUNT OF
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY (FOR NEW YORK RESIDENTS BY FIRST
PROVIDIAN LIFE & HEALTH INSURANCE 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:
Following a generally lackluster fiscal 1994, stock and bond prices
surged upward during Vanguard Variable Insurance Fund's 1995 fiscal year,
which ended on September 30. Each of the Portfolios provided a higher return
than in the previous year--in the case of our stock and bond Portfolios,
dramatically higher. What is more, each Portfolio provided results that were
fully competitive with comparable mutual funds.
The table below lists the total return (capital change plus income) for
the Fund's seven Portfolios. We also provide the return of a comparative
benchmark for each Portfolio.
<TABLE>
<CAPTION>
- -----------------------------------------------
FUND TOTAL RETURN
------------------
FISCAL YEAR ENDED
SEPTEMBER 30, 1995
- -----------------------------------------------
<S> <C>
MONEY MARKET PORTFOLIO + 5.8%
AVERAGE MONEY MARKET FUND + 5.3
- -----------------------------------------------
HIGH-GRADE BOND PORTFOLIO +13.8%
LEHMAN AGGREGATE BOND INDEX +14.1
- -----------------------------------------------
BALANCED PORTFOLIO +23.7%
COMPOSITE INDEX* +26.6
- -----------------------------------------------
EQUITY INDEX PORTFOLIO +29.5%
EQUITY INCOME PORTFOLIO +25.7
GROWTH PORTFOLIO +32.0
STANDARD & POOR'S 500 STOCK INDEX +29.7
- -----------------------------------------------
INTERNATIONAL PORTFOLIO +11.2%
MSCI EUROPE, AUSTRALIA, AND
FAR EAST (EAFE) INDEX + 6.1
- -----------------------------------------------
</TABLE>
*65% Standard & Poor's 500 Index, 35% Salomon High-Grade Bond Index.
Each Portfolio's return listed above reflects its change in net asset value
plus any distributions during the fiscal year. As you know, the returns earned
by holders of the Vanguard Variable Annuity Plan are reduced by administrative
and insurance expenses associated with the Plan, totaling some 0.51% annually.
The table that follows shows the net investment results to planholders.
<TABLE>
<CAPTION>
- -----------------------------------------------
PLAN TOTAL RETURN
-----------------
FISCAL YEAR ENDED
VANGUARD PORTFOLIO SEPTEMBER 30, 1995
- -----------------------------------------------
<S> <C>
MONEY MARKET + 5.2%
HIGH-GRADE BOND +13.3
BALANCED +23.0
EQUITY INDEX +28.8
EQUITY INCOME +25.0
GROWTH +31.3
INTERNATIONAL +10.6
- -----------------------------------------------
</TABLE>
THE FINANCIAL MARKETS IN FISCAL 1995
In the United States, both stocks and bonds enjoyed a remarkable bull
market during the past twelve months. In fact, the past fiscal year provided
one of the best combined returns of any year in the modern history of the
financial markets, going all the way back to 1926. (The combined return assumes
a mix of 50% stocks and 50% bonds.) The recovery from a lackluster 1994
delighted the bulls even as it astonished the bears.
During the first three months of the fiscal year, both markets went
essentially nowhere. Then, as January began, they sprang to life. During the
seven months that followed, stocks and bonds alike moved upward, week after
week, in virtually straight-line fashion. The only area of disappointment was
international stocks, which, as measured by the unmanaged MSCI EAFE Index,
returned +6.1%. The European market returns were reasonably strong (+19.1%)
thanks largely to a weak dollar, but the Pacific region, dominated by Japan,
was dismal (-4.1%). On balance, it was a year to savor in the world's financial
markets, even as it should remind us that participation in fluctuating
securities markets inevitably entails not only reward, but risk as well.
There were, as always, many opinions as to the source of the surprising
strength in the U.S. financial markets. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) the sharp decline in
long-term interest rates; (3) the diminishing threat of additional increases in
short-term interest rates by the Federal Reserve Board; (4) a slight softening
in U.S. economic growth,
1
<PAGE> 4
[FIGURE 2]
resulting in continued optimism about the outlook for inflation; and (5) a
hint of speculative fever in the marketplace.
Among the most dominant of these factors was the sharp drop in
long-term interest rates and the commensurate increase in the prices of
long-term bonds. On balance for the fiscal year, the yield on the long-term
U.S. Treasury bond tumbled from 7.8% to 6.6%, a precipitous drop of 120 basis
points, equivalent to a +16% price increase excluding the generous interest
coupon. Short-term rates, however, continued to rise, with the Treasury bill
yield beginning the fiscal year at 4.7% and closing at 5.4%.
This dichotomy, of course, reflects the way things are supposed to work
(although they often do not) in the bond market. When the Federal Reserve Bank
raises short-term rates, it is read as a signal of the Bank's willingness to
fight inflation. This determination, in turn, increases confidence that the
outlook for the real return (yield minus the rate of inflation) on long-term
bonds will be viewed with increased optimism by investors, which would
ultimately reduce long-term rates.
Since the three primary financial asset classes compete with one
another for investors' assets, lower yields on fixed-income securities tend to
engender lower yields on stocks. At fiscal year end, the average yield on the
stocks in the Standard & Poor's 500 Index had tumbled to 2.3%, the lowest yield
in modern market history. Whether the level of investor optimism--or perhaps
even greed--suggested by this low yield will be justified by future dividend
growth or even lower yields (however unlikely) remains to be seen.
To place fiscal 1995 in the perspective of recent history, the chart to
the left shows the cumulative returns on U.S. stocks, foreign stocks, long-term
bonds, and bills over the past five fiscal years. For the full period, the
results surely justify the "greater-the-risk, greater-the-reward" theory, with
average annual total returns as follows: U.S. stocks +17.2%, bonds +12.7%, and
bills +4.6%--all far above historical norms. Foreign stocks, with a return of
"only" +11.0%, were "the exception that proves the rule." The ongoing slide in
Japanese stocks demonstrates the risks of international stock investing.
THE FUND'S PORTFOLIOS IN 1995
Each Portfolio gave a good account of itself during fiscal 1995, not only in
absolute terms, but also relative to competitive funds. A summary of our
Portfolio results follows:
MONEY MARKET PORTFOLIO . . . benefited from the Federal Reserve's
policy of maintaining short-term interest rates in the 4.8% to 6.0% range . . .
the Portfolio's return of +5.8% surpassed the average money market fund's
return of +5.3%.
HIGH-GRADE BOND PORTFOLIO . . . declining bond yields and our
intermediate-term average maturity led to a rise in net asset value of
+6.6% . . . our total return of +13.8% was just shy of the +14.1% return of our
benchmark index, but well ahead of the +11.3% return of the average
intermediate-term U.S. Government fund.
BALANCED PORTFOLIO . . . return of +23.7% fell somewhat short of the
+26.6% return of the unmanaged composite index (65% equities/35%
2
<PAGE> 5
bonds) but exceeded by a substantial margin the +19.0% return of the average
competitive balanced fund.
EQUITY INDEX PORTFOLIO . . . return of +29.5% closely tracked the
+29.7% return of our unmanaged target index, the Standard & Poor's 500
Composite Stock Price Index . . . Portfolio outperformed 76% of all general
equity mutual funds, as large capitalization stocks, heavily represented in the
Index, dominated the market for most of the fiscal year.
EQUITY INCOME PORTFOLIO . . . for a relatively conservative equity
fund, a very satisfactory return of +25.7% . . . compares favorably to the
+20.0% return of the average competitive equity income fund.
GROWTH PORTFOLIO . . . exceptional return of +32.0% nicely outpaced the
+25.9% return achieved by the average growth fund.
INTERNATIONAL PORTFOLIO . . . in spite of mediocre foreign stock market
results, our Portfolio provided a return of +11.2%, well ahead of the average
international fund's gain of +3.0%.
Overall, our Portfolios made a "clean sweep" of it, with each bettering
its competitive norm. It was a good year for Vanguard planholders--both on an
absolute basis and relative to competitive mutual funds with similar investment
policies.
A LONG-TERM PERSPECTIVE
Of course, one year is really too short a period in which to evaluate the
success of any investment program. Looking at the results since inception, the
table to the right compares each Portfolio's total return since inception with
its respective competitive group.
Each of the Vanguard Portfolios provided a solid return advantage over
the average comparable mutual fund. Part of this edge, of course, comes from
the lower expense ratios associated with the Vanguard Funds. Another
contributing factor has been the excellent job done by the investment managers
to the Fund's Portfolios. As you may know, three of the Portfolios are managed
by Vanguard's own investment professionals, while our actively managed equity
and balanced Portfolios are managed by external investment advisers.
<TABLE>
<CAPTION>
- -----------------------------------------------
AVERAGE ANNUAL
TOTAL RETURN
-----------------------------
SINCE INCEPTION THROUGH
SEPTEMBER 30, 1995
-----------------------------
VANGUARD AVERAGE VANGUARD
PORTFOLIO PORTFOLIO COMPETITOR ADVANTAGE
- -----------------------------------------------
<S> <C> <C> <C>
MONEY MARKET + 4.3% + 3.9% +0.4%
HIGH-GRADE BOND + 8.2 + 7.4 +0.8
BALANCED +12.0 +10.3 +1.7
EQUITY INDEX +13.5 +12.7 +0.8
EQUITY INCOME +12.8 +11.3 +1.5
GROWTH +16.9 +14.3 +2.6
INTERNATIONAL +10.9 + 4.6 +6.3
- -----------------------------------------------
</TABLE>
Fund inceptions: High-Grade Bond and Equity Index Portfolios, April 1991; Money
Market and Balanced Portfolios, May 1991; Equity Income and Growth Portfolios,
June 1993; International Portfolio, June 1994.
For variable annuity investors, the Vanguard margin is considerably
understated, as it does not reflect the dramatic costs savings accrued by
holders of the Vanguard Variable Annuity Plan. Our insurance and
administration expenses of 0.51% annually are less than one-half the insurance
industry's average of 1.24%. Adding this savings to the advantage created by
the low expense ratios of our Portfolios, you get aggregate savings in
Vanguard's low-cost variable annuity plan of some 1% per year (relative to
other variable annuity programs). We think this substantial savings resides
better in your pocket than someone else's.
IN SUMMARY
During fiscal 1995, Vanguard Variable Insurance Fund enjoyed the best year of a
relatively short but auspicious lifetime. Now that it's behind us, however, we
should recognize the sobering realities of historically high securities price
levels. Future returns on stocks and bonds will almost surely be lower in the
years ahead.
Starting with yields of 2.3% on the Standard & Poor's 500 Index and
6.6% on long-term U.S. Treasury bonds, it seems highly unlikely that returns
can be sustained at double-digit levels. Instead, I think that the current bond
yield gives a reasonable
3
<PAGE> 6
projection of possible returns on long bonds over the next decade. Much
lower returns than we have become accustomed to also seem in order for
stocks--perhaps averaging less than the long-term historical norm of about +10%
annually.
Of course, with inflation seemingly in check at the moment, at less
than 3%, lower nominal returns may provide fully satisfactory real
(after-inflation) returns. The important message, I think, is to "be prepared"
for whatever volatility may lie ahead. Being prepared means holding a
diversified portfolio consisting of stocks, bonds, and reserves, in whatever
proportion matches your personal risk/reward profile. It also means being
mentally ready to "stay the course" when, not if, times get tough. If you keep
these straightforward axioms in mind, the Portfolios of Vanguard Variable
Insurance Fund should serve you well, whatever the financial markets bring to
bear.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle,
Chairman of the Board
October 16, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
VANGUARD VARIABLE INSURANCE FUND VANGUARD VARIABLE ANNUITY PLAN
- -------------------------------------------------------------------------------------------------------
SEC SEC
TOTAL RETURN 30-DAY TOTAL RETURN 30-DAY
INCEPTION FISCAL YEAR ENDED ANNUALIZED ACCUMULATED FISCAL YEAR ENDED ANNUALIZED
PORTFOLIO DATE SEPT. 30, 1995 YIELD UNIT VALUE SEPT. 30, 1995 YIELD
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET 5/2/91 + 5.8% 5.56%* $ 1.18 + 5.2% 5.05%*
HIGH-GRADE BOND 4/29/91 +13.8 6.55 13.86 +13.3 6.04
BALANCED 5/23/91 +23.7 3.94 16.00 +23.0 3.43
EQUITY INDEX 4/29/91 +29.5 2.20 17.07 +28.8 1.69
EQUITY INCOME 6/7/93 +25.7 3.93 13.04 +25.0 3.42
GROWTH 6/7/93 +32.0 1.44 14.17 +31.3 0.93
INTERNATIONAL 6/3/94 +11.2 N/A 11.39 +10.6 N/A
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Yield for Money Market Portfolio is a 7-day yield.
4
<PAGE> 7
CUMULATIVE PERFORMANCE
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
MONEY MARKET PORTFOLIO +5.77% +4.29%
AVERAGE MONEY MARKET FUND +5.25 +3.87
SALOMON 90-DAY T-BILL +5.69 +4.16
</TABLE>
*Inception, May 2, 1991.
Note: Past performance is not predictive of future performance.
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND PORTFOLIO +13.83% +8.23%
AVERAGE INTERMEDIATE-TERM
U.S. GOVERNMENT FUND +11.34 +7.40
LEHMAN AGGREGATE BOND INDEX +14.06 +8.80
</TABLE>
*Inception, April 29, 1991.
Note: Past performance is not predictive of future performance.
5
<PAGE> 8
CUMULATIVE PERFORMANCE (continued)
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
BALANCED PORTFOLIO +23.65% +11.99%
AVERAGE BALANCED FUND +18.99 +10.32
COMPOSITE INDEX** +26.56 +12.31
</TABLE>
*Inception, May 23, 1991.
**65% S&P 500 Index, 35% Salomon High-Grade Bond Index.
Note: Past performance is not predictive of future performance.
[FIGURE 6]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
EQUITY INDEX PORTFOLIO +29.51% +13.47%
AVERAGE GROWTH & INCOME FUND +23.66 +12.73
STANDARD & POOR'S 500 INDEX +29.71 +13.88
</TABLE>
*Inception, April 29, 1991.
Note: Past performance is not predictive of future performance.
6
<PAGE> 9
[FIGURE 7]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
EQUITY INCOME PORTFOLIO +25.69% +12.76%
AVERAGE EQUITY INCOME FUND +20.02 +11.28
STANDARD & POOR'S 500 INDEX +29.71 +15.30
</TABLE>
*Inception, June 7, 1993.
Note: Past performance is not predictive of future performance.
[FIGURE 8]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
GROWTH PORTFOLIO +32.02% +16.85%
AVERAGE GROWTH FUND +25.87 +14.28
STANDARD & POOR'S 500 INDEX +29.71 +15.30
</TABLE>
*Inception, June 7, 1993.
Note: Past performance is not predictive of future performance.
7
<PAGE> 10
CUMULATIVE PERFORMANCE (continued)
[FIGURE 9]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended September 30, 1995
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
INTERNATIONAL PORTFOLIO +11.21% +10.87%
AVERAGE INTERNATIONAL FUND + 2.95 + 4.64
MSCI EAFE INDEX + 6.11 + 4.62
</TABLE>
*Inception, June 3, 1994.
Note: Past performance is not predictive of future performance.
8
<PAGE> 11
REPORT FROM VANGUARD FIXED INCOME GROUP
During the fiscal year ended September 30, 1995, bond market returns
were strong across all maturity sectors. After a rocky start, bond markets
rallied throughout the remainder of the fiscal year, as the Federal Reserve (the
"Fed") implemented the final stage of a decisive and preemptive round of
interest rate increases. This year's gains have helped dull the sting of 1994's
bear market in bonds and provided a handsome reward to investors who remained
committed to their long-term investment objective.
The favorable impact of the market's performance was greatest on bonds
of longer maturity for which the capital appreciation component of return is
more volatile. Short-term money market investments provided high returns
relative to recent years measured both before and after inflation. (Please refer
to the Chairman's letter for more detail on the returns of the various
Portfolios.)
In managing the Portfolios, we focus on the fundamental condition of the
economy, and with it the demand for credit and the forces acting on inflation,
which are the primary drivers of interest rates. Economic growth has moderated
from the torrid pace at which it opened the year. By mid-1995, goods producing
industries and job growth had slowed while bloated inventories were worked off.
However, by historical standards, this pullback in the rate of expansion has
been exceedingly mild, and recent economic statistics give some indications that
the economy will likely resume its upward path, albeit at a more sustainable
pace.
Currently, the most favorable indicator for the long-term health of the
economy and the financial markets is the stable and relatively low rate of
inflation. A period of rapid growth like that witnessed in 1994 typically would
have led to upward pressure on inflation as manufacturing capacity became
strained. In this episode, however, the interest rate increases initiated by the
Fed early in the fiscal year seem to have been adequate to forestall such a
surge in prices.
While changes in monetary policy affect the economy with highly variable
magnitudes and time lags, the Fed certainly deserves some credit for acting
early. In fact, in July, Fed officials cited low inflation when they acted to
lower short-term rates a fraction. The bond market's rally this year has been a
vote of confidence in the Fed, as long-term interest rates have declined
relative to short-term rates. This "flattening" of the yield curve reflects a
lessening of the premium demanded by long-term investors as protection against
the risk of higher future inflation.
