<PAGE> 1
A MESSAGE TO PLANHOLDERS
DEAR PLANHOLDER:
A generally positive investing environment prevailed for Vanguard Variable
Insurance Fund during the six months ended March 31, the first half of the
Fund's 1996 fiscal year. U.S. and foreign stock prices continued to climb, bond
prices see-sawed in a narrow trading pattern, and money market yields remained
fairly flat.
INVESTMENT PERFORMANCE
The returns of the Fund's seven portfolios reflect these overall market
conditions. The table below shows the total return (capital change plus
reinvested dividends) of each Portfolio relative to the benchmark that we think
is most appropriate for that Portfolio:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
FUND TOTAL RETURN
-----------------
SIX MONTHS ENDED
MARCH 31, 1996
- -----------------------------------------------------------------
<S> <C>
MONEY MARKET PORTFOLIO + 2.7%
AVERAGE MONEY MARKET FUND + 2.5
- -----------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO + 2.3%
LEHMAN AGGREGATE BOND INDEX + 2.4
- -----------------------------------------------------------------
BALANCED PORTFOLIO + 9.2%
COMPOSITE INDEX* + 8.0
- -----------------------------------------------------------------
EQUITY INDEX PORTFOLIO +11.7%
EQUITY INCOME PORTFOLIO +12.3
GROWTH PORTFOLIO +14.1
STANDARD & POOR'S 500 STOCK INDEX +11.7
- -----------------------------------------------------------------
INTERNATIONAL PORTFOLIO + 8.6%
MSCI EUROPE, AUSTRALIA, AND
FAR EAST (EAFE) INDEX + 7.2
- -----------------------------------------------------------------
</TABLE>
* 65% Standard & Poor's 500 Index, 35% Lehman Long-Term Corporate AA or Better
Bond Index.
The total returns shown above reflect the change in net asset value for each
Portfolio adjusted to include the reinvestment of any income or capital gains
distributions. We also provide in the table that follows the actual returns to
investors in the Vanguard Variable Annuity Plan. These returns are somewhat
lower, because they take into account the administrative and insurance expenses
associated with the Plan, which total some 0.49% on an annual basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
PLAN TOTAL RETURN
-----------------
SIX MONTHS ENDED
VANGUARD PORTFOLIO MARCH 31, 1996
- -----------------------------------------------------------------
<S> <C>
MONEY MARKET + 2.5%
HIGH-GRADE BOND + 2.0
BALANCED + 9.0
EQUITY INDEX +11.4
EQUITY INCOME +12.0
GROWTH +13.8
INTERNATIONAL + 8.3
- -----------------------------------------------------------------
</TABLE>
FINANCIAL MARKETS REVIEW
As fiscal 1996 began, bond yields were declining amid a widespread belief that
the U.S. economy was slowing markedly. By February the yield on the 30-year
U.S. Treasury bond had dipped below 6% to its lowest level in more than two
years. Signs of an economic rebound changed investor perceptions late in
February and during March, causing long-term interest rates to rise sharply. By
the end of the Fund's first fiscal half, interest rates, at 6.7%, were just
slightly above their level at the beginning of the fiscal period in October
1995. This small change was only modestly harmful for our HIGH-GRADE BOND
PORTFOLIO, which provided a return (+2.3%) just a whisker below that of its
unmanaged benchmark, the Lehman Aggregate Bond Index (+2.4%).
Short-term interest rates, meanwhile, declined slightly over the six
months, a period that saw two small reductions (totaling -0.50%) in the Federal
funds rate by the Federal Reserve Board. The yield on our MONEY MARKET
PORTFOLIO fell by about four-tenths of a percentage point, and stood at 5.15%
on March 31, 1996.
The U.S. stock market, despite some brief pauses and dips along the
way, kept marching higher through the first half of the Fund's fiscal year.
Energy stocks and health-care stocks led the advance during the first quarter
of the fiscal half-year, while basic materials producers (including paper and
steel manufacturers) headed the field during the second quarter. In this
environment, our three U.S. common
1
<PAGE> 2
stock Portfolios--EQUITY INDEX (+11.7% for the six months), EQUITY INCOME
(+12.3%), and Growth (+14.1%)--produced generous returns that were well above
those provided by the average general equity fund (+8.9%). The EQUITY INDEX
PORTFOLIO, as expected, matched the +11.7% return of its benchmark, the
Standard & Poor's 500 Index, while also outpacing the average growth and income
fund (+10.4%). Both the EQUITY INCOME PORTFOLIO and GROWTH PORTFOLIO produced
higher returns than the Standard & Poor's 500 Index, and each beat the average
return of its respective peer group, equity income funds (+10.6%) and growth
funds (+7.9%).
Our BALANCED PORTFOLIO, not surprisingly, provided a return (+9.2%) in
between the returns of the U.S. stock and bond markets, a reflection of its
policy of investing about 60% to 70% of assets in stocks with the remainder
invested in high-quality bonds. This mix of assets helped the Portfolio to
comfortably outdistance the +7.0% return from the average balanced fund.
Foreign stock markets generally provided handsome returns during the
six months despite the drag caused by the U.S. dollar's gain in strength
versus most currencies. (As you know, a stronger U.S. dollar diminishes the
return to U.S. investors from foreign holdings, since each unit of foreign
currency translates into fewer dollars.) The +8.6% return of our INTERNATIONAL
PORTFOLIO outpaced the +7.2% return of the unmanaged MSCI EAFE (Europe,
Australia, and Far East) Index and the +6.4% return of the average
international fund.
IN SUMMARY
The positive returns achieved by all seven Portfolios during the first half of
our fiscal year were, of course, most welcome. However, with securities prices
near historical highs, it is an apt time to repeat a message we have delivered
in the past: volatility is an inescapable part of investing in securities
markets. To cope with this volatility, you should hold a diversified portfolio
of stocks, bonds, and cash reserves in a proportion that matches your own
financial situation and tolerance for risk. Thus prepared, you'll find it less
challenging to "stay the course" when difficult times occur. We look forward to
reporting to our planholders at the completion of our fiscal year, six months
hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle,
Chairman of the Board
/s/ JOHN J. BRENNAN
- -------------------
John J. Brennan,
President
April 23, 1996
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 SIX MONTHS ENDED ANNUALIZED ACCUMULATED SIX MONTHS ENDED ANNUALIZED
PORTFOLIO DATE MARCH 31, 1996 YIELD UNIT VALUE MARCH 31, 1996 YIELD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET 5/2/91 + 2.7% 5.15%* $ 1.21 + 2.5% 4.66%*
HIGH-GRADE BOND 4/29/91 + 2.3 5.94 14.14 + 2.0 5.45
BALANCED 5/23/91 + 9.2 3.95 17.43 + 9.0 3.46
EQUITY INDEX 4/29/91 +11.7 2.13 19.02 +11.4 1.64
EQUITY INCOME 6/7/93 +12.3 3.62 14.61 +12.0 3.13
GROWTH 6/7/93 +14.1 1.25 16.13 +13.8 0.76
INTERNATIONAL 6/3/94 + 8.6 N/A 12.33 + 8.3 N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Yield for Money Market Portfolio is a 7-day yield.
2
<PAGE> 3
REPORT FROM VANGUARD FIXED INCOME GROUP
MARKET OVERVIEW
In the six-month period ended March 31, 1996, bond market interest rates
finished not far from where they began, with short-term rates slightly lower
and long-term bond yields up modestly. In such an environment, returns to bond
investors are dominated by interest income, and the change in the market value
of one's holdings contributes (or detracts) relatively little to total return.
However, this benign point-to-point comparison belies the volatile swings, both
up and down, in the bond market that took place during the period.
In December and January, the Federal Reserve Board (the Fed) eased
monetary policy, causing a reduction in short-term interest rates. Typically,
when it changes monetary policy, the Fed adds or removes reserves from the
banking system to make sizable adjustments to the cost of borrowing for
businesses and consumers, thereby influencing economic growth and inflation
pressures over a period best measured in years. In contrast, the relatively
small changes (a combined total reduction of -0.5% in short-term rates)
recently made by the Fed might better be described as a "fine tuning" of real
(after inflation) short-term rates in response to a favorable inflation outlook
rather than an attempt to stimulate a substantial increase in growth. Market
participants, however, anticipated further Fed easing, and market interest
rates declined even more.
By many measures, the elusive "soft landing" of the economy had become
a reality in 1995, with moderate growth and an unemployment rate at or near the
minimum levels considered to be non-inflationary. By February, the temporary
shutdowns of the federal government, the January blizzard in the eastern
states, and continuing factory-production slowdowns for the liquidation of
oversized inventories fostered a progressively more dismal interpretation of
the economic indicators, despite the fact that these one-time shocks would have
little or no long-term impact on the economy. These factors helped to extend
the bond market rally, bringing yields on long-term Treasury bonds to within
0.2% of the historic lows reached in 1993.
During the latter part of the fiscal half-year, the economy seemed to
have rebounded from the temporary shocks described earlier. This economic "good
news" dashed hopes of significant additional reductions in short-term rates
from the Fed, thus removing the key assumption on which the bond market's rally
had been based. Bond prices tumbled. The strength of economic statistics since
the half-year ended on March 31 has extended this selloff. At current levels,
the market has factored in the likelihood that the Fed will keep short-term
rates stable for the foreseeable future.
The speed and magnitude of the market's rally and subsequent descent
over the past six months underscore the benefits to be gained from taking a
long-term approach to the market and the importance of dollar-cost averaging.
MONEY MARKET PORTFOLIO
While money market rates have fallen in step with the Fed's actions in recent
months, they still offer historically attractive premiums of more than two
percentage points over the rate of inflation.
In managing the Money Market Portfolio, we have stayed faithful to the
conservative practices that have served us well in the past. In particular, we
have steered clear of issues with lower credit quality. While the Securities
and Exchange Commission and prospectus guidelines would allow us to make some
lower-quality investments, we have concluded that there is not adequate
additional yield to compensate for the extra risk, especially in light of our
primary mission to maintain a stable net asset value. Likewise, we have kept
the Portfolio's interest-rate sensitivity in the market-neutral portion of our
investment policy, an appropriate compromise between locking in attractive
yields and keeping a healthy liquidity cushion in the form of maturing issues.
In general, with our low cost structure, we have delivered highly
competitive returns without reaching to the extreme of the allowable limits of
credit quality or interest-rate exposure.
HIGH-GRADE BOND PORTFOLIO
Over the past six months, the bond market has experienced very little net
change in yields. The Treasury yield curve steepened slightly, with yields on
two-year issues declining by -0.1% and yields on
3
<PAGE> 4
30-year issues increasing by +0.2%. This small net change masks what was a very
strong fourth quarter 1995 (yields declined by -0.5% to -0.7%) and a very weak
first quarter 1996 (yields increased by +0.5% to +0.7%) in the bond market.
As the first half of the fiscal year ended on March 31, the yield on
two-year Treasury securities was -1.0% lower than a year earlier, while the
yield on 10-year and 30-year Treasuries had declined by -0.9% and -0.8%,
respectively, in the past 12 months.
The performance of the various sectors of the Lehman Aggregate Bond
Index for the six-month and twelve-month periods ended March 31, 1996, are
shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TOTAL RETURN
-------------------------------
PERIODS ENDED
MARCH 31, 1996
-------------------------------
SIX TWELVE
MONTHS MONTHS
- ------------------------------------------------------------------------------------
<S> <C> <C>
LEHMAN AGGREGATE BOND INDEX +2.4% +10.8%
- -------------------------------------------------------------------------------------
GOVERNMENT SECTOR +2.2% +10.5%
CORPORATE SECTOR +2.2 +12.4
MORTGAGE-BACKED SECURITIES SECTOR +2.9 +10.5
- -------------------------------------------------------------------------------------
</TABLE>
The best-performing category for the six-month period was the mortgage sector,
due to its lower exposure to interest-rate changes (mortgage-backed securities
have a shorter average effective maturity) combined with the yield advantage
offered by the sector. For the past twelve months, the best-performing segment
was the corporate sector, due to its longer average maturity, which provides a
boost when interest rates are declining, combined with the higher yields
offered by corporate bonds.
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index. For the past six-month and
twelve-month periods the Portfolio's returns were +2.3% and +10.5%,
respectively. Adjusted for expenses and transaction costs (neither of which
affect the theoretical Index), the Portfolio outperformed the Index by +0.1%
and +0.2%, respectively. As of March 31, 1996, the Portfolio comprised 31%
government bonds, 34% corporate bonds, 5% foreign bonds (denominated in
dollars), and 30% mortgage-backed securities.
Respectfully,
Ian A. MacKinnon
Senior Vice President
Kenneth E. Volpert
Principal
High-Grade Bond Portfolio
John W. Hollyer
Principal
Money Market Portfolio
Vanguard Fixed Income Group
April 17, 1996
4
<PAGE> 5
REPORT FROM WELLINGTON MANAGEMENT COMPANY
The Vanguard Variable Insurance Fund Balanced Portfolio earned a total return
of +9.2% for the six months ended March 31, 1996. At the end of the period, the
Portfolio had about 64% of its assets in equities, in the middle of the 60% to
70% range that it maintains as a matter of policy. As you know, the remainder
of the Portfolio is invested in long-term, investment-grade bonds.
During the first few months of our fiscal year, interest rates
continued to decline, with the yield on the 30-year U.S. Treasury bond falling
below 6.0% on several occasions. However, signs that the economy might be
gaining strength drove Treasury yields back up to near 7.0% toward the end of
March 1996. The stock market took this volatility in interest rates in stride,
and advanced +6.0% and +5.4%, respectively, during the first and second
quarters of our fiscal year.
The good news for investors is that the economy is picking up speed a
little faster than projected; the bad news is that this growth has resulted in
higher interest rates and could lead to higher inflation. Already there is
upward pressure on energy prices, partly as a result of the demand created by a
cold winter; food prices are also increasing.
Our equity holdings continue to emphasize companies in the basic
industry, finance, health, and energy sectors. Our below-average exposure to
the utility sector was positive throughout the first half of our fiscal year.
On the fixed-income side, we remain focused on long-term, high-quality
securities.
To position the Portfolio for the future, we modestly reduced our
exposure to the finance and health-care sectors during the first half of the
year, although these positions had served us well. We added to the basic
industry and energy sectors and to the electric utility sector, although we
remain underweighted in utilities in general.
The increase in economic activity that appears to be under way bodes
well for the materials sector, which went through the recent slowdown with
relatively high operating rates, good earnings and healthy balance sheets. We
increased holdings such as British Steel and Dow Chemical and added Phelps
Dodge to the portfolio. In the industrial sector we purchased Browning-Ferris
Industries and added to the Portfolio's Union Pacific holding. In the energy
sector we added to our positions in Amoco and Chevron, which have good
prospects in terms of earnings and dividend growth, even without commodity
price increases. We believe that the electric utility sector, which is going
through competitive and regulatory change, provides interesting opportunities
for income with modest growth through companies such as Texas Utilities and
PacifiCorp. With respect to the rise in interest rates, we recently lengthened
the maturity of the bond portfolio modestly, given our view that the long
government bond yields should not exceed 7.0% by much in the near future.
We have positioned the portfolio to participate in a somewhat
faster-growing economy, with moderate inflation. While returns in the equity
and fixed-income markets in 1996 are not expected to match those of 1995, we
believe that your Portfolio presents an attractive way to invest in an
improving economy.
Respectfully,
Ernst H. von Metzsch, Senior Vice President
Portfolio Manager
Wellington Management Company
April 23, 1996
5
<PAGE> 6
SPECIAL NOTICE TO PLANHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Trustees of Vanguard
Variable Insurance Fund-Balanced Portfolio has reached agreement with
Wellington Management Company (WMC), the Portfolio's investment adviser, on a
revised investment advisory agreement. The revised agreement involves a
reduction in the annual rate of advisory fees to be paid to WMC, however, the
savings do not begin until the Portfolio's assets exceed $1 billion. The
effective annual fee rate equals 0.10% of average net assets over the past
twelve months, and will decline further if the assets continue to grow.