MONEY MARKET PORTFOLIO
Throughout the swings in the market this past year, we have steered a
conservative course for the Money Market Portfolio of Vanguard Variable
Insurance Fund. Specifically, we have kept the average weighted maturity of the
Portfolio in the market-neutral band of our investment policy guidelines. This
has helped us to ride out the gyrations in market expectations. By keeping our
interest rate sensitivity stable, we were able to lock in some attractive
yields when rates were higher. By the same token, we are not making excessive
commitments to the market now that rates have fallen.
In terms of the credit quality of our investments, we have determined
that lower quality money market securities generally do not provide adequate
additional return for the additional credit risk taken. Thus, we have emphasized
high-quality issuers in the Portfolio, the holdings of which are all rated in
the highest category by nationally recognized credit rating agencies. Finally,
we have not invested (nor will we) in the risky or exotic derivative securities
that have caused losses for investors whose managers either bet incorrectly or
did not fully evaluate the risks of such strategies. As always, we are relying
on our conservative management philosophy in combination with our exceptionally
low cost structure to provide our investors with highly competitive returns.
HIGH-GRADE BOND PORTFOLIO
Over the past six months, the bond market has experienced a strong rally and a
flattening in the Treasury yield curve, with one-year rates declining by about
- -0.8% and 10- to 30-year rates declining by about -1.0% and -0.9%,
respectively. The resulting improvement in bond prices is primarily associated
with the belief that the Federal Reserve tightening
9
<PAGE> 12
is largely complete and that economic growth is slowing with the hoped for
result being the long-awaited "soft landing."
The performance of the various sectors of the Lehman Aggregate Bond
Index for the six- and twelve-month periods ended September 30, 1995, is shown
below:
<TABLE>
<CAPTION>
- -----------------------------------------------------
TOTAL RETURN
------------------
PERIODS ENDED
SEPTEMBER 30, 1995
------------------
SIX TWELVE
MONTHS MONTHS
- -----------------------------------------------------
<S> <C> <C>
LEHMAN AGGREGATE BOND INDEX + 8.2% +14.1%
- -----------------------------------------------------
GOVERNMENT SECTOR + 8.1% +13.6%
CORPORATE SECTOR +10.0 +17.0
MORTGAGE-BACKED SECURITIES SECTOR + 7.4 +13.5
- -----------------------------------------------------
</TABLE>
The best performing category for both the six- and twelve-month periods
was the corporate sector. This was largely caused by narrowing credit spreads
resulting from continued strong corporate earnings and the belief that the
economy will experience a soft landing. For the twelve-month period, the worst
performing sector was the mortgage sector, with a return of +13.5%. The average
effective maturity of this sector has been shorter than that of the other major
sectors resulting in lower interest rate risk and therefore lower price
increases during the recent declining rate environment.
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index. For the past six- and
twelve-month periods, the Portfolio's return was +8.0% and +13.8%, respectively.
Adjusted for expenses and transaction costs (neither of which affect the
theoretical Index), the difference was a favorable +0.1% and +0.2%.
As of September 30, 1995, the High-Grade Bond Portfolio was composed of
38% government bonds, 29% corporate bonds, 4% foreign bonds (dollar
denominated), and 29% mortgage-backed securities.
Respectfully,
Kenneth E. Volpert, Vice President
High-Grade Bond Portfolio
John W. Hollyer, Assistant Vice President
Money Market Portfolio
Vanguard Fixed Income Group
October 12, 1995
10
<PAGE> 13
REPORT FROM WELLINGTON MANAGEMENT COMPANY
In a favorable period for both stocks and bonds, the Balanced Portfolio
earned a return of +23.7% for the twelve months ended September 30, 1995. The
Portfolio normally allocates about two-thirds of its assets to equity
investments and the remainder to long-term, investment-grade fixed-income
securities. As of September 30, the Portfolio had about 65% of its assets in
equities, in the middle of its policy range of 60% to 70%.
During the past twelve months, the banking industry turned in a powerful
performance for the Portfolio, with sector weighting and stock selection both
strong pluses. The health-care sector also provided excellent relative results.
By far the biggest drag on performance during the period was the large
under-representation in technology stocks, as the market fixated on this sector.
Nine months ago, in the midst of a strong economy, we felt that the
rise in interest rates during 1994 would lead to a slowdown in business activity
during 1995. We were unwilling, however, to abandon our emphasis on cyclically
sensitive stocks, because we believed that the slowdown wouldn't last long
enough to allow a meaningful shift out of, and then back into, stocks like
Alcoa, DuPont, Georgia Pacific, et al. We accepted the possibility of
underperformance in this sector for a time rather than risk missing the
resumption of their move to much higher price objectives.
In the equity arena, investor disappointment about the prospects for
lower interest rates is likely to take the form of lower price/earnings ratios.
How individual stocks behave, therefore, will be linked to how fast their
earnings are rising. For this reason, and for other longer-term reasons as well,
we remain content with our large commitment to the cyclical sector. We believe
the potential for even larger price gains ahead is real.
Health care remains a significant part of the Portfolio. This sector has
contributed importantly to our investment results since the health reform
related panic of a couple of years ago. We have begun to cut back some positions
as valuations approach more rational levels.
Banks also continue to serve us well, reporting solid earnings gains
while the industry continues to consolidate. We have also added to the
Portfolio's insurance holdings. We read Warren Buffett's bid for the rest of
GEICO as an endorsement of our very large holding in Allstate, another prominent
personal lines insurer. We've also initiated a position in Jefferson-Pilot.
We are a bit disappointed in our meaningful position in energy stocks.
Crude oil prices are not firming as we thought, and natural gas prices went
lower than expected before winter prospects brightened the outlook. But
companies with chemical operations are doing better, and a number of them are
proceeding with large-scale cost reduction schemes. This group remains an anchor
to windward in the Portfolio and contributes importantly to income.
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. We believe that
interest rates remain high relative to current or prospective rates of
inflation.
Despite reduced odds (because of improving economic conditions), we
still expect the Federal Reserve to lower short-term interest rates as it
becomes clear that inflation is not going to accelerate sharply. Our bias,
therefore, is to remain fully invested in the bond portion, and to maintain a
long duration. We expect to utilize periods of accelerating growth and higher
interest rates to speed up purchasing programs and extend duration. Should
long-term Treasury yields approach 6%, we expect to become more defensive (i.e.,
shorten duration).
We believe the Portfolio is well positioned to take advantage of coming
economic conditions. However, the broad stock market brought stellar returns in
an absolute sense this year, and we would not expect the market to continue to
reach the lofty levels of the past twelve months year after year.
Respectfully,
Ernst H. von Metzsch, Senior Vice President
Portfolio Manager
Wellington Management Company
October 11, 1995
11
<PAGE> 14
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
In the 1995 Semi-Annual Report of the Equity Index Portfolio, I wrote
that it would be difficult to imagine as favorable a market environment during
the second half of the year as we experienced in the first half. I concluded
that it would be natural for the stock market to consolidate the gains of the
first half of the fiscal year. Instead, the market soared during the second half
of the year, with the Standard & Poor's 500 Index (S&P 500) providing a total
return of +18.2%. For the fiscal year, the total return was +29.7%, making 1995
one of the best years in the history of the stock market. In fact, of the twelve
months of the year, only November 1994 had a negative return.
IN RETROSPECT . . .
As in the first half of the year, the bond market sustained a strong rally
while the economy continued to grow at a moderate pace without any indication
of increasing inflationary pressure. Simultaneously, earnings increased more
than 30% over the prior year, as corporate restructuring benefited the bottom
line. The decline in interest rates justified the relatively high
price/earnings ratio, and the effect of soaring earnings drove the market
sharply higher.
To be sure, there were other macro-economic factors affecting the
internal valuations of the market, such as the wildly fluctuating value of the
U.S. dollar. During the first six months of the calendar year, the dollar
declined precipitously, particularly against the Japanese yen and German
deutsche mark. A weak dollar makes domestically produced goods and services
relatively cheaper in foreign markets. This favors large capitalization
companies, which tend to derive a greater portion of their sales and profits
from exports.
During the first nine months of the fiscal year, the drop in the dollar
benefited large capitalization stocks, which provided a +20.2% total return, as
measured by the S&P 500. In contrast, small capitalization stocks, as measured
by the Russell 2000 Index, advanced by a much lesser +12.3%. During the last
quarter of the fiscal year, however, the dollar regained about half of its
decline and small capitalization stocks outperformed large capitalization stocks
with a +9.9% return compared to +7.9%.
Of course, the Equity Index Portfolio is designed to track the
performance of the S&P 500, and thus greatly benefited from the net decline of
the dollar. During the fiscal year, the Portfolio continued to track the
performance of the S&P 500 quite closely, once again lagging by less than the
expense ratio of the fund. The total return of the Portfolio was +29.5% during
the fiscal year compared to +29.7% for the Index.
PROSPECTIVELY . . .
The absolute returns of the past year, or even of the past decade (+16%
per year), are probably not sustainable given that current price/earnings ratios
are somewhat high historically and that earnings growth prospects are subsiding.
However, we believe the indexed approach of the Portfolio will continue to
provide returns commensurate with the market and superior to most actively
managed funds over the long term. The Portfolio should meet its objective of
matching the performance of the S&P 500.
Respectfully,
George U. Sauter, Vice President
Vanguard Core Management Group
October 17, 1995
12
<PAGE> 15
REPORT FROM NEWELL ASSOCIATES
Vanguard Equity Income Portfolio outperformed the average equity income
fund by a small amount over the past six months, and by a substantial margin
for the fiscal year. The Portfolio continued to lag behind the Standard &
Poor's 500 Stock Index, but gradually narrowed the gap during the year
and outperformed the Index during the most recent quarter. The results during
the fiscal year are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
TOTAL RETURN
---------------------------
FISCAL YEAR ENDED
SEPTEMBER 30, 1995
---------------------------
THREE SIX TWELVE
MONTHS MONTHS MONTHS
- ----------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME PORTFOLIO +9.0% +15.5% +25.7%
- ----------------------------------------------------
AVERAGE EQUITY INCOME FUND +7.2% +14.4% +20.0%
STANDARD & POOR'S 500 INDEX +7.9 +18.2 +29.7
- ----------------------------------------------------
</TABLE>
Mutual funds included in the average equity income group are very diverse in
character and, as a consequence, it is difficult to divine why they perform as
they do. However, we do know that in recent years some managers in the group
have made investments that would not traditionally be viewed as appropriate for
conservative high-yield equity funds.
It is evident that these departures have not always worked out, and the
negative effects continued to show up in the performance of the equity income
fund group during the past year. On the other hand, most conservative high-yield
common stocks have not had severe performance problems in 1995. While they
generally have not led the market, they have participated in the rise over the
past year to the degree we would have expected in light of their inherent low
volatility.
AN IMPROBABLE ROTATION
During the first six months of 1995, technology stocks cast a spell over stock
investors. Semiconductor, computer, and information technology companies came
to be seen as one-decision growth investments that could be held virtually
forever. The resulting surge in the prices of their stocks was a major factor
in the rise of the stock market. It was also a prime cause of the lag in the
performance of equity income funds versus the S&P 500 Index.
For the most part, technology stocks have low current yields and are not
a natural selection for equity income portfolios. In the third quarter, with the
coming of a few earnings disappointments, the spell enveloping technology stocks
began to dissipate. Even some long-time advocates of the stocks lightened their
holdings. Investment commentators have suggested that some of the proceeds of
such sales have gone into conservative stocks, including utilities and consumer
non-durables, as a hedge against a possible weak market. Switching from
technology stocks to utilities is an improbable sector rotation, and the mere
thought of it cannot fail to give satisfaction to conservative income stock
investors, but it helps to explain the stronger performance of the Equity Income
Portfolio versus the S&P 500 Index in the most recent quarter.
PORTFOLIO CHANGES
Most of the movement in group allocation since our Semi-Annual Report occurred
as the result of stock price changes rather than purchase and sale activity.
The Portfolio's weightings in banks, drugs, insurance, and telephone companies
increased in size primarily because of their strong performance relative to the
market. However, we also added two new stocks to the insurance group and one
each to the food and banking groups. Despite the strong performance of these
groups, the share prices of the new stocks lagged the broad market during the
past six months, causing them to enter their relative yield buy zones. We also
made additional sales of two stocks in the financial area which continued to
move through their relative yield sell zones based on reports of strong
earnings and restructuring.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
October 9, 1995
13
<PAGE> 16
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
The domestic equity market enjoyed a remarkable +29.7% return during the
twelve months ending September 30, 1995. A return in the area of +30% has been
earned on only five occasions in the past twenty-five calendar years, so it was
a very unusual event.
Most of the big gain, nearly +20%, came in the second half of the fiscal
year. Surprisingly robust corporate profits, materially lower interest rates,
continued strong cash flows into equity mutual funds, and perhaps anticipation
of some constraints on federal spending all contributed to the powerful stock
market rally. Looking out from here, we see no obvious end to the good news,
although we would expect more typical market volatility.
Your Growth Portfolio generated a +32.0% return for the fiscal year, a
bit above the traditional standards of performance. This turned out to be no
mean accomplishment, since the Portfolio's modest underweighting in technology
combined with our cash holdings constrained returns. As a result, Lincoln's
individual stock selections had to be good, and they were.
The character of the Portfolio, mostly largest-sized, dominant growth
companies, was unchanged. During the past six months, industry diversification
was modified with approximately 3% increases in both technology and health care
and 3% reductions in financials and industrials. The largest purchases were
Johnson & Johnson, Philip Morris, and PepsiCo, all steady growers. Philip Morris
and Johnson & Johnson are new among the ten largest commitments, while Fannie
Mae and Gillette (now #11 and #13, respectively) slipped back.
Over the past five semi-annual reporting periods (encompassing Lincoln's
management), seven companies have been among the largest fifteen holdings each
period, a sign of unusual continuity in implementing our growth mandate. The
companies are: Automatic Data, Fannie Mae, General Electric, Gillette, PepsiCo,
Procter & Gamble, and Wal-Mart. We continue to be impressed with the long-term
strength and durability of the earnings of these large, dominant companies. The
following table provides an overview of our ten largest holdings.
<TABLE>
<CAPTION>
- -----------------------------------------------------
COMPANY BUSINESS
- -----------------------------------------------------
<S> <C>
1. PHILIP MORRIS #1 DIVERSIFIED CONSUMER
PRODUCTS COMPANY
2. PEPSICO #1 SNACK GOODS, #2 SOFT DRINKS
3. AT&T #1 LONG DISTANCE TELEPHONE
COMPANY
4. GENERAL ELECTRIC DIVERSIFIED MANUFACTURER
(#1 IN MOST SEGMENTS)
5. WAL-MART STORES #1 RETAILER
6. JOHNSON & JOHNSON #1 PRODUCER OF HEALTH CARE/
CONSUMER PRODUCTS
7. INTEL #1 MICROPROCESSOR MANUFACTURER
8. COCA-COLA #1 SOFT DRINKS COMPANY
9. PROCTER & GAMBLE #1 HOUSEHOLD PRODUCTS COMPANY
10. AUTOMATIC DATA #1 PAYROLL SERVICES
- ----------------------------------------------------
</TABLE>
The largest ten commitments continue to sell at a market price/earnings ratio,
imparting attractive long-term value to the Portfolio.
Respectfully,
Dave Fowler and Parker Hall, Co-managers
Lincoln Capital Management Company
October 8, 1995
14
<PAGE> 17
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
Vanguard International Portfolio rose +13.1% during the second half of
fiscal 1995, erasing the -1.7% fall during the first half. For the full fiscal
year, the Portfolio returned +11.2%, which compares favorably to a +6.1% return
for the MSCI EAFE Index. Clearly, it has been a volatile year, but throughout we
have invested the Portfolio on the basis that markets would emerge from this
period of consolidation on the upside. This continues to be our view.
Sentiment in favor of the U.S. dollar has changed dramatically during
the past three months. Relative to the Japanese yen, the U.S. dollar has risen
+24% from its low point in April; against the deutsche mark, it has risen +6%.
These sharp moves reflect: (1) the extent of the recent falls (note that the
dollar is only back to early 1995 levels); and (2) some very effective policy
action by the Japanese authorities at a time when U.S.-Japan trade talks had
become less confrontational. Currency and stock price moves tend to offset each
other as we have recently seen--in dramatic fashion--in Japan. On balance, a
weak dollar environment is better for our returns relative to U.S. stocks.
The future value of foreign currencies is notoriously difficult to
predict; accordingly, only a small proportion (8%) of the Portfolio's assets is
hedged through the forward currency markets back to U.S. dollars. However,
"bullish dollar" investors may take comfort from the 17% of the Portfolio that
is invested in S.E. Asian countries, whose currencies are to varying degrees
linked to the U.S. dollar. From my standpoint, I would emphasize that the reason
for such a large commitment to this area is not currency related, but to capture
the excellent economic growth prospects that reside there. Local stock markets
have been miserable performers over the past 20 months reflecting
over-enthusiasm in 1993, but inflationary fears more recently. In our opinion,
poor performance is unlikely to last for much longer.
Japan is the other major part of the Portfolio that has held back
returns during the past year, as the market fell by -5% in U.S. dollar terms.
Although our stocks performed relatively better, the period must be termed a
disappointment. As of fiscal year end, 27% of the Portfolio was invested in
Japan. Our good stock performance relative to the local index is a consequence
of focusing over 70% of our stock picks in manufacturing companies; of these,
half are electronics related. Although the broad economic recovery is once again
faltering, there is no doubting the profit recovery now underway in the
manufacturing industry. Moreover, if, as we expect, the government continues to
provide stimuli to the economy, profits will be further boosted by a recovery in
domestic consumer spending.
The Portfolio's strong point during the past year has been Europe:
markets generally are up +19% in dollar terms and your stocks by significantly
more. In total, we have 50% of the Portfolio invested there with particularly
large exposures to the UK (17%) and the Netherlands (11%). Although the UK has
performed in line with other European markets over the year, our policy of
overweighting the Netherlands has been notably successful.
As in the U.S., economic growth in Europe has been hobbled by tight
fiscal stances and high interest rates. The strength of European currencies
against competitor nations, notably the U.S., has also restrained corporate
profits. The complete absence of inflationary pressures encourages us to see the
current slow growth as the harbinger of a longer period of economic expansion,
which we regard as bullish for investors. Three-quarters of our European stocks
are in high-growth industries or relate to companies where management is proving
particularly effective at cutting costs to maintain above-average profit growth
in a difficult business environment.
I look forward to the year ahead and to reporting results to you in
six-months time.
Respectfully,
Richard Foulkes
Schroder Capital Management International
October 12, 1995
15
<PAGE> 18
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
September 30, 1995
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY
OBLIGATION (.9%)
- ----------------------------------------------------------------
Federal Home Loan Bank
5.86%, 6/6/96
(Cost $1,999) $ 2,000 $ 1,999
- ----------------------------------------------------------------
COMMERCIAL PAPER (65.3%)
- ----------------------------------------------------------------
BANK HOLDING COMPANY (3.6%)
Banc One Corp.
5.699%-5.715%,
11/10/95-11/14/95 5,000 4,967
Norwest Corp.
5.748%, 11/17/95 3,000 2,978
--------
GROUP TOTAL 7,945
--------
- ----------------------------------------------------------------
FINANCE--AUTO (.9%)
Toyota Motor Credit
5.704%, 11/20/95 2,000 1,984
--------
- ----------------------------------------------------------------
FINANCE--OTHER (18.5%)
American Express Credit Corp.
5.756%, 11/1/95 1,000 995
Asset Securitization Cooperative Corp.
5.698%-5.737%,
10/10/95-11/1/95 4,500 4,487
Associates Corp.
5.736%-5.759%, 11/3/95-11/22/95 6,000 5,957
CIT Group Holdings Inc.
5.723%-5.77%,
10/25/95-11/16/95 4,000 3,978
Ciesco L.P.
5.746%-5.763%,
10/20/95-12/13/95 4,000 3,971
Commercial Credit Co.
5.741%, 11/21/95 2,000 1,984
Corporate Asset Funding Corp.
5.758%-5.769%,
11/3/95-11/21/95 4,000 3,973
Eiger Capital Corp.
5.78%, 10/2/95 4,000 3,999
General Electric Capital Corp.
5.724%-5.781%,
10/13/95-1/31/96 8,000 7,935
Pitney Bowes Credit Corp.
5.729%-5.733%,
10/27/95-11/3/95 3,100 3,085
--------
GROUP TOTAL 40,364
--------
- ----------------------------------------------------------------
INDUSTRIAL (21.3%)
Bayer Corp.
5.738%, 10/27/95 3,000 2,988
Cargill Inc.
5.757%, 10/13/95 1,250 1,248
Chevron Oil Finance Co.
5.74%, 10/12/95 2,000 1,997
Chevron Transport Corp.
5.752%, 11/22/95 3,000 2,975
The Coca-Cola Co.
5.729%-5.769%,
10/11/95-10/26/95 3,900 3,889
R.R. Donnelley & Sons Co.
5.765%, 10/10/95 2,000 1,997
The Dun & Bradstreet Corp.
5.687%-5.796%,
10/13/95-1/1/96 5,000 4,948
Electronic Data Systems
5.799%, 12/1/95 2,000 1,981
Exxon Imperial U.S. Inc.
5.737%, 11/2/95 2,000 1,990
Hewlett Packard Co.
5.75%-5.761%,
11/30/95-12/12/95 4,000 3,958
Eli Lilly & Co.
5.766%, 11/24/95 4,000 3,966
Mobil Australia Finance Co.
5.748%-5.789%,
10/26/95-10/31/95 5,000 4,978
Nestle Capital Corp.
5.934%, 11/8/95 1,700 1,690
Norfolk & Southern Corp.
5.735%-5.761%,
11/10/95-11/21/95 5,000 4,965
Procter & Gamble Co.
5.758%, 11/27/95 3,000 2,973
--------
GROUP TOTAL 46,543
--------
- ----------------------------------------------------------------
INSURANCE (6.2%)
AIG Funding Inc.
5.802%, 11/2/95 2,000 1,990
MetLife Funding Corp.
5.726%-5.801%,
12/4/95-12/11/95 4,000 3,957
Prudential Funding Corp.
5.723%, 11/20/95 2,000 1,984
USAA Capital Corp.
5.725%-6.753%,
10/2/95-12/15/95 5,526 5,501
--------
GROUP TOTAL 13,432
--------
- ----------------------------------------------------------------
UTILITY (.7%)
U.S. West Communications Inc.
5.733%, 11/2/95 1,500 1,492
--------
- ----------------------------------------------------------------
FOREIGN--BANKS (3.7%)
Bank of Nova Scotia
5.72%, 10/11/95 3,000 2,995
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Canadian Imperial Holdings Inc.
5.79%, 11/27/95 $ 2,000 $ 1,982
Commerzbank U.S. Finance Inc.
5.771%, 10/31/95 1,000 995
Toronto Dominion Holdings USA Inc.
5.756%, 10/24/95 2,000 1,993
--------
GROUP TOTAL 7,965
--------
- ----------------------------------------------------------------
FOREIGN GOVERNMENT (6.8%)
Province of British Columbia
5.692%, 3/4/96 3,000 2,928
Caisse des Depots et Consignations
5.713%-5.743%,
11/17/95-12/12/95 5,000 4,955
KFW International Finance Inc.
5.729%-5.734%,
10/23/95-10/24/95 4,000 3,986
Oesterreichische Kontrollbank
5.627%, 1/11/96 1,000 985
Western Australia Treasury Corp.
5.76%, 11/22/95 2,000 1,984
--------
GROUP TOTAL 14,838
--------
- ----------------------------------------------------------------
FOREIGN--OTHER (3.6%)
Glaxo
5.79%, 11/21/95 2,004 1,988
Reed Elsevier
5.746%, 10/20/95 2,000 1,994
Siemens Corp.
5.789%, 11/20/95 2,000 1,984
Unilever Capital Corp.
5.739%, 12/14/95 2,000 1,977
--------
GROUP TOTAL 7,943
--------
- ----------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $142,506) 142,506
- ----------------------------------------------------------------
CERTIFICATES OF DEPOSIT (20.6%)
- ----------------------------------------------------------------
U.S. BANK (1.8%)
NBD Bank
5.775%, 12/1/95 4,000 4,000
--------
- ----------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
U.S. BRANCHES (18.8%)
Bayerische Landesbank
5.72%, 10/11/95 1,000 1,000
Bayerische Vereinsbank
5.73%-5.75%,
11/7/95-2/5/96 4,000 4,000
Caisse Nationale de Credit Agricole
5.60%-5.75%,
11/6/95-12/11/95 5,000 5,000
Canadian Imperial Bank of Commerce
5.75%, 10/10/95 2,000 2,000
Credit Suisse
5.63%-5.64%,
12/4/95-12/11/95 3,000 3,000
Dresdner Bank
5.75%-7.40%,
10/12/95-3/15/96 5,000 5,009
Rabobank Nederlanden
5.75%-5.87%,
10/5/95-10/31/95 7,000 7,000
Societe Generale
5.775%, 10/4/95 3,000 3,000
Swiss Bank
5.75%, 12/4/95 5,000 5,000
Union Bank of Switzerland
5.75%, 12/28/95 2,000 2,001
Westdeutsche Landesbank
5.62%-5.64%,
12/4/95-1/12/96 4,000 4,000
--------
GROUP TOTAL 41,010
--------
- ----------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $45,010) 45,010
- ----------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (6.4%)
- ----------------------------------------------------------------
Abbey National
5.65%, 1/17/96 1,000 1,000
Bayerische Landesbank
5.76%, 2/14/96 2,000 2,000
Lloyds Bank
6.33%, 1/22/96 3,000 3,005
Morgan Guaranty Trust
5.81%, 11/17/95 3,000 3,000
National Westminster Bank
5.76%, 12/20/95 4,000 4,000
Toronto Dominion Bank
5.95%, 11/1/95 1,000 1,000
- ----------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT (Cost $14,005) 14,005
- ----------------------------------------------------------------
BANKERS ACCEPTANCES (2.7%)
- ----------------------------------------------------------------
Barclays Bank
5.72%-5.758%,
10/6/95-11/7/95 3,000 2,989
Union Bank of Switzerland
5.794%, 1/22/96 3,000 2,947
- ----------------------------------------------------------------
TOTAL BANKERS ACCEPTANCES
(Cost $5,936) 5,936
- ----------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
MONEY MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT (5.5%)
- ----------------------------------------------------------------
SBC Capital Markets Inc.
6.50%, 10/2/95
(Collateralized by
U.S. Treasury Bond
6.25%, 8/15/23)
(Cost $12,000) $12,000 $ 12,000
- ----------------------------------------------------------------
TOTAL INVESTMENTS (101.4%)
(Cost $221,456) 221,456
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.4%)
- ----------------------------------------------------------------
Other Assets--Note C 1,167
Liabilities (4,256)
--------
(3,089)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 218,368,628 outstanding
shares of beneficial interest (unlimited
authorization--no par value) $218,367
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
------ -----
<S> <C> <C>
Paid in Capital $218,369 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net Realized Losses (2) --
Unrealized Appreciation of
Investments -- --
- ----------------------------------------------------------------
NET ASSETS $218,367 $1.00
- ----------------------------------------------------------------
<CAPTION>
Face Market
Amount Value
HIGH-GRADE BOND PORTFOLIO (000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (34.6%)
- ----------------------------------------------------------------
U.S. Treasury Bonds
7.875%, 2/15/21 $2,090 $ 2,397
8.125%, 8/15/19 2,000 2,346
8.50%, 2/15/20 1,870 2,279
8.75%, 5/15/17 1,430 1,772
8.875%, 8/15/17-2/15/19 4,545 5,705
9.125%, 5/15/18 810 1,043
10.375%, 11/15/09-11/15/12 930 1,205
10.75%, 8/15/05 875 1,160
11.625%, 11/15/02 1,000 1,314
14.00%, 11/15/11 1,565 2,505
U.S. Treasury Notes
5.125%, 4/30/98 1,025 1,006
5.25%, 7/31/98 1,675 1,646
5.375%, 5/31/98 550 543
5.75%, 8/15/03 1,015 988
5.875%, 2/15/04 200 196
6.25%, 2/15/03 45 45
6.375%, 1/15/99-8/15/02 1,175 1,189
6.75%, 5/31/99 400 410
6.875%, 7/31/99-3/31/00 3,500 3,613
7.00%, 4/15/99 1,710 1,765
7.125%, 2/29/00 675 703
7.25%, 5/15/04 1,335 1,426
7.50%, 10/31/99 1,075 1,132
7.75%, 11/30/99-2/15/01 1,965 2,090
7.875%, 1/15/98-11/15/04 650 688
8.00%, 8/15/99 140 150
8.25%, 7/15/98 700 741
8.625%, 8/15/97 1,350 1,416
8.875%, 11/15/98 150 162
- --------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $40,278) 41,635
- --------------------------------------------------------------
FEDERAL AGENCY OBLIGATIONS (2.8%)
- --------------------------------------------------------------
Federal National Mortgage Assn.
4.95%, 9/30/98 700 675
5.30%, 3/11/98 525 514
5.35%, 8/12/98 700 686
5.80%, 12/10/03 600 575
7.00%, 8/12/02 900 897
- --------------------------------------------------------------
TOTAL FEDERAL AGENCY OBLIGATIONS
(Cost $3,225) 3,347
- --------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
MORTGAGE PASS-THROUGH SECURITIES (28.6%)
- ----------------------------------------------------------------
U.S. GOVERNMENT (28.2%)
Federal Home Loan Mortgage Corp.
5.50%, 12/1/98-11/1/08 $ 267 $ 259
6.00%, 7/1/98-1/1/24 840 816
6.50%, 4/1/98-6/1/24 2,676 2,621
7.00%, 1/1/98-6/1/24 2,450 2,438
7.50%, 4/1/98-7/1/25 1,881 1,903
8.00%, 6/1/96-9/1/25 1,446 1,481
8.50%, 3/1/96-1/1/25 625 646
9.00%, 11/1/05-6/1/22 743 775
9.50%, 1/1/25 259 273
10.00%, 3/1/17-11/1/19 164 177
Federal National Mortgage Assn.
5.50%, 3/1/01 92 88
6.00%, 11/15/98-3/1/24 1,197 1,153
6.50%, 3/1/00-6/1/24 2,043 1,994
7.00%, 5/1/00-9/1/24 3,060 3,034
7.50%, 4/1/99-7/1/25 2,027 2,046
8.00%, 2/1/00-9/1/25 1,917 1,963
8.50%, 10/1/04-1/15/25 921 953
9.00%, 3/1/20-4/1/25 545 569
9.50%, 6/1/01-9/1/19 297 313
10.00%, 8/1/20-8/1/21 219 238
10.50%, 8/1/20 61 67
Government National Mortgage Assn.
6.00%, 3/15/09-1/15/24 187 179
6.50%, 10/15/08-5/15/24 859 834
7.00%, 10/15/08-5/15/24 1,664 1,650
7.50%, 5/15/08-1/15/24 1,558 1,576
8.00%, 3/15/08-11/15/24 1,695 1,743
8.50%, 7/15/09-2/15/25 1,473 1,534
9.00%, 4/15/16-8/15/21 1,283 1,346
9.50%, 4/15/17-2/15/25 859 915
10.00%, 5/15/20-8/15/20 164 177
10.50%, 5/15/19 29 32
11.00%, 10/15/15 54 60
11.50%, 2/15/13 87 97
---------
GROUP TOTAL 33,950
---------
- ----------------------------------------------------------------
PRIVATE (.4%)
Resolution Trust Corp.
7.75%-10.40%,
12/25/18-8/25/21 518 523
---------
- ----------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH SECURITIES
(Cost $34,353) 34,473
- ----------------------------------------------------------------
CORPORATE BONDS (28.7%)
- ----------------------------------------------------------------
ASSET-BACKED SECURITIES (3.1%)
Chase Manhattan Credit Card Trust
7.40%, 5/15/00 300 304
8.75%, 8/15/99 300 305
First Chicago Master Trust
6.25%, 8/15/99 450 450
8.40%, 6/15/98 450 456
MBNA Credit Card Trust
6.20%, 8/15/99 450 450
7.75%, 10/15/98 300 305
Sears Credit Card Account Trust
5.90%, 11/15/98 175 175
7.75%, 9/15/98 300 305
Standard Credit Card Trust
8.00%, 10/7/97 450 457
8.50%, 8/7/97 450 457
---------
GROUP TOTAL 3,664
---------
- ----------------------------------------------------------------
FINANCE (11.5%)
Associates Corp.
8.75%, 9/4/96 600 608
AVCO Financial Services
7.50%, 11/15/96 200 203
8.85%, 2/1/96 420 423
BankAmerica Corp.
9.625%, 2/13/01 500 565
10.00%, 2/1/03 200 235
Bankers Trust New York Corp.
8.25%, 7/2/96 400 406
Bear Stearns Cos.
6.625%, 1/15/04 200 195
CIT Group Holdings
5.65%, 11/15/95 450 450
The Chase Manhattan Corp.
8.50%, 3/1/96 500 505
Chemical Banking Corp.
6.625%, 1/15/98 250 252
7.375%, 6/15/97 300 306
Commercial Credit Corp.
6.75%, 1/15/97 450 453
CoreStates Capital
9.375%, 4/15/03 250 286
Countrywide Funding Corp. MTN
7.31%, 8/28/00 600 612
Dean Witter Discover & Co.
6.00%, 3/1/98 510 507
First Interstate Bancorp
8.625%, 4/1/99 500 532
Ford Motor Credit Corp.
7.875%, 1/15/97 950 970
8.25%, 7/15/96 300 304
General Motors Acceptance Corp.
5.50%, 12/15/01 750 702
7.75%, 4/15/97 400 409
International Lease Finance
7.90%, 10/1/96 600 611
Manufacturers Hanover Corp.
8.50%, 2/15/99 500 530
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
HIGH-GRADE BOND Amount Value
PORTFOLIO (continued) (000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Mellon Finance Corp.
6.125%, 11/15/95 $ 400 $ 400
7.625%, 11/15/99 200 208
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 400 406
Morgan Stanley Group Inc.
9.25%, 3/1/98 200 212
NationsBank Corp.
5.375%, 12/1/95 425 425
7.75%, 8/15/04 500 525
NCNB Corp.
9.50%, 6/1/04 150 174
Norwest Financial Inc.
7.10%, 11/15/96 450 455
PaineWebber Group Inc.
7.00%, 3/1/00 150 149
Transamerica Financial Corp.
8.375%, 2/15/98 325 340
US West Financial MTN
8.85%, 9/20/99 500 539
---------
GROUP TOTAL 13,897
---------
- ----------------------------------------------------------------
INDUSTRIAL (10.1%)
American Brands Inc.