Under the terms of the new agreement, the Portfolio will pay WMC a basic
advisory fee at the end of each fiscal quarter, based on the Portfolio's
average month-end net assets during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- -----------------------------------------------------------------
<S> <C>
FIRST $500 MILLION 0.10%
NEXT $500 MILLION 0.05
OVER $1 BILLION 0.04
- -----------------------------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the Portfolio relative to the investment
performance of a "composite index." This benchmark comprises the Standard &
Poor's 500 Composite Stock Price Index (65%) and the Lehman Long-Term Corporate
AA or Better Bond Index (35%). The fixed-income component of the composite
index reflects a change from our customary standard, the Salomon Brothers
High-Grade Bond Index. In our view, the Lehman Index is substantially similar
to the Salomon High-Grade Index and accurately reflects the long-term,
high-quality fixed-income securities held in the Balanced Portfolio. The
following table sets forth the incentive/penalty adjustment to the basic
advisory fee payable by the Portfolio to WMC under the new advisory agreement:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE COMPOSITE INDEX ADJUSTMENT*
- -----------------------------------------------------------------
<S> <C>
LESS THAN -6% -0.20 x BASIC FEE
BETWEEN -3% AND -6% -0.10 x BASIC FEE
BETWEEN -3% AND +3% 0.00 x BASIC FEE
BETWEEN +3% AND +6% +0.10 x BASIC FEE
MORE THAN +6% +0.20 x BASIC FEE
- -----------------------------------------------------------------
</TABLE>
* For purposes of this calculation, the basic fee is calculated by
applying the quarterly fee rate based on the annual basic fee rate using
average assets over the same 36-month period over which performance is
measured.
Under the interpretations of the Securities and Exchange Commission, the new
incentive/penalty fee will not be fully operable until the quarter ending June
30, 1999; until that date, the fee will be calculated according to certain
transition rules. This revised investment advisory agreement replaces the
Portfolio's original agreement with the adviser dated April 29, 1991, and will
go into effect on July 1, 1996. Until the effective date, the adviser has
agreed to waive its advisory fees to the extent necessary to abide by the new
fee schedule. For the fiscal year ended September 30, 1995, the Portfolio paid
approximately $244,000 to WMC for investment advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which globally provides investment
services to investment companies, institutions, and individuals. Among the
clients of WMC are 12 investment companies of The Vanguard Group. Under the
terms of its investment advisory agreement with the Fund, the adviser agrees to
manage the investment and reinvestment of the assets of the Portfolio and to
continuously review, supervise, and administer the Portfolio's investment
program. The adviser discharges its responsibilities subject to the control of
the officers and trustees of the Fund.
6
<PAGE> 7
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
During the first half of Vanguard Variable Insurance Fund's 1996 fiscal year,
the U.S. stock market continued its strong advance that commenced in December
1994. The total return of the stock market during this period, as measured by
the Standard & Poor's 500 Index, was +11.7%. The +11.7% return of the Equity
Index Portfolio precisely matched that of its unmanaged tracking standard.
IN RETROSPECT . . .
The economy continued to throw off mixed signals, as apparent slowing in the
October-December quarter was replaced with signs of an improving economy in
the next quarter, most notably a very strong increase in employment in
February, with the creation of more than 700,000 new jobs. Despite a coincident
increase in the average hours worked, wage inflation has been held in check.
Other measures of inflation--the consumer price index and the producer price
index--were also benign. The only indication of price pressure occurred in a
number of commodities ranging from base metals, to grains, to oil, where tight
supplies have precipitated rather dramatic price increases.
Indications of a strengthening economy halted the advance of the bond
market that began in November 1994, as the interest rate on the long-term U.S.
Treasury bond fell from about 8.3% to just under 6% in mid-January 1996. Since
then, bonds have declined sharply as interest rates on the long-term Treasury
bond increased to almost 7%. At this point, stocks have shaken off the ill
effects of the bond market and have moved, on balance, sideways for a couple of
months, although with increased volatility producing some sharp declines and
equally sharp advances.
PROSPECTIVELY . . .
Company earnings have continued to increase at greater-than-historical rates,
which has helped improve stock valuation levels. However, the year-over-year
rate of increase in earnings has declined substantially in the last six months,
and will almost assuredly be unable to sustain the kind of market advance we
have seen in the past 18 months. The decoupling of the stock and bond markets
mentioned earlier is also a phenomenon that typically does not last over
extended periods and must be resolved either by a rebound in the bond market or
a decline in the stock market. Consequently, we believe that future equity
returns will be lower than those we have experienced during the great bull
market that has extended, with few interruptions, from the summer of 1982.
Realistic expectations for the next decade should be in line with longer-term
historical annual returns of about +10%, or perhaps less.
In this type of environment, controlling portfolio costs, including
expense ratios and transaction costs, will be very important. Of course, this
is the advantage of the indexed approach of the Portfolio, which, given its
size, should continue to closely match the performance of the Standard & Poor's
500 Index. As in the past, we believe that the low-cost approach will provide
superior returns compared to most actively managed funds.
Respectfully,
George U. Sauter, Principal
Vanguard Core Management Group
April 17, 1996
7
<PAGE> 8
REPORT FROM NEWELL ASSOCIATES
The stock market continued its upward surge during the first half of our
fiscal year, adding to its remarkable ascent since the latter part of 1994.
The Equity Income Portfolio outperformed both the average equity income fund
and the Standard & Poor's 500 Index during the six months ended March 31, 1996.
The Portfolio underperformed both the average equity income fund and the Index
over the past three months.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TOTAL RETURN
-------------------------------
PERIODS ENDED
MARCH 31, 1996
-------------------------------
THREE MONTHS SIX MONTHS
- ------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY INCOME PORTFOLIO +2.7% +12.3%
AVERAGE EQUITY INCOME FUND +4.5% +10.6%
STANDARD & POOR'S 500
STOCK INDEX +5.4 +11.7
- -------------------------------------------------------------------------------------
</TABLE>
A TUG OF WAR
For some time there has been a tug of war in the stock market between stocks
that do well in a subdued economy with falling interest rates and those that do
well in a strong economy with rising rates. Changes in the economic outlook
have caused the fortunes of the groups to reverse fitfully. Such a change
occurred in the early part of this fiscal year. Health-care and telephone
stocks, as well as certain interest-sensitive groups, were the mainstay of the
Equity Income Portfolio's performance during 1995, against a backdrop of a
slowing economy and low inflation. However, the new year spawned a whole new
investment premise. Suddenly, in the early part of calendar 1996, the economy
looked stronger and interest rates began to rise. Stock prices of many
companies sensitive to the economic cycle surged as investors anticipated a
pickup in their profitability. Health-care stocks still performed quite well,
but not relative to the more cyclical areas, and growing uncertainties of
telephone deregulation hurt the performance of the regional telephone
companies.
The Portfolio has less representation in cyclical stocks than in some
other areas because many cyclicals do not pay dividends high enough to justify
heavy holdings in a relatively high-yield portfolio. This difference in
representation relative to the broader market explains much of the
underperformance of the Portfolio in the second quarter of our fiscal year.
A GOOD FISHING HOLE
We do not choose stocks for the Portfolio on the basis of economic forecasts.
We endeavor to purchase stocks when their yields are high and attractive
relative to the yield history of the companies and to sell them when price
appreciation causes those yields to move to low levels relative to history.
Investors sometimes fear that this consigns the Portfolio to a dull
area of investing which virtually guarantees underperformance. However,
research suggests quite the contrary. Recent studies show that the stocks in
the Standard & Poor's 500 Index with above-average yields, treated as a
portfolio, have equaled or exceeded the performance of the Index itself in most
annual measurement periods over the past 15 years--and at a risk level below
that of the Index. However, these out-of-favor companies with depressed
profitability often can be purchased at bargain prices, and offer potential for
return to higher profitability and resulting capital appreciation.
High-yield, out-of-favor stocks have another advantage: reinvested
dividends compound at a relatively high rate, giving a powerful boost to total
return. Far from consigning investors to a stagnant backwater, high-yield
common stocks provide a good fishing hole for anyone trying to keep up with the
long-running bull market without taking high risk.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
April 17, 1996
8
<PAGE> 9
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
The first six months of the fiscal year was another barnburner,
generating a lot of heat and high returns. The +14.1% return on the Growth
Portfolio of Vanguard Variable Insurance Fund was nearly four percentage points
ahead of the Standard & Poor's/BARRA Growth Index (+10.2%) and more than six
percentage points higher than the +7.9% return from the average growth fund. In
short, it was an altogether delightful period, both absolutely and relatively,
if perhaps atypically good.
Among the large holdings at the beginning of the period that performed
well, up about +20% or more, were Coca-Cola, General Electric, Johnson &
Johnson, and PepsiCo. Important new commitments that did well were W.R. Grace
and Monsanto. Several that performed poorly were AT&T, Intel, and Wal-Mart,
each down -5% to -7%. These were not disasters, but we now feel we should have
known better. There were lots of other material holdings in the Portfolio that
did quite well, so the good returns were well diffused. We like it this way,
rather than relying on several "home runs" to generate superior results.
Within the various industry sectors, we trimmed back on retail and
added to technology and health care during the six months. In all, 22 new names
were added to the Portfolio and nine were eliminated. Most of the additions,
approximately 15, could be described as mid-capitalization companies.
The Portfolio's ten largest holdings, shown in the following list,
represent 38% of the total Portfolio. The ten largest holdings six months ago
represented 42% of the total Portfolio. New to the group of largest commitments
are Cisco Systems, Hewlett Packard, and Walt Disney. Each was among the top 15
six months ago, progressing upward partly because of relative price changes and
partly because of net purchases. Procter & Gamble dropped back to #11, and
General Electric and Wal-Mart are now modest holdings of the Portfolio.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
COMPANY BUSINESS
- -------------------------------------------------------------------------------------
<S> <C> <C>
1. PEPSICO #1 SNACK FOODS
2. PHILIP MORRIS #1 DIVERSIFIED CONSUMER PRODUCTS
COMPANY
3. COCA-COLA #1 SOFT DRINKS
4. JOHNSON & JOHNSON #1 HEALTH CARE/CONSUMER PRODUCTS
5. INTEL #1 MICROPROCESSORS
6. AT&T #1 COMMUNICATIONS COMPANY
7. CISCO SYSTEMS #1 PROVIDER OF ROUTERS
8. HEWLETT PACKARD #1 ELECTRONIC INSTRUMENTS/
PRINTERS
9. AUTOMATIC DATA #1 PAYROLL SERVICES
10. WALT DISNEY #1 ENTERTAINMENT COMPANY
- -------------------------------------------------------------------------------------
</TABLE>
We feel good about the valuation of the Portfolio. The major holdings sell at
only a modest premium to the market, slightly up from September 30, 1995, the
end of last fiscal year. The Portfolio, on average, sells in line with the
market, based on estimated earnings for the twelve months ending September 1997
(we roll out our earnings projections about six months further than most
investors). We would count it our very good fortune if the Portfolio were to
continue to outperform the growth stock indices.
Respectfully,
Dave Fowler and Parker Hall, Co-Managers
Lincoln Capital Management Company
April 11, 1996
9
<PAGE> 10
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
The International Portfolio rose by +8.6% during the first half of fiscal 1996.
This performance exceeded the return of +7.2% on the MSCI EAFE Index over the
same period.
Although the U.S. dollar rose, on average, by +5% against the
currencies in which we invest, market returns in local currencies were strong
enough to produce satisfactory U.S. dollar returns to investors. The Swiss
market was the star performer, up +17% over the first half of our fiscal year,
while returns in eight other markets (out of the 30 where we typically might
invest the Portfolio) also exceeded the return on the U.S. market. However, the
all-important Japanese market was once again a laggard, with a return of only
+5.6% over the half-year.
I have remarked in the past that most major international markets
entered a consolidation period after their upward surges in 1993. The Dutch
market was the first outside North America to emerge to a new high in mid-1995,
closely followed by the United Kingdom, Germany, Switzerland, South Africa, and
Singapore. Those that have not done so are either countries with governments
that are too weak to address with sufficient boldness the problems that
confront them (Spain, France, and Italy being the obvious examples), or
countries such as Hong Kong and Malaysia, where stock markets had peaked so
high that insufficient time has elapsed to surpass the previous tops.
We have emphasized long-term reliability, and stocks in Spain, France,
and Italy, for instance, have averaged in total only 5% of the Portfolio's
assets in the past six months. By contrast, stocks in the Netherlands, Germany,
and Switzerland have represented more than 25% of the Portfolio, with the
United Kingdom accounting for another 13% of the Portfolio's assets.
The Portfolio's emphasis on growth in corporate profits and good
visibility of future business trends is a powerful support at times when
economic trends are weak and uncertain. Continental Europe continues to
struggle under the burden of tight fiscal stances and high real interest rates,
not to mention, in some cases, high currency values when compared to currencies
of competitor nations like the United States. However, slow economic growth is
not an impediment to stock markets if interest rates are falling and there are
reasonable expectations that growth will pick up. As in the United States,
companies are addressing their business costs and, in most cases, profit
margins are recovering. This is a particular feature of several of the largest
European positions in the Portfolio, such as Veba, Philips Electronics, and Elf
Aquitaine.
We have reduced exposure to the United Kingdom over the past six
months because the business cycle is more advanced there than in other major
European countries. Moreover, the UK is entering the run-up to a parliamentary
election, a period during which there is a danger of excessive economic stimuli
to promote a "feel good" spirit. This makes the outlook for consumer stocks
excellent, but we are more cautious elsewhere.
We have 30% of the Portfolio invested in Japan, where the mixture of
monetary policy and economic growth looks encouraging for stock prices:
consumer and business confidence is slowly recovering and monetary policy is
extremely loose. Over the past six months, we have repositioned the Portfolio
to benefit from the expected growth of Japanese consumer spending and capital
investment, with 75% of your exposure to Japan invested accordingly, and the
25% remainder invested in companies sensitive to exports, which have been aided
by the weakening trend of the yen.
Fully 17% of the Portfolio is invested in the high-growth markets of
Asia. Most of these stock markets have been consolidating since the beginning
of 1994, despite continued strong increases in corporate profits. Inflationary
pressures and excess domestic demand are ever-present dangers in these
countries but I believe the long-term case for their inclusion in a diversified
portfolio is overwhelming.
This year has started well and I hope to be able to write of further
progress in six months' time.
Respectfully,
Richard R. Foulkes
Schroder Capital Management International
April 5, 1996
10
<PAGE> 11
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
March 31, 1996
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (6.3%)
- --------------------------------------------------------------------------------
Federal Home Loan Bank
4.957%-5.86%, 6/6/96-7/17/96 $5,000 $ 4,957
5.171%, 6/6/96(1) 5,000 4,997
Federal National Mortgage Assn.
5.273%-5.34%,
4/12/96-6/25/96 5,150 5,110
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $15,064) 15,064
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (63.8%)
- --------------------------------------------------------------------------------
BANK HOLDING COMPANIES (2.7%)
Banc One Corp.
5.185%, 4/17/96 4,500 4,490
J.P. Morgan & Co., Inc.
5.164%, 6/3/96 2,000 1,982
---------
SECTOR TOTAL 6,472
---------
- --------------------------------------------------------------------------------
FINANCE--AUTO (2.5%)
Daimler-Benz N.A. Co.
5.223%, 4/19/96 2,000 1,995
Ford Motor Credit Corp.
5.196%-5.226%,
4/1/96-4/15/96 2,000 1,998
New Center Asset Trust
5.204%, 4/12/96 2,000 1,997
---------
SECTOR TOTAL 5,990
---------
- --------------------------------------------------------------------------------
FINANCE--OTHER (20.3%)
Asset Securitization Cooperative Corp.
5.356%, 4/30/96 4,000 3,983
Associates Corp.
5.185%, 5/20/96 2,000 1,986
CIT Group Holdings Inc.
5.208%-5.297%,
4/12/96-4/26/96 4,000 3,990
Ciesco L.P.
5.183%-5.198%,
4/26/96-5/3/96 4,000 4,980
Corporate Asset Funding Corp.
5.178%-5.30%,
4/18/96-6/14/96 4,000 3,973
Dean Witter Discover & Co.
5.196%, 4/12/96 2,000 1,997
Delaware Funding
5.196%, 4/22/96 2,000 1,994
Eiger Capital Corp.
5.276%-5.298%,
5/10/96-5/16/96 5,000 4,969
Ford Motor Credit Receivable Co.
5.285%, 5/9/96 2,000 1,989
General Electric Capital Corp.
5.173%-5.342%,
4/8/96-7/16/96 9,000 8,939
Panasonic Finance
5.196%-5.339%,
4/17/96-4/30/96 6,000 5,981
Pitney Bowes Credit Corp.