7.875%, 1/15/23 100 105
Anheuser-Busch Co., Inc.
7.375%, 7/1/23 75 76
8.625%, 12/1/16 150 158
Applied Materials
8.00%, 9/1/04 100 107
Archer-Daniels-Midland Co.
8.875%, 4/15/11 180 209
Auburn Hills
12.00%, 5/1/20 115 169
The Boeing Co.
8.375%, 3/1/96 450 454
British Petroleum
7.875%, 5/15/02 200 215
8.875%, 12/1/97 600 632
9.50%, 1/1/98 500 534
Chrysler Corp.
10.40%, 8/1/99 300 320
CSX Corp.
8.25%, 11/1/96 350 357
8.40%, 8/1/96 150 153
8.625%, 5/15/22 50 57
Conrail Corp.
9.75%, 6/15/20 100 127
Cyprus Minerals
6.625%, 10/15/05 400 388
Deere & Co.
8.50%, 1/9/22 100 114
Eastman Chemical Co.
6.375%, 1/15/04 400 391
Federal Express MTN
10.00%, 9/1/98 400 436
Ford Capital B.V.
9.00%, 6/1/96 225 229
9.875%, 5/15/02 400 465
Ford Holdings
9.25%, 7/15/97 500 525
Ford Motor Corp.
9.95%, 2/15/32 65 85
General Motors
7.625%, 2/15/97 500 510
9.125%, 7/15/01 400 444
W.R. Grace & Co.
7.40%, 2/1/00 400 410
8.00%, 8/15/04 100 106
International Paper Co.
7.625%, 1/15/07 100 106
May Department Stores Co.
9.75%, 2/15/21 100 121
McDonald's Corp.
6.75%, 2/15/03 230 231
Mobil Corp.
7.625%, 2/23/33 200 206
PepsiCo Inc.
5.00%, 2/24/97 500 493
6.125%, 1/15/98 200 199
Philip Morris Co., Inc.
8.25%, 10/15/03 150 161
Sears, Roebuck & Co.
9.25%, 8/1/97 300 315
Tenneco Inc.
9.875%, 2/1/01 200 228
10.00%, 8/1/98 500 545
Texaco Capital Corp.
8.875%, 9/1/21 150 179
Union Carbide
7.875%, 4/1/23 125 130
Union Oil of California
6.375%, 2/1/04 200 194
9.125%, 2/15/06 115 134
9.25%, 2/1/03 80 91
Union Pacific
8.625%, 5/15/22 175 189
Waste Management, Inc.
7.875%, 8/15/96 275 279
Whirlpool Corp.
9.00%, 3/1/03 150 169
Xerox Corp.
9.625%, 10/15/00 400 400
---------
GROUP TOTAL 12,146
---------
- ----------------------------------------------------------------
20
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
UTILITIES (4.0%)
Alabama Power Co.
8.75%, 12/1/21 $ 129 $ 138
Arizona Public Service
8.00%, 2/1/25 150 153
Baltimore Gas & Electric
8.375%, 8/15/01 500 543
Carolina Power & Light
6.875%, 8/15/23 175 165
Enron Corp.
7.125%, 5/15/07 150 153
9.65%, 5/15/01 450 511
Houston Lighting & Power Co.
8.75%, 3/1/22 100 113
MCI Communications
7.50%, 8/20/04 250 263
Michigan Bell Telephone
7.50%, 2/15/23 175 181
New York Telephone
7.00%, 8/15/25 175 167
Pacific Bell Corp.
7.25%, 7/1/02 225 234
Southern Bell Telephone Co.
7.625%, 3/15/13 450 456
Southwestern Bell Corp.
7.625%, 10/1/13 125 126
7.625%, 3/1/23 300 310
Texas Utilities Corp.
7.125%, 6/1/97 600 608
7.375%, 8/1/01 250 258
7.875%, 3/1/23 110 112
8.25%, 4/1/04 100 109
Virginia Electric Power
6.625%, 4/1/03 200 199
--------
GROUP TOTAL 4,799
--------
- ----------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $34,230) 34,506
- ----------------------------------------------------------------
FOREIGN BONDS (3.8%)
- ----------------------------------------------------------------
CANADA (1.3%)
Province of British Columbia
7.00%, 1/15/03 170 175
Province of Manitoba
8.75%, 5/15/01 500 551
9.25%, 4/1/20 120 147
9.50%, 10/1/00 130 147
Province of Ontario
7.375%, 1/27/03 110 115
7.75%, 6/4/02 200 213
Province of Saskatchewan
7.125%, 3/15/08 200 204
--------
GROUP TOTAL 1,552
--------
- ----------------------------------------------------------------
WORLD BANKS (.5%)
European Investment Bank
8.875%, 3/1/01 225 250
InterAmerican Development Bank
8.50%, 3/15/11 130 150
International Bank for Reconstruction
and Development
12.375%, 10/15/02 175 233
--------
GROUP TOTAL 633
--------
- ----------------------------------------------------------------
OTHER (2.0%)
Grand Metropolitan Investments
9.00%, 8/15/11 150 176
KFW International Finance
8.85%, 6/15/99 425 460
9.125%, 5/15/01 200 225
National Westminster Bancorp Inc.
9.375%, 11/15/03 350 407
New Zealand Government
9.875%, 1/15/11 175 222
Noranda Inc.
8.625%, 7/15/02 370 405
Philips Electronics NV
8.375%, 9/15/06 300 332
Republic of Portugal
5.75%, 10/8/03 250 237
--------
GROUP TOTAL 2,464
--------
- ----------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $4,551) 4,649
- ----------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.7%)
- ----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 6.41%, 10/2/95
(Cost $882) 882 882
- ----------------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(Cost $117,519) 119,492
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.8%)
- ----------------------------------------------------------------
Other Assets--Note C 3,447
Liabilities (2,494)
--------
953
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 11,507,697 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $120,445
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.47
================================================================
</TABLE>
+See Note A to Financial Statements.
MTN--Medium Term Note.
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
HIGH-GRADE BOND
PORTFOLIO (continued)
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
- ----------------------------------------------------------------
<S> <C> <C>
Paid in Capital $119,122 $10.36
Undistributed Net Investment
Income -- --
Accumulated Net Realized
Losses--Note D (650) (.06)
Unrealized Appreciation of
Investments--Note E 1,973 .17
- ----------------------------------------------------------------
NET ASSETS $120,445 $10.47
- ----------------------------------------------------------------
<CAPTION>
Market
Value
BALANCED PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (63.8%)
- ----------------------------------------------------------------
BASIC MATERIALS (12.5%)
Aluminum Co. of America 67,000 $ 3,542
British Steel PLC ADR 57,400 1,643
Cabot Corp. 22,600 1,200
Dow Chemical Co. 42,000 3,129
E.I. du Pont de Nemours & Co. 60,300 4,145
Eastman Chemical 4,025 257
Georgia-Pacific Corp. 25,200 2,205
International Paper Co. 49,000 2,058
J & L Specialty Steel Inc. 37,000 777
Kimberly-Clark Corp. 54,600 3,665
Norsk Hydro AS ADR 19,900 858
PPG Industries, Inc. 47,200 2,195
Reynolds Metals Co. 24,700 1,426
Temple-Inland Inc. 48,000 2,556
USX-U.S. Steel Group 24,900 772
Westvaco Corp. 37,300 1,702
Willamette Industries, Inc. 22,400 1,495
Witco Chemical Corp. 40,000 1,405
--------
GROUP TOTAL 35,030
--------
- ----------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.2%)
General Electric Co. 87,600 5,585
Honeywell, Inc. 74,800 3,207
Northrop Grumman Corp. 63,500 3,866
United Technologies Corp. 20,800 1,838
--------
GROUP TOTAL 14,496
--------
- ----------------------------------------------------------------
CONSUMER CYCLICAL (5.6%)
Brunswick Corp. 62,000 1,256
Eastman Kodak Co. 20,100 1,191
Ford Motor Co. 109,500 3,408
General Motors Corp. 93,573 4,386
May Department Stores Co. 37,800 1,654
J.C. Penney Co., Inc. 40,000 1,985
Sears, Roebuck & Co. 45,052 1,661
--------
GROUP TOTAL 15,541
--------
- ----------------------------------------------------------------
CONSUMER STAPLES (.5%)
SuperValu Inc. 49,900 1,466
--------
- ----------------------------------------------------------------
ENERGY (8.3%)
Amerada Hess Corp. 38,000 1,848
Amoco Corp. 10,400 667
Ashland Inc. 15,400 514
Atlantic Richfield Co. 18,000 1,933
Chevron Corp. 19,600 953
Exxon Corp. 48,300 3,490
Kerr-McGee Corp. 20,200 1,121
Mobil Corp. 28,900 2,879
Pennzoil Co. 10,700 469
Phillips Petroleum Co. 30,800 1,001
Repsol SA ADR 56,400 1,791
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Royal Dutch Petroleum Co. ADR 13,700 $ 1,682
Texaco Inc. 25,000 1,616
Total SA ADR 47,000 1,416
USX-Marathon Group 22,200 438
Unocal Corp. 49,216 1,403
---------
GROUP TOTAL 23,221
---------
- ----------------------------------------------------------------
FINANCIAL (15.1%)
Allstate Corp. 138,765 4,909
Banc One Corp. 97,247 3,550
The Bank of New York Co., Inc. 114,400 5,320
BankAmerica Corp. 35,000 2,096
Citicorp 77,000 5,448
CoreStates Financial Corp. 67,540 2,474
First Bank System, Inc. 102,000 4,909
First Union Corp. 40,532 2,067
General Re Corp. 29,700 4,485
Jefferson-Pilot Corp. 5,000 321
KeyCorp 50,136 1,717
Norwest Corp. 71,893 2,355
Wachovia Corp. 59,800 2,579
---------
GROUP TOTAL 42,230
---------
- ----------------------------------------------------------------
HEALTH CARE (8.8%)
Abbott Laboratories, Inc. 64,600 2,753
American Home Products Corp. 41,000 3,480
C.R. Bard, Inc. 13,000 396
Baxter International, Inc. 85,100 3,500
Bristol-Myers Squibb Co. 36,200 2,638
Johnson & Johnson 50,000 3,706
Pfizer, Inc. 97,000 5,177
U.S. Healthcare, Inc. 55,000 1,945
Zeneca Group ADR 16,399 894
---------
GROUP TOTAL 24,489
---------
- ----------------------------------------------------------------
TECHNOLOGY (1.4%)
Xerox Corp. 30,000 4,031
---------
- ----------------------------------------------------------------
TRANSPORT & SERVICES (2.6%)
British Airways PLC 25,250 1,802
Canadian Pacific Ltd. 121,500 1,939
Norfolk Southern Corp. 15,400 1,151
Union Pacific Corp. 35,800 2,372
---------
GROUP TOTAL 7,264
---------
- ----------------------------------------------------------------
UTILITIES (2.5%)
AT&T Corp. 25,000 1,644
Bell Atlantic Corp. 10,000 614
NYNEX Corp. 17,600 840
PECO Energy Corp. 25,100 718
Pacific Telesis Group 13,300 409
SBC Communications Inc. 29,200 1,606
U S WEST, Inc. 24,100 1,136
---------
GROUP TOTAL 6,967
---------
- ----------------------------------------------------------------
MISCELLANEOUS (1.3%)
Hanson PLC ADR 121,000 1,966
Minnesota Mining &
Manufacturing Co. 30,400 1,718
---------
GROUP TOTAL 3,684
---------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $133,447) 178,419
- ----------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (1.3%)
- ----------------------------------------------------------------
Alumax, Inc. $4.00 6,334 892
Bethlehem Steel Corp. $3.50 10,000 434
Cyprus Amax $4.00 11,666 723
Ford Motor Co. $4.20 6,900 700
Reynolds Metals Co. $3.31 16,100 827
- ----------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $2,909) 3,576
- ----------------------------------------------------------------
CORPORATE BONDS (16.9%)
- ----------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
-------
<S> <C> <C>
ASSET-BACKED (.6%)
American Express Credit Europe
5.375%, 7/15/01 $1,000 957
Sears Credit Account Trust
8.60%, 5/15/98 822 835
---------
GROUP TOTAL 1,792
---------
- ----------------------------------------------------------------
FINANCE (4.0%)
Associates Corp.
5.25%, 9/1/98 1,000 973
BankAmerica Corp.
7.20%, 4/15/06 1,000 1,021
The Chase Manhattan Corp.
7.75%, 11/1/99 1,000 1,042
Chemical Banking Corp.
8.625%, 5/1/02 1,000 1,095
Citicorp
7.625%, 5/1/05 1,000 1,051
Dean Witter Discover & Co.
6.75%, 10/15/13 1,000 931
Exxon Capital Corp.
6.00%, 7/1/05 1,000 960
First Union Corp.
7.50%, 4/15/35 1,000 1,051
General Motors Acceptance
Corp. MTN
8.50%, 1/1/03 1,000 1,091
Republic New York Corp.
7.75%, 5/15/09 1,000 1,065
Wells Fargo & Co.
6.125%, 11/1/03 1,000 952
---------
GROUP TOTAL 11,232
---------
- ----------------------------------------------------------------
</TABLE>
23
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
BALANCED Amount Value
PORTFOLIO (continued) (000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL (6.2%)
Baxter International
9.25%, 9/15/96 $1,000 $ 1,027
British Petroleum Co.
7.875%, 5/15/02 1,000 1,074
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 1,000 1,139
Georgia Pacific Corp.
9.625%, 3/15/22 1,000 1,125
International Business
Machines Corp.
6.375%, 11/1/97 1,000 1,002
Eli Lilly & Co.
7.125%, 6/1/25 1,000 997
McDonald's Corp.
7.375%, 7/15/33 1,000 1,014
J.C. Penney Co., Inc.
6.00%, 5/1/06 1,000 943
Procter & Gamble Co. ESOP
9.36%, 1/1/21 1,000 1,222
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,203
Temple Inland
9.00%, 5/1/01 1,000 1,099
TRW, Inc.
9.375%, 4/15/21 1,000 1,227
United Parcel Service
8.375%, 4/1/20 2,000 2,306
WMX Technologies
6.375%, 12/1/03 1,000 982
Wal-Mart Stores Inc.
7.25%, 6/1/13 1,000 1,015
---------
GROUP TOTAL 17,375
---------
- ----------------------------------------------------------------
UTILITIES (6.1%)
AT&T Corp.
7.75%, 3/1/07 1,000 1,080
Baltimore Gas & Electric
5.50%, 4/15/04 1,000 919
BellSouth Telecommunications
7.50%, 6/15/33 1,000 1,008
Carolina Power & Light
6.75%, 10/1/02 1,000 997
Duke Power Co.
7.00%, 7/1/33 1,000 956
Illinois Bell Telephone Co.
6.625%, 2/1/25 1,000 919
New Jersey Bell Telephone Co.
8.00%, 6/1/22 1,000 1,099
New York Telephone
7.25%, 2/15/24 1,000 974
Pacific Bell Telephone Co.
7.125%, 3/15/26 1,000 975
Pacific Gas & Electric
6.25%, 8/1/03 1,000 967
PacifiCorp
6.625%, 6/1/07 1,000 986
Southern California Gas
5.75%, 11/15/03 1,000 937
Texas Utilities Electric Co.
7.875%, 4/1/24 1,000 1,010
Union Electric Co.
7.375%, 12/15/04 1,000 1,052
U.S. West Communications
6.875%, 9/15/33 1,000 927
Virginia Electric & Power
8.00%, 3/1/04 1,000 1,081
Wisconsin Electric Power
7.70%, 12/15/27 1,000 1,044
---------
GROUP TOTAL 16,931
---------
- ----------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $46,083) 47,330
- ----------------------------------------------------------------
FOREIGN BONDS (1.8%)
- ----------------------------------------------------------------
ABN AMRO Holding NV
7.25%, 5/31/05 1,000 1,028
Italy Global Bond
6.875%, 9/27/23 1,000 912
Japanese Financial Corp.