5.175%, 4/22/96 4,000 3,988
---------
SECTOR TOTAL 48,769
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (19.8%)
Bayer Corp.
5.181%, 4/10/96 3,100 3,096
Campbell Soup Co.
5.182%, 10/4/96 2,000 1,948
Cargill Inc.
5.155%-5.296%,
5/1/96-6/7/96 4,000 3,972
Chevron U.K.
5.232%, 4/25/96 3,500 3,488
The Coca-Cola Co.
5.11%-5.302%,
5/3/96-6/14/96 6,000 5,960
John Deere Capital Corp.
5.285%, 5/10/96 2,000 1,989
Exxon Imperial U.S. Inc.
5.191%, 4/2/96 2,000 2,000
Hewlett Packard Co.
5.236%-5.301%,
4/23/96-7/19/96 5,218 5,168
Kimberly-Clark Corp.
5.299%, 6/13/96 2,000 1,979
Eli Lilly & Co.
5.379%, 9/27/96 2,000 1,948
Minnesota Mining &
Manufacturing Co.
5.279%-5.296%,
6/14/96-6/20/96 4,210 4,164
Nestle Capital Corp.
5.18%, 4/9/96 3,475 3,471
Norfolk & Southern Corp.
5.353%, 6/19/96 3,587 3,545
Procter & Gamble Co.
5.141%-5.289%,
4/17/96-6/20/96 5,000 4,963
---------
SECTOR TOTAL 47,691
---------
- --------------------------------------------------------------------------------
INSURANCE (4.6%)
AIG Funding Inc.
5.31%, 6/21/96 3,000 2,965
MetLife Funding Corp.
5.17%-5.319%,
4/24/96-4/25/96 6,058 6,038
</TABLE>
11
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
MONEY MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
SAFECO Credit Corp.
5.196%, 4/23/96 $2,000 $ 1,993
---------
SECTOR TOTAL 10,996
---------
- --------------------------------------------------------------------------------
UTILITY (.8%)
AT&T Corp.
5.202%, 5/14/96 2,000 1,987
---------
- --------------------------------------------------------------------------------
FOREIGN--BANKS (2.7%)
Canadian Imperial Holdings Inc.
5.231%-5.29%,
4/1/96-4/2/96 4,000 4,000
Toronto Dominion Holdings
5.175%, 5/7/96 2,000 1,990
UBS Finance
5.452%, 4/1/96 420 420
---------
SECTOR TOTAL 6,410
---------
- --------------------------------------------------------------------------------
FOREIGN GOVERNMENT (7.1%)
Province of British Columbia
5.168%, 8/12/96 2,000 1,962
Caisse des Depots et Consignations
5.216%-5.362%,
4/8/96-6/18/96 4,000 3,975
Electricite de France
5.213%, 7/24/96 2,000 1,968
KFW International Finance Inc.
5.171%-5.216%,
4/17/96-4/23/96 6,000 5,983
Oesterreichische Kontrollbank
5.289%, 6/10/96 2,000 1,980
Kingdom of Sweden
5.222%, 4/17/96 1,350 1,347
---------
SECTOR TOTAL 17,215
---------
- --------------------------------------------------------------------------------
FOREIGN--OTHER (3.3%)
France Telecom
5.193%, 4/15/96 4,000 3,992
Glaxo
5.196%-5.292%,
4/26/96-6/17/96 4,000 3,971
---------
SECTOR TOTAL 7,963
---------
- --------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $153,493) 153,493
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (16.2%)
- --------------------------------------------------------------------------------
YANKEE CERTIFICATE OF DEPOSIT--
CANADIAN BRANCH (.8%)
Barclays Bank
5.35%, 4/25/96 2,000 1,993
---------
- --------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
U.S. BRANCHES (15.4%)
Bayerische Vereinsbank
5.06%-5.15%,
6/4/96-8/5/96 $4,000 4,000
Caisse Nationale de Credit Agricole
5.35%, 7/5/96 2,000 2,000
Credit Suisse
5.23%, 4/4/96 2,000 2,000
Deutsche Bank
5.29%, 6/17/96 2,000 2,000
Dresdner Bank
5.30%, 5/22/96-6/19/96 3,000 3,000
Landesbank Hessen-Thueringen
5.25%-5.45%,
4/9/96-7/25/96 4,000 4,000
Lloyds Bank
5.23%, 7/25/96 3,000 3,000
Bank of Nova Scotia
5.19%, 4/26/96 4,000 4,000
Rabobank Nederlanden
5.21%-5.79%,
4/17/96-6/28/96 7,000 7,002
Societe Generale
5.25%-5.45%,
4/3/96-4/4/96 4,000 4,000
Swiss Bank
5.35%, 6/5/96 2,000 2,000
---------
SECTOR TOTAL 37,002
---------
- --------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $38,995) 38,995
- --------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (9.6%)
- --------------------------------------------------------------------------------
ABN AMRO
5.23%, 4/26/96 3,000 3,000
Abbey National
5.31%, 5/28/96 1,000 1,000
Bayerische Landesbank
5.09%, 6/26/96 3,000 3,000
Credit Agricole
5.27%, 5/1/96 3,000 3,000
Deutsche Bank
5.25%, 4/4/96 2,000 2,000
Dresdner Bank
5.35%, 6/10/96 2,000 2,000
National Westminster Bank
5.32%-5.51%,
5/17/96-6/17/96 5,000 5,001
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Toronto Dominion Bank
5.16%, 6/5/96 $2,000 $ 2,000
Westdeutsche Landesbank
Girozentrale
5.17%, 5/7/96 2,000 2,000
- --------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT (Cost $23,001) 23,001
- --------------------------------------------------------------------------------
BANKERS ACCEPTANCE (.8%)
- --------------------------------------------------------------------------------
Republic Bank of New York
5.377%, 5/31/96
(Cost $1,982) 2,000 1,982
---------
- --------------------------------------------------------------------------------
BANK NOTES (2.1%)
- --------------------------------------------------------------------------------
NationsBank
5.35%, 4/22/96 2,000 2,000
Wachovia Bank
4.47%, 8/26/96 3,000 2,989
- --------------------------------------------------------------------------------
TOTAL BANK NOTES
(Cost $4,989) 4,989
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(Cost $237,524) 237,524
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.2%)
- --------------------------------------------------------------------------------
Other Assets--Note C 3,177
Liabilities (283)
---------
2,894
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 240,421,261 outstanding
shares of beneficial interest (unlimited
authorization--no par value) $240,418
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
================================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Floating Rate Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- -------
<S> <C> <C>
PAID IN CAPITAL $240,421 $1.00
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES (3) --
UNREALIZED APPRECIATION
OF INVESTMENTS -- --
- --------------------------------------------------------------------------------
NET ASSETS $240,418 $1.00
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
HIGH-GRADE Amount Value
BOND PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (28.0%)
- --------------------------------------------------------------------------------
U.S. Treasury Bonds
7.875%, 2/15/21 $2,090 $ 2,334
8.125%, 8/15/19 2,000 2,286
8.50%, 2/15/20 1,870 2,221
8.75%, 5/15/17-5/15/20 3,105 3,757
8.875%, 8/15/17-2/15/19 4,495 5,506
9.125%, 5/15/18 1,335 1,675
10.375%, 11/15/09-11/15/12 1,030 1,309
10.75%, 8/15/05 875 1,138
11.625%, 11/15/02 1,000 1,286
14.00%, 11/15/11 1,565 2,447
U.S. Treasury Notes
5.25%, 7/31/98 275 271
5.375%, 5/31/98 550 545
5.625%, 11/30/00 500 490
5.875%, 7/31/97 400 401
6.25%, 2/15/03 45 45
6.50%, 8/15/97 325 329
6.75%, 5/31/99 400 409
7.125%, 2/29/00 525 544
7.25%, 2/15/98-8/15/04 1,645 1,722
7.50%, 10/31/99 2,550 2,669
7.75%, 11/30/99-2/15/01 965 1,020
7.875%, 1/15/98-11/15/04 2,175 2,320
8.00%, 8/15/99 140 148
8.875%, 11/15/98 250 268
9.00%, 5/15/98 2,650 2,815
9.125%, 5/15/99 925 1,006
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $38,558) 38,961
- --------------------------------------------------------------------------------
FEDERAL AGENCY OBLIGATIONS (2.4%)
- --------------------------------------------------------------------------------
Federal National Mortgage Assn.
4.95%, 9/30/98 700 682
5.30%, 3/11/98 525 519
5.35%, 8/12/98 700 690
5.80%, 12/10/03 600 571
7.00%, 8/12/02 900 897
- --------------------------------------------------------------------------------
TOTAL FEDERAL AGENCY OBLIGATIONS
(Cost $3,245) 3,359
- --------------------------------------------------------------------------------
MORTGAGE PASS-THROUGH SECURITIES (29.6%)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT (29.3%)
Federal Home Loan Mortgage Corp.
5.50%, 12/1/98-11/1/08 249 240
6.00%, 7/1/98-1/1/24 1,029 988
6.50%, 4/1/98-3/1/26 3,102 3,005
7.00%, 1/1/98-2/1/26 3,181 3,129
7.50%, 4/1/98-3/1/26 2,570 2,583
8.00%, 6/1/96-9/1/25 1,610 1,647
8.50%, 5/1/06-9/1/25 752 781
</TABLE>
13
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
HIGH-GRADE BOND Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
9.00%, 11/1/05-6/1/22 $ 621 $ 656
9.50%, 1/1/25-2/1/25 470 501
10.00%, 3/1/17-11/1/19 155 169
Federal National Mortgage Assn.
5.50%, 3/1/01 87 83
6.00%, 11/15/98-10/1/25 1,143 1,084
6.50%, 3/1/00-11/1/25 3,013 2,911
7.00%, 5/1/00-2/1/26 4,037 3,965
7.50%, 4/1/99-12/1/25 2,651 2,657
8.00%, 2/1/00-12/1/25 2,091 2,136
8.50%, 10/1/04-1/15/25 819 851
9.00%, 3/1/20-4/1/25 692 730
9.50%, 6/1/01-2/1/25 500 535
10.00%, 8/1/20-8/1/21 199 218
10.50%, 8/1/20 53 59
Government National Mortgage Assn.
6.00%, 3/15/09-1/15/24 178 167
6.50%, 10/15/08-5/15/24 838 800
7.00%, 10/15/08-1/15/26 2,537 2,476
7.50%, 5/15/08-12/15/25 2,300 2,305
8.00%, 3/15/08-10/15/25 2,009 2,056
8.50%, 7/15/09-4/15/25 1,327 1,388
9.00%, 4/15/16-8/15/21 1,135 1,215
9.50%, 4/15/17-2/15/25 579 626
10.00%, 5/15/20-1/15/25 370 408
10.50%, 5/15/19 29 32
11.00%, 10/15/15 54 60
11.50%, 2/15/13 87 97
---------
SECTOR TOTAL 40,558
---------
- --------------------------------------------------------------------------------
PRIVATE (.3%)
Resolution Trust Corp.
7.75%-10.40%,
12/25/18-8/25/21 469 472
---------
- --------------------------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH
SECURITIES (Cost $41,199) 41,030
- --------------------------------------------------------------------------------
CORPORATE BONDS (33.9%)
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (7.6%)
Chase Manhattan Credit Card
Master Trust
7.40%, 5/15/00 300 304
8.75%, 8/15/99 225 227
Discover Card Master Trust
5.40%, 11/16/01 1,400 1,375
First Chicago Master Trust
6.25%, 8/15/99 450 451
8.40%, 6/15/98 338 340
First Deposit Master Trust
5.75%, 6/15/01 1,400 1,390
6.05%, 8/15/02 1,400 1,399
MBNA Credit Card Master Trust
6.20%, 8/15/99 450 451
7.75%, 10/15/98 300 303
Sears Credit Card Account
Master Trust
5.90%, 11/15/98 100 100
7.75%, 9/15/98 300 303
8.10%, 6/15/04 1,400 1,480
Standard Credit Card Master Trust
7.875%, 1/7/00 1,400 1,453
8.00%, 10/7/97 450 454
8.50%, 8/7/97 450 452
---------
SECTOR TOTAL 10,482
---------
- --------------------------------------------------------------------------------
FINANCE (11.9%)
American General Finance
8.00%, 2/15/00 900 942
Associates Corp.
6.25%, 3/15/99 500 498
7.50%, 4/15/02 600 623
8.75%, 9/4/96 600 600
BankAmerica Corp.
9.625%, 2/13/01 500 560
10.00%, 2/1/03 200 233
Bear Stearns Cos.
6.625%, 1/15/04 200 195
7.625%, 4/15/00 250 259
9.125%, 4/15/98 250 263
The Chase Manhattan Corp.
6.625%, 1/15/98 250 252
7.375%, 6/15/97 300 305
CIT Group Holdings
6.625%, 6/15/05 400 393
Citicorp
10.15%, 2/15/98 900 963
CoreStates Capital
9.375%, 4/15/03 250 284
Countrywide Funding Corp. MTN
7.31%, 8/28/00 600 615
Dean Witter Discover & Co.
6.00%, 3/1/98 1,010 1,007
First Chicago Corp.
11.25%, 2/20/01 300 357
First Interstate Bancorp
8.625%, 4/1/99 500 530
General Motors Acceptance Corp.
5.50%, 12/15/01 750 701
7.75%, 4/15/97 400 407
Great Western Finance
6.375%, 7/1/00 900 891
Household Finance Corp.
7.65%, 5/15/07 400 419
Lehman Brothers Holdings
5.75%, 2/15/98 500 495
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Manufacturers Hanover Corp.
8.50%, 2/15/99 $ 500 $ 528
Mellon Finance Corp.
7.625%, 11/15/99 200 207
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 400 405
Morgan Stanley Group Inc.
9.25%, 3/1/98 200 211
NationsBank Corp.
6.75%, 8/15/00 500 504
7.75%, 8/15/04 500 523
NCNB Corp.
9.50%, 6/1/04 150 174
PaineWebber Group Inc.
7.00%, 3/1/00 450 452
Sears Roebuck Acceptance Corp.
6.75%, 9/15/05 150 147
Smith Barney Holdings Inc.
7.98%, 3/1/00 700 735
Transamerica Financial Corp.
8.375%, 2/15/98 325 337
US WEST Financial MTN
8.85%, 9/20/99 500 534
---------
SECTOR TOTAL 16,549
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (10.3%)
American Airlines Equipment Trust
9.71%, 1/2/07 197 219
American Brands Inc.
7.875%, 1/15/23 100 103
Anheuser-Busch Co., Inc.
7.375%, 7/1/23 75 72
8.625%, 12/1/16 150 157
Applied Materials
8.00%, 9/1/04 100 105
Archer-Daniels-Midland Co.
8.875%, 4/15/11 180 207
Auburn Hills
12.00%, 5/1/20 115 168
British Petroleum
7.875%, 5/15/02 200 213
8.875%, 12/1/97 600 626
9.50%, 1/1/98 500 528
Burlington Northern
6.875%, 2/15/16 300 279
Chrysler Corp.
10.40%, 8/1/99 300 315
Conrail Corp.
9.75%, 6/15/20 100 124
CSX Corp.
8.625%, 5/15/22 50 56
Cyprus Minerals
6.625%, 10/15/05 400 384
Deere & Co.
8.50%, 1/9/22 100 112
Delta Airlines Equipment Trust
8.54%, 1/2/07 212 223
Eastman Chemical Co.
6.375%, 1/15/04 400 388
7.25%, 1/15/24 100 97
Federal Express Corp.
10.00%, 9/1/98 400 431
Ford Capital B.V.
9.875%, 5/15/02 400 460
Ford Holdings Inc.
9.25%, 7/15/97 500 520
9.25%, 3/1/00 300 327
Ford Motor Corp.
9.95%, 2/15/32 65 83
General Motors Corp.
9.125%, 7/15/01 400 442
W.R. Grace & Co.
7.40%, 2/1/00 400 407
8.00%, 8/15/04 100 105
International Paper Co.
7.625%, 1/15/07 100 104
May Department Stores Co.
9.75%, 2/15/21 100 120
McDonald's Corp.
6.75%, 2/15/03 230 230
Mobil Corp.
7.625%, 2/23/33 200 199
Occidental Petroleum
8.50%, 11/9/01 500 540
J.C. Penney Co., Inc.
6.875%, 6/15/99 500 507
PepsiCo Inc.
5.00%, 2/24/97 500 497
6.125%, 1/15/98 200 200
Philip Morris Co., Inc.
8.25%, 10/15/03 150 160
Phillips Petroleum Co.
9.00%, 6/1/01 600 660
Quaker State Corp.
6.625%, 10/15/05 175 170
Sears, Roebuck & Co.
9.25%, 8/1/97 300 312
9.25%, 4/15/98 750 793
Tenneco Inc.
9.875%, 2/1/01 200 225
10.00%, 8/1/98 500 539
10.375%, 11/15/00 500 571
Texaco Capital Corp.
8.875%, 9/1/21 150 175
Union Carbide Corp.
6.75%, 4/1/03 200 199
7.875%, 4/1/23 125 127
</TABLE>
15
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
HIGH-GRADE BOND Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Union Oil of California
6.375%, 2/1/04 $ 200 $ 192
9.125%, 2/15/06 115 130
9.25%, 2/1/03 80 90
Union Pacific Corp.
8.625%, 5/15/22 175 181
Whirlpool Corp.
9.00%, 3/1/03 150 166
---------
SECTOR TOTAL 14,238
---------
- --------------------------------------------------------------------------------
UTILITIES (4.1%)
Alabama Power Co.
8.75%, 12/1/21 129 138
Arizona Public Service
8.00%, 2/1/25 150 150
Baltimore Gas & Electric Co.
8.375%, 8/15/01 500 539
Carolina Power & Light Co.
6.875%, 8/15/23 175 162
Coastal Corp.
7.75%, 10/15/35 250 244
Enron Corp.
7.125%, 5/15/07 150 151
9.65%, 5/15/01 450 505
GTE Corp.
7.83%, 5/1/23 250 249
Houston Lighting & Power Co.
8.75%, 3/1/22 100 106
MCI Communications Corp.
7.50%, 8/20/04 250 260
7.75%, 3/23/25 250 248
Michigan Bell Telephone
7.50%, 2/15/23 175 174
New York Telephone
7.00%, 8/15/25 175 161
Pacific Bell Corp.
7.25%, 7/1/02 225 232
Southern Bell Telephone Co.
7.625%, 3/15/13 450 462
Southwestern Bell Corp.
7.625%, 10/1/13 125 123
7.625%, 3/1/23 475 468
Texas Utilities Corp.
7.125%, 6/1/97 600 607
7.375%, 8/1/01 250 257
7.875%, 3/1/23 110 108
8.25%, 4/1/04 100 107
Virginia Electric & Power Co.
6.625%, 4/1/03 200 198
---------
SECTOR TOTAL 5,649
---------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $46,942) 46,918
- --------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL AGENCY
BONDS (Dollar Denominated) (4.7%)
- --------------------------------------------------------------------------------
CANADA (1.4%)
Province of British Columbia
7.00%, 1/15/03 170 174
Province of Manitoba
8.75%, 5/15/01 500 546
9.25%, 4/1/20 120 145
9.50%, 10/1/00 130 145
Province of Ontario
7.375%, 1/27/03 110 114
7.75%, 6/4/02 200 211
Province of Saskatchewan
7.125%, 3/15/08 200 201
8.00%, 7/15/04 400 429
---------
SECTOR TOTAL 1,965
---------
- --------------------------------------------------------------------------------
WORLD BANKS (.4%)
European Investment Bank
8.875%, 3/1/01 225 247
InterAmerican Development Bank
8.50%, 3/15/11 130 148
International Bank for Reconstruction
and Development
12.375%, 10/15/02 175 228
---------
SECTOR TOTAL 623
---------
- --------------------------------------------------------------------------------
OTHER (2.9%)
Grand Metropolitan Investments
9.00%, 8/15/11 150 174
Hanson Overseas
7.375%, 1/15/03 400 408
KFW International Finance
7.625%, 2/15/04 300 317
8.85%, 6/15/99 425 456
9.125%, 5/15/01 200 223
National Westminster Bancorp Inc.
9.375%, 11/15/03 350 401
New Zealand Government
9.875%, 1/15/11 175 220
Noranda Inc.
8.625%, 7/15/02 370 400
Philips Electronics NV
8.375%, 9/15/06 400 437
Republic of Portugal
5.75%, 10/8/03 250 238
Kingdom of Thailand
8.25%, 3/15/02 700 749
---------
SECTOR TOTAL 4,023
---------
- --------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS
(Cost $6,578) 6,611
- --------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.40%, 4/1/96
(Cost $1,206) $1,206 $ 1,206
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $137,728) 138,085
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- --------------------------------------------------------------------------------
Other Assets--Note C 3,117
Liabilities (2,481)
---------
636
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 13,359,612 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $138,721
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.38
================================================================================
</TABLE>
+ See Note A to Financial Statements.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $138,817 $10.38
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES (453) (.03)
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE E 357 .03
- --------------------------------------------------------------------------------
NET ASSETS $138,721 $10.38
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
BALANCED PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (64.4%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (13.4%)
Aluminum Co. of America 59,000 $ 3,695
British Steel PLC ADR 106,400 3,139
Cabot Corp. 47,200 1,440
Dow Chemical Co. 64,000 5,560
E.I. du Pont de Nemours & Co. 67,300 5,586
Georgia-Pacific Corp. 24,200 1,679
International Paper Co. 57,000 2,244
J & L Specialty Steel Inc. 12,100 207
Kimberly-Clark Corp. 58,600 4,366
Norsk Hydro AS ADR 23,900 1,046
PPG Industries, Inc. 45,200 2,209
Phelps Dodge Corp. 34,000 2,333
Reynolds Metals Co. 25,700 1,520
Temple-Inland Inc. 48,000 2,250
Westvaco Corp. 78,300 2,300
Willamette Industries, Inc. 29,400 1,756
Witco Chemical Corp. 38,000 1,340
---------
SECTOR TOTAL 42,670
---------
- --------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.9%)
Browning-Ferris Industries, Inc. 64,000 2,016
General Electric Co. 85,600 6,666
Honeywell, Inc. 72,800 4,022
Northrop Grumman Corp. 61,500 3,913
United Technologies Corp. 20,800 2,335
---------
SECTOR TOTAL 18,952
---------
- --------------------------------------------------------------------------------
CONSUMER CYCLICAL (5.7%)
Brunswick Corp. 58,000 1,334
Eastman Kodak Co. 20,100 1,427
Ford Motor Co. 142,031 4,882
General Motors Corp. 89,139 4,747
May Department Stores Co. 35,800 1,727
J.C. Penney Co., Inc. 38,000 1,891
Sears, Roebuck & Co. 43,052 2,099
---------
SECTOR TOTAL 18,107
---------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (.5%)
SuperValu Inc. 53,900 1,664
---------
- --------------------------------------------------------------------------------
ENERGY (8.7%)
Amerada Hess Corp. 36,000 1,980
Amoco Corp. 35,400 2,558
Ashland Inc. 23,400 898
Atlantic Richfield Co. 12,000 1,428
Chevron Corp. 42,600 2,391
Exxon Corp. 48,300 3,942
Kerr-McGee Corp. 20,500 1,302
Mobil Corp. 9,900 1,147
Pennzoil Co. 10,700 425
</TABLE>
17
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
BALANCED Value
PORTFOLIO (continued) Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Phillips Petroleum Co. 30,800 $ 1,217
Repsol SA ADR 64,400 2,407
Royal Dutch Petroleum Co. ADR 13,700 1,935
Texaco Inc. 29,000 2,494
Total SA ADR 47,000 1,598
Unocal Corp. 59,587 1,989
---------
SECTOR TOTAL 27,711
---------
- --------------------------------------------------------------------------------
FINANCIAL (13.0%)
Allstate Corp. 134,065 5,647
Banc One Corp. 60,971 2,172
The Bank of New York Co., Inc. 78,400 4,038
BankAmerica Corp. 40,000 3,100
Citicorp 80,100 6,408
CoreStates Financial Corp. 83,540 3,540
First Bank System, Inc. 100,000 5,963
First Union Corp. 53,887 3,260
General Re Corp. 23,700 3,454
Jefferson-Pilot Corp. 8,700 469
Norwest Corp. 19,993 735
Wachovia Corp. 57,800 2,586
---------
SECTOR TOTAL 41,372
---------
- --------------------------------------------------------------------------------
HEALTH CARE (8.5%)
Abbott Laboratories 64,600 2,632
American Home Products Corp. 39,000 4,227
C.R. Bard, Inc. 40,000 1,425
Baxter International, Inc. 69,100 3,127
Bristol-Myers Squibb Co. 35,200 3,014
Johnson & Johnson 40,000 3,690
Pfizer, Inc. 66,000 4,422
Rhone-Poulenc SA ADR 46,000 1,195
U.S. Healthcare, Inc. 48,000 2,208
Zeneca Group ADR 16,399 1,045
---------
SECTOR TOTAL 26,985
---------
- --------------------------------------------------------------------------------
TECHNOLOGY (1.2%)
Xerox Corp. 30,000 3,765
---------
- --------------------------------------------------------------------------------
TRANSPORT & SERVICES (2.7%)
Canadian National Railway Co. 56,000 966
Canadian Pacific Ltd. 126,500 2,518
Norfolk Southern Corp. 15,400 1,309
Union Pacific Corp. 57,800 3,967
---------
SECTOR TOTAL 8,760
---------
- --------------------------------------------------------------------------------
UTILITIES (3.8%)
AT&T Corp. 25,000 1,531
Carolina Power & Light Co. 34,000 1,266
CINergy Corp. 38,000 1,140
Equitable Resources, Inc. 15,000 439
NYNEX Corp. 15,600 778
PacifiCorp 74,000 1,545
SBC Communications Inc. 24,500 1,289
Sonat, Inc. 24,000 864
Texas Utilities Co. 58,200 2,408
U S WEST Communications Group 22,100 716
---------
SECTOR TOTAL 11,976
---------
- --------------------------------------------------------------------------------
MISCELLANEOUS (1.0%)
Hanson PLC ADR 53,900 808
Minnesota Mining &
Manufacturing Co. 35,400 2,297
---------
SECTOR TOTAL 3,105
---------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $143,510) 205,067
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (.9%)
- --------------------------------------------------------------------------------
Alumax, Inc. 6,334 928
Bethlehem Steel Corp. 10,000 435
Cyprus Amax Minerals Co. 11,666 715
Reynolds Metals Co. 16,100 829
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $2,349) 2,907
<CAPTION>
- --------------------------------------------------------------------------------
CORPORATE BONDS (19.2%)
- --------------------------------------------------------------------------------
Face
Amount
(000)
--------
<S> <C> <C>
ASSET-BACKED (.5%)
American Express Credit Europe
5.375%, 7/15/01 $ 1,000 958
Sears Credit Account Trust
8.60%, 5/15/98 822 825
---------
SECTOR TOTAL 1,783
---------
- --------------------------------------------------------------------------------
FINANCE (5.1%)
Associates Corp.
5.25%, 9/1/98 1,000 978
BankAmerica Corp.
7.20%, 4/15/06 1,000 1,008
The Chase Manhattan Corp.
7.75%, 11/1/99 1,000 1,036
Chemical Banking Corp.
8.625%, 5/1/02 1,000 1,091
Citicorp
7.625%, 5/1/05 1,000 1,044
Comerica, Inc.
7.25%, 8/1/07 1,500 1,517
Dean Witter Discover & Co.
6.75%, 10/15/13 1,000 927
First Union Corp.
7.50%, 4/15/35 1,000 1,060
Ford Motor Credit Corp.
6.25%, 12/8/05 1,000 943
General Motors Acceptance
Corp. MTN
8.50%, 1/1/03 1,000 1,081
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
John Hancock
7.375%, 2/15/24 $1,000 $ 944
First Chicago NBD Corp.
7.125%, 5/15/07 1,500 1,510
Republic New York Corp.
7.75%, 5/15/09 1,000 1,053
Wachovia Corp.
6.375%, 2/1/09 1,000 941
Wells Fargo & Co.
6.125%, 11/1/03 1,000 947
---------
SECTOR TOTAL 16,080
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (6.9%)
Abbott Laboratories
6.80%, 5/15/05 1,000 1,004
Air Products & Chemicals, Inc.
7.375%, 5/1/05 1,000 1,041
BP America Inc.
7.875%, 5/15/02 1,000 1,064
Baxter International
9.25%, 9/15/96 1,000 1,014
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 1,000 953
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 1,000 1,115
Exxon Capital Corp.
6.00%, 7/1/05 1,000 950
Georgia-Pacific Corp.
9.625%, 3/15/22 1,000 1,055
International Business Machines Corp.
6.375%, 11/1/97 1,000 1,005
Eli Lilly & Co.
7.125%, 6/1/25 1,000 980
McDonald's Corp.
7.375%, 7/15/33 1,000 966
J.C. Penney Co., Inc.
6.00%, 5/1/06 1,000 916
Procter & Gamble Co. ESOP
9.36%, 1/1/21 1,000 1,213
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,180
TRW, Inc.
9.375%, 4/15/21 1,000 1,196
Temple-Inland Inc.
9.00%, 5/1/01 1,000 1,098
Union Pacific Corp.
7.00%, 2/1/16 1,000 940
United Parcel Service
8.375%, 4/1/20 2,000 2,260
WMX Technologies Inc.
6.375%, 12/1/03 1,000 968
Wal-Mart Stores, Inc.
7.25%, 6/1/13 1,000 997
---------
SECTOR TOTAL 21,915
---------
- --------------------------------------------------------------------------------
UTILITIES (6.7%)
AT&T Corp.
7.75%, 3/1/07 1,000 1,069
Atlantic City Electric
7.00%, 9/1/23(1) 1,000 916
Baltimore Gas & Electric Co.
5.50%, 4/15/04 1,000 913
BellSouth Telecommunications
7.50%, 6/15/33 1,000 981
Carolina Power & Light Co.
6.75%, 10/1/02 1,000 997
Central Power and Light Co.
6.625%, 7/1/05 1,000 981
Duke Power Co.
7.00%, 7/1/33 1,000 913
Florida Power Corp.
6.875%, 2/1/08 1,850 1,827
GTE Southwest Inc.
6.00%, 1/15/06 1,000 944
Illinois Bell Telephone Co.
6.625%, 2/1/25 1,000 898
New Jersey Bell Telephone Co.
8.00%, 6/1/22 1,000 1,069
New York Telephone Co.
7.25%, 2/15/24 1,000 948
Pacific Bell Telephone Co.
7.125%, 3/15/26 1,000 961
Pacific Gas & Electric Co.
6.25%, 8/1/03 1,000 961
PacifiCorp
6.625%, 6/1/07 1,000 974
Southern California Gas Co.
5.75%, 11/15/03 1,000 935
Texas Utilities Electric Co.
7.875%, 4/1/24 1,000 981
Union Electric Co.
7.375%, 12/15/04 1,000 1,038
U S WEST Communications
6.875%, 9/15/33 1,000 892
Virginia Electric & Power Co.
8.00%, 3/1/04 1,000 1,067
Wisconsin Electric Power
7.70%, 12/15/27 1,000 989
---------
SECTOR TOTAL 21,254
---------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $61,069) 61,032
- --------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
BALANCED Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN BONDS (DOLLAR DENOMINATED) (1.6%)
- --------------------------------------------------------------------------------
ABN AMRO Holding NV
7.25%, 5/31/05 $1,000 $ 1,022
Italy Global Bond
6.875%, 9/27/23 1,000 897
Japanese Financial Corp.
7.375%, 4/27/05 1,000 1,044
Philips Electronics NV
7.75%, 4/15/04 1,000 1,044
Toronto Dominion Bank
6.45%, 1/15/09 1,000 948
- --------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $4,916) 4,955
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (12.9%)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (10.2%)
U.S. Treasury Bonds
7.25%, 5/15/16 12,000 12,519
7.50%, 11/15/16 5,000 5,356
U.S. Treasury Notes
6.125%, 9/30/00 5,500 5,501
6.375%, 8/15/02 6,000 6,035
6.50%, 8/15/05 3,000 3,012
---------
SECTOR TOTAL 32,423
---------
- --------------------------------------------------------------------------------
AGENCY NOTE (.3%)
Federal Home Loan Bank
7.66%, 7/20/04 1,000 1,065
---------
- --------------------------------------------------------------------------------
MORTGAGE OBLIGATIONS (2.4%)
Federal Home Loan Mortgage Corp.