7.375%, 4/27/05 1,000 1,062
Philips Electronics
7.75%, 4/15/04 1,000 1,058
Toronto Dominion Bank
6.45%, 1/15/09 1,000 952
- ----------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $4,914) 5,012
- ----------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (13.2%)
- ----------------------------------------------------------------
Federal Home Loan Bank
7.66%, 7/20/04 1,000 1,079
U.S. Treasury Bonds
7.125%, 2/15/23 3,000 3,184
7.25%, 5/15/16 7,500 8,017
7.50%, 11/15/16 8,000 8,776
U.S. Treasury Notes
6.375%, 8/15/02 4,000 4,060
7.25%, 8/15/04 2,000 2,139
7.75%, 12/31/99 5,000 5,320
7.875%, 11/15/04 4,000 4,448
- ----------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $34,492) 37,023
- ----------------------------------------------------------------
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (2.0%)
- ----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.41%, 10/2/95
(Cost $5,652) $5,652 $ 5,652
- ----------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(Cost $227,497) 277,012
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- ----------------------------------------------------------------
Other Assets--Notes C and F 8,097
Liabilities--Note F (5,338)
---------
2,759
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 20,983,498 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $279,771
- ----------------------------------------------------------------
NET ASSETS VALUE PER SHARE $13.33
================================================================
</TABLE>
+See Note A to Financial Statements.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $228,956 $10.91
Undistributed Net
Investment Income 2,779 .13
Accumulated Net
Realized Losses--Note D (1,479) (.07)
Unrealized Appreciation
of Investments--Note E 49,515 2.36
- ----------------------------------------------------------------
NET ASSETS $279,771 $13.33
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
EQUITY INDEX PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.9%)(1)
- ----------------------------------------------------------------
General Electric Co. 107,568 $ 6,858
AT&T Corp. 100,564 6,612
Exxon Corp. 78,715 5,687
The Coca-Cola Co. 80,381 5,546
Philip Morris Cos., Inc. 53,223 4,444
Merck & Co., Inc. 78,728 4,409
Royal Dutch Petroleum Co. ADR 33,995 4,173
Wal-Mart Stores, Inc. 145,542 3,620
International Business
Machines Corp. 36,016 3,399
* Microsoft Corp. 37,275 3,373
Procter & Gamble Co. 43,622 3,359
Intel Corp. 52,314 3,145
Johnson & Johnson 41,127 3,049
Motorola, Inc. 37,356 2,853
Hewlett-Packard Co. 32,424 2,703
American International Group, Inc. 30,090 2,558
PepsiCo, Inc. 49,952 2,548
Mobil Corp. 25,149 2,506
E.I. du Pont de Nemours & Co. 35,320 2,428
GTE Corp. 61,835 2,427
Bristol-Myers Squibb Co. 32,275 2,352
BellSouth Corp. 31,652 2,315
General Motors Corp. 47,614 2,232
Pfizer, Inc. 40,268 2,149
Abbott Laboratories, Inc. 50,328 2,145
SBC Communications Inc. 38,565 2,122
Ford Motor Co. 68,158 2,121
Amoco Corp. 31,497 2,020
Chevron Corp. 41,530 2,019
The Walt Disney Co. 33,110 1,900
Ameritech Corp. 35,336 1,842
Federal National Mortgage Assn. 17,374 1,798
Citicorp 25,116 1,777
Bell Atlantic Corp. 27,669 1,698
McDonald's Corp. 44,193 1,690
American Home Products Corp. 19,675 1,670
Eli Lilly & Co. 17,551 1,577
Minnesota Mining &
Manufacturing Co. 26,809 1,515
The Boeing Co. 21,748 1,484
BankAmerica Corp. 23,913 1,432
U S WEST, Inc. 29,829 1,406
American Express Co. 30,857 1,369
Columbia/HCA Healthcare Corp. 28,105 1,367
Gillette Co. 27,978 1,333
Unilever NV ADR 10,164 1,321
NYNEX Corp. 27,145 1,296
Dow Chemical Co. 17,277 1,287
Eastman Kodak Co. 21,706 1,286
</TABLE>
25
<PAGE> 28
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INDEX Value
PORTFOLIO (continued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Chrysler Corp. 24,168 $ 1,281
Home Depot, Inc. 30,330 1,209
Schering-Plough Corp. 23,472 1,209
* Cisco Systems, Inc. 17,113 1,181
NationsBank, Inc. 17,302 1,164
Capital Cities/ABC, Inc. 9,763 1,148
MCI Communications Corp. 42,922 1,116
Atlantic Richfield Co. 10,169 1,092
* Viacom International Class B 21,867 1,088
Travelers Group Inc. 20,199 1,073
Texaco Inc. 16,500 1,066
* Oracle Corp. 27,669 1,058
Micron Technology Inc. 12,997 1,033
Emerson Electric Co. 14,340 1,025
Anheuser-Busch Co., Inc. 16,135 1,006
Allstate Corp. 28,358 1,003
Southern Co. 42,425 1,002
Kellogg Co. 13,829 1,001
Schlumberger Ltd. 15,300 998
Chemical Banking Corp. 15,943 971
Time Warner, Inc. 24,351 968
* AirTouch Communications 31,178 955
Texas Instruments, Inc. 11,861 947
Xerox Corp. 6,849 920
J.P. Morgan & Co., Inc. 11,843 916
ITT Corp. 7,388 916
Sears, Roebuck & Co. 24,707 911
Banc One Corp. 24,869 908
Sara Lee Corp. 30,254 900
WMX Technologies Inc. 30,719 875
Union Pacific Corp. 12,998 861
Lockheed Martin Corp. 12,748 856
The Seagram Co. Ltd. 23,519 844
Pacific Telesis Group 27,239 838
* Amgen, Inc. 16,699 833
* COMPAQ Computer Corp. 16,802 813
Warner-Lambert Co. 8,527 812
Pacific Gas & Electric Co. 27,105 810
General Re Corp. 5,254 793
Campbell Soup Co. 15,753 792
AlliedSignal Inc. 17,906 790
Federal Home Loan Mortgage Corp. 11,414 789
Medtronic, Inc. 14,664 788
Sprint Corp. 22,013 770
Monsanto Co. 7,341 740
Baxter International, Inc. 17,721 729
J.C. Penney Co., Inc. 14,656 727
* Tele-Communications Inc. Class A 41,203 721
Caterpillar, Inc. 12,583 716
H.J. Heinz Co. 15,341 702
Merrill Lynch & Co., Inc. 11,100 694
The Chase Manhattan Corp. 11,339 693
Kimberly-Clark Corp. 10,265 689
May Department Stores Co. 15,736 688
United Technologies Corp. 7,762 686
International Paper Co. 16,198 680
Norwest Corp. 20,735 679
Raytheon Co. 7,680 653
Rockwell International Corp. 13,809 652
Burlington Northern Santa Fe Corp. 14,703 650
Computer Associates
International, Inc. 15,163 641
Norfolk Southern Corp. 8,363 625
ConAgra, Inc. 15,651 620
Automatic Data Processing, Inc. 9,068 618
Colgate-Palmolive Co. 9,259 617
The Dun & Bradstreet Corp. 10,634 615
CPC International, Inc. 9,199 607
Dean Witter Discover & Co. 10,782 606
PPG Industries, Inc. 13,025 606
Aluminum Co. of America 11,345 600
Weyerhaeuser Co. 13,002 593
McDonnell Douglas Corp. 7,119 589
Barrick Gold Corp. 22,501 582
Northern Telecom Ltd. 16,148 575
Wells Fargo & Co. 3,089 573
* Applied Materials, Inc. 5,586 571
Duke Power Co. 13,001 564
General Mills, Inc. 10,067 561
The Bank of New York Co., Inc. 12,049 560
CSX Corp. 6,654 560
Albertson's, Inc. 16,199 553
First Union Corp. 10,802 551
Phillips Petroleum Co. 16,709 543
Loews Corp. 3,700 538
Enron Corp. 16,059 538
United Healthcare Corp. 10,988 537
Archer-Daniels-Midland Co. 34,831 536
AMP, Inc. 13,698 527
Tenneco, Inc. 11,361 525
The Chubb Corp. 5,459 524
Aetna Life & Casualty Co. 7,105 521
KeyCorp 14,909 511
Georgia-Pacific Corp. 5,782 506
American Brands, Inc. 11,839 500
Nike, Inc. Class B 4,495 500
SCEcorp 28,094 499
Texas Utilities Co. 14,166 494
The Upjohn Co. 10,941 488
American General Corp. 12,972 485
First Interstate Bancorp. 4,782 482
Gannett Co., Inc. 8,796 480
SunTrust Banks, Inc. 7,245 479
CIGNA Corp. 4,589 478
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
FPL Group, Inc. 11,646 $ 476
Morgan Stanley Group, Inc. 4,900 471
* Toys R Us, Inc. 17,418 470
First Data Corp. 7,507 465
Wachovia Corp. 10,782 465
Scott Paper Co. 9,509 461
Public Service Enterprise Group Inc. 15,468 460
Alcan Aluminium Ltd. 14,112 457
Consolidated Edison Co. of
New York, Inc. 14,755 448
Occidental Petroleum Corp. 20,369 448
Unocal Corp. 15,599 445
Deere & Co. 5,446 443
Walgreen Co. 15,728 440
Illinois Tool Works, Inc. 7,408 436
* Novell, Inc. 23,545 430
* DSC Communications Corp. 7,250 430
Hercules, Inc. 7,378 428
The Limited, Inc. 22,435 426
American Electric Power Co., Inc. 11,700 426
* Digital Equipment Corp. 9,243 422
Kmart Corp. 28,653 415
Mellon Bank Corp. 9,230 412
Corning, Inc. 14,348 411
Unicom Corp. 13,554 410
Dominion Resources, Inc. 10,896 410
Mattel, Inc. 13,898 408
* Boston Scientific Corp. 9,542 407
Browning-Ferris Industries, Inc. 13,329 405
Marsh & McLennan Cos., Inc. 4,595 404
PNC Bank Corp. 14,457 403
PECO Energy Corp. 13,985 400
Pitney Bowes, Inc. 9,527 400
W.R. Grace & Co. 5,992 400
Placer Dome Group, Inc. 15,083 396
MBNA Corp. 9,405 391
NBD Bancorp 10,163 389
First Chicago Corp. 5,638 387
Household International, Inc. 6,170 383
* CUC International, Inc. 10,939 382
Ralston-Purina Group 6,564 380
* Sun Microsystems, Inc. 6,025 380
The Goodyear Tire & Rubber Co. 9,549 376
R.R. Donnelley & Sons Co. 9,627 375
Entergy Corp. 14,350 375
Westinghouse Electric Corp. 24,800 372
Wrigley, (Wm.) Jr. 7,329 370
USX-Marathon Group 18,719 370
Houston Industries, Inc. 8,302 366
Textron, Inc. 5,360 366
Air Products & Chemicals, Inc. 7,003 365
U.S. Healthcare, Inc. 10,145 359
ALLTEL Corp. 11,942 357
UST Inc. 12,393 355
Barnett Banks, Inc. 6,157 349
Bankers Trust New York Corp. 4,928 346
* AMR Corp. 4,793 346
Conrail, Inc. 5,028 346
Honeywell, Inc. 8,016 344
Union Carbide Corp. 8,618 343
* Silicon Graphics, Inc. 9,939 342
PacifiCorp 17,972 341
Dayton-Hudson Corp. 4,486 340
Fleet Financial Group, Inc. 8,999 340
Eastman Chemical 5,294 339
International Flavors &
Fragrances, Inc. 7,007 338
CoreStates Financial Corp. 9,209 337
First Fidelity Bancorp. 4,994 337
Bank of Boston Corp. 7,026 335
Carolina Power & Light Co. 9,853 331
The Gap, Inc. 9,173 330
Champion International Corp. 6,104 329
CBS, Inc. 4,115 329
Genuine Parts Co. 7,846 315
Sysco Corp. 11,490 313
St. Paul Cos., Inc. 5,355 313
Avon Products, Inc. 4,347 312
Hershey Foods Corp. 4,845 312
Burlington Resources, Inc. 8,030 311
Central & South West Corp. 12,126 309
Loral Corp. 5,390 307
* Cabletron Systems, Inc. 4,643 306
Tyco International Ltd. 4,853 306
Transamerica Corp. 4,288 306
Lowes Cos., Inc. 10,135 304
TRW, Inc. 4,043 301
Halliburton Co. 7,202 301
Detroit Edison Co. 9,186 296
Marriott International 7,903 295
Boatmen's Bancshares, Inc. 7,978 295
Alco Standard Corp. 3,469 294
Fluor Corp. 5,242 294
Freeport-McMoRan Copper &
Gold Inc. Class B 11,400 292
Morton International, Inc. 9,391 291
* Federal Express Corp. 3,498 290
National City Corp. 9,298 287
Winn Dixie Stores, Inc. 4,813 287
Amerada Hess Corp. 5,878 286
Great Lakes Chemical Corp. 4,225 286
Apple Computer, Inc. 7,646 285
The Quaker Oats Co. 8,559 284
Lincoln National Corp. 5,987 282
Rubbermaid, Inc. 10,167 281
Phelps Dodge Corp. 4,474 280
</TABLE>
27
<PAGE> 30
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INDEX Value
PORTFOLIO (continued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
CINergy Corp. 9,973 $ 278
Dresser Industries, Inc. 11,587 277
Dover Corp. 7,230 277
Tribune Co. 4,151 276
Shawmut National Corp. 8,190 275
Masco Corp. 9,929 273
American Stores Co. 9,480 269
Whirlpool Corp. 4,590 265
Eaton Corp. 5,000 265
* The Kroger Co. 7,751 265
Becton, Dickinson & Co. 4,180 263
Inco Ltd. 7,607 261
Salomon, Inc. 6,783 259
The McGraw-Hill Cos. 3,167 259
SAFECO Corp. 3,940 258
Rohm & Haas Co. 4,263 257
H & R Block, Inc. 6,768 257
Williams Cos., Inc. 6,510 254
Panhandle Eastern Corp. 9,287 253
Pioneer Hi Bred International 5,488 252
Union Camp Corp. 4,375 252
Ingersoll-Rand Co. 6,667 250
Newell Co. 10,075 249
Providian Corp. 6,008 249
Nucor Corp. 5,569 249
Tandy Corp. 4,097 249
UNUM Corp. 4,647 245
Union Electric Co. 6,547 245
* Tellabs, Inc. 5,798 244
Service Corp. International 6,162 241
Willamette Industries, Inc. 3,587 239
Praxair, Inc. 8,921 239
Consolidated Natural Gas Co. 5,888 238
Baltimore Gas & Electric Co. 9,151 237
Cooper Industries, Inc. 6,684 236
The Clorox Co. 3,288 235
Reynolds Metals Co. 4,033 233
* Computer Sciences Corp. 3,582 231
General Public Utilities Corp. 7,392 230
Engelhard Corp. 9,033 229
Dillard Department Stores Class A 7,106 227
Newmont Mining Corp. 5,329 226
Melville Corp. 6,562 226
Dow Jones & Co., Inc. 6,131 226
Southwest Airlines Co. 8,888 224
* Tenet Healthcare Corp. 12,897 224
Ohio Edison Co. 9,723 221
Delta Air Lines, Inc. 3,171 220
Nordstrom, Inc. 5,243 219
Coastal Corp. 6,463 217
* Crown Cork & Seal Co., Inc. 5,580 216
* Price/Costco Inc. 12,518 214
National Semiconductor Corp. 7,729 214
General Dynamics Corp. 3,880 213
Times Mirror Co. Class A 7,338 211
Great Western Financial Corp. 8,716 207
The Mead Corp. 3,508 206
Premark International, Inc. 4,029 205
Republic New York Corp. 3,478 203
VF Corp. 3,930 200
* St. Jude Medical, Inc. 3,152 199
W.W. Grainger, Inc. 3,280 198
Interpublic Group of Cos., Inc. 4,866 193
Northrop Grumman Corp. 3,162 192
Harcourt General, Inc. 4,585 192
* Harrah's Entertainment, Inc. 6,557 192
Sherwin-Williams Co. 5,462 191
Jefferson-Pilot Corp. 2,970 191
Mallinckrodt Group, Inc. 4,810 191
Circuit City Stores, Inc. 6,012 190
Westvaco Corp. 4,160 190
Advanced Micro Devices, Inc. 6,516 190
Torchmark Corp. 4,497 189
Hilton Hotels Corp. 2,959 189
Northern States Power Co. 4,154 188
Black & Decker Corp. 5,512 188
Kerr-McGee Corp. 3,374 187
Temple-Inland Inc. 3,501 186
H.F. Ahmanson & Co. 7,231 183
Golden West Financial Corp. 3,626 183
Knight-Ridder, Inc. 3,068 180
Dana Corp. 6,208 179
Baker Hughes, Inc. 8,754 178
Parker Hannifin Corp. 4,595 175
* FMC Corp. 2,294 174
Sonat, Inc. 5,366 172
Beneficial Corp. 3,284 172
U.S. Bancorp 6,064 171
Pall Corp. 7,356 171
Reebok International Ltd. 4,952 170
James River Corp. 5,241 168
Deluxe Corp. 5,049 167
Brown-Forman Corp. Class B 4,299 167
Hasbro, Inc. 5,367 167
New York Times Co. Class A 5,982 164
Cyprus Amax Minerals Co. 5,730 161
* Western Atlas Inc. 3,364 159
Johnson Controls, Inc. 2,518 159
Louisiana-Pacific Corp. 6,582 159
USX-U.S. Steel Group 5,078 157
Comcast Corp. Class A Special 7,729 155
Sigma Aldrich Corp. 3,169 154
* Andrew Corp. 2,516 153
Rite Aid Corp. 5,352 150
Comcast Corp. Class A 7,531 150
Bausch & Lomb, Inc. 3,616 150
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Laidlaw Inc. Class B 17,042 $ 149
Nalco Chemical Co. 4,369 149
The Dial Corp. 5,874 145
* Owens-Corning Fiberglas Corp. 3,253 145
Allergan, Inc. 4,318 144
Homestake Mining Co. 8,467 144
Avery Dennison Corp. 3,405 143
American Greetings Corp. Class A 4,578 140
Wendy's International, Inc. 6,541 138
Harris Corp. 2,510 138
Ashland Inc. 4,126 138
Whitman Corp. 6,663 137
Manor Care Inc. 4,026 137
Autodesk, Inc. 3,060 134
Pacific Enterprises 5,320 134
USF&G Corp. 6,844 133
Woolworth Corp. 8,309 131
* Ceridian Corp. 2,940 130
Millipore Corp. 3,465 130
Echlin, Inc. 3,614 129
Armstrong World Industries Inc. 2,301 128
Ryder System, Inc. 5,015 127
Raychem Corp. 2,824 127
* Biomet, Inc. 7,319 126
Brunswick Corp. 6,202 126
Roadway Services, Inc. 2,510 125
Cooper Tire & Rubber Co. 5,148 125
Pennzoil Co. 2,837 124
Moore Corp. Ltd. 6,130 123
SuperValu Inc. 4,188 123
Tektronix, Inc. 2,068 122
Liz Claiborne, Inc. 4,824 122
Sun Co., Inc. 4,705 121
Maytag Corp. 6,878 120
* ALZA Corp. 5,209 120
* Columbia Gas Systems, Inc. 3,073 119
The Stanley Works 2,735 119
Boise Cascade Corp. 2,936 119
Stone Container Corp. 6,179 117
Giant Food, Inc. Class A 3,719 117
Niagara Mohawk Power Corp. 8,862 116
Paccar, Inc. 2,480 116
* Darden Restaurants Inc. 10,067 116
The BF Goodrich Co. 1,739 115
Polaroid Corp. 2,853 113
Federal Paper Board Co., Inc. 2,936 113
Ecolab, Inc. 4,013 111
* Varity Corp. 2,491 111
C.R. Bard, Inc. 3,583 109
Santa Fe Pacific Gold Corp. 8,293 105
Pep Boys (Manny, Moe & Jack) 3,820 104
Worthington Industries, Inc. 5,586 103
* Fruit of the Loom, Inc. 4,858 100
Cummins Engine Co., Inc. 2,599 100
Snap-On Inc. 2,619 100
Mercantile Stores Co., Inc. 2,199 99
United States Surgical Corp. 3,693 99
* Bethlehem Steel Corp. 6,926 98
Harnischfeger Industries Inc. 2,919 97
Teledyne Inc. 3,500 95
Perkin-Elmer Corp. 2,608 93
* Tandem Computers, Inc. 7,408 91
Bemis Co., Inc. 3,277 91
* Beverly Enterprises Inc. 6,479 89
National Service Industries, Inc. 2,963 87
* Oryx Energy Co. 6,510 85
NICOR, Inc. 3,089 84
General Signal Corp. 2,839 83
ASARCO, Inc. 2,625 83
Scientific-Atlanta, Inc. 4,895 83
* Unisys Corp. 10,305 81
* King World Productions, Inc. 2,201 81
Echo Bay Mines Ltd. 7,381 80
The Timkin Co. 1,865 80
Thomas & Betts Corp. 1,201 78
Foster Wheeler Corp. 2,193 78
Potlatch Corp. 1,857 76
Briggs & Stratton Corp. 1,860 75
Alexander & Alexander Services, Inc. 2,931 71
Pittston Services Group 2,617 71
ENSERCH Corp. 4,258 70
Louisiana Land & Exploration Co. 1,970 70
Meredith Corp. 1,761 70
Ogden Corp. 2,951 69
Inland Steel Industries, Inc. 3,027 69
McDermott International, Inc. 3,471 69
* Amdahl Corp. 7,121 69
Cincinnati Milacron, Inc. 2,170 68
EG & G, Inc. 3,393 66
Great Atlantic & Pacific Tea Co., Inc. 2,306 65
Crane Co. 1,866 64
Russell Corp. 2,514 64
Peoples Energy Corp. 2,285 63
USLIFE Corp. 2,136 62
Consolidated Freightways, Inc. 2,517 62
NorAm Energy Corp. 7,550 59
Trinova Corp. 1,754 59
Ball Corp. 1,946 58
Fleming Cos., Inc. 2,388 57
TJX Cos., Inc. 4,786 57
Jostens Inc. 2,412 57
First Mississippi Corp. 1,408 56
Shared Medical Systems Corp. 1,323 55
* Santa Fe Energy Resources, Inc. 5,735 54
Longs Drug Stores, Inc. 1,310 54
Alberto-Culver Co. Class B 1,751 53
</TABLE>
29
<PAGE> 32
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INDEX Value
PORTFOLIO (continued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Safety-Kleen Corp. 3,608 $ 53
Fleetwood Enterprises, Inc. 2,644 53
* Viacom International Class A 1,056 53
* Navistar International Corp. 4,335 52
Centex Corp. 1,757 51
Springs Industries Inc. Class A 1,203 47
* USAir Group, Inc. 4,001 46
Pulte Corp. 1,539 44
* Armco, Inc. 6,637 43
ONEOK, Inc. 1,845 43
Eastern Enterprises 1,313 42
* Freeport-McMoRan Copper &
Gold Inc. Class A 1,600 41
Helmerich & Payne, Inc. 1,433 40
* Rowan Cos., Inc. 5,331 40
John H. Harland Co. 1,779 39
Adolph Coors Co. Class B 2,205 39
NACCO Industries, Inc. Class A 648 38
* Intergraph Corp. 2,951 35
* Cray Research, Inc. 1,538 34
Stride Rite Corp. 2,971 34
Giddings & Lewis, Inc. 1,917 33
Luby's Cafeterias, Inc. 1,535 33