6.50%, 1/1/25-3/1/26 6,031 5,738
Government National Mortgage Assn.
6.50%, 3/15/26 2,010 1,904
---------
SECTOR TOTAL 7,642
---------
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $40,694) 41,130
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.7%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.40%, 4/1/96
(Cost $2,110) 2,110 2,110
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $254,648) 317,201
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F $ 12,663
Liabilities--Note F (11,602)
---------
1,061
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 22,269,387 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $318,262
- --------------------------------------------------------------------------------
NET ASSETS VALUE PER SHARE $14.29
================================================================================
</TABLE>
+ See Note A to Financial Statements.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
(1) Scheduled principal and interest payments are guaranteed by MBIA (Municipal
Bond Insurance Association).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $246,531 $11.07
UNDISTRIBUTED NET
INVESTMENT INCOME 3,170 .14
ACCUMULATED NET
REALIZED GAINS 6,008 .27
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE E 62,553 2.81
- --------------------------------------------------------------------------------
NET ASSETS $318,262 $14.29
- --------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
EQUITY INDEX PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.4%)(1)
- --------------------------------------------------------------------------------
General Electric Co. 118,868 $ 9,257
The Coca-Cola Co. 89,081 7,360
Exxon Corp. 88,415 7,217
AT&T Corp. 113,764 6,968
Merck & Co., Inc. 87,428 5,442
Royal Dutch Petroleum Co. ADR 38,095 5,381
Philip Morris Cos., Inc. 59,323 5,206
International Business
Machines Corp. 40,216 4,469
* Microsoft Corp. 42,375 4,365
Johnson & Johnson 47,127 4,347
Procter & Gamble Co. 48,622 4,121
Wal-Mart Stores, Inc. 162,942 3,768
PepsiCo, Inc. 55,952 3,539
Hewlett-Packard Co. 36,224 3,405
Intel Corp. 58,214 3,304
E.I. du Pont de Nemours & Co. 39,420 3,272
Mobil Corp. 28,049 3,250
American International Group, Inc. 33,690 3,154
The Walt Disney Co. 48,210 3,079
Bristol-Myers Squibb Co. 35,675 3,055
Pfizer, Inc. 44,968 3,013
GTE Corp. 68,435 3,003
General Motors Corp. 52,982 2,821
Citicorp 34,516 2,761
Ford Motor Co. 75,958 2,611
BellSouth Corp. 70,204 2,598
Chevron Corp. 46,130 2,589
Amoco Corp. 35,097 2,536
Eli Lilly & Co. 39,002 2,535
Federal National Mortgage Assn. 77,096 2,457
American Home Products Corp. 22,175 2,403
McDonald's Corp. 49,193 2,361
Abbott Laboratories, Inc. 55,828 2,275
SBC Communications Inc. 43,065 2,266
Motorola, Inc. 41,756 2,213
Ameritech Corp. 39,136 2,133
The Boeing Co. 24,248 2,100
BankAmerica Corp. 26,113 2,024
Minnesota Mining &
Manufacturing Co. 29,709 1,927
Bell Atlantic Corp. 30,869 1,906
Columbia/HCA Healthcare Corp. 31,505 1,819
* Cisco Systems, Inc. 39,226 1,819
Eastman Kodak Co. 24,206 1,719
American Express Co. 34,257 1,691
NationsBank Corp. 20,902 1,675
Chrysler Corp. 26,768 1,666
Gillette Co. 31,378 1,624
Home Depot, Inc. 33,730 1,615
Texaco Inc. 18,700 1,608
Dow Chemical Co. 18,477 1,605
Unilever NV ADR 11,364 1,543
NYNEX Corp. 30,345 1,513
Schering-Plough Corp. 25,772 1,498
Travelers Group Inc. 22,399 1,478
MCI Communications Corp. 48,522 1,468
Kimberly-Clark Corp. 19,694 1,467
* Oracle Corp. 30,769 1,442
Pharmacia & Upjohn, Inc. 35,589 1,419
Schlumberger Ltd. 17,100 1,353
Atlantic Richfield Co. 11,369 1,353
Sears, Roebuck & Co. 27,507 1,341
Allstate Corp. 31,658 1,334
Emerson Electric Co. 15,840 1,279
Monsanto Co. 8,241 1,265
Chemical Banking Corp. 17,643 1,244
Computer Associates
International, Inc. 17,063 1,222
First Union Corp. 20,186 1,221
Anheuser-Busch Co., Inc. 17,935 1,208
AlliedSignal Inc. 20,006 1,183
Kellogg Co. 15,329 1,161
Banc One Corp. 32,135 1,145
Southern Co. 47,125 1,125
Time Warner, Inc. 27,351 1,118
Sara Lee Corp. 34,254 1,118
First Data Corp. 15,732 1,109
J.P. Morgan & Co., Inc. 13,243 1,099
WMX Technologies Inc. 34,419 1,093
Federal Home Loan Mortgage Corp. 12,814 1,092
* Amgen, Inc. 18,799 1,090
* AirTouch Communications 34,978 1,089
U S WEST Communications Group 33,229 1,076
Campbell Soup Co. 17,653 1,075
Lockheed Martin Corp. 14,048 1,066
* Viacom International Class B 24,967 1,052
Sprint Corp. 27,313 1,038
Union Pacific Corp. 14,498 995
Warner-Lambert Co. 9,527 984
Medtronic, Inc. 16,464 982
United Technologies Corp. 8,662 972
Xerox Corp. 7,649 960
Caterpillar, Inc. 13,983 951
First Chicago NBD Corp. 22,629 939
First Interstate Bancorp. 5,382 934
The Chase Manhattan Corp. 12,639 929
Norwest Corp. 24,935 916
Rockwell International Corp. 15,309 901
Wells Fargo & Co. 3,389 885
Raytheon Co. 17,160 879
Baxter International, Inc. 19,421 879
H.J. Heinz Co. 26,111 865
Northern Telecom Ltd. 17,948 857
</TABLE>
21
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INDEX Value
PORTFOLIO (continued) Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
The Seagram Co. Ltd. 26,419 $ 855
General Re Corp. 5,854 853
* Tele-Communications, Inc. Class A 46,103 853
May Department Stores Co. 17,636 851
Pacific Telesis Group 30,239 835
Burlington Northern Santa Fe Corp. 10,066 827
International Paper Co. 20,974 826
Nike, Inc. Class B 10,090 820
Automatic Data Processing, Inc. 20,536 809
Colgate-Palmolive Co. 10,259 799
J.C. Penney Co., Inc. 15,856 789
Aluminum Co. of America 12,545 786
Norfolk Southern Corp. 9,163 779
Deere & Co. 18,538 774
United Healthcare Corp. 12,388 762
Barrick Gold Corp. 25,001 759
Fleet Financial Group, Inc. 18,748 759
Merrill Lynch & Co., Inc. 12,400 753
PNC Bank Corp. 24,157 743
Duke Power Co. 14,501 732
Phillips Petroleum Co. 18,509 731
The Bank of New York Co., Inc. 14,149 729
* COMPAQ Computer Corp. 18,802 726
McDonnell Douglas Corp. 7,919 726
The Dun & Bradstreet Corp. 11,934 724
CPC International, Inc. 10,299 714
ConAgra, Inc. 17,451 709
Dean Witter Discover & Co. 12,082 692
Tenneco, Inc. 12,361 691
* U S WEST Media Group 33,329 687
Archer-Daniels-Midland Co. 37,331 686
CSX Corp. 14,908 680
Texas Instruments, Inc. 13,361 680
Pacific Gas & Electric Co. 29,605 670
Gannett Co., Inc. 9,896 666
Albertson's, Inc. 17,899 665
PPG Industries, Inc. 13,525 661
Texas Utilities Co. 15,966 661
Weyerhaeuser Co. 14,302 660
General Mills, Inc. 11,267 658
Enron Corp. 17,759 655
KeyCorp 16,708 645
AMP, Inc. 15,398 637
Loews Corp. 8,300 628
CIGNA Corp. 5,389 616
First Bank System, Inc. 10,300 614
Aetna Life & Casualty Co. 8,105 612
Loral Corp. 12,280 602
Occidental Petroleum Corp. 22,469 601
* Digital Equipment Corp. 10,843 598
FPL Group, Inc. 13,046 590
Unocal Corp. 17,499 584
The Chubb Corp. 6,159 578
Morgan Stanley Group, Inc. 11,000 569
Corning, Inc. 16,248 569
Walgreen Co. 17,428 569
Westinghouse Electric Corp. 29,400 566
The Gap, Inc. 10,173 563
SunTrust Banks, Inc. 8,045 563
* Boston Scientific Corp. 12,242 563
* Sun Microsystems, Inc. 12,850 562
American Electric Power Co., Inc. 13,200 551
The Goodyear Tire & Rubber Co. 10,749 548
American Brands, Inc. 12,839 544
Wachovia Corp. 12,082 541
Edison International 31,494 539
W.R. Grace & Co. 6,892 539
Illinois Tool Works, Inc. 8,308 537
Consolidated Edison Co. of
New York, Inc. 16,655 531
Mellon Bank Corp. 9,630 531
Mattel, Inc. 19,522 530
Pitney Bowes, Inc. 10,727 526
* Toys R Us, Inc. 19,318 522
Alcan Aluminium Ltd. 16,012 516
* ITT Corp. 8,388 503
American General Corp. 14,472 499
Ralston-Ralston Purina Group 7,464 499
U.S. Healthcare, Inc. 10,845 499
Honeywell, Inc. 9,016 498
Dominion Resources, Inc. 12,496 495
Placer Dome Group, Inc. 16,883 488
* AMR Corp. 5,393 483
Marsh & McLennan Cos., Inc. 5,195 482
Wrigley, (Wm.) Jr. 8,229 482
Union Carbide Corp. 9,718 482
Hercules, Inc. 7,778 482
Textron, Inc. 5,960 477
Household International, Inc. 7,070 475
Public Service Enterprise
Group Inc. 17,268 475
Browning-Ferris Industries, Inc. 15,029 473
Alco Standard Corp. 9,038 471
MBNA Corp. 15,707 465
* Federated Department Stores 14,300 461
* 3 Com Corp. 11,600 461
Halliburton Co. 8,102 461
Micron Technology Inc. 14,597 458
Georgia-Pacific Corp. 6,482 450
Entergy Corp. 16,050 449
* Applied Materials, Inc. 12,672 440
Boatmen's Bancshares Inc. 11,178 439
PacifiCorp 20,972 438
UST Inc. 13,693 436
Air Products & Chemicals, Inc. 7,903 432
Dayton-Hudson Corp. 5,086 432
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Crown Cork & Seal Co., Inc. 8,780 $ 428
Sysco Corp. 12,990 427
Praxair, Inc. 10,621 424
PECO Energy Corp. 15,885 423
Barnett Banks, Inc. 6,757 421
Marriott International 8,803 418
Central & South West Corp. 14,626 417
ALLTEL Corp. 13,442 417
ITT Hartford Group, Inc. 8,488 416
CoreStates Financial Corp. 9,809 416
TRW, Inc. 4,643 414
Unicom Corp. 15,154 409
Lowes Cos., Inc. 11,435 409
Service Corp. International 8,362 408
Avon Products, Inc. 4,747 407
Hershey Foods Corp. 5,445 406
Fluor Corp. 5,942 406
Carolina Power & Light Co. 10,853 404
Houston Industries, Inc. 18,604 402
Freeport-McMoRan Copper
& Gold Inc. Class B 12,700 402
* Bay Networks 13,000 400
Morton International, Inc. 10,391 399
Conrail, Inc. 5,528 396
Eastman Chemical 5,694 394
Bank of Boston Corp. 7,926 393
Dresser Industries, Inc. 12,887 393
Bankers Trust New York Corp. 5,528 392
USX-Marathon Group 20,319 391
Genuine Parts Co. 8,646 389
Tyco International Ltd. 10,806 386
* CUC International, Inc. 13,039 381
Newmont Mining Corp. 6,729 381
International Flavors
& Fragrances, Inc. 7,907 379
R.R. Donnelley & Sons Co. 10,927 377
Lincoln National Corp. 7,387 375
* WorldCom, Inc. 8,000 368
Dover Corp. 8,030 367
Becton, Dickinson & Co. 4,480 367
U.S. Bancorp 10,764 366
Nucor Corp. 6,169 365
The Limited, Inc. 19,186 365
Winn Dixie Stores, Inc. 10,826 364
Williams Cos., Inc. 7,210 363
Amerada Hess Corp. 6,578 362
National City Corp. 10,298 362
Transamerica Corp. 4,788 359
Comerica, Inc. 8,500 355
* The Kroger Co. 8,751 354
* Novell, Inc. 26,145 350
DTE Energy Co. 10,286 346
American Stores Co. 10,380 343
Phelps Dodge Corp. 4,974 341
* Cabletron Systems, Inc. 5,143 341
Green Tree Financial Corp. 9,800 337
Burlington Resources, Inc. 9,030 335
CINergy Corp. 11,073 332
Masco Corp. 11,429 331
Eaton Corp. 5,500 331
St. Paul Cos., Inc. 5,955 331
Panhandle Eastern Corp. 10,587 330
Hilton Hotels Corp. 3,459 325
The Quaker Oats Co. 9,559 319
The Clorox Co. 3,688 318
Rubbermaid, Inc. 11,167 317
Rohm & Haas Co. 4,763 317
* Tenet Healthcare Corp. 14,997 315
Ingersoll-Rand Co. 7,667 312
Great Lakes Chemical Corp. 4,625 312
Pioneer Hi Bred International 5,888 310
The McGraw-Hill Cos. 3,567 309
Champion International Corp. 6,804 308
Newell Co. 11,375 304
Kmart Corp. 32,453 304
* Tellabs, Inc. 6,298 304
Providian Corp. 6,808 304
Southwest Airlines Co. 10,188 302
Union Electric Co. 7,347 301
SAFECO Corp. 8,980 301
Times Mirror Co. Class A 7,638 301
UNUM Corp. 5,047 300
Tribune Co. 4,551 300
Cooper Industries, Inc. 7,684 300
Baker Hughes, Inc. 10,154 297
Coastal Corp. 7,463 295
* Humana, Inc. 11,500 289
Baltimore Gas & Electric Co. 10,451 289
* Silicon Graphics, Inc. 11,539 288
Whirlpool Corp. 5,190 287
Consolidated Natural Gas Co. 6,588 287
Delta Air Lines, Inc. 3,671 282
Dillard Department Stores Class A 8,106 281
General Public Utilities Corp. 8,492 280
* Computer Sciences Corp. 3,982 280
* Federal Express Corp. 3,998 279
PP&L Resources Inc. 11,400 278
Nordstrom, Inc. 5,743 278
Salomon, Inc. 7,383 277
Jefferson-Pilot Corp. 5,105 275
Melville Corp. 7,562 271
H & R Block, Inc. 7,468 270
Sherwin-Williams Co. 6,062 269
Reynolds Metals Co. 4,533 268
Interpublic Group of Cos., Inc. 5,566 263
Inco Ltd. 8,307 263
</TABLE>
23
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INDEX Value
PORTFOLIO (continued) Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
General Dynamics Corp. 4,480 $ 262
* EMC Corp. 11,900 260
Case Corp. 5,100 259
Dow Jones & Co., Inc. 6,731 259
* Price/Costco Inc. 13,818 259
Union Camp Corp. 5,075 252
VF Corp. 4,530 250
* LSI Logic Corp. 9,200 246
Dana Corp. 7,308 244
W.W. Grainger, Inc. 3,580 240
Willamette Industries, Inc. 3,987 238
Ohio Edison Co. 10,523 238
Northern States Power Co. 4,854 237
Knight-Ridder, Inc. 3,468 236
* Black & Decker Corp. 6,212 235
Harcourt General, Inc. 5,185 235
Great Western Financial Corp. 9,716 234
Laidlaw Inc. Class B 22,042 234
Engelhard Corp. 9,933 232
Hasbro, Inc. 6,267 232
Republic New York Corp. 3,878 231
Torchmark Corp. 5,097 229
Kerr-McGee Corp. 3,574 227
Premark International, Inc. 4,229 227
Northrop Grumman Corp. 3,562 227
* Western Atlas Inc. 3,764 226
* DSC Communications Corp. 8,250 222
Johnson Controls, Inc. 2,918 218
ITT Industries, Inc. 8,488 216
Harrah's Entertainment, Inc. 7,357 216
Golden West Financial Corp. 4,026 216
Sonat, Inc. 5,966 215
Apple Computer, Inc. 8,746 214
Tandy Corp. 4,597 213
Beneficial Corp. 3,684 212
Pall Corp. 8,256 212
Circuit City Stores, Inc. 7,012 209
Raychem Corp. 3,224 208
Avery Dennison Corp. 3,805 205
H.F. Ahmanson & Co. 8,431 204
Westvaco Corp. 6,940 204
Sigma Aldrich Corp. 3,569 203
The Mead Corp. 3,708 200
Parker Hannifin Corp. 5,295 199
USX-U.S. Steel Group 5,678 197
Brown-Forman Corp. Class B 4,899 197
* Ceridian Corp. 4,540 195
* FMC Corp. 2,594 195
New York Times Co. Class A 6,682 194
Mallinckrodt Group, Inc. 5,110 192
Columbia Gas Systems, Inc. 4,173 191
Fifth Third Bancorp 3,300 191
Temple-Inland Inc. 4,001 188
Homestake Mining Co. 9,667 187
Cyprus Amax Minerals Co. 6,630 187
* St. Jude Medical, Inc. 5,028 187
The Dial Corp. 6,674 187
Rite Aid Corp. 6,052 187
Whitman Corp. 7,563 183
* ALZA Corp. 5,909 182
Louisiana-Pacific Corp. 7,382 180
Deluxe Corp. 5,649 177
Liz Claiborne, Inc. 5,124 176
The Stanley Works 3,135 172
Allergan, Inc. 4,618 170
Ashland Inc. 4,426 170
Manor Care Inc. 4,326 170
Perkin-Elmer Corp. 3,108 168
Armstrong World Industries Inc. 2,701 168
Harris Corp. 2,710 168
Comcast Corp. Class A Special 9,429 166
Mercantile Stores Co., Inc. 2,599 160
Pacific Enterprises 6,120 158
* Advanced Micro Devices, Inc. 9,116 157
Echlin, Inc. 4,314 156
* Andrew Corp. 4,074 156
James River Corp. 6,041 156
Wendy's International, Inc. 8,541 155
Cooper Tire & Rubber Co. 5,948 153
Brunswick Corp. 6,602 152
SuperValu Inc. 4,888 151
Maytag Corp. 7,378 149
Reebok International Ltd. 5,352 148
Ryder System, Inc. 5,415 148
Sun Co., Inc. 5,105 147
Darden Restaurants Inc. 10,867 147
* Owens Corning 3,653 147