* Bally Entertainment Corp. 3,021 33
Community Psychiatric Centers 2,742 32
* Shoney's Inc. 2,918 32
Outboard Marine Corp. 1,307 28
Charming Shoppes, Inc. 5,950 27
* Ryan's Family Steak Houses, Inc. 3,387 26
* Data General Corp. 2,487 26
Kaufman & Broad Home Corp. 1,965 25
* Zenith Electronics Corp. 2,518 22
Yellow Corp. 1,552 21
Bassett Furniture Industries, Inc. 700 18
Zurn Industries, Inc. 667 17
Brown Group, Inc. 896 16
* Liberty Media Group Class A 596 16
Morrison-Knudsen Co., Inc. 1,958 15
Handleman Co. 1,580 14
Brunos Inc. 132 1
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $208,266) 273,130
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.2%)
- ----------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL--Note E
5.40%, 12/21/95 $ 200 $ 198
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.41%, 10/2/95 3,066 3,066
- ----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $3,264) 3,264
- ----------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $211,530) 276,394
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.1%)
- ----------------------------------------------------------------
Other Assets--Note C 789
Liabilities (1,101)
--------
(312)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 17,599,057 outstanding
shares of beneficial interest
(unlimited authorization-no par value) $276,082
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.69
================================================================
</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. See Note E.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $205,829 $11.70
Undistributed Net
Investment Income 3,126 .18
Accumulated Net Realized Gains 2,207 .12
Unrealized Appreciation of
Investments--Note E 64,920 3.69
- ----------------------------------------------------------------
NET ASSETS $276,082 $15.69
- ----------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
Market
Value
EQUITY INCOME PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.2%)
- ----------------------------------------------------------------
BASIC MATERIALS (5.4%)
ARCO Chemical Co. 16,200 $ 790
Dow Chemical Co. 22,800 1,699
E.I. du Pont de Nemours & Co. 10,100 694
Kimberly-Clark Corp. 1,100 74
Monsanto Co. 7,500 756
Potlatch Corp. 9,700 396
Union Camp Corp. 9,100 524
--------
GROUP TOTAL 4,933
--------
- ----------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (.6%)
Thomas & Betts Corp. 8,700 562
--------
- ----------------------------------------------------------------
CONSUMER CYCLICALS (7.6%)
Deluxe Corp. 10,800 358
The Dun & Bradstreet Corp. 24,500 1,418
Eastman Kodak Co. 18,000 1,066
John H. Harland Co. 23,400 518
Kmart Corp. 85,000 1,232
The McGraw-Hill Cos. 6,600 540
Melville Corp. 12,500 431
National Service Industries, Inc. 5,400 158
J.C. Penney Co., Inc. 11,500 571
* Woolworth Corp. 42,800 674
--------
GROUP TOTAL 6,966
--------
- ----------------------------------------------------------------
CONSUMER STAPLES (8.5%)
American Brands, Inc. 46,500 1,965
The Clorox Co. 8,600 614
General Mills, Inc. 9,900 552
H.J. Heinz Co. 9,100 416
Philip Morris Cos., Inc. 29,700 2,480
The Quaker Oats Co. 8,900 295
SuperValu Inc. 7,800 229
Tambrands, Inc. 15,600 684
UST Inc. 17,000 487
--------
GROUP TOTAL 7,722
--------
- ----------------------------------------------------------------
ENERGY (15.2%)
Amoco Corp. 18,200 1,167
Atlantic Richfield Co. 19,500 2,094
Chevron Corp. 44,600 2,169
Exxon Corp. 30,800 2,225
Mobil Corp. 22,400 2,232
Phillips Petroleum Co. 11,200 364
Royal Dutch Petroleum Co. ADR 4,900 601
Sun Co., Inc. 18,658 480
Texaco Inc. 30,500 1,971
USX-Marathon Group 32,300 638
--------
GROUP TOTAL 13,941
--------
- ----------------------------------------------------------------
FINANCIAL (16.7%)
Aetna Life & Casualty Co. 11,700 859
H.F. Ahmanson & Co. 39,000 990
American Express Co. 8,200 364
American General Corp. 19,300 721
Banc One Corp. 12,900 471
Bankers Trust New York Corp. 12,600 885
Barnett Banks, Inc. 6,200 351
Boatmen's Bancshares, Inc. 10,500 389
CIGNA Corp. 10,600 1,104
CoreStates Financial Corp. 15,300 560
First Union Corp. 9,900 505
Fleet Financial Group, Inc. 10,600 400
Great Western Financial Corp. 56,800 1,349
KeyCorp 9,000 308
Lincoln National Corp. 16,300 768
Marsh & McLennan Cos., Inc. 9,200 808
Mellon Bank Corp. 6,350 283
J.P. Morgan & Co., Inc. 11,600 898
NBD Bancorp 13,600 520
NationsBank, Inc. 7,100 478
PNC Bank Corp. 24,100 672
SAFECO Corp. 7,800 511
U.S. Bancorp 16,900 477
Wachovia Corp. 14,800 638
--------
GROUP TOTAL 15,309
--------
- ----------------------------------------------------------------
HEALTH CARE (14.1%)
American Home Products Corp. 28,600 2,428
Baxter International, Inc. 10,800 444
Bristol-Myers Squibb Co. 36,300 2,645
Eli Lilly & Co. 33,200 2,984
Merck & Co., Inc. 27,200 1,523
The Upjohn Co. 47,000 2,097
Warner-Lambert Co. 8,300 791
--------
GROUP TOTAL 12,912
--------
- ----------------------------------------------------------------
UTILITIES (28.2%)
Allegheny Power System, Inc. 24,700 630
Ameritech Corp. 40,200 2,095
Baltimore Gas & Electric Co. 23,700 613
Bell Atlantic Corp. 28,700 1,761
BellSouth Corp. 21,700 1,587
Central & South West Corp. 18,600 474
Consolidated Edison Co. of
New York, Inc. 14,000 425
Consolidated Natural Gas Co. 28,100 1,135
Dominion Resources, Inc. 13,600 512
Duke Power Co. 9,600 416
FPL Group, Inc. 17,100 699
GTE Corp. 55,300 2,171
NICOR, Inc. 17,700 482
Northern States Power Co. 9,500 431
</TABLE>
31
<PAGE> 34
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INCOME Value
PORTFOLIO (continued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
NYNEX Corp. 43,900 $ 2,096
Oklahoma Gas & Electric Co. 15,900 598
PP&L Resources Inc. 19,800 463
Pacific Enterprises 19,500 490
Pacific Telesis Group 21,400 658
PacifiCorp 61,200 1,163
Potomac Electric Power Co. 26,300 638
Public Service Enterprise Group Inc. 25,500 759
SCEcorp 45,600 809
SCANA Corp. 25,100 602
Southern New England
Telecommunications Corp. 8,000 283
TECO Energy, Inc. 25,700 601
Texas Utilities Co. 18,400 642
Union Electric Co. 15,300 572
U S WEST, Inc. 35,200 1,659
Wisconsin Energy Corp. 11,400 322
--------
GROUP TOTAL 25,786
--------
- ----------------------------------------------------------------
MISCELLANEOUS (2.9%)
Hanson PLC ADR 53,900 876
Minnesota Mining &
Manufacturing Co. 10,800 610
Ogden Corp. 48,400 1,138
--------
GROUP TOTAL 2,624
--------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $79,361) 90,755
- ----------------------------------------------------------------
<CAPTION>
TEMPORARY CASH INVESTMENT (1.1%)
- ----------------------------------------------------------------
Face Market
Amount Value
(000) (000)+
-------- -------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.41%, 10/2/95
(Cost $1,008) $ 1,008 1,008
- ----------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $80,369) 91,763
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- ----------------------------------------------------------------
Other Assets--Notes C and F $ 780
Liabilities--Note F (1,051)
--------
(271)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 7,626,646 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $91,492
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.00
================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
------- ------
<S> <C> <C>
Paid in Capital $78,597 $10.31
Undistributed Net
Investment Income 1,001 .13
Accumulated Net Realized Gains 500 .07
Unrealized Appreciation of
Investments--Note E 11,394 1.49
- ----------------------------------------------------------------
NET ASSETS $91,492 $12.00
- ----------------------------------------------------------------
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.2%)
- ----------------------------------------------------------------
BASIC MATERIALS (1.6%)
W.R. Grace & Co. 17,300 $ 1,155
Kimberly-Clark Corp. 13,100 879
Scott Paper Co. 12,300 597
-------
GROUP TOTAL 2,631
-------
- ----------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (6.9%)
Duracell International, Inc. 46,400 2,082
General Electric Co. 114,800 7,319
Honeywell, Inc. 20,300 870
Illinois Tool Works, Inc. 14,700 865
-------
GROUP TOTAL 11,136
-------
- ----------------------------------------------------------------
CONSUMER CYCLICALS (14.2%)
Carnival Cruise Lines, Inc. 41,600 998
The Walt Disney Co. 80,400 4,613
Lowes Cos., Inc. 94,700 2,841
May Department Stores Co. 71,600 3,132
McDonald's Corp. 101,000 3,863
Nordstrom, Inc. 8,300 347
Wal-Mart Stores, Inc. 287,900 7,162
-------
GROUP TOTAL 22,956
-------
- ----------------------------------------------------------------
CONSUMER STAPLES (20.6%)
Campbell Soup Co. 17,100 859
The Coca-Cola Co. 92,100 6,355
Gillette Co. 109,200 5,201
PepsiCo, Inc. 146,800 7,487
Philip Morris Cos., Inc. 89,900 7,506
Procter & Gamble Co. 75,300 5,798
-------
GROUP TOTAL 33,206
-------
- ----------------------------------------------------------------
ENERGY (1.5%)
* Renaissance Energy Ltd. 60,900 1,368
* Talisman Energy, Inc. 56,300 1,092
-------
GROUP TOTAL 2,460
-------
- ----------------------------------------------------------------
FINANCIAL (7.9%)
American International Group, Inc. 50,050 4,254
Chemical Banking Corp. 25,200 1,534
Federal National Mortgage Assn. 53,100 5,495
First Financial Management 5,200 508
Norwest Corp. 27,500 901
-------
GROUP TOTAL 12,692
-------
- ----------------------------------------------------------------
HEALTH CARE (14.0%)
Abbott Laboratories, Inc. 33,900 1,445
American Home Products Corp. 29,500 2,504
Glaxo Wellcome PLC ADR 28,400 685
Johnson & Johnson 89,800 6,656
Eli Lilly & Co. 50,300 4,521
Merck & Co., Inc. 41,100 2,302
Pfizer, Inc. 52,600 2,808
The Upjohn Co. 36,400 1,624
-------
GROUP TOTAL 22,545
-------
- ----------------------------------------------------------------
TECHNOLOGY (20.7%)
AMP, Inc. 51,800 1,994
Automatic Data Processing, Inc. 84,800 5,777
* Cisco Systems, Inc. 62,100 4,285
General Motors Corp. Class E 82,700 3,763
Hewlett-Packard Co. 64,500 5,378
Intel Corp. 107,700 6,475
Motorola, Inc. 30,600 2,337
* Oracle Corp. 46,000 1,760
Reuters Holdings PLC ADR 33,400 1,762
-------
GROUP TOTAL 33,531
-------
- ----------------------------------------------------------------
UTILITIES (5.9%)
AT&T Corp. 113,500 7,463
MCI Communications Corp. 81,400 2,116
-------
GROUP TOTAL 9,579
-------
- ----------------------------------------------------------------
MISCELLANEOUS (.9%)
Alco Standard Corp. 8,800 746
Minnesota Mining &
Manufacturing Co. 13,300 751
-------
GROUP TOTAL 1,497
-------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $119,967) 152,233
- ----------------------------------------------------------------
<CAPTION>
TEMPORARY CASH INVESTMENT (4.6%)
- ----------------------------------------------------------------
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.41%, 10/2/95
(Cost $7,548) $ 7,548 7,548
- ----------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(Cost $127,515) 159,781
- ----------------------------------------------------------------
</TABLE>
33
<PAGE> 36
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
GROWTH Value
PORTFOLIO (continued) (000)+
- ----------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.2%)
- ----------------------------------------------------------------
Other Assets--Note C $ 2,403
Liabilities (542)
--------
1,861
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 11,467,865 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $161,642
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.10
================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $125,328 $10.93
Undistributed Net Investment
Income 1,849 .16
Accumulated Net
Realized Gains 2,199 .19
Unrealized Appreciation of
Investments--Note E 32,266 2.82
- ----------------------------------------------------------------
NET ASSETS $161,642 $14.10
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.2%)
- ----------------------------------------------------------------
AUSTRALIA (.8%)
Mayne Nickless Ltd. 22,000 $ 104
News Corp. Ltd. 38,000 211
News Corp. Ltd. Pfd. 19,000 94
Normandy Mining Ltd. 32,000 41
Western Mining Corp. 25,000 163
Woodside Petroleum Ltd. 24,000 115
------
GROUP TOTAL 728
------
- ----------------------------------------------------------------
BRAZIL (1.2%)
Telebras ADR 15,341 698
Usiminas ADS 30,000 334
------
GROUP TOTAL 1,032
------
- ----------------------------------------------------------------
CHILE (.2%)
Compania de Telecommunicaciones
de Chile SA ADR 3,200 221
------
- ----------------------------------------------------------------
FINLAND (.5%)
Metsa-Serla Oy B 3,000 118
Repola Oy 15,000 323
------
GROUP TOTAL 441
------
- ----------------------------------------------------------------
FRANCE (4.3%)
Cardif 3,200 339
Carrefour 1,400 824
Cie. Generale Des Eaux 5,627 542
Primagaz Cie. 6,600 456
* Primagaz Cie. Warrants Exp. 6/30/98 600 3
Societe National Elf Aquitaine 24,637 1,667
------
GROUP TOTAL 3,831
------
- ----------------------------------------------------------------
GERMANY (5.8%)
Allianz AG Holding (Registered) 400 724
* Allianz AG Holding Rfd. (Registered) 28 50
Buderus 520 228
Mannesmann AG 1,800 593
Munchener Ruckversicherung 130 266
SAP Pfd. (non-voting) 5,200 850
Veba AG 45,000 1,793
Wella AG Pfd. 1,000 715
------
GROUP TOTAL 5,219
------
- ----------------------------------------------------------------
HONG KONG (6.2%)
Cheung Kong Holdings Ltd. 142,000 773
HSBC Holdings PLC 70,600 982
Hong Kong Electric Holdings Ltd. 155,000 518
Hutchison Whampoa Ltd. 204,000 1,106
Sun Hung Kai Properties Ltd. 130,000 1,055
Swire Pacific Ltd. A 106,000 840
Wharf Holdings Ltd. 86,000 268
------
GROUP TOTAL 5,542
------
- ----------------------------------------------------------------
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
INDONESIA (1.7%)
Indocement (Foreign) 77,000 $ 280
Indofood (Foreign) 105,000 506
Kalbe Farma (Foreign) 20,000 80
Perusahaan Gudang Garam
(Foreign) 24,000 191
PT Indosat ADS 13,000 457
--------
GROUP TOTAL 1,514
--------
- ----------------------------------------------------------------
ITALY (1.7%)
Telecom Italia SPA 452,000 741
* Telecom Italia Mobile SPA 452,000 753
--------
GROUP TOTAL 1,494
--------
- ----------------------------------------------------------------
JAPAN (26.8%)
Advantest Corp. 6,000 357
Bridgestone Corp. 60,000 894
Dai-Nippon Printing Co. Ltd. 30,000 478
Daini Den Den Corp. 200 1,658
East Japan Railway 85 422
Eisai Co., Ltd. 20,000 351
Fuji Photo Film Co., Ltd. 24,000 601
Fujitsu Ltd. 50,000 634
Hirose Electronics Co. Ltd. 3,150 199
Hitachi Ltd. 122,000 1,336
Hoya Corp. 15,000 444
Ito-Yokado Co. 44,000 2,444
Keyence Inc. 6,000 748
Kuraray Co., Ltd. 35,000 352
Kyocera Corp. 10,000 825
Mabuchi Motors 9,000 534
Matsushita Electric
Industrial Co. Ltd. 50,000 770
Mitsubishi Corp. 60,000 675
Murata Manufacturing Co. Ltd. 50,000 1,886
NEC Corp. 28,000 392
Nippon Shinpan Co. 35,000 220
Nippon Television Network 1,000 249
Nissei Sangyo 40,000 511
Sankyo Co., Ltd. 22,000 504
Seino Transportation Co. Ltd. 45,000 766
Sharp Corp. 35,000 493
Shin-Etsu Chemical Co. Ltd. 18,000 350
Showa Shell Sekiyu 55,000 434
Skylark Co., Ltd. 22,000 359
Takeda Chemical Industries 87,000 1,217
Toho Co., Ltd. 3,000 471
Tokio Marine & Fire
Insurance Ltd. 40,000 434
Tokyo Electron Inc. 16,000 699
Tokyo Style Co. 15,000 234
Toyota Motor Corp. 55,000 1,054
--------
GROUP TOTAL 23,995
--------
- ----------------------------------------------------------------
MALAYSIA (3.0%)
Edaran Otomobil 64,000 512
Genting Bhd. 88,500 765
Malayan Banking Bhd. 99,000 801
Telekom Malaysia Bhd. 78,000 587
--------
GROUP TOTAL 2,665
--------
- ----------------------------------------------------------------
NETHERLANDS (10.6%)
Cap Volmac Group NV 13,000 160
* Delft Instruments 12,000 252
Getronics NV 20,298 1,004
Heineken NV 13,750 2,227
Internationale Nederlanden Groep 21,066 1,229
KLM Royal Dutch Airlines 14,341 505
Oce Van Der Grinten 15,000 857
Philips Electronics NV (non-voting) 50,000 2,448
Samas Groep 8,000 362
Ver Ned Uitgeners 3,400 453
--------
GROUP TOTAL 9,497
--------
- ----------------------------------------------------------------
NORWAY (1.1%)
Norsk Hydro 23,000 989
--------
- ----------------------------------------------------------------
PHILIPPINES (1.6%)
Ayala Land Inc. B 281,250 313
Manila Electric B 42,000 321
Philippines Long Distance
Telephone Co. 4,000 267
* Philippine National Bank Class B 2,879 30
SM Prime Holdings 1,224,600 367
San Miguel Corp. B 38,000 134
--------
GROUP TOTAL 1,432
--------
- ----------------------------------------------------------------
SINGAPORE (2.6%)
DBS Land 103,000 306
Development Bank of
Singapore (Foreign) 20,000 228
Jurong Shipyard 26,000 187
Keppel Corp. 61,000 489
Mandarin Oriental (Registered) 204,000 212
Overseas Chinese
Banking Corp. (Foreign) 28,000 317
Singapore International
Airlines Ltd. (Foreign) 32,000 297
Singapore Press
Holdings Ltd. (Foreign) 21,600 331
--------
GROUP TOTAL 2,367
--------
- ----------------------------------------------------------------
SWEDEN (1.7%)
Astra AB Series B 14,300 504
LM Ericsson Telephone 28,000 691
Stora Kopparberg Series A 26,000 355
--------
GROUP TOTAL 1,550
--------
- ----------------------------------------------------------------
</TABLE>
35
<PAGE> 38
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
INTERNATIONAL Value
PORTFOLIO (continued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------
SWITZERLAND (7.3%)
BBC Brown Boveri AG A (Bearer) 1,950 $ 2,272
Ciba Geigy (Registered) 1,000 806
Nestle SA (Registered) 1,150 1,184
Roche Holdings Ltd. 125 888
Sandoz AG (Registered) 990 758
Societe Generale de Surveillance
Holdings SA (Bearer) 350 652
--------
GROUP TOTAL 6,560
--------
- ----------------------------------------------------------------
THAILAND (2.2%)
Land & House Co. Ltd. (Foreign) 29,000 456
Siam Cement Co., Ltd. (Foreign) 8,000 472
Siam City Bank (Foreign) 183,000 248
* TelecomAsia Corp. (Foreign) 108,000 325
Thai Farmers Bank Ltd. (Foreign) 54,000 469
--------
GROUP TOTAL 1,970
--------
- ----------------------------------------------------------------
UNITED KINGDOM (16.9%)
Allied Domecq PLC 60,000 511
Asda Group PLC 600,000 986
BOC Group 50,000 633
Barclays PLC 70,000 827
British Airways PLC 115,000 825
British Land Co., PLC 72,000 471
British Petroleum Co. 80,000 599
British Steel PLC 212,500 612
Cable and Wireless PLC 110,000 726
Courtaulds PLC 40,000 252
Daily Mail & General Class A 30,000 532
De La Rue Co. PLC 25,000 358
ECC Group (English China Clays) 45,000 259
Fisons 60,000 244
Glaxo Wellcome PLC 40,000 490
Guinness PLC 70,000 572
MFI Furniture Group 600,000 1,282
Peninsular & Oriental Steam
Navigation Co. Pfd. 52,000 394
Rank Organisation Ltd. 170,000 1,144
Reuters Holdings PLC 80,000 709
Rexam PLC 40,000 256
Rolls Royce PLC 94,814 259
Thorn EMI PLC 40,000 933
Vodafone Group PLC 220,000 925
Zeneca Group PLC 20,000 361
--------
GROUP TOTAL 15,160
--------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $78,424) 86,207
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (4.1%)
- ----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.41%, 10/2/95
(Cost $3,691) $3,691 $ 3,691
- ----------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $82,115) 89,898
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- ----------------------------------------------------------------
Other Assets--Notes C and F 8,399
Liabilities--Note F (8,681)
--------
(282)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 7,857,716 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $89,616
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.40
================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
ADS--American Depository Share.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
------- ------
<S> <C> <C>
Paid in Capital $80,715 $10.27
Undistributed Net
Investment Income--Note D 1,149 .15
Accumulated Net
Realized Gains--Note D 283 .03
Unrealized Appreciation of
Investments--Note E 7,469 .95
- ----------------------------------------------------------------
NET ASSETS $89,616 $11.40
- ----------------------------------------------------------------
</TABLE>
36
<PAGE> 39
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MONEY HIGH-GRADE
MARKET BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1995 1995 1995
(000) (000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends.......................................... -- -- $ 5,218
Interest........................................... $11,357 $ 6,861 6,012
- -------------------------------------------------------------------------------------------------
Total Income................................ 11,357 6,861 11,230
- -------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees...................................... 24 12 244
Performance Adjustments......................... -- -- --
The Vanguard Group--Note C.........................
Management and Administrative................... 315 200 533
Marketing and Distribution...................... 52 16 39
Custodians' Fees................................... 29 38 2
Auditing Fees...................................... 9 9 10
Shareholders' Reports.............................. 14 14 35
Annual Meeting and Proxy Costs..................... 2 2 5
Trustees' Fees and Expenses........................ 1 -- 1
- -------------------------------------------------------------------------------------------------
Total Expenses.............................. 446 291 869
- -------------------------------------------------------------------------------------------------
Net Investment Income.................... 10,911 6,570 10,361
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold......................... (1) (13) (1,374)
Futures Contracts.................................. -- -- --
Foreign Currencies and Forward
Currency Contracts.............................. -- -- --
- -------------------------------------------------------------------------------------------------
Realized Net Gain (Loss)................. (1) (13) (1,374)
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities.............................. -- 6,687 44,095
Futures Contracts.................................. -- -- --
Foreign Currencies and Forward Currency Contracts.. -- -- --
- -------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation)............ -- 6,687 44,095
- -------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations.............. $10,910 $13,244 $53,082
=================================================================================================
</TABLE>
37
<PAGE> 40
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
EQUITY EQUITY
INDEX INCOME GROWTH INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30,
1995 1995 1995 1995
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1).......................... $ 5,536 $ 3,465 $ 1,883 $1,478
Interest.............................. 596 83 584 188
- -------------------------------------------------------------------------------------------------
Total Income................... 6,132 3,548 2,467 1,666
- -------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees......................... 23 76 179 96
Performance Adjustments............ -- -- -- 17
The Vanguard Group--Note C
Management and Administrative...... 505 166 308 212
Marketing and Distribution......... 34 14 18 11
Custodians' Fees...................... 4 15 14 49
Auditing Fees......................... 10 8 9 8
Shareholders' Reports................. 30 17 20 13
Annual Meeting and Proxy Costs........ 4 2 2 2
Trustees' Fees and Expenses........... 1 1 1 --
- -------------------------------------------------------------------------------------------------
Total Expenses................. 611 299 551 408
- -------------------------------------------------------------------------------------------------
Net Investment Income....... 5,521 3,249 1,916 1,258
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold............ 213 499 3,088 (655)
Futures Contracts..................... 1,966 -- -- --
Foreign Currencies and Forward
Currency Contracts................. -- -- -- 896
- -------------------------------------------------------------------------------------------------
Realized Net Gain (Loss).... 2,179 499 3,088 241
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities................. 50,509 14,100 28,739 7,058
Futures Contracts..................... 201 -- -- --
Foreign Currencies and Forward
Currency Contracts................. -- -- -- (289)
- -------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) 50,710 14,100 28,739 6,769
- -------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations. $58,410 $17,848 $33,743 $8,268
=================================================================================================
</TABLE>
(1) Dividends for the International Portfolio are net of foreign withholding
taxes of $224,000.
38
<PAGE> 41
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,
1995 1994 1995 1994 1995 1994
(000) (000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income............... $ 10,911 $ 5,231 $ 6,570 $ 5,047 $ 10,361 $ 9,163
Realized Net Gain (Loss)............ (1) (1) (13) (534) (1,374) 2,529
Change in Unrealized Appreciation
(Depreciation).................... -- -- 6,687 (7,468) 44,095 (6,551)
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations...... 10,910 5,230 13,244 (2,955) 53,082 5,141
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income............... (10,911) (5,231) (6,570) (5,047) (10,052) (7,649)
Realized Net Gain................... -- -- -- (1,239) (1,616) (2,895)
- -----------------------------------------------------------------------------------------------------------
Total Distributions............... (10,911) (5,231) (6,570) (6,286) (11,668) (10,544)
- -----------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A........ -- -- -- -- 2 182
- -----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued--Regular..................... 287,895 348,060 54,758 41,578 45,578 97,152
--In Lieu of Cash Distributions 10,877 5,231 6,548 6,286 11,640 10,542
Redeemed ........................... (251,570) (295,746) (27,894) (43,481) (48,471) (64,162)
- -----------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions..... 47,202 57,545 33,412 4,383 8,747 43,532
- -----------------------------------------------------------------------------------------------------------
Total Increase (Decrease)......... 47,201 57,544 40,086 (4,858) 50,163 38,311
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period................. 171,166 113,622 80,359 85,217 229,608 191,297
- -----------------------------------------------------------------------------------------------------------
End of Period (3)................... $ 218,367 $171,166 $120,445 $ 80,359 $279,771 $229,608
===========================================================================================================
(1) Distributions Per Share
Net Investment Income.......... $.056 $.035 $.663 $.619 $.50 $.39
Realized Net Gain.............. -- -- -- $.154 $.08 $.16
- -----------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued......................... 287,895 348,060 5,444 3,978 3,877 8,513
Issued in Lieu of Cash
Distributions................ 10,877 5,231 647 608 1,015 934
Redeemed........................ (251,570) (295,746) (2,763) (4,192) (4,180) (5,695)
- -----------------------------------------------------------------------------------------------------------
47,202 57,545 3,328 394 712 3,752
- -----------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income............ -- -- -- -- $ 2,779 $ 2,468
- -----------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
EQUITY INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------
YEAR Year YEAR Year
ENDED Ended ENDED Ended
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
1995 1994 1995 1994
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income..................... $ 5,521 $ 4,629 $ 3,249 $ 3,061
Realized Net Gain (Loss).................. 2,179 1,247 499 332
Change in Unrealized Appreciation
(Depreciation).......................... 50,710 52 14,100 (4,564)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations............ 58,410 5,928 17,848 (1,171)
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income..................... (4,508) (3,274) (3,350) (2,251)
Realized Net Gain......................... (1,196) (1,383) (338) (66)
- -------------------------------------------------------------------------------------------------
Total Distributions..................... (5,704) (4,657) (3,688) (2,317)
- -------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A ............ -- -- 65 99
- -------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular 69,694 66,892 24,993 60,416
--In Lieu of Cash Distributions... 5,704 4,657 3,670 2,312
Redeemed ................................. (37,968) (51,790) (19,367) (40,943)
- -------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions........... 37,430 19,759 9,296 21,785
- -------------------------------------------------------------------------------------------------
Total Increase (Decrease)............... 90,136 21,030 23,521 18,396
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period....................... 185,946 164,916 67,971 49,575
- -------------------------------------------------------------------------------------------------
End of Period (3)......................... $ 276,082 $185,946 $ 91,492 $ 67,971
=================================================================================================
(1) Distributions Per Share
Net Investment Income................ $.29 $.23 $.48 $.33
Realized Net Gain.................... $.08 $.10 $.05 $.01
- -------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued............................... 5,094 5,400 2,369 5,951
Issued in Lieu of Cash Distributions. 447 379 359 232
Redeemed............................. (2,854) (4,195) (1,867) (4,109)
- -------------------------------------------------------------------------------------------------
2,687 1,584 861 2,074
- -------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income.................... $ 3,126 $ 2,113 $ 1,001 $ 1,037
- -------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
GROWTH INTERNATIONAL
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------
YEAR Year YEAR
ENDED Ended ENDED June 3+ to
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
1995 1994 1995 1994
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income.................... $ 1,916 $ 993 $ 1,258 $ 325
Realized Net Gain (Loss)................. 3,088 (768) 241 5
Change in Unrealized Appreciation
(Depreciation)......................... 28,739 2,947 6,769 700
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations........... 33,743 3,172 8,268 1,030
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income.................... (862) (342) (397) --
Realized Net Gain........................ -- -- -- --
- --------------------------------------------------------------------------------------------------
Total Distributions.................... (862) (342) (397) --
- --------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A ........... -- -- -- --
- --------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular 68,148 66,763 47,204 64,245
--In Lieu of Cash Distributions.. 862 342 397 --
Redeemed ................................ (22,177) (23,735) (28,360) (2,771)
- --------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions.......... 46,833 43,370 19,241 61,474
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease).............. 79,714 46,200 27,112 62,504
- --------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period...................... 81,928 35,728 62,504 --
- --------------------------------------------------------------------------------------------------
End of Period (3)........................ $161,642 $ 81,928 $ 89,616 $62,504
==================================================================================================
(1) Distributions Per Share
Net Investment Income............... $.11 $.07 $.06 --
Realized Net Gain................... -- -- -- --
- --------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued ............................. 5,637 6,333 4,526 6,328
Issued in Lieu of Cash Distributions 81 33 38 --
Redeemed............................ (1,846) (2,253) (2,766) (268)
- --------------------------------------------------------------------------------------------------
3,872 4,113 1,798 6,060
- --------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income--Note D........ $ 1,849 $ 795 $ 1,149 $ 325
- --------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
41
<PAGE> 44
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------------------------
Year Ended September 30, May 2+ to
---------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income.................... .056 .035 .030 .040 .023
Net Realized and Unrealized Gain (Loss)
on Investments......................... -- -- -- -- --
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ... .056 .035 .030 .040 .023
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... (.056) (.035) (.030) (.040) (.023)
Distributions from Realized Capital Gains -- -- -- -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ................ (.056) (.035) (.030) (.040) (.023)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. $1.00 $1.00 $1.00 $1.00 $1.00
=================================================================================================
TOTAL RETURN ............................... +5.77% +3.63% +3.05% +4.11% +2.35%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)........ $218 $171 $114 $71 $27
Ratio of Expenses to Average Net Assets..... .23% .23% .29% .33% .34%*
Ratio of Net Investment Income to
Average Net Assets....................... 5.66% 3.66% 3.00% 3.90% 5.50%*
Portfolio Turnover Rate..................... N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------
<CAPTION>
HIGH-GRADE BOND PORTFOLIO
- -------------------------------------------------------------------------------------------------
Year Ended September 30, April 29+ to
-------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $9.82 $10.94 $10.64 $10.24 $10.00
----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income.................... .663 .619 .636 .705 .299
Net Realized and Unrealized Gain (Loss)
on Investments......................... .650 (.966) .349 .427 .240
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ... 1.313 (.347) .985 1.132 .539
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... (.663) (.619) (.636) (.705) (.299)
Distributions from Realized Capital Gains -- (.154) (.049) (.027) --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ................ (.663) (.773) (.685) (.732) (.299)
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. $10.47 $9.82 $10.94 $10.64 $10.24
=================================================================================================
TOTAL RETURN ............................... +13.83% -3.31% +9.64% +11.47% +5.48%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)........ $120 $80 $85 $52 $16
Ratio of Expenses to Average Net Assets..... .29% .24% .29% .32% .40%*
Ratio of Net Investment Income to
Average Net Assets....................... 6.58% 5.98% 5.92% 6.66% 6.89%*
Portfolio Turnover Rate..................... 29% 46% 73% 31% 9%
- -------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
*Annualized.