Polaroid Corp. 3,253 146
The BF Goodrich Co. 1,839 146
American Greetings Corp. Class A 5,278 146
Bausch & Lomb, Inc. 3,916 145
Boise Cascade Corp. 3,436 144
Santa Fe Pacific Gold Corp. 8,993 144
Nalco Chemical Co. 4,669 144
Pep Boys (Manny, Moe & Jack) 4,220 141
Moore Corp. Ltd. 7,230 141
* Woolworth Corp. 9,009 141
Ecolab, Inc. 4,613 138
C.R. Bard, Inc. 3,883 138
Snap-On Inc. 2,919 136
* Fruit of the Loom, Inc. 5,258 136
* National Semiconductor Corp. 9,729 135
United States Surgical Corp. 4,093 134
Giant Food, Inc. Class A 4,019 133
Millipore Corp. 3,465 133
Worthington Industries, Inc. 6,586 131
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Comcast Corp. Class A 7,531 $ 131
Paccar, Inc. 2,680 131
TJX Cos., Inc. 5,186 130
Foster Wheeler Corp. 2,893 128
Autodesk, Inc. 3,360 128
USF&G Corp. 8,144 126
Harnischfeger Industries Inc. 3,219 125
Pennzoil Co. 3,137 125
General Signal Corp. 3,439 125
Echo Bay Mines Ltd. 9,081 123
* Varity Corp. 2,791 121
National Service Industries, Inc. 3,263 118
Cummins Engine Co., Inc. 2,899 117
Caliber System Inc. 2,710 116
Bemis Co., Inc. 3,677 115
* General Instrument 4,100 112
* Biomet, Inc. 7,819 109
Teledyne Inc. 3,900 109
Louisiana Land & Exploration Co. 2,270 106
Thomas & Betts Corp. 1,401 105
The Timkin Co. 2,265 104
* King World Productions, Inc. 2,501 103
ASARCO, Inc. 2,925 102
* Oryx Energy Co. 7,310 101
* Bethlehem Steel Corp. 7,626 100
Scientific-Atlanta, Inc. 5,495 98
Shared Medical Systems Corp. 1,623 97
Stone Container Corp. 6,879 96
NICOR, Inc. 3,489 93
Briggs & Stratton Corp. 2,060 89
Potlatch Corp. 2,057 88
Great Atlantic & Pacific Tea Co., Inc. 2,706 84
Crane Co. 2,066 83
Inland Steel Industries, Inc. 3,327 82
* USAir Group, Inc. 4,501 82
Meredith Corp. 1,961 81
ENSERCH Corp. 4,958 81
NorAm Energy Corp. 8,650 80
* Rowan Cos., Inc. 6,231 79
Alberto-Culver Co. Class B 2,051 79
Russell Corp. 2,914 78
Fleetwood Enterprises, Inc. 3,144 78
McDermott International, Inc. 3,971 76
EG & G, Inc. 3,393 76
* Tandem Computers, Inc. 8,508 76
Consolidated Freightways, Inc. 2,917 75
Peoples Energy Corp. 2,285 74
Tektronix, Inc. 2,268 74
USLIFE Corp. 2,436 72
* Beverly Enterprises Inc. 6,479 71
* Unisys Corp. 11,805 71
* Santa Fe Energy Resources, Inc. 6,735 71
* Amdahl Corp. 8,121 69
Cincinnati Milacron, Inc. 2,570 67
Ogden Corp. 3,451 67
Trinova Corp. 2,054 65
Niagara Mohawk Power Corp. 9,862 65
Springs Industries Inc. Class A 1,403 65
Centex Corp. 2,057 64
Jostens Inc. 2,812 63
Safety-Kleen Corp. 4,308 62
Longs Drug Stores, Inc. 1,310 62
Ball Corp. 1,946 60
* 360 Communications Co. 2,471 59
Helmerich & Payne, Inc. 1,733 58
Alexander & Alexander
Services, Inc. 2,931 55
* Navistar International Corp. 5,235 54
* Cray Research, Inc. 1,838 54
* Bally Entertainment Corp. 3,021 52
John H. Harland Co. 2,279 50
Pulte Corp. 1,839 49
Freeport-McMoRan Copper
& Gold Inc. Class A 1,600 49
Adolph Coors Co. Class B 2,705 48
Giddings & Lewis, Inc. 2,517 48
* Intergraph Corp. 2,951 47
Eastern Enterprises 1,313 47
ONEOK, Inc. 1,845 44
* Viacom International Class A 1,056 43
Charming Shoppes, Inc. 7,850 40
NACCO Industries, Inc. Class A 648 37
* Data General Corp. 2,487 36
* Armco, Inc. 6,637 36
Luby's Cafeterias, Inc. 1,535 36
Fleming Cos., Inc. 2,388 34
Kaufman & Broad Home Corp. 1,965 32
* Ryan's Family Steak Houses, Inc. 3,387 30
Stride Rite Corp. 2,971 27
* Shoney's Inc. 2,918 26
Outboard Marine Corp. 1,307 25
* Community Psychiatric Centers 2,742 23
* Earthgrains Co. 717 21
Yellow Corp. 1,552 20
Brown Group, Inc. 896 12
* Bally Total Fitness Holding Corp. 755 3
* Teledyne Inc. Pfd. Series E 39 1
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $249,354) 343,686
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
EQUITY INDEX Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (.8%)
- --------------------------------------------------------------------------------
U.S. TREASURY BILL--Note E
5.02%, 7/11/96 $ 300 $ 296
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.40%, 4/1/96 2,514 2,514
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH
INVESTMENTS (Cost $2,810) 2,810
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(Cost $252,164) 346,496
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.2%)
- --------------------------------------------------------------------------------
Other Assets--Note C 661
Liabilities (1,285)
---------
(624)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 20,206,252 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $345,872
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $17.12
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) The combined market value of common stocks and Standard and Poor's 500
Index Futures Contracts represents 100.1% of net assets. See Note E.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $248,219 $12.28
UNDISTRIBUTED NET
INVESTMENT INCOME 2,200 .11
ACCUMULATED NET
REALIZED GAINS 1,103 .06
UNREALIZED APPRECIATION
--NOTE E:
INVESTMENT SECURITIES 94,332 4.67
FUTURES CONTRACTS 18 --
- --------------------------------------------------------------------------------
NET ASSETS $345,872 $17.12
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
EQUITY INCOME PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.1%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (5.7%)
ARCO Chemical Co. 16,200 $ 840
Dow Chemical Co. 26,900 2,337
E.I. du Pont de Nemours & Co. 13,200 1,096
Monsanto Co. 4,200 645
Potlatch Corp. 17,200 735
Union Camp Corp. 13,900 690
Weyerhaeuser Co. 18,900 872
---------
SECTOR TOTAL 7,215
---------
- --------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (.9%)
General Electric Co. 6,400 498
Thomas & Betts Corp. 8,700 653
---------
SECTOR TOTAL 1,151
---------
- --------------------------------------------------------------------------------
CONSUMER CYCLICALS (6.1%)
Deluxe Corp. 13,800 433
The Dun & Bradstreet Corp. 28,300 1,716
Eastman Kodak Co. 15,000 1,065
John H. Harland Co. 27,500 605
Kmart Corp. 73,200 686
May Department Stores Co. 11,500 555
The McGraw-Hill Cos. 7,200 625
J.C. Penney Co., Inc. 19,300 960
* U S WEST Media Group 16,600 342
* Woolworth Corp. 42,800 669
---------
SECTOR TOTAL 7,656
---------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (9.2%)
American Brands, Inc. 63,700 2,699
The Clorox Co. 10,400 896
General Mills, Inc. 16,600 969
H.J. Heinz Co. 29,050 962
Philip Morris Cos., Inc. 42,400 3,721
The Quaker Oats Co. 17,000 567
SuperValu Inc. 3,800 117
Tambrands, Inc. 17,700 827
UST Inc. 26,000 829
---------
SECTOR TOTAL 11,587
---------
- --------------------------------------------------------------------------------
ENERGY (17.1%)
Amoco Corp. 22,600 1,633
Ashland Inc. 8,900 342
Atlantic Richfield Co. 23,000 2,737
Chevron Corp. 58,000 3,255
Exxon Corp. 40,100 3,273
Mobil Corp. 28,300 3,279
Phillips Petroleum Co. 18,600 735
Royal Dutch Petroleum Co. ADR 11,600 1,639
Sun Co., Inc. 23,058 666
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Texaco Inc. 36,000 $ 3,096
USX-Marathon Group 42,600 820
---------
SECTOR TOTAL 21,475
---------
- --------------------------------------------------------------------------------
FINANCIAL (17.0%)
Aetna Life & Casualty Co. 11,700 883
H.F. Ahmanson & Co. 48,700 1,181
American Express Co. 6,400 316
American General Corp. 25,500 880
Banc One Corp. 25,340 903
Bankers Trust New York Corp. 17,700 1,254
Barnett Banks, Inc. 11,200 697
Boatmen's Bancshares, Inc. 20,600 809
CIGNA Corp. 4,600 526
CoreStates Financial Corp. 22,000 932
First Chicago NBD Corp. 21,400 888
First Union Corp. 14,800 895
Fleet Financial Group, Inc. 23,400 948
Great Western Financial Corp. 56,800 1,370
KeyCorp 23,400 904
Lincoln National Corp. 20,700 1,051
Marsh & McLennan Cos., Inc. 10,400 966
Mellon Bank Corp. 9,950 548
J.P. Morgan & Co., Inc. 17,800 1,477
NationsBank Corp. 9,200 737
PNC Bank Corp. 34,000 1,046
SAFECO Corp. 19,100 640
U.S. Bancorp 23,800 809
Wachovia Corp. 14,800 662
---------
SECTOR TOTAL 21,322
---------
- --------------------------------------------------------------------------------
HEALTH CARE (14.9%)
American Home Products Corp. 32,600 3,533
Baxter International, Inc. 16,300 738
Bristol-Myers Squibb Co. 43,200 3,699
Glaxo Wellcome PLC ADR 28,600 719
Eli Lilly & Co. 70,800 4,602
Merck & Co., Inc. 27,200 1,693
Pharmacia & Upjohn, Inc. 68,150 2,717
Warner-Lambert Co. 10,200 1,053
---------
SECTOR TOTAL 18,754
---------
- --------------------------------------------------------------------------------
UTILITIES (25.5%)
Allegheny Power System, Inc. 24,700 750
Ameritech Corp. 41,200 2,245
Baltimore Gas & Electric Co. 29,200 807
Bell Atlantic Corp. 35,900 2,217
BellSouth Corp. 46,000 1,702
Central & South West Corp. 24,900 710
Consolidated Edison Co. of
New York, Inc. 17,800 567
Consolidated Natural Gas Co. 37,600 1,636
Dominion Resources, Inc. 19,200 761
Duke Power Co. 9,600 485
Edison International 54,900 940
FPL Group, Inc. 17,100 774
GTE Corp. 72,300 3,172
NICOR, Inc. 21,100 565
Northern States Power Co. 12,000 585
NYNEX Corp. 52,300 2,608
Oklahoma Gas & Electric Co. 15,900 634
PP&L Resources Inc. 28,800 702
Pacific Enterprises 22,800 590
Pacific Telesis Group 33,700 931
PacifiCorp 71,200 1,486
Potomac Electric Power Co. 26,300 687
Public Service Enterprise Group Inc. 31,900 877
SCANA Corp. 30,600 842
Southern New England
Telecommunications Corp. 11,300 455
TECO Energy, Inc. 25,700 639
Texas Utilities Co. 18,400 761
Union Electric Co. 15,300 627
U S WEST Communications Group 51,400 1,664
Wisconsin Energy Corp. 24,700 701
---------
SECTOR TOTAL 32,120
---------
- --------------------------------------------------------------------------------
TRANSPORT & SERVICES (.4%)
Union Pacific Corp. 7,500 515
---------
- --------------------------------------------------------------------------------
MISCELLANEOUS (2.3%)
Hanson PLC ADR 65,800 987
Minnesota Mining &
Manufacturing Co. 14,000 908
Ogden Corp. 50,400 983
---------
SECTOR TOTAL 2,878
---------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $103,691) 124,673
<CAPTION>
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
- --------------------------------------------------------------------------------
Face
Amount
(000)
-------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.40%, 4/1/96
(Cost $1,348) $1,348 1,348
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(Cost $105,039) 126,021
- --------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
EQUITY INCOME Value
PORTFOLIO (continued) (000)+
- --------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-.2%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F $ 1,181
Liabilities--Note F (1,467)
---------
(286)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 9,562,046 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $125,735
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.15
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $102,938 $10.77
UNDISTRIBUTED NET
INVESTMENT INCOME 1,192 .12
ACCUMULATED NET
REALIZED GAINS 623 .07
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE E 20,982 2.19
- --------------------------------------------------------------------------------
NET ASSETS $125,735 $13.15
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.6%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (4.8%)
W.R. Grace & Co. 70,500 $ 5,517
Kimberly-Clark Corp. 14,700 1,095
Monsanto Co. 24,900 3,822
---------
SECTOR TOTAL 10,434
---------
- --------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (4.4%)
The Boeing Co. 29,700 2,573
Duracell International, Inc. 21,800 1,082
General Electric Co. 41,200 3,208
Honeywell, Inc. 24,300 1,343
Illinois Tool Works, Inc. 21,900 1,415
---------
SECTOR TOTAL 9,621
---------
- --------------------------------------------------------------------------------
CONSUMER CYCLICALS (12.6%)
* Brinker International, Inc. 70,300 1,177
Carnival Corp. Class A 56,400 1,551
The Walt Disney Co. 101,700 6,496
* Harrah's Entertainment, Inc. 36,800 1,081
* Kohls Corp. 17,900 1,134
Lowes Cos., Inc. 70,300 2,513
Mattel, Inc. 38,775 1,052
May Department Stores Co. 96,300 4,646
McDonald's Corp. 108,000 5,184
Wal-Mart Stores, Inc. 68,400 1,582
Warnaco Group 47,900 1,155
---------
SECTOR TOTAL 27,571
---------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (20.1%)
The Coca-Cola Co. 111,000 9,171
Gillette Co. 90,600 4,689
PepsiCo, Inc. 170,900 10,809
Philip Morris Cos., Inc. 105,500 9,258
Procter & Gamble Co. 76,200 6,458
Unilever NV ADR 26,200 3,556
---------
SECTOR TOTAL 43,941
---------
- --------------------------------------------------------------------------------
ENERGY (2.2%)
Enron Oil & Gas Co. 30,200 797
* Renaissance Energy Ltd. 85,300 2,238
* Talisman Energy, Inc. 74,200 1,695
---------
SECTOR TOTAL 4,730
---------
- --------------------------------------------------------------------------------
FINANCIAL (7.5%)
Aetna Life & Casualty Co. 13,400 1,012
American International Group, Inc. 53,700 5,028
Chemical Banking Corp. 64,800 4,568
Federal National Mortgage Assn. 67,700 2,158
Household International, Inc. 17,900 1,204
Norwest Corp. 62,700 2,304
---------
SECTOR TOTAL 16,274
---------
- --------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE (17.7%)
American Home Products Corp. 39,500 $ 4,281
Cardinal Health, Inc. 17,800 1,144
* Forest Laboratories, Inc. 19,400 946
* HealthCare Compare Corp. 25,500 1,285
Johnson & Johnson 94,300 8,699
Eli Lilly & Co. 85,500 5,557
Merck & Co., Inc. 33,100 2,060
Pharmacia & Upjohn, Inc. 103,100 4,111
Pfizer, Inc. 71,000 4,757
* Pyxis Corp. 44,800 1,148
SmithKline Beecham Unit ADR 90,400 4,656
---------
SECTOR TOTAL 38,644
---------
- --------------------------------------------------------------------------------
TECHNOLOGY (23.5%)
* Altera Corp. 38,600 2,152
AMP, Inc. 74,300 3,074
Automatic Data Processing, Inc. 182,800 7,198
* Cisco Systems, Inc. 166,600 7,726
First Data Corp. 10,946 772
General Motors Corp. Class E 77,200 4,400
Hewlett-Packard Co. 81,000 7,614
* Informix Corp. 40,400 1,066
Intel Corp. 144,900 8,223
Molex, Inc. Class A 22,300 714
* Oracle Corp. 85,700 4,017
Reuters Holdings PLC ADR 36,600 2,374
* Xilinx, Inc. 62,800 1,994
---------
SECTOR TOTAL 51,324
---------
- --------------------------------------------------------------------------------
UTILITIES (4.3%)
AT&T Corp. 133,300 8,165
MCI Communications Corp. 38,600 1,168
---------
SECTOR TOTAL 9,333
---------
- --------------------------------------------------------------------------------
MISCELLANEOUS (.5%)
Alco Standard Corp. 19,200 1,001
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $159,741) 212,873
<CAPTION>
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.9%)
- --------------------------------------------------------------------------------
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.40%, 4/1/96
(Cost $6,352) $ 6,352 6,352
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(Cost $166,093) 219,225
- --------------------------------------------------------------------------------
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-.5%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F $ 3,646
Liabilities--Note F (4,790)
--------
(1,144)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 13,890,216 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $218,081
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.70
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $161,302 $11.61
UNDISTRIBUTED NET
INVESTMENT INCOME 1,231 .09
ACCUMULATED NET
REALIZED GAINS 2,416 .17
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE E 53,132 3.83
- --------------------------------------------------------------------------------
NET ASSETS $218,081 $15.70
- --------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.5%)
- --------------------------------------------------------------------------------
AUSTRALIA (.4%)
News Corp. Ltd. 38,000 $ 223
News Corp. Ltd. Pfd. 19,000 97
WMC Ltd. 35,000 232
---------
COUNTRY TOTAL 552
---------
- --------------------------------------------------------------------------------
BRAZIL (.3%)
USIMINAS ADR 30,000 323
---------
- --------------------------------------------------------------------------------
CANADA (2.6%)
Canadian Pacific Ltd. 43,000 856
Noranda Inc. 40,000 844
Nova Corp. 95,000 898
Royal Bank of Canada 33,000 772
---------
COUNTRY TOTAL 3,370
---------
- --------------------------------------------------------------------------------
CHILE (.2%)
Compania de Telecomunicaciones
de Chile SA ADR 3,200 271
---------
- --------------------------------------------------------------------------------
FINLAND (.3%)
Metsa-Serla Oy B 3,000 94
Repola Oy 15,000 298
---------
COUNTRY TOTAL 392
---------
- --------------------------------------------------------------------------------
FRANCE (3.7%)
Cie. Generale des Eaux 9,000 921
Primagaz Cie. 6,600 666
* Primagaz Cie. Warrants Exp. 6/30/98 600 10
* SGS-Thomson Microelectronics
NV ADR 10,000 363
Societe National Elf Aquitaine 32,000 2,170
Valeo SA 12,000 638
---------
COUNTRY TOTAL 4,768
---------
- --------------------------------------------------------------------------------
GERMANY (9.4%)
Allianz AG Holdings (Registered) 980 1,821
Bayer AG 3,000 1,022
Buderus 520 197
Deutsche Bank AG 23,000 1,158
Linde AG 1,900 1,170
Mannesmann AG 3,200 1,166
Munchener Ruckversicherung 11 23
SAP AG NVP 4,000 576
Siemens AG 2,500 1,376
Veba AG 66,000 3,208
Wella AG Pfd. 1,000 481
---------
COUNTRY TOTAL 12,198
---------
- --------------------------------------------------------------------------------
HONG KONG (4.9%)
Cheung Kong Holdings Ltd. 142,000 1,001
Hong Kong Electric Holdings Ltd. 115,000 374
HSBC Holdings PLC 60,600 909
Hutchison Whampoa Ltd. 188,000 1,186
Sun Hung Kai Properties Ltd. 119,000 1,066
Swire Pacific Ltd. A 132,000 1,161
Wharf Holdings Ltd. 168,000 634
---------
COUNTRY TOTAL 6,331
---------
- --------------------------------------------------------------------------------
INDONESIA (1.8%)
Indocement (Foreign) 105,000 381
Indofood Sukses Makmur (Foreign) 105,000 491
PT Indosat ADR 13,000 444
Perusahaan Gudang Garam
(Foreign) 24,000 297
* Telekomunikasi Indonesia ADR 22,000 679
---------
COUNTRY TOTAL 2,292
---------
- --------------------------------------------------------------------------------
ITALY (.9%)
Telecom Italia SPA 452,000 716
* Telecom Italia Mobile SPA 269,000 488
---------
COUNTRY TOTAL 1,204
---------
- --------------------------------------------------------------------------------
JAPAN (30.3%)
Advantest Corp. 6,600 298
Bridgestone Corp. 94,000 1,575
Dai-Nippon Printing Co., Ltd. 30,000 548
Daini Den Den Corp. 250 1,908
East Japan Railway 150 772
Eisai Co., Ltd. 21,000 421
Fanuc Co., Ltd. 8,000 325
Fuji Photo Film Co., Ltd. 62,000 1,776
Fujitsu Ltd. 50,000 462
Hirose Electronics Co., Ltd. 8,100 457
Hitachi Ltd. 169,000 1,646
Hoya Corp. 15,000 517
Ito-Yokado Co. 56,000 3,329
Keyence Inc. 6,000 719
Kuraray Co., Ltd. 35,000 377
Kyocera Corp. 10,000 680
Mabuchi Motor 9,000 513
Matsushita Electric Industrial
Co., Ltd. 75,000 1,222
Mitsubishi Corp. 125,000 1,638
Mitsubishi Heavy Industries Ltd. 130,000 1,125
Mitsui & Co., Ltd. 183,000 1,660
Murata Manufacturing Co., Ltd. 60,000 2,079
NEC Corp. 28,000 325
Nippon Television Network 1,000 295
Nissei Sangyo 40,000 693
Omron Tateisi Electronics Co. 49,000 1,087
Sankyo Co., Ltd. 22,000 505
Seino Transportation Co., Ltd. 45,000 767
Sharp Corp. 35,000 560
Shin-Etsu Chemical Co., Ltd. 18,900 365
Showa Shell Sekiyu 55,000 536
Skylark Co., Ltd. 22,000 416
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
SMC Corp. 17,900 $ 1,269
Sumitomo Electric Co. 83,000 1,119
Takeda Chemical Industries 126,000 1,970
Toho Co., Ltd. 3,700 603
Tokio Marine & Fire Insurance Ltd. 110,000 1,432
Tokyo Electron Inc. 16,000 547
Tokyo Style Co. 20,000 331
Toppan Printing Co. 34,000 443
Toray Industries, Inc. 90,000 583
Toyota Motor Corp. 60,000 1,326
---------
COUNTRY TOTAL 39,219
---------
- --------------------------------------------------------------------------------
MALAYSIA (2.7%)
Edaran Otomobil Nasional 64,000 574
Genting Bhd. 88,500 801
Malayan Banking Bhd. 99,000 924
Telekom Malaysia Bhd. 91,000 838
United Engineering Bhd. 50,000 346
---------
COUNTRY TOTAL 3,483
---------
- --------------------------------------------------------------------------------
MEXICO (.6%)
Telebras ADR 15,341 763
---------
- --------------------------------------------------------------------------------
NETHERLANDS (10.4%)
* Delft Instruments 12,000 265
Getronics NV 20,298 1,471
Hagemeyer NV 7,400 505
Heineken NV 13,000 2,804
Hunter Douglas NV 14,000 949
Internationale Nederlanden
Groep NV 30,000 2,178
* KLM Royal Dutch Airlines NV 14,341 499
OceVan Der Grinten NV 15,000 1,398
Philips Electronics NV (non-voting) 66,000 2,400
Samas Groep 8,195 327
Ver Ned Uitgevers 41,000 682
---------
COUNTRY TOTAL 13,478
---------
- --------------------------------------------------------------------------------
PHILIPPINES (2.2%)
Ayala Land Inc. B 981,250 1,593
Manila Electric B 70,000 618
Philippine Long Distance
Telephone Co. 4,000 217
* SM Prime Holdings 1,224,600 365
---------
COUNTRY TOTAL 2,793
---------
- --------------------------------------------------------------------------------
SINGAPORE (2.4%)
DBS Land Ltd. 162,000 621
Development Bank of Singapore
Ltd. (Foreign) 36,000 442
Jurong Shipyard 26,000 154
Keppel Corp., Ltd. 61,000 555
Overseas Chinese Banking Corp.
(Foreign) 28,000 376
Singapore International Airlines
Ltd. (Foreign) 32,000 332
Singapore Press Holdings Ltd.
(Foreign) 30,600 611
---------
COUNTRY TOTAL 3,091
---------
- --------------------------------------------------------------------------------
SWEDEN (3.2%)
Astra AB Series B 48,000 2,208
Electrolux Series B 14,000 684
LM Ericsson Telephone Series B 42,000 924
Stora Kopparberg Series A 26,000 335
---------
COUNTRY TOTAL 4,151
---------
- --------------------------------------------------------------------------------
SWITZERLAND (7.4%)
BBC Brown Boveri AG A (Bearer) 2,500 3,039
Ciba Geigy (Registered) 1,969 2,463
CS Holdings (Registered) 19,000 1,744
Nestle SA (Registered) 1,150 1,296
Roche Holdings Ltd. 125 1,037
---------
COUNTRY TOTAL 9,579
---------
- --------------------------------------------------------------------------------
THAILAND (2.8%)
Bangkok Bank Public Co., Ltd.
(Foreign) 48,000 647
Land and House Co., Ltd. (Foreign) 29,000 478
Siam Cement Public Co., Ltd.
(Foreign) 8,000 412
Siam City Bank Public Co., Ltd.
(Foreign) 53,000 66
* TelecomAsia Corp. Public Co., Ltd.
(Foreign) 123,000 339
Thai Farmers Bank Public Co., Ltd.
(Foreign) 54,000 634
United Communication Industry
(Foreign) 75,000 1,029
---------
COUNTRY TOTAL 3,605
---------
- --------------------------------------------------------------------------------
UNITED KINGDOM (11.0%)
Allied Domecq PLC 40,000 299
Asda Group PLC 600,000 975
Barclays PLC 60,000 668
British Airways PLC 50,000 408
British Land Co., PLC 84,000 490
British Petroleum Co., PLC 115,000 1,006
British Steel PLC 180,000 522
Cable and Wireless PLC 110,000 895
Courtaulds PLC 77,900 517
Daily Mail & General Class A 30,000 643
De La Rue Co., PLC 25,000 274
Glaxo Wellcome PLC 40,000 502
Guinness PLC 70,000 510
Lucas Industries 212,000 699
MFI Furniture Group 600,000 1,488
Peninsular & Oriental Steam
Navigation Co. Pfd. 52,000 426
</TABLE>
31
<PAGE> 32
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
INTERNATIONAL Value
PORTFOLIO (continued) Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Rank Organisation Ltd. PLC 170,000 $ 1,261
Thorn EMI PLC 40,000 1,030
United News & Media PLC 60,000 564
Vodafone Group PLC 150,000 556
Zeneca Group PLC 20,000 414
---------
COUNTRY TOTAL 14,147
---------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $112,125) 126,010
<CAPTION>
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.6%)
- --------------------------------------------------------------------------------
Face
Amount
(000)
-------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.40%, 4/1/96
(Cost $4,671) $4,671 4,671
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.1%)
(Cost $116,796) 130,681
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.1%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F 19,577
Liabilities--Note F (21,026)
---------
(1,449)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 10,591,840 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $129,232
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.20
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MARCH 31, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $112,601 $10.63
UNDISTRIBUTED NET
INVESTMENT INCOME 195 .02
ACCUMULATED NET
REALIZED GAINS 2,491 .23
UNREALIZED APPRECIATION
--NOTE E:
INVESTMENT SECURITIES 13,885 1.31
FOREIGN CURRENCIES AND
FORWARD CURRENCY CONTRACTS 60 .01
- --------------------------------------------------------------------------------
NET ASSETS $129,232 $12.20
- --------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MONEY HIGH-GRADE
MARKET BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended Six Months Ended
March 31, March 31, March 31,
1996 1996 1996
(000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . -- -- $ 2,752
Interest . . . . . . . . . . . . . . . . . . . . . . $6,429 $4,318 3,468
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . 6,429 4,318 6,220
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . 12 7 151
Performance Adjustments . . . . . . . . . . . . . . . -- -- --
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . 184 149 298
Marketing and Distribution . . . . . . . . . . . . . 31 10 23
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 12 15 1
Auditing Fees . . . . . . . . . . . . . . . . . . . . . 5 4 5
Shareholders' Reports . . . . . . . . . . . . . . . . . 3 3 6
Annual Meeting and Proxy Costs . . . . . . . . . . . . . 2 2 3
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 249 190 487
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . 6,180 4,128 5,733
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . (1) 197 7,487
Futures Contracts . . . . . . . . . . . . . . . . . . . -- -- --
Foreign Currencies and Forward
Currency Contracts . . . . . . . . . . . . . . . . . -- -- --
- --------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . . . (1) 197 7,487
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . -- (1,616) 13,038
Futures Contracts . . . . . . . . . . . . . . . . . . . -- -- --
Foreign Currencies and Forward Currency Contracts . . . -- -- --
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . -- (1,616) 13,038
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . $6,179 $2,709 $26,258
====================================================================================================================
</TABLE>
33
<PAGE> 34
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
EQUITY EQUITY
INDEX INCOME GROWTH INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended Six Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1996 1996 1996 1996
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . $ 3,437 $ 2,172 $ 1,398 $ 475
Interest . . . . . . . . . . . . . . . . . 194 41 289 181
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . 3,631 2,213 1,687 656
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . 10 56 147 67
Performance Adjustments . . . . . . . . . . -- -- -- 19
The Vanguard Group--Note C
Management and Administrative . . . . . . . 337 132 250 185
Marketing and Distribution . . . . . . . . 23 8 14 8
Custodian Fees . . . . . . . . . . . . . . . . 4 7 6 40
Auditing Fees . . . . . . . . . . . . . . . . 5 4 4 4
Shareholders' Reports . . . . . . . . . . . . 5 3 4 3
Annual Meeting and Proxy Costs . . . . . . . . 3 2 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . 387 212 427 328
- -----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 3,244 2,001 1,260 328
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . 757 591 2,447 1,449
Futures Contracts . . . . . . . . . . . . . . 457 -- -- --
Foreign Currencies and Forward
Currency Contracts . . . . . . . . . . . . -- -- -- 759
- -----------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . 1,214 591 2,447 2,208
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . 29,468 9,588 20,866 6,102
Futures Contracts . . . . . . . . . . . . . . (38) -- -- --
Foreign Currencies and Forward
Currency Contracts . . . . . . . . . . . . -- -- -- 374
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . 29,430 9,588 20,866 6,476
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . $33,888 $12,180 $24,573 $9,012
===================================================================================================================================
</TABLE>
(1) Dividends for the International Portfolio are net of foreign withholding
taxes of $77,000.