42
<PAGE> 45
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------------------------
Year Ended September 30, May 23+ to
-------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $11.33 $11.58 $10.83 $10.25 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................... .51 .46 .50 .51 .19
Net Realized and Unrealized Gain (Loss)
on Investments......................... 2.07 (.16) .97 .52 .06
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ... 2.58 .30 1.47 1.03 .25
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... (.50) (.39) (.69) (.45) --
Distributions from Realized Capital Gains (.08) (.16) (.03) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ................ (.58) (.55) (.72) (.45) --
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. $13.33 $11.33 $11.58 $10.83 $10.25
=================================================================================================
TOTAL RETURN ............................... +23.65% +2.67% +14.10% +10.29% +2.50%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)........ $280 $230 $191 $76 $13
Ratio of Expenses to Average Net Assets..... .36% .34% .39% .42% .51%*
Ratio of Net Investment Income to
Average Net Assets....................... 4.25% 4.11% 4.45% 4.77% 5.24%*
Portfolio Turnover Rate..................... 26% 42% 41% 15% 3%
- -------------------------------------------------------------------------------------------------
<CAPTION>
EQUITY INDEX PORTFOLIO
- -------------------------------------------------------------------------------------------------
Year Ended September 30, April 29+ to
------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $12.47 $12.37 $11.32 $10.45 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................... .33 .31 .34 .26 .08
Net Realized and Unrealized Gain (Loss)
on Investments......................... 3.26 .12 1.07 .85 .37
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ... 3.59 .43 1.41 1.11 .45
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... (.29) (.23) (.34) (.24) --
Distributions from Realized Capital Gains (.08) (.10) (.02) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ................ (.37) (.33) (.36) (.24) --
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. $15.69 $12.47 $12.37 $11.32 $10.45
=================================================================================================
TOTAL RETURN ............................... +29.51% +3.53% +12.68% +10.74% +4.50%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)........ $276 $186 $165 $85 $24
Ratio of Expenses to Average Net Assets..... .28% .24% .29% .32% .45%*
Ratio of Net Investment Income to
Average Net Assets....................... 2.53% 2.60% 2.63% 2.84% 3.22%*
Portfolio Turnover Rate..................... 2% 7% 16% 1% 5%
- -------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
*Annualized.
43
<PAGE> 46
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------------------------
Year Ended Sept. 30, June 7+ to
-------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................... $10.05 $10.57 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income................................ .46 .45 .14
Net Realized and Unrealized Gain (Loss)
on Investments..................................... 2.02 (.63) .54
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ............... 2.48 (.18) .68
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................. (.48) (.33) (.11)
Distributions from Realized Capital Gains............ (.05) (.01) --
------ ------ ------
TOTAL DISTRIBUTIONS ............................ (.53) (.34) (.11)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ......................... $12.00 $10.05 $10.57
==================================================================================================
TOTAL RETURN ........................................... +25.69% -1.64% +6.81%
- --------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions).................... $91 $68 $50
Ratio of Expenses to Average Net Assets................. .39% .34% .39%*
Ratio of Net Investment Income to
Average Net Assets................................... 4.28% 4.57% 4.30%*
Portfolio Turnover Rate................................. 10% 18% 2%
- ---------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
*Annualized.
44
<PAGE> 47
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------
Year Ended Sept. 30, June 7+ to
-------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................... $10.79 $10.26 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income................................ .16 .14 .04
Net Realized and Unrealized Gain (Loss)
on Investments..................................... 3.26 .46 .22
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ............... 3.42 .60 .26
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................. (.11) (.07) --
Distributions from Realized Capital Gains............ -- -- --
------ ------ ------
TOTAL DISTRIBUTIONS ............................ (.11) (.07) --
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ......................... $14.10 $10.79 $10.26
=================================================================================================
TOTAL RETURN ........................................... +32.02% +5.87% +2.60%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions).................... $162 $82 $36
Ratio of Expenses to Average Net Assets................. .47% .38% .43%*
Ratio of Net Investment Income to
Average Net Assets................................... 1.64% 1.55% 1.63%*
Portfolio Turnover Rate................................. 32% 34% 10%
- -------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
*Annualized.
45
<PAGE> 48
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------------------------
YEAR ENDED June 3+ to
SEPT. 30, Sept. 30,
For a Share Outstanding Throughout Each Period 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............................... $10.31 $10.00
------ ------
INVESTMENT OPERATIONS
Net Investment Income............................................ .16 .05
Net Realized and Unrealized Gain (Loss)
on Investments................................................. .99 .26
------ ------
TOTAL FROM INVESTMENT OPERATIONS ........................... 1.15 .31
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................. (.06) --
Distributions from Realized Capital Gains........................ -- --
------ ------
TOTAL DISTRIBUTIONS ........................................ (.06) --
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ..................................... $11.40 $10.31
=================================================================================================
TOTAL RETURN ....................................................... +11.21% +3.10%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)................................ $90 $63
Ratio of Expenses to Average Net Assets............................. .54% .30%*
Ratio of Net Investment Income to
Average Net Assets............................................... 1.67% 1.91%*
Portfolio Turnover Rate............................................. 27% 0%
- -------------------------------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
*Annualized.
46
<PAGE> 49
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. Shares of the Fund are currently offered only to
Providian Life & Health Insurance Company Separate Account IV and First
Providian Life & Health Insurance Company Separate Account B for the Vanguard
Variable Annuity Plan Contract.
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. The International Portfolio invests in securities of foreign
issuers which may subject the Portfolio to investment risks not normally
associated with investing in securities of United States corporations.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: 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 the close of the New York
Stock Exchange (generally 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.
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. FOREIGN CURRENCY: Securities and other assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the bid prices of
those currencies against U.S. dollars last quoted by major banks as of 4:00
PM London time on the valuation date.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on securities from the
portion arising from changes in market prices of securities. Such
fluctuations are included in realized net gains (losses) and unrealized
appreciation (depreciation) on investment securities. Changes in the value
of other assets and liabilities resulting from changes in foreign exchange
rates are recorded as unrealized foreign currency gains (losses) until
settled in cash, at which time realized foreign currency gains (losses) are
recognized.
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Equity Index Portfolio utilizes
Standard & Poor's 500 Index futures contracts to a limited extent, with
the objectives of maintaining full exposure to the stock market, enhancing
returns, maintaining liquidity, and minimizing transaction costs. The
Portfolio may purchase futures contracts to immediately position incoming
cash in the market, thereby simulating a fully invested position in the
underlying index while maintaining a cash balance for liquidity. In the event
of redemptions, the Portfolio may pay departing shareholders from its cash
balance and reduce its futures position accordingly. Returns may be enhanced
by using futures contracts instead of the underlying securities when futures
are believed to be priced more attractively than the underlying securities.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the Portfolio
and the
47
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS (continued)
prices of futures contracts, and the possibility of an illiquid market.
The International Portfolio enters into forward currency contracts to
protect the value of securities and related receivables and payables against
changes in future foreign exchange rates. Risks associated with such
contracts include movement in the value of the foreign currency relative to
the U.S. dollar and the ability of the counterparties to fulfill their
obligations under the contracts.
Fluctuations in the value of futures and forward currency contracts are
recorded as unrealized appreciation (depreciation) until terminated, at
which time realized gains (losses) are recognized.
4. 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.
5. 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.
6. REPURCHASE AGREEMENTS: The Money Market Portfolio may invest in repurchase
agreements secured by U.S. Government obligations. Each other Portfolio of
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 a custodian bank until maturity of the
repurchase agreements. Provisions of each agreement require 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.
7. 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 28, 1996
COMPANY
EQUITY INCOME NEWELL ASSOCIATES MAY 31, 1996
GROWTH LINCOLN CAPITAL MAY 31, 1996
MANAGEMENT COMPANY
INTERNATIONAL SCHRODER CAPITAL MAY 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, 1995, the investment advisory fee
of the Balanced Portfolio
48
<PAGE> 51
represented an effective annual rate of .10 of 1% of average net assets.
No performance adjustment was required during the period. The basic fee thus
computed for the International Portfolio is subject to quarterly adjustments
based on performance relative to the Morgan Stanley Capital International
Europe, Australia, and Far East Index. For the year ended September 30, 1995,
the investment advisory fee of the International Portfolio represented an
effective annual base rate of .13 of 1% of average net assets before an increase
of $17,000 (.02 of 1%) based on performance. The advisory fees of the Equity
Income and Growth Portfolios represented effective annual rates of .10 of 1% and
.15 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, 1995, the Fund had contributed capital
of $150,000 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, 1995, 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 $13,968 $ 1,635
BALANCED 32,401 36,036
EQUITY INDEX 47,489 3,211
EQUITY INCOME 16,634 7,492
GROWTH 79,474 34,449
INTERNATIONAL 42,670 19,867
- -----------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- -----------------------------------------------
(000)
-------------------
Portfolio Purchases Sales
- -----------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND $51,223 $26,741
BALANCED 30,971 26,085
- -----------------------------------------------
</TABLE>
The Growth Portfolio utilized a capital loss carryforward of $889,000, to
offset taxable capital gains realized during the year ended September 30, 1995.
During the year ended September 30, 1995, the International Portfolio realized
net foreign currency losses of $37,000 which reduced distributable net income
for tax purposes; accordingly, such losses have been reclassified by increasing
accumulated net realized gains and decreasing undistributed net investment
income.
49
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS (continued)
At September 30, 1995, the Fund had available realized capital losses to offset
future taxable 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 2003-2004 $ 652
BALANCED 2004 1,537
INTERNATIONAL 2003 55
- -------------------------------------------------
</TABLE>
E. At September 30, 1995, net unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------
(000)
------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- -----------------------------------------------------
<S> <C> <C> <C>
HIGH-GRADE BOND $ 2,761 $ (788) $ 1,973
BALANCED 50,859 (1,344) 49,515
EQUITY INDEX 68,616 (3,752) 64,864
EQUITY INCOME 13,588 (2,194) 11,394
GROWTH 32,605 (339) 32,266
INTERNATIONAL 10,890 (3,107) 7,783
- -----------------------------------------------------
</TABLE>
At September 30, 1995, the International Portfolio had net unrealized
foreign currency gains of $5,000 resulting from the translation of other assets
and liabilities.
At September 30, 1995, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in December 1995 held by the Equity Index
Portfolio, the related unrealized appreciation, and the market value of U.S.
Treasury bills deposited as initial margin for such contracts were $2,941,000,
$56,000, and $198,000, respectively.
Under the terms of open forward currency exchange contracts at September 30,
1995, the International Portfolio was obligated to deliver foreign currency in
exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------
(000)
-------------------
Contract Foreign U.S.
Settlement date Currency Dollars
- -----------------------------------------------
<S> <C> <C>
12/21/95 JAPANESE YEN 700,000 $6,863
- -----------------------------------------------
</TABLE>
Unrealized depreciation related to open forward currency contracts of
$319,000 is required to be treated as realized loss for tax purposes, and is
included in the Portfolio's capital loss carryforward at September 30, 1995. See
Note D.
F. The market value of securities on loan to broker/dealers at September 30,
1995, and cash collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- ----------------------------------------------
(000)
------------------------
Market Value Cash
of Loaned Collateral
portfolio Securities Received
- ----------------------------------------------
<S> <C> <C>
BALANCED $5,042 $5,148
EQUITY INCOME 365 380
INTERNATIONAL 6,658 7,054
- ----------------------------------------------
</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.
50
<PAGE> 53
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, 1995, and 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
October 30, 1995
51
<PAGE> 54
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 of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. 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. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
52
<PAGE> 55
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
VARIABLE ANNUITY
Vanguard Variable Annuity Fund
[THE VANGUARD GROUP LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q640-9/95
On Our Cover: On the evening of August 1, 1798, Lord Horatio Nelson
sailed his flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night
encounter, the British fleet decimated Napoleon Bonaparte's ships of the line
in what is still considered to be the most complete victory ever recorded in
naval history. Our Report's cover illustration is Thomas Luny's 1830 painting,
The Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 56
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 Thomas Luny's 1830
painting "The Battle Of The Nile"
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet and gloves and battleships in the
background appear at the top of pages one through eight.
A line chart of the Indexed Value (Standard & Poor's 500 Stock Index) of
Vanguard Variable Insurance Fund for the fiscal years 1991 through 1995 appears
at the upper left of page two.
Line charts illustrating cumulative performance between VVIF-Money Market
Portfolio, Salomon 90 Day T-Bill and Average Money Market Fund, average Annual
Total Returns for the period May 2, 1991 to September 30, 1995 appear at the
top of page five.
Line charts illustrating cumulative performance between VVIF-High Grade Bond
Portfolio, Lehman Aggregate Bond Index and Average Intermediate-Term U.S.
Government Fund, average Annual Total Returns for the period April 29, 1991, to
September 30, 1995 appear at the bottom of page five.
Line charts illustrating cumulative performance between VVIF-Balanced
Portfolio, Composite Index (65% S&P 500 Index, 35% Salomon High-Grade Bond
Index) and Average Balanced Fund, average Annual Total Returns for the period
May 23, 1991, to September 30, 1995 appear at the top of page six.
Line charts illustrating cumulative performance between VVIF-Equity Index
Portfolio, Standard & Poor's 500 Index and Average Growth & Income Fund,
average Annual Total Returns for the period April 29, 1991, to September 30,
1995 appear at the bottom of page six.
Line charts illustrating cumulative performance between VVIF-Equity Income
Portfolio, Standard & Poor's 500 Index, Average Equity Income Fund, average
Annual Total Returns for the period June 7, 1993 to September 30, 1995 appear
at the top of page seven.
Line charts illustrating cumulative performance between VVIF-Growth Portfolio,
Standard & Poor's 500 Index, Average Growth Fund, average Annual Total Returns
for the period June 7, 1993 to September 30, 1995 appear at the bottom of page
seven.
<PAGE> 57
Line charts illustrating cumulative performance between VVIF-International
Portfolio, MSCI EAFE Index, Average International Fund, average Annual Total
Returns for the period June 3, 1994, to September 30, 1995 appear at the top of
page eight.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages nine through fifteen.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages sixteen through fifty one.
A running head featuring a sextant, a map and battleships in the background
appears at the top of page fifty two.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