34
<PAGE> 35
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET HIGH-GRADE BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year SIX MONTHS Year SIX MONTHS Year
ENDED Ended ENDED Ended ENDED Ended
MARCH 31, Sept. 30, MARCH 31, Sept. 30, MARCH 31, Sept. 30,
1996 1995 1996 1995 1996 1995
(000) (000) (000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 6,180 $ 10,911 $ 4,128 $ 6,570 $ 5,733 $ 10,361
Realized Net Gain (Loss) . . . . . . . . . . (1) (1) 197 (13) 7,487 (1,374)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . -- -- (1,616) 6,687 13,038 44,095
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . 6,179 10,910 2,709 13,244 26,258 53,082
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (6,180) (10,911) (4,128) (6,570) (5,440) (10,052)
Realized Net Gain . . . . . . . . . . . . . . -- -- -- -- -- (1,616)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (6,180) (10,911) (4,128) (6,570) (5,440) (11,668)
- -------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . -- -- -- -- 98 2
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued . . . . . . . . . . . . . . . . . . 147,577 287,895 22,804 54,758 21,893 45,578
Issued In Lieu of Cash Distributions . . . . 6,146 10,877 4,100 6,548 5,427 11,640
Redeemed . . . . . . . . . . . . . . . . . . (131,671) (251,570) (7,209) (27,894) (9,745) (48,471)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . 22,052 47,202 19,695 33,412 17,575 8,747
- -------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . 22,051 47,201 18,276 40,086 38,491 50,163
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . 218,367 171,166 120,445 80,359 279,771 229,608
- -------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . $240,418 $218,367 $138,721 $120,445 $318,262 $279,771
=========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $.027 $.056 $.329 $.663 $.26 $.50
Realized Net Gain . . . . . . . . . . . -- -- -- -- -- $.08
- -------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 147,577 287,895 2,147 5,444 1,595 3,877
Issued in Lieu of Cash Distributions . 6,146 10,877 387 647 404 1,015
Redeemed . . . . . . . . . . . . . . . (131,671) (251,570) (682) (2,763) (713) (4,180)
- -------------------------------------------------------------------------------------------------------------------------
22,052 47,202 1,852 3,328 1,286 712
- -------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income . . . . . . . . . . -- -- -- -- $ 3,170 $ 2,779
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
EQUITY INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year SIX MONTHS Year
ENDED Ended ENDED Ended
MARCH 31, Sept. 30, MARCH 31, Sept. 30,
1996 1995 1996 1995
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 3,244 $ 5,521 $ 2,001 $ 3,249
Realized Net Gain (Loss) . . . . . . . . . . . . 1,214 2,179 591 499
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . 29,430 50,710 9,588 14,100
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . 33,888 58,410 12,180 17,848
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . (4,170) (4,508) (1,985) (3,350)
Realized Net Gain . . . . . . . . . . . . . . . . (2,318) (1,196) (468) (338)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (6,488) (5,704) (2,453) (3,688)
- -----------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . . . -- -- 175 65
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued . . . . . . . . . . . . . . . . . 43,880 69,694 24,757 24,993
Issued In Lieu of Cash Distributions . . . . . . 6,488 5,704 2,448 3,670
Redeemed . . . . . . . . . . . . . . . . . (7,978) (37,968) (2,864) (19,367)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . 42,390 37,430 24,341 9,296
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . 69,790 90,136 34,243 23,521
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . 276,082 185,946 91,492 67,971
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . $345,872 $276,082 $125,735 $91,492
===================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . $.23 $.29 $.24 $.48
Realized Net Gain . . . . . . . . . . . . . $.13 $.08 $.06 $.05
- -----------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 2,674 5,094 1,959 2,369
Issued in Lieu of Cash Distributions . . . 419 447 200 359
Redeemed . . . . . . . . . . . . . . . . . (486) (2,854) (224) (1,867)
- -----------------------------------------------------------------------------------------------------------------------------------
2,607 2,687 1,935 861
- -----------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income . . . . . . . . . . . $ 2,200 $ 3,126 $ 1,192 $ 1,001
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
GROWTH INTERNATIONAL
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year SIX MONTHS Year
ENDED Ended ENDED Ended
MARCH 31, Sept. 30, MARCH 31, Sept. 30,
1996 1995 1996 1995
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 1,260 $ 1,916 $ 328 $ 1,258
Realized Net Gain (Loss) . . . . . . . . . . . . 2,447 3,088 2,208 241
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . 20,866 28,739 6,476 6,769
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . 24,573 33,743 9,012 8,268
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . (1,878) (862) (1,282) (397)
Realized Net Gain . . . . . . . . . . . . . . . . (2,230) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (4,108) (862) (1,282) (397)
- -----------------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . . . -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued . . . . . . . . . . . . . . . . . 39,155 68,148 34,763 47,204
Issued In Lieu of Cash Distributions . . . . . . 4,107 862 1,281 397
Redeemed . . . . . . . . . . . . . . . . . (7,288) (22,177) (4,158) (28,360)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . 35,974 46,833 31,886 19,241
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . 56,439 79,714 39,616 27,112
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . 161,642 81,928 89,616 62,504
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . $218,081 $161,642 $129,232 $ 89,616
===================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . $.16 $.11 $.16 $.06
Realized Net Gain . . . . . . . . . . . . . $.19 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 2,614 5,637 2,979 4,526
Issued in Lieu of Cash Distributions . . . 293 81 115 38
Redeemed . . . . . . . . . . . . . . . . . (485) (1,846) (360) (2,766)
- -----------------------------------------------------------------------------------------------------------------------------------
2,422 3,872 2,734 1,798
- -----------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income . . . . . . . . . . . $ 1,231 $ 1,849 $ 195 $ 1,149
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, May 2+ to
SIX MONTHS ENDED ----------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .027 .056 .035 .030 .040 .023
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . -- -- -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . .027 .056 .035 .030 .040 .023
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.027) (.056) (.035) (.030) (.040) (.023)
Distributions from Realized Capital Gains . . . . -- -- -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.027) (.056) (.035) (.030) (.040) (.023)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +2.73% +5.77% +3.63% +3.05% +4.11% +2.35%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $240 $218 $171 $114 $71 $27
Ratio of Expenses to Average Net Assets . . . . . . . .22%* .23% .23% .29% .33% .34%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 5.44%* 5.66% 3.66% 3.00% 3.90% 5.50%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH-GRADE BOND PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, April 29+ to
SIX MONTHS ENDED ----------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $10.47 $9.82 $10.94 $10.64 $10.24 $10.00
------ ----- ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .329 .663 .619 .636 .705 .299
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . (.090) .650 (.966) .349 .427 .240
------ ----- ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . .239 1.313 (.347) .985 1.132 .539
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.329) (.663) (.619) (.636) (.705) (.299)
Distributions from Realized Capital Gains . . . . -- -- (.154) (.049) (.027) --
------ ----- ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.329) (.663) (.773) (.685) (.732) (.299)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $10.38 $10.47 $9.82 $10.94 $10.64 $10.24
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +2.25% +13.83% -3.31% +9.64% +11.47% +5.48%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $139 $120 $80 $85 $52 $16
Ratio of Expenses to Average Net Assets . . . . . . . .29%* .29% .24% .29% .32% .40%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.26%* 6.58% 5.98% 5.92% 6.66% 6.89%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 70%* 29% 46% 73% 31% 9%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
38
<PAGE> 39
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, May 23+ to
SIX MONTHS ENDED ----------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $13.33 $11.33 $11.58 $10.83 $10.25 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .27 .51 .46 .50 .51 .19
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .95 2.07 (.16) .97 .52 .06
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.22 2.58 .30 1.47 1.03 .25
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.26) (.50) (.39) (.69) (.45) --
Distributions from Realized Capital Gains . . . . -- (.08) (.16) (.03) -- --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.26) (.58) (.55) (.72) (.45) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $14.29 $13.33 $11.33 $11.58 $10.83 $10.25
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +9.24% +23.65% +2.67% +14.10% +10.29% +2.50%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $318 $280 $230 $191 $76 $13
Ratio of Expenses to Average Net Assets . . . . . . . .33%* .36% .34% .39% .42% .51%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 3.84%* 4.25% 4.11% 4.45% 4.77% 5.24%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 37%* 26% 42% 41% 15% 3%
Average Commission Rate Paid . . . . . . . . . . . . $.0380++ N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
++ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
39
<PAGE> 40
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
EQUITY INDEX PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, April 29+ to
SIX MONTHS ENDED ----------------------------------------- Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $15.69 $12.47 $12.37 $11.32 $10.45 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .16 .33 .31 .34 .26 .08
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.63 3.26 .12 1.07 .85 .37
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.79 3.59 .43 1.41 1.11 .45
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.23) (.29) (.23) (.34) (.24) --
Distributions from Realized Capital Gains . . . . (.13) (.08) (.10) (.02) -- --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.36) (.37) (.33) (.36) (.24) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $17.12 $15.69 $12.47 $12.37 $11.32 $10.45
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +11.66% +29.51% +3.53% +12.68% +10.74% +4.50%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $346 $276 $186 $165 $85 $24
Ratio of Expenses to Average Net Assets . . . . . . . .25%* .28% .24% .29% .32% .45%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 2.09%* 2.53% 2.60% 2.63% 2.84% 3.22%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 2%* 2% 7% 16% 1% 5%
Average Commission Rate Paid . . . . . . . . . . . . $.0190++ N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
++ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
40
<PAGE> 41
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
Year Ended Sept. 30, June 7+ to
SIX MONTHS ENDED ----------------------- Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $12.00 $10.05 $10.57 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .23 .46 .45 .14
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.22 2.02 (.63) .54
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.45 2.48 (.18) .68
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.24) (.48) (.33) (.11)
Distributions from Realized Capital Gains . . . . (.06) (.05) (.01) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.30) (.53) (.34) (.11)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $13.15 $12.00 $10.05 $10.57
=========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +12.29% +25.69% -1.64% +6.81%
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $126 $91 $68 $50
Ratio of Expenses to Average Net Assets . . . . . . . .39%* .39% .34% .39%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 3.67%* 4.28% 4.57% 4.30%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 6%* 10% 18% 2%
Average Commission Rate Paid . . . . . . . . . . . . $.0587++ N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
++ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
41
<PAGE> 42
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
Year Ended Sept. 30, June 7+ to
SIX MONTHS ENDED ---------------------- Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $14.10 $10.79 $10.26 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .09 .16 .14 .04
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.86 3.26 .46 .22
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.95 3.42 .60 .26
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.16) (.11) (.07) --
Distributions from Realized Capital Gains . . . . (.19) -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.35) (.11) (.07) --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $15.70 $14.10 $10.79 $10.26
=========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +14.13% +32.02% +5.87% +2.60%
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $218 $162 $82 $36
Ratio of Expenses to Average Net Assets . . . . . . . .45%* .47% .38% .43%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 1.32%* 1.64% 1.55% 1.63%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 41%* 32% 34% 10%
Average Commission Rate Paid . . . . . . . . . . . . $.0499++ N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
++ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
42
<PAGE> 43
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
- ------------------------------------------------------------------------------------------
Year Ended June 3+ to
SIX MONTHS ENDED Sept. 30, Sept. 30,
For a Share Outstanding Throughout Each Period MARCH 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $11.40 $10.31 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .03 .16 .05
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .93 .99 .26
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . .96 1.15 .31
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.16) (.06) --
Distributions from Realized Capital Gains . . . . -- -- --
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.16) (.06) --
- ------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $12.20 $11.40 $10.31
==========================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +8.55% +11.21% +3.10%
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $129 $90 $63
Ratio of Expenses to Average Net Assets . . . . . . . .59%* .54% .30%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . .59%* 1.67% 1.91%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 21%* 27% 0%
Average Commission Rate Paid . . . . . . . . . . . . $.0426++ N/A N/A
- ------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
++ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
43
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the Money
Market, High-Grade Bond, Balanced, Equity Index, Equity Income, Growth, and
International Portfolios.
Certain investments of the Money Market, High-Grade Bond, and Balanced
Portfolios are in corporate debt instruments; the issuers' abilities to meet
their obligations may be affected by economic developments in their respective
industries. 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, and temporary cash investments acquired over sixty days to maturity,
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. Other
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 Geneva 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 redeeming 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 prices of futures contracts, and the possibility of an
illiquid market.
44
<PAGE> 45
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 JULY 1, 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 six months ended March 31, 1996, the investment advisory
fee of the Balanced Portfolio represented an effective annual rate of .10 of 1%
of average net assets. No performance adjustment was required during the
period. The basic fee thus computed for the International Portfolio is subject
to
45
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (continued)
quarterly adjustments based on performance relative to the Morgan Stanley
Capital International Europe, Australia, and Far East Index. For the six months
ended March 31, 1996, 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 $19,000 (.04 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 March 31, 1996, the Fund had contributed capital of
$160,000 to Vanguard (included in Other Assets), representing .8% of Vanguard's
capitalization. The Fund's trustees and officers are also directors and
officers of Vanguard.
D. During the six months ended March 31, 1996, 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 $23,759 $ 8,500
BALANCED 44,740 25,909
EQUITY INDEX 42,836 2,504
EQUITY INCOME 26,848 3,110
GROWTH 74,418 37,090
INTERNATIONAL 42,720 10,472
- ------------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(000)
------------------------
Portfolio Purchases Sales
- ------------------------------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND $44,749 $37,020
BALANCED 32,311 27,849
- ------------------------------------------------------------------
</TABLE>
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 March 31, 1996, 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 $ 1,839 $ (1,482) $ 357
BALANCED 64,946 (2,393) 62,553
EQUITY INDEX 98,500 (4,168) 94,332
EQUITY INCOME 23,349 (2,367) 20,982
GROWTH 54,155 (1,023) 53,132
INTERNATIONAL 16,923 (3,038) 13,885
- ----------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, the aggregate settlement value of open Standard & Poor's 500
Index futures contracts expiring in June 1996 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 $2,605,000,
$18,000, and $296,000, respectively.
46
<PAGE> 47
Under the terms of open forward currency exchange contracts at March 31, 1996,
the International Portfolio was obligated to deliver foreign currency in
exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(000)
----------------------------------------
Net Unrealized
Contract Foreign U.S. Appreciation
Settlement Date Currency Dollars (Depreciation)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
6/14/96 SWISS FRANC 3,400 $ 2,877 (26)
6/21/96 JAPANESE YEN 1,530,000 $14,489 90
- ----------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, the International Portfolio had net unrealized foreign
currency losses of $4,000 resulting from the translation of other assets and
liabilities.
F. The market value of securities on loan to broker/dealers at March 31,
1996, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(000)
----------------------------------------
Collateral Received
--------------------------
Market Value Market Value
of Loaned of U.S. Treasury
Portfolio Securities Cash Securities
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCED $13,135 $ 7,273 $6,438
EQUITY INCOME 750 800 --
GROWTH 2,374 2,416 --
INTERNATIONAL 17,917 18,921 --
- ----------------------------------------------------------------------------------
</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.
47
<PAGE> 48
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
VARIABLE ANNUITY
Vanguard Variable Annuity Plan
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus.
All Funds in the Vanguard Family are offered by prospectus only.
Q642-3/96
VANGUARD
VARIABLE
INSURANCE FUND
SEMI-ANNUAL REPORT
MARCH 31, 1996
